Wednesday, July 25, 2012

Nuanced Subsidy

Energy is the ‘weak link’ in a variety of industries. In Healthcare, it is the burden that inflates operation costs, making what could be a thousand dollar surgery into a fifteen hundred dollar one. In technology, it is a constant draw turning data centers into money sinks. And in defense, the issue of energy is one of the most pressing demands that any nation’s forces can face.

In the military, one of the greatest burdens for any force is supply lines. They are the unsung logistic nightmare that cripples mobility, inflates expense, and paralyzes forces in their tracks. It has been the policy of almost every military force over the last century to minimize the vulnerability of supply chains. In some cases, this is fortifying the infrastructure necessary… i.e. making sure that the heavy supply chains can be maintained.

However, in other instances, minimizing supply chain vulnerability includes eliminating the need for certain supplies altogether. Nuclear naval vessels are a perfect example of this capacity. A nuclear naval vessel propels itself by the use of a nuclear reactor. This system has no need for the conventional supply chain of diesel fuel in order to keep the ship mobile. Rather, the energy is all harvested and processed in house, allowing for longer, independent, and less vulnerable sails, especially in the case of submarines.

Yet, the Navy is also thinking long term supply chain security. Due to the vulnerability of depending on imported oil, the Navy has been working on a series of green fuel options for its fleet. Fuels made from recycled cooking grease as well as processed algae fuel stocks are looking to wring the navy’s reliance upon conventional oil and its unfortunate foreign stigma.

But, green fuels are not cheap. In fact, proponents against the navy’s push towards a sustainable fuel stock have pointed that the cost of purchasing green fuel is coming in at about $26 a gallon whereas conventional fuel sources are priced at around $4. Especially with the renaissance of America’s natural gas industry due to the advent of widespread fracking, there is a growing opinion that perhaps a reliance upon conventional fuels for the time being is the proper course the navy should set.

Developing alternative fuel resources does open the door to a variety of additional benefits that may not be incorporated at this point yet. The $26 price point is paying for a lot more than simply the gallons of fuel stock. $26 dollars is an investment in internal infrastructure and production system of alternative energy sources. It is sort of like a targeted subsidy. Rather than simply dolling out money to alternative energy providers via grants and other public funding pools, the government is sponsoring green fuel providers through its naval initiatives. This, not only, gives a positive image to the navy, but also provides a more ‘economical’ framework by which alternative fuel firms can establish in a somewhat competitive market.

Obviously, the time for alternative fuels and biofuels to really penetrate the market is not here presently. They lag behind in so many productions efficiency categories that it is difficult to catch up. However, every year they creep closer and closer to the artificially low price point that oil enjoys. In a ‘free market’ economy, there are subsidies not only for the alternative fuels, but also for the conventional ones. If those who wish to cry foul on the undue government spending for alternatives should look at how much money goes into keeping our gas artificially below $4 at the pumps.

The world of energy economies is amazingly complex and to point a finger at one VC project, which is essentially what the navy’s spending entail, is simple minded at best. Countless subsidies ebb and flow giving an energy market dynamic that is neither open, nor fully fair. It is just the nature of the beast. If we did have a purely unsubsidized market, people would have great issues with the amount of money they were shelling out at the pump.

For the time being, I praise the Navy’s targeted subsidy. Go get em.


For more on the great green fleet check out: http://www.reuters.com/article/2012/07/19/us-usa-navy-greenfleet-idUSBRE86I0B220120719


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