Global Warming and the Middle East

02/28/2011 10:28 am ET | Updated May 25, 2011

Whether the issue is security, sustainability or global warming, there is a single truth: We must stop our dependence on foreign oil. Every President since Nixon has bemoaned our dependence on foreign oil. Yet, there are insufficient oil reserves in the U.S. to support our appetite for oil. The US is a debtor nation, in part because we import on average between 8.3 and 9.3 million barrels of oil per day, this equates to about one-half of our annual trade deficit. Yet, we have an innate ability to use politics as a barrier to reducing our dependence.

As a nation, we are driven by economics. The economics of gasoline is unlike that of most other commodities. Gasoline consumption does not readily retreat with increased prices. Economists call petroleum inelastic (i.e., demand is nonresponsive to price changes). As long as the price of oil does not increase at a rate too fast to upset our buying patterns, we will not significantly reduce our dependence on foreign oil. The oil industry knows this so you rarely see prices increase more than about 10 to 15% in a season and then the price is usually reduced 5 to 8% for the shoulder seasons (i.e., spring and fall), the "bunny hop" of gasoline pricing. An increase not large enough to really upset the petroleum apple cart. Economists estimate that prices need to get north of $7.00 a gallon (in 2007 dollars) before we can reduce imports by about 30%.

The petroleum problem is simple: There is no market competitor when it comes to powering automobiles. This allows the price of gasoline to rise at a rate far beyond inflation. Sure you can do the math and calculate the cost of insurance, daily parking versus carpooling, or taking public transportation. This is a relatively futile exercise because our utility curve (i.e., an economist's structural term for characterizing our need or derived value for something) always has the automobile win. The romance with automobiles runs deep in this country and only petroleum runs a car.

Yet, there are vehicles that begin to solve the problem: electric vehicles augmented with compressed natural gas (cng) (e.g., Toyota, Hyundai, Ford, GM). Natural gas is homegrown. The Energy Information Agency estimates that the U.S. has enough natural gas to last 110 years.

Did someone just say: "Natural gas production is dirty?" The Academy Award nominated documentary "Gasland" will certainly make that case. My response: Make a realistic choice. We want electric cars. Great. How are we going to charge them?

  • Nuclear -- environmentalists hate nuclear.
  • Coal -- environmentalists hate coal.
  • Gas turbine electricity -- environmentalists hate natural gas.

Environmentalists love:

  • Solar and wind -- not enough capacity in our lifetime or perhaps our children's.
  • Biomass -- concept is too new to discover the reasons environmentalists will hate this.

We need to stop being a debtor nation. Natural gas coupled with electric cars, either hybrids or as a charging source, (e.g., Chevy Volt) gives us the best chance to reduce the stranglehold of foreign oil, and, oh yes, reduce greenhouse gases.

Think all of this is crazy? A recent issue of The Economist discussed the fact that China and Israel are both moving towards 100% electric vehicles. Neither country wants to be like the US, a junkie on foreign oil. Both countries can achieve this either through an edict in China or fuel pricing in Israel. We don't have those tools available to us. Furthermore, the US is like a shark. If a shark stops swimming, it dies. If the US stops innovating, it kills our economy. The intellectual capital that China and Israel will create from moving to electric vehicles will further erode our position in the global marketplace.

So what can we do? Don't raise the price of gasoline, but cut the price of natural gas. Reduce the price of natural gas used for transportation by eliminating government royalties and keeping states and municipalities from taxing its usage. Or, we can continue the status quo: Be a debtor nation, always worrying about the Middle East and oil.