The Age of Oil is coming to an end. How do we avoid the economic and political turmoil as we transition away from fossil fuels? We must find alternative energy while reducing demand.

We will never run out of oil. We will soon run out of “cheap” oil. As the end of the Age of Oil approaches, we can expect wild economic swings and geopolitical disruptions when supply and demand fluctuate. Ending our addiction to oil will take a long time and it will be expensive. As we switch from gasoline to alternative fuels, we need to build totally new energy and transportation infrastructures

When energy prices rise, we all suffer. The cost of energy is embedded in every product and service we use. Cheap energy is the foundation of our American way of life. The only way to hold down the cost of energy is to increase supply and decrease demand.

What is worse than expensive oil? The answer is: oil prices that wildly fluctuate. Economic and political instability occurs when we alternate between cheap and expensive energy. This cycle of instability inhibits conservation by discouraging investment in energy saving technologies. Companies are reluctant to make or buy energy conserving (or alternative energy) equipment unless they can recoup the costs of their investment through savings in energy costs.

So, how do we make the transition to alternative fuels and how are we going to pay for it? Three things need to happen: 1) the price of fossil fuels must go up; 2) the price of alternative energy must come down; 3) the government must help to make the transition more efficient.

Reducing Demand
Reduction of demand can be achieved only by increasing the cost of using fossil fuels. For instance, we could wait and let demand exceed supply with its resulting sharp increases in price followed by economic recession and eventual innovations that bring down demand. Or, we could increase the price of fossil fuels now, proactively managing its price through taxation. The price of oil and coal could be incrementally increased every year to achieve an annual increase around 20%.  The tax rate would change depending on the underlying cost of the fossil fuel. If the cost of fuel go up, the tax rate goes down. If the cost of fuel goes down, taxes go up. In this way, the price of fossil fuel increases at a planned, pre-defined rate.

This controlled approach has many advantages over a laissez faire energy policy that subsidizes the use of fossil and nuclear fuels and passes the hidden costs onto others, mostly our children.
 1. An immediate decrease in our demand for fossil fuels.
 2. A predictable cost of energy, which enables everyone to plan for the future. Businesses can invest in energy saving strategies and have confidence in the return on investment.
 3. An early start on the transition away from fossil fuels before severe shortages can cause significant economic damage.
 4. A fertile field for the growth of renewable energy generation.

As we use tax policy to suppress demand for fossil fuels and to increase supplies of alternative fuels, we have the added benefit of generating significant revenues for American interests while decreasing wealth transferred overseas. We will need this extra money to invest in the transportation and energy infrastructure that is needed to move us from the Age of Oil through the Age of Natural Gas and eventually to a hydrogen based economy fueled by renewable energy. This infrastructure includes new power plants and pipelines and the retrofit of “gas” stations to provide alternative fuels. We will have money to invest in energy saving technologies, such as computer assisted traffic control systems, ubiquitous wireless Internet services and other technological innovations that will increase our productivity while decreasing out energy consumption.

We will reach a tipping point when renewable energy approaches the cost of fossil fuels and we have the infrastructure to use renewable energy for transportation. Then, the miracle of mass production will significantly decrease the cost of renewable energy. Innovative technologies, like photovoltaic systems, will sprout like wildflowers, providing distributed generation of clean energy.

The transition away from fossil fuels is part of the evolutionary history of our use of energy.  By planning and encouraging this transition we can avoid the economic turmoil caused by sustained energy shortages. Our continued use of oil pollutes our cities and sends our wealth overseas. Every barrel of oil we use steals it away from the future of mankind and makes us vulnerable to those who hate us. We can manage our transition away from the Age of Oil so that our energy future will be controlled by us instead of those motivated only by profits or prophets.

Originally posted to desert leap on Tue Nov 28, 2006 at 01:02 PM PST.

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