Cheap Gas: Energy Independence And Small Business , Read More

“Energy Independence” is an idea that’s been kicked around for a long time. Back in 1973 during the Arab Oil Embargo that sent prices rising, gas lines lengthening and speed limits dropping, Richard Nixon first brought up the idea of an energy independent America. It seemed to make sense at the time. The Arab world was punishing us for their losses during the Yom Kippur War with Israel. Curtailing their control over our energy production was logical. After all, we were importing nearly 35% of our oil from the Middle East.

Since then, every president has paid lip service to the concept of energy independence but have you noticed that it hasn’t gotten any better? In fact, since Nixon’s first, tentative words on the subject, we have increased our dependence on foreign oil. We now import over 60% of our oil each year and pump prices go up far more than they go down. In other words, we have had an “energy crisis” of one sort or another for 35 years and for reasons of diplomacy, environmentalism, real politic, industrial intransigence, consumer inertia and who knows what else, very little has been done to solve the problem.

True, alternative fuels like ethanol seem promising, and we are doing better at harnessing wind and solar power. Hybrid, electrical, fuel cell and biodiesel vehicles are slowly making their way into the marketplace while the President has started an initiative to increase CAFÉ standards by 20 miles per gallon within the next 10 years. We are doing better at recycling and using energy efficient devices. All of that is great but most of these efforts depend on emerging technology and none of it deals with the problem that exists right now: Energy prices are out of control and the most vulnerable sector of the economy, the sector most likely to be harmed by this, is small business.

In 2006, back in the good old days of $76 per barrel oil prices, the Small Business Committee of the U.S. House of Representatives issued a report called Impact of Rising Energy Costs on Small Business. It is an interesting read for any small businessman. The conclusions of that report are as follows:

The impacts from the perceived and actual status of our energy supplies are significant.Last month [July, 2006], the Federal Reserve Chairman projected that higher energy rates will create some inflation in the economy. He cited the cumulative impacts of escalating energy prices as causing consumers and businesses to spend less, and to pass on costs to others. U.S. industries are also showing signs of deflation due to energy problems. Last month, the manufacturing sector growth index was the lowest since the previous August. Industry officials attributed energy costs, along with other inflationary impacts, such as interest rate increases, as impediments to expansion.

Given the impacts from the energy crisis, including inflation and slowed economic growth, these firms – in an attempt to cover rising production costs – have constricted operations while limiting their investment and expansion plans. Facing an increasingly unequal playing field, the extreme volatility of energy prices only creates larger financial burdens and operational disruptions for small firms when compared to their corporate counterparts.

The current energy crisis is just one more in a series of challenges that have recently befallen small businesses. These firms already face rising costs from many aspects of their enterprises, particularly health care, pensions, and regulatory requirements – all which deplete key resources from their operations. On top of these demands, energy affects entrepreneur’s human, capital, and raw materials. If these conditions continue, the economic climate will become increasingly harsh for this country’s small businesses and entrepreneurs. (Impact of Rising Energy Costs on Small Business, House Small Business Committee, U.S. House of Representatives, August 2006)

Does any of this sound familiar to anyone? It should, given the facts that small business is the least able to absorb high energy costs and that it dominates many energy-intensive industries. The energy crisis is squeezing profit margins of small firms from different sources. Consequently, they are at a competitive disadvantage to their large, corporate counterparts who, through economies of scale, can afford equipment and technology to reduce energy use. Firms with larger capital and production resources also maintain a greater capacity to negotiate favorable prices for inputs from suppliers and to control the price of products sold. In other words, large companies can more easily weather this storm than small companies. No surprises there. Sometimes size does matter. Still, it ought to raise some hackles that the pinch that you and your business are feeling today was predicted two years ago! How many small businesses have had to close behind the energy policies (or lack thereof) to which we have been subjected?

That is not so easy to determine since a business closing is usually the result of a number of factors. It is a dead certainty, however, that energy costs figure prominently in a large number of such closings. What is clear is that the current crop of presidential hopefuls doesn’t seem to have any real plans to do anything decisive about this problem.

With his Plan for a Clean Energy Future, Barack Obama is obviously more interested in climate change than energy independence and lower gas prices. A look at his campaign website, BarackObama.com, shows that his platform calls for an 80% reduction in carbon emissions by 2050; a ten-year, $150 billion research and development effort to find “Clean Energy” alternatives including bio-fuels, renewable energy and clean coal technology; support next generation biofuels as well as a low-carbon fuel standard and an increase in renewable fuels by 2030; reduce oil consumption by at least 35% by 2030 with higher fuel economy standards, doubling them within the next 18 years. Finally, he wants to increase energy efficiency by 50% by 2030 and restore the U.S. to a leadership position on the issue of climate change.

While there is not one thing in this plan that one can disagree with, they are all good ideas and should go forward, one has to ask how much of this depends on technology that is currently tried and true and how much of it depends on developing new technology? If a plan depends on something yet to be invented or perfected, then that plan has some serious faults to it. Of course, the primary fault is that it does nothing to address the problems that we face here and now. Perhaps his opponent can do better:

According to her campaign website (HillaryClinton.com), Hillary has a bold and comprehensive plan to address America’s energy and environmental challenges that will establish a green, efficient economy and create as many as five million new jobs. Sounds great! How will she do it? Here is the outline:

• A new cap-and-trade program that auctions 100% of permits alongside investments to move us on the path towards energy independence;
• An aggressive comprehensive energy efficiency agenda to reduce electricity consumption 20% from projected levels by 2020 by changing the way utilities do business, catalyzing a green building industry, enacting strict appliance efficiency standards, and phasing out incandescent light bulbs;
• A $50 billion Strategic Energy Fund, paid for in part by oil companies, to fund investments in alternative energy. The SEF will finance one-third of the $150 billon ten-year investment in a new energy future contained in this plan;
• Doubling of federal investment in basic energy research, including funding for an ARPA-E, a new research agency modeled on the successful Defense Advanced Research Projects Agency;
• Aggressive action to transition our economy toward renewable energy sources, with renewables generating 25% of electricity by 2025 and with 60 billion gallons of home-grown biofuels available for cars and trucks by 2030;
• 10 “Smart Grid City” partnerships to prove the advanced capabilities of smart grid and other advanced demand-reduction technologies, as well as new investment in plug-in hybrid vehicle technologies;
• An increase in fuel efficiency standards to 55 mpg by 2030, and $20 billion of “Green Vehicle Bonds” to help U.S. automakers retool their plants to meet the standards;
• A plan to catalyze a thriving green building industry by investing in green collar jobs and helping to modernize and retrofit 20 million low-income homes to make them more energy efficient;
• A new “Connie Mae” program to make it easier for low and middle-income Americans to buy green homes and invest in green home improvements;
• A requirement that all publicly traded companies report financial risks due to climate change in annual reports filed with the Securities and Exchange Commission; and
• Creation of a “National Energy Council” within the White House to ensure implementation of the plan across the Executive Branch;
• A requirement that all federal buildings designed after January 20, 2009 will be zero emissions buildings.

OK, more new technology and an emphasis on environment over economics. Again, there is nothing wrong with any of these per se, high mileage standards and renewable resources are great, but does anything on this list address the issues at hand? Do they take advantage of existing technologies to deal with the core issues facing America as its energy bills mount up? Will they lower the exorbitant pump prices that we are all paying today? No, they won’t. Perhaps we need to cross the aisle and see what the other end of the American political spectrum can offer.

John McCain has net yet offered a comprehensive energy plan. However, his speeches, statements and proposals do offer some insight into the Senator’s point of view on energy and the environment. Some of the things he has mentioned include:

• A cap-and-trade system to cut carbon dioxide emissions 30% below 2004 levels by 2050;
• The construction of new nuclear power plants and economic incentives for communities that host nuclear waste repositories;
• Research and development of new energy technologies;
• Work with China to share clean coal technology;
• The development of ways to break down carbon dioxide into useful components;
• New fossil fuel exploration and extraction;
• The development of plug-in and battery-powered electric, hybrid fuel-electric and hydrogen fuel cell vehicles;
• Support for alternative fuels, like ethanol from various crop sources, and biodiesel from wastes;
• Support for government spending on research and development, pilot projects and other initiatives to spur development of energy products that can compete in the free market;
• Support for an increase in fuel efficiency. At one time McCain supported raising the fuel economy of vehicles to 36 mpg by 2016;
• Make permanent a tax credit that businesses can use for research and development;

This sounds good, has long-term prospects as well as shorter-term solutions, but since this is gleaned from a number of speeches, statements and position that McCain has made both as a senator and as a presidential candidate, it is difficult to know how his final energy plan will work out. While it is certain that the cap-and-trade systems would lead to higher costs (the Environmental Protection Agency estimates that McCain’s proposal would add another $0.68 per gallon of gas by 2050), it is also certain that a sizable portion of what we can consider McCain’s proposal works with resources and technologies that we have today. Unlike the other contenders for the Oval Office, McCain sees energy as a security issue as well. A great deal of the money we spend on foreign oil goes to terrorist organizations. In a way, we are funding both sides of the Iraq War! McCain at least understands that this has to stop and it has to stop soon. Taking advantage of domestic oil fields and building nuclear reactors while engaged in research and development is a sensible way to go since it offers a reasonably short-term solution for current problems and it allows us to find truly viable answers to the long-term energy problems that we face.

Will any of these positions make their way into law? Any one of the three would have to convince Congress that their plan is the right one. Partisanship, vested interests, lobbyists and other obstacles will stand in the way for good or ill, but that is the nature of our system of government. We are not yet there, however. We still have candidates to nominate and an election to finish. How these candidates approach the energy issue will have ramifications for years to come. It is as important as taxes, defense, gun control or any of the other hot-button political issues we face this year.

Far be it from this Blog to tell you who to vote for, but before you throw your support behind one candidate or another, consider how their positions will affect your livelihood. As a small business owner you can no longer afford to be a straight-ticket kind of voter. You need to look at who will create the best climate for you to do business. Can you afford more of the same pie-eyed promises of new technology solving all our problems or do you want solutions for problems you are facing today? Think carefully. There is a lot riding on your decision.

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Tagged as: alternative fuels, dependence on foreign oil, energy production, miles per gallon, oil prices, yom kippur war