Discussion of Energy-Related Issues

[MediumTex]

TBV's right about energy prices.  They weren't really coming down until later in the 80s so Reagan didn't benefit from this until much later in his Presidency.

Below is a chart of oil prices in 2000 dollars:



I'm not taking anything away from Reagan, but a sustained oil price decline like the one above will juice ANY economy.

Similarly, a sustained oil price increase will poison any modern economy (look at what Carter had to deal with), and I don't think it's an accident that the secular bull market for stocks ended right about the time the current secular bull in oil prices started to take off around 1999 (it's also no accident that the recessions of 1981, 1991, 2000 and 2008 were preceded by oil price spikes).

As I have said before, I think it's just bad luck that our demographic situation is shifting in the midst of this period of high oil prices, since either one of these factors can do serious damage to an economy.

Sorry to get us off topic.

[TBV]

MT: There's no denying the Regan era budget facts.  But there's always been considerable effort expended to spin them one way or another. The tax info in your link shows that Reagan didn't raise rates, but did close loopholes and expand the tax base. Yet one rarely hears detractors arguing that in so doing he increased tax "fairness", which he did.  Post-Reagan criticism of his administration focuses heavily on deficits, ignoring the relentless contemporary criticism that he was a ruthless slasher of government spending.  Which shall it be?

You mentioned demographics before, but didn't allude to the 800 pound gorilla in the room, i.e. the huge outlays in the 1970's and 80's for the retirement of the first generation to have spent their entire working lives building up underfunded Social Security IOU's. Total discretionary federal spending in constant dollars rose 13.6% from 1980 to 1988, but mandatory spending (mostly entitlements) rose 24%!  By 1988, despite substantial hikes in defense spending, mandatory spending was still 54% higher than defense spending. A big chunk of the tax increases laid at Reagan's doorstep were in fact quite proper measures to save Social Security and Medicare.

A little perspective never hurts.

[TBV]

MT:  To shift the focus a bit.....

Given the enormous obligations that the federal government somehow has to pay for, and the negative impact of high energy prices on economic growth, how do you feel about pursuing lower energy costs (to juice the economy) versus higher energy costs (to meet political/environmental targets)?

[Lone Wolf]

TBV's right about energy prices.  They weren't really coming down until later in the 80s so Reagan didn't benefit from this until much later in his Presidency.

Below is a chart of oil prices in 2000 dollars:
...
I'm not taking anything away from Reagan, but a sustained oil price decline like the one above will juice ANY economy.

You're right, thanks for casting the right nuance on this topic.  I was recalling how hard times didn't really settle on the Texas energy sector until 1986 (which is when oil prices finally settled back to the levels they had been up to the middle of the Carter years.)  As a kid, I remember how old I was when times "got a little leaner" for us energy sector families.

But the very good point you make is a) that they did start declining a lot in '81, even if it did take them until '86 to hit pre-'79 crisis levels in real terms and b) adjusting for inflation makes this a little more obvious.

[MediumTex]

MT:  To shift the focus a bit.....

Given the enormous obligations that the federal government somehow has to pay for, and the negative impact of high energy prices on economic growth, how do you feel about pursuing lower energy costs (to juice the economy) versus higher energy costs (to meet political/environmental targets)?

I wish it were as simple as deciding that we should pursue lower energy costs.

Since 2005, economists would tell you that a huge amount of new oil should have started hitting the market based upon the price signals.  Instead, worldwide production levels have been stuck at current levels for the past 5 or 6 years, regardless of price.  

In other words, at this point I don't think that a new period of cheap energy is something that we will see again.  There is too much global demand against a supply that seems to be stuck at current levels.  As the peak oil theory suggests, at a certain point world crude flow rates simply can't be increased any more because any new supply that comes on-line is offset by declining production in existing fields.  

That's the problem, and it is why I return to this topic often.  When you have built a world economy premised upon more or less ready availability of cheap energy and that cheap energy is no longer cheap, it's an ominous sign.

The larger problem (among a cluster of large problems) is that economic prosperity requires a constant level of surplus energy (economic prosperity being but one way of deploying surplus energy).  Without surplus energy, many things become difficult or impossible.  In particular, the assumptions on which today's debt is premised normally involve future economic growth that is more or less consistent with historic trendlines.  In other words, the assumption embedded in today's debt (and today's money, since today's money is a claim on future production in the form of debt) is that there will be a similar or larger economic surplus in the future that will allow us to BOTH provide for future consumption AND service today's debt.  If the hoped-for surpluses don't materialize in the future, then the entire financial system may find itself faced with something it hadn't anticipated--i.e., insufficient economic surpluses to service the existing debt levels and provide for future needs.  When this happens, all past promises are normally broken, and this obviously creates a series of serious and cascading problems.

I don't mean to sound so dire, but I make these points hoping that someone will start working these possible future challenges into the way we think about the world economy, because whether we think about them now or not, they will be the factors that shape the future, for better or worse.

[TBV]

MT:  To shift the focus a bit.....

