Maginot Line Mentality

By Douglas L. Faulkner, “The Cleantech Conservative”

Following the long bloodbath of World War I trench warfare, the war-weary French spent the interwar years building the Maginot Line, a supposedly-impenetrable defensive structure, to prevent another such tragedy and give them the edge over their historic enemies, the Germans. Unfortunately, France’s massive effort failed to anticipate the rapidly changing technological and other trends which Germany exploited, making a feared repeat of the Great War impossible – – and, rendering the much-touted French defensive preparations obsolete in the face of an even worse conflict.

Historians still speculate on other possible outcomes had the French spent their time and treasure on mastering the new technologies of the offensive instead of re-fighting the last conflict. Our biofuels leaders need to be preparing for the coming conflicts on-the-horizon or face the reality that the battle will just sweep around their Maginot Line.

History rarely fully repeats itself, but there are uncomfortable parallels with today’s efforts to defend at all costs the status quo, like the seven-year-old Renewable Fuels Standard (RFS). I fear this approach is missing an historic opportunity to build a sustainable path for long-term growth in biofuels and bio-based products.

It does not appear any of the experts are looking at the entire picture of the evolving and increasingly inter-connected agricultural-energy-transportation sector, let alone suggesting a plan with all, or even some, of the right policy moves.

Here are my suggestions on where to start digging:

1. What are the long-term supply-and-demand trends for transportation fuels? There are multiple indicators that our assumptions of even a few years ago are woefully out-of-date, such as the changing driving habits of the American public and the rise of new transportation technologies. The good news for the U.S. taxpayer is that rising domestic oil and gas production has significantly reduced our trade deficit and American consumers benefit from the growing cornucopia of choices for personal transportation. (Witness the wide range of vehicles with more efficient gasoline and diesel engines as well as hybrid, electric and unconventionally-fueled power plants on display at auto shows.) But both of these “good news” stories are potentially bad news for not only the biofuels industry but also eventually the oil and auto industries, all of which are facing regulatory battles, shifting tastes and cost pressures on multiple fronts. I believe these three industries could find new common ground in response to changing circumstances.

2. What would be the impact of falling prices for petroleum and refined products for the emerging biofuels industry? Of course, who knows where prices are going, but has the biofuels industry been too complacent regarding continued high prices for crude and failed to plan for a possible scenario of over-production and falling prices of its competitor?

The interplay of market forces only grows more complex and unpredictable with the changing global oil production picture and the rise of fracked natural gas as the feedstock of choice for the petrochemical industry and maybe a rising competitor for transportation fuels.

3. How can the biofuels industry increase demand for its products in such a rapidly changing market? This may mean embracing new or strange bed-fellows. Or, perhaps more accurately, turning opponents into allies by teaming with Big Oil, for example, to push for the end of the embargo on U.S. oil exports. Viewed another way, collaborate in a quid pro quo manner that helps build a more robust global market for U.S. biofuels and its supporting technologies.

Or, help develop an energetic R&D agenda to support the biofuels-to-hydrogen pathway, in conjunction with the suppliers of fuel cell autos. Or, simply join the current fight over gas taxes and the highway trust fund or elbow into the upcoming lobbyist brawl over the 2017 review of the Obama Administration’s fuel economy standards. Both moves could help to avoid further dampening of consumer vehicle fuel demand and killing the golden goose. I would challenge all of us to ponder what other new market-building opportunities are now being ignored and what common ground can we find with potential allies.

4. What’s Obamacare (aka the Patient Protection and Affordable Care Act) got to do with it? As I have argued in this column before, conservatives hate government mandates and market distortions, rather than biofuels per se, but this distinction is now effectively a tangled mess from the right’s viewpoint. The industry needs to portray earlier legislation as necessary and initial stepping stones to building a healthy, jobs-creating industry with much less reliance sooner-rather-than-later on government fiat. The good news potentially for the biofuels industry is that the hottest political battle for at least this fall’s Congressional elections will be over Obamacare, which the right views as the ultimate federal intervention in the marketplace.

The bad news is that the harder the industry and its supporters push to overturn the EPA’s current proposed biofuels ruling the more it will undermine political support on the right for the current RFS. The biofuels industry should think very carefully about its current stance of “no retreat” from the 2007 legislation and its resultant regulation, rather than embracing reform on its own terms to adjust to new realities only dimly appearing on the horizon for the coming decades. A more conservative Congress in 2015 may well decide to broaden its attacks on federal over-reach in the run-up to the 2016 elections and the biofuels industry should move now to anticipate that shifting tide and avoid giving opponents on the right such a juicy target.

5. What steps could government take other than mandates? All sides in the debate would benefit from looking to American history for inspiration for successful federal market interventions, as the transportation sector of the future and the constraints of federal debt come into better focus.

Yes, the annual deficit has lately been falling, but the long-term trend for rising debt remains very scary. So, with massive new federal spending programs off-the-table and discretionary spending dropping, what targeted, short-term, low level federal efforts with industry and state support could give the biggest bang for the buck?

6. How can U.S. rural prosperity be sustained and world hunger be tackled? The last few years have been unprecedented for the wealth flowing to growers and many American rural communities. But, the iron laws of supply and demand still reign. Commodity prices and land prices are softening, as they fall into the typically cyclic pattern. We need to find ways to technically, environmentally and economically better understand the production and use of a broad range of feedstocks, the impacts of co-product generation as well as other markets outside the immediate biofuels arena.

How can global feedstock price and supply volatility be reduced while ensuring the continued growth of food production and trade for a more populous and hungrier planet? It all calls out loudly for new inter-disciplinary, multi-market analyses, and the courage to break new ground.

These are just a few of the emerging new questions muddying the waters for policymakers and industry leaders. Yes, it is important to avoid sudden rule changes and to protect past gains. But, it is also critical to see clearly how the future will be different from the past and embrace those opportunities early enough to make a difference.