Money and Energy

Money and Energy

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Money and Energy

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    • The days of cheap energy are gone, and the U.S. can no longer rely on foreign energy sources.

    • The U.S. is capable of being self-sufficient, but an expensive investment is required.

    • By becoming self-sufficient, the U.S. will have an energy policy which reflects national security, pollution, taxation, and productivity.


    Energy self-sufficiency is a must. Failure is unthinkable. Never again must our whole economy be held for ransom by a foreign power. The U.S. can be self-sufficient. But massive added investment is required. It will take time and energy. Prices must go up now.

    The days of cheap energy are gone forever. There will be no more windfalls for consumers. There will not be enough energy either if the added capital is not invested.

    The profits of energy companies must be sharply increased. Domestic price levels must be insulated against foreign sources. Otherwise, who will risk supplying the massive added capital? Foreign cartels like OPEC or even friendly governments like Canada can suddenly change policy and make all added internal investment worthless. Yet within the next ten years energy companies must raise and invest capital probably equal to more than twice their present total assets employed.

    There are abundant potential sources of energy in the U.S. Uranium and coal can substitute for much oil and gas. Petroleum can be found in less economic fields than those developed so far. Offshore drilling can open major sources. Oil can be derived from shale. All of this is at a price. All of these sources have a cost which is uneconomic at prices of the past.

    The cost of environmental standards must be added if we are to have both energy and high standards of environmental purity. Environmental controls have significant direct cost. Most of them require substantial added capital, too. Indirectly the uncertainty and delay tie up very large amounts of capital. Examples are the Alaska Pipeline postponement, refinery site location postponement and other uncertainties about public policy. Worth it or not, there is an added price that must be paid if we are to have both energy and tight but uncertain environmental rules.

    The 15 largest petroleum companies in the U.S. have grown in revenue at approximately 7 percent per year for the past ten years. Their return on total assets has declined from a mean of about 9 1/2 percent to about 8 1/3 percent. An extension of the trend line growth alone would require doubling those assets in ten years. Doubling the capital intensity would require quadrupling the assets employed at the end of ten years.

    Who will supply the capital? It cannot possibly come from retained earnings. At present profit levels, even a 1:1 debt/equity ratio would be insufficient. Lack of profit to sustain an adequate increase in debt can be a major block to adequate energy.

    Extremely large investments must be made, with long deferred recovery of that investment, to:

    • Search for oil even deeper in the earth and deeper in the ocean.

    • Drill for oil in less promising, more expensive and less accessible areas.

    • Recover more oil from old secondary and marginal fields.

    • Develop and reduce to practice oil recovery from oil shale.

    • Develop and reduce to practice the gasification of coal and removal of its sulfur content.

    • Open completely new deep coal mines with modern safety equipment.

    • Use and rehabilitate the coal strip mines that are so essential to our energy resources.

    • Build the nuclear power plants required to conserve irreplaceable fossil fuels.

    • Develop and build the breeder reactors necessary to prevent the exhaustion of our uranium supply.

    • Rebuild the refineries and transportation facilities necessary to match a completely different mix of energy sources and energy economics.

    • Provide the steadily increasing energy supply to match a predictable increase in population and an inexorable increase in energy use as the average standard of living increases.

    These are capital intensive investments. They are unavoidable investments. Capital cost may well be the principal cost increase for domestic energy.

    Exploration, research, development and production facilities are like a house. They must be paid for in advance even though the use and benefits will all be in the future. Even if the money is borrowed to pay for it, still someone must advance the cash. But income taxes drain off cash flow and available capital before debt repayment.

    The required financing must be provided without fail. The following program is recommended:

    • Remove all price controls on energy or hydrocarbon compounds. Allocate resources where they will be the most productive. Use the market place to determine this.

    • Schedule a tightening of import controls that will gradually phase out all imports of energy even from Canada. This should be in the form of a gradually increasing import tariff that provides a reasonable protection for the large increase in capital investment that will be required.

    • Discourage energy use and encourage increased supply by encouraging higher prices for energy. If prices do not rise now to the equivalent of an estimated future $10 cost per barrel (or some such figure) of crude, then force them up to that level by a temporary tariff equivalent to the differential. Use the tariff proceeds, if necessary, to temporarily subsidize hardship cases.

    • Stop draining capital prematurely from productive use by “income” taxes. Allow energy companies to treat all expenditures as expenses for tax purposes as long as the taxes they pay equal their dividend payments. The government will then receive its taxes when the shareholders receive their dividends. Taxes are not reduced, just deferred.

    Such a program will not solve the problem of increasing energy supply, but it would make it possible to solve. It would make clear the costs and relative values involved. It would at least postpone the drain of capital by taxes just when such added capital is most needed. It would permit profit levels which would support the required raising of capital from public markets. It would release the latent initiative and imagination of American business which has served the public so superlatively in the past.

    The public would be the great beneficiary.

    The government tax collector would be the next major beneficiary since he would take half the return, at least, on the added investment. The deferred taxes should earn more on the investment for the government than the interest on government bonds.

    Our basic energy policy should be clearly stated:

    • Rely on market forces and free market prices for allocation of capital and supplies now.

    • As a matter of national policy, be independent of reliance on foreign sourced energy.

    • Protect the added investment needed for self-sufficiency by adequate tariff walls to offset external cost differentials.

    • Encourage high prices and high profits for energy companies in order to provide more capital.

    • Defer all taxes that exceed dividend payouts in order to conserve capital and encourage reinvestment.

    Do these things and we will not have future energy shortages. We will have the lowest possible cost of energy. We will have the fairest distribution of the cost of the energy we do use. We will also have an energy policy that is consistent with public policy on national security, pollution, taxation and national productivity.

    Period 1964-72 inclusive for U.S. based petroleum companies with revenues in excess of $1 billion in 1972. Source: The Value Line.
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