Energy Independence for the United States -- How?

This is the right time for the United States to seriously consider embarking on a bold investment of creating technology in energy that would reduce the cost of energy, create energy independence via renewable sources and attendant benefits of favorable trade balance, employment, higher GDP growth, deficit reduction and national debt reduction. The energy independence platform of the U.S. administrations, from President Carter to President Obama, has not met goals for energy independence. This void can be filled by a determined decision to make the U.S. the world's largest producer of renewable energy.

With the advent of the Organization of the Petroleum Exporting Countries (OPEC) in the early 70s, the energy crises ensued in the high energy-consuming countries in Europe along with the United States in which the price of oil was set and by OPEC -- an organized and collusive oligopoly -- a cartel. OPEC was able to shift approximately $2.1 trillion of additional wealth transfer -- above a free market price -- from the American consumers to oil producing countries during 1973-2011.

In response, the West has opted for energy independence attempting to develop renewable energy. But the effort has been meager. For instance 17% of Germany's electricity supply is in renewable energy and only 8% of energy supply draws upon renewable energy in the U.S. Other policy measures such as price control, raising oil taxes, monetary and fiscal incentives have not been effective. The United States' petroleum imports from OPEC were leveled at 41 percent in 2009, a much lower percentage from 70 percent in 1977. U.S. petroleum imports shifted from OPEC to non-OPEC after 1992; although petroleum prices are set by OPEC globally. The United States has had a negative energy trade balance since the mid-50s.

After nearly half a century of struggling with the energy issue in the U.S. the following are obvious:

1. All of the development of renewable energy (solar, wind and others) thus far has contributed only 8 percent of the total energy supply in the U.S. It follows that a large supply gap for renewable energy remains to be filled in the U.S. market. To put this figure into perspective, coal and petroleum comprise 58 percent of total supply for energy consumption.
2. Energy consuming countries remain heavily dependent upon oil imports, most notably in 2010; the United States' import bill of oil had reached $337 billion.
3. Per person energy consumption has steadily increased over time with the rise of living standard outstripping per capita production of all sources of energy. This has contributed to higher prices of energy. Energy expenditures per person have increased from $404/year in 1970 to $4,089/year in 2009. The rise in energy prices has had negative impact upon distributional objectives of the U.S. imposing pressure on middle and low income groups.
4. China and India -- the two emerging countries with high growth rates have entered the buyers' market in energy, contributing further pressure upon oil prices. Both China and India account for 36 percent of incremental increase in the world primary energy market.
5. Oil companies in the private sector while amassing billions of dollars in profits have not solved the energy supply constraint. The private sector which is the logical agent of invention, innovation, and technological breakthroughs in energy technology has not measured up to the requirements of the supply challenge for energy. In the first three months of the 2011, Exxon Mobil Corp. actually increased its performance by 69 percent over last year's and in the process earned nearly $11 billion of profits. The first quarter closed off at $6.3 billion profits for Royal Dutch and $7.1 billion profit for British Petroleum. These companies were collectors of revenues for OPEC not inventors of energy independence from OPEC.
6. Higher taxes on energy have been regressive and have not reduced quantity demanded for oil due to inelastic demand for oil.

WHAT NEEDS TO BE DONE?

Since energy independence is a public issue, the government must invest in basic and applied research perhaps in the order of $2 trillion despite the current status of high unemployment, high deficit, high national debt and high unfavorable balance of trade but because of it. A joint government -- university -- industry consortium is required to tackle the energy issue in a similar way that the government invented the computer, the internet and many other high tech societal innovations.

With its track record, the United States has proven to overcome challenges time and again. The energy challenge is no exception.

Nake M. Kamrany is Professor of Economics and Director of Program in Law and Economics at the University of Southern California. Vincent Viruni is a research associate of the Income Convergence Research Group in Los Angeles.