Given the enormous obligations that the federal government somehow has to pay for, and the negative impact of high energy prices on economic growth, how do you feel about pursuing lower energy costs (to juice the economy) versus higher energy costs (to meet political/environmental targets)?

I wish it were as simple as deciding that we should pursue lower energy costs.

Since 2005, economists would tell you that a huge amount of new oil should have started hitting the market based upon the price signals.  Instead, worldwide production levels have been stuck at current levels for the past 5 or 6 years. 

In other words, at this point I don't think that a new period of cheap energy is something that we will see again.  There is too much global demand against a supply that seems to be stuck at current levels. 

That's the problem, and it is why I return to this topic often.  When you have built a world economy premised upon more or less ready availability of cheap energy and that cheap energy is no longer available, it's an ominous sign.

There are lots of moving parts to this topic, though.  I will post more later or start a new thread.

Not to suggest that energy will be cheap (or expensive), but rather that certain forms of energy have market prices that are higher than others.  I'd look forward to an assessment of the systemic costs of choosing some over others.

[Pkg Man]

I think Reagan tried to do what he wanted to do, but one man -- even if President -- can only do what so much.  But right now I'd take a Reagan over any of the major party contenders in a New York minute.

Why does this nation have such fond memories of the Reagan presidency? 

Was Jimmy Carter really so bad?

Yes

[MediumTex]

Not to suggest that energy will be cheap (or expensive), but rather that certain forms of energy have market prices that are higher than others.  I'd look forward to an assessment of the systemic costs of choosing some over others.

There is really no alternative to coal, oil and natural gas.  We have built our world economy to run on these fuels.

When we try to step outside of this paradigm in the form of other energy sources such as nuclear energy, we get unsatisfactory results. 

Most alternative energy sources only become economical when oil is relatively expensive.  Based on the argument I make in the posts above, these alternative sources of energy would be just as toxic to world economic health as expensive oil if they only become viable when oil is very expensive.

It's a real dilemma.

I think the best chance at a non-chaotic transition is going to be some combination of coal and natural gas plugging the holes created by tight oil supplies (along with whatever alternatives we can cobble together).  Unfortunately, this isn't much of a long term fix, and will probably only buy another 10-20 years of business as usual.

This is all just my opinion and speculation, of course.

[moda0306]

Hydrogen fuel cells with a bridge of many smaller cars, less commuting, and hybrids.  That's my guess, for personal transportation anyway.

[MediumTex]

Hydrogen fuel cells with a bridge of many smaller cars, less commuting, and hybrids.  That's my guess, for personal transportation anyway.

You mean the hydrogen that is most efficiently produced using natural gas?

[Pkg Man]

As far as energy, HB had a great argument that the US should not have an energy policy.  While I am not sure I agree with that entirely, the economist side of me sees merit in the approach.  As traditional forms of energy become more expensive, the market will naturally gravitate toward other sources as they become viable.  Government has a generally poor track record in predicting winners, and doing so also opens up a whole host of corruption possibilities (which I guess is one of the reasons government likes to engage in such activities in the first place).

But since we (the world, not just the US) rely to a great extent on an unstable region of the world for our energy needs, a sudden disruption in supply can wreak havoc on the economy.  Taxes on imported oil can lessen this negative externality, but not eliminate it.  The other issue that MT touched upon is what level of reserves actually exist.  There is a lot of secrecy surrounding exactly how tapped out some of the largest oil exporting nations, i.e., Saudi Arabia, really are.  Better transparency would allow the energy markets to accurately price energy and make for a smoother transition than a sudden realization that the well is nearly dry...

[TBV]

It would be nice if we could get a national consensus around the idea that all/most future energy consumption would be domestically sourced.  In fact, sourced as close to the consumption point as technically possible.  That would be a boon economically, politically and militarily.  And would probably result in a very diverse pool of energy generation schemes.

[moda0306]

MT,

I see your point, but in a way, yes.  The internal combusion engine is extremly inefficient.  I think I read that if we used our current electric grid to power a hydgrogen refueling station (sold with each Honda Clarity I think) it would still, even with parasitic loss of the electricity getting to your home, be the equivalent of getting about 100 mpg in a gasoline engine.

I know the hydrogen has to come from somewhere, but internal combustion inefficiency makes it not a simple tit for tat argument, especially if we start running out of oil before uranium, coal and natural gas.

[Pkg Man]

It would be nice if we could get a national consensus around the idea that all/most future energy consumption would be domestically sourced.  In fact, sourced as close to the consumption point as technically possible.  That would be a boon economically, politically and militarily.  And would probably result in a very diverse pool of energy generation schemes.

There would be some advantages to this, in terms of ensuring supplies are not restricted, but this would have no positive effect on prices. 

Oil is a global commodity.  A reduction in supply from any source has the same effect on price.  Even if the US imported NO energy whatsoever, the Libya situation would still result in higher prices here.

Unless the domestically produced commodity is nationalized so that domestic consumption can be subsidized (and this brings about its own problems), the law of one price holds.

[MediumTex]

It would be nice if we could get a national consensus