Mr. Pickens’ numbers are wrong

by Guest Writers :: Filed Under The Environment :: June 10th, 2009 @ 1:26 pm EST

Oilman T. Boone Pickens has proposed that Congress include billions of dollars of subsidies in a future energy bill to encourage the trucking industry to convert some of its trucks to run on natural gas. Mr. Pickens says the cost is justified by the benefit of reducing the nation’s dependence on foreign oil, especially from places like the Middle East. In an email to supporters, he recently wrote, “If we can get just 350,000 of the 6.5 million 18-wheelers running on natural gas, we can cut our foreign oil dependence by over five percent…. About a quarter of [imported oil] is used for diesel fuel to run 18-wheelers.”

Unfortunately, Pickens’ numbers don’t add up and the subsidies could slow efforts to reduce gasoline consumption and green-house gas emissions.

According to the federal Bureau of Transportation Statistics (BTS), rather than 6.5 million, there are only about 2.2 million “combination” trucks - the class that includes the 18-wheel tractor-trailers. Let us suppose that all 2.2 million of those combination trucks are the 18-wheelers Pickens discusses; the BTS estimates that, annually, these trucks use about 29 billion gallons of diesel. That is about sixteen per cent of the 176 billion gallons of diesel and gasoline that U.S. motorists consume each year. If 350,000 of those trucks were converted to natural gas, motor fuel consumption would fall by only about 2.5 per cent - about the same fuel saving that would take place if Americans kept their tires properly inflated, according to federal Department of Transportation estimates.

The 2.5 per cent decline in motor fuel consumption would result in an even smaller reduction in oil imports. About a third of the petroleum consumed in the United States is produced here, and another twenty per cent is produced in neighboring Canada and Mexico. Only a little over ten per cent of the petroleum consumed in the United States comes from the Middle East.

But even if there were great benefits from converting part of the U.S. tractor-trailer fleet to natural gas, it is unclear that government would need to compel trucking companies to do this. Those trucking companies have to deal with diesel fuel’s cost and price volatility, and they have large financial incentives to use the most cost-effective fuel. Throwing $28 billion in federal money at those companies will accomplish little and may actually slow the development of the next-generation of vehicles: A 2.5 percent reduction in diesel consumption offers little to the nation, but $28 billion will distract a lot of entrepreneurs and scientists from pursuing other, perhaps more promising, alternatives to the natural gas vehicle.

The truth is that it is impossible for anyone to know what development or combination of developments will resolve the growing problems of fuel consumption and green house gas emissions. For example, authors of an MIT report wrote:

“…progress must come from a comprehensive effort to develop and market more efficient vehicles and more environmentally benign fuels, find more sustainable ways to satisfy demands for transportation services, and prompt all of us who use our vehicles and other transportation options to reduce our consumption. All of these changes will need to be implemented at very large scale to achieve significant reductions in petroleum, energy, and GHG emissions. Implementing these objectives will increase the cost of transportation to ultimate users, and will require government policies to encourage or require moving toward these goals while sharing the burdens more equitably and attempting to minimize total social costs.”

Imagine all the pieces that have to fall into place to accomplish these goals: The government policies would have to encourage the development of more efficient cars and cleaner fuels. It would have to cause us to drive our cars differently. And all of this would have to happen quickly and on a massive scale. Even if we could trust politicians to be motivated by their sincere belief that their policies would accomplish these goals - rather than a desire to payoff a powerful lobby (e.g., corn ethanol producers) - they would probably still get it wrong: There are simply too many variables and too much uncertainty. The coordination problem is beyond human comprehension.

The most efficient way to accomplish a particular energy policy goal is to first understand that most adults in market-based societies are predominantly motivated by financial incentives. Then, government should implement “blind-policies” that encourage any option rather than particular ones. For example, if the goal is to reduce gasoline consumption, then we can simultaneously encourage consumers to drive differently and demand more efficient cars by increasing the gas tax. Smart automobile producers will then aggressively compete to give consumers what they want. Similarly, if the goal is to reduce GHG emissions, the government should implement a carbon tax. No one likes to hear the word “tax” but taxes are the most efficient and CHEAPEST alternatives. CAFE standards, Low Carbon Fuel Standards, subsidies for particular alternative fuels, all cost consumers far more dollars per displaced unit of gas or emissions than a direct tax. There is not a legitimate economist anywhere that will tell you differently. That is just the cold-hard truth.

Taxes send a powerful, unambiguous signal to the market regarding our policy objectives. From there, it is left to the market to find the most efficient way to accomplish those objectives. The beauty of a market is that it provides a strong incentive - the possibility of making lots of money - to lots of smart people to compete intensively to find the most economically viable alternative fuel. When the government, using subsidies, favors a particular one, there’s suddenly lots of money to be made from producing it, whether it’s the best one or not, distracting investment from alternatives. When the government subsidizes natural gas vehicles (or any alternative technology), it is betting billions of taxpayer dollars, and more importantly, precious time and creative resources, that it knows better then the cumulative knowledge of millions of engineers, scientists, entrepreneurs, and investors, who have devoted their lives to understanding energy. That’s not a good bet.

James Eaves (james.eaves@fsa.ulaval.ca) is Professor of Finance at the Université Laval. His personal blog is www.practicalpolicy.com. Stephen Eaves is the president of Eaves Devices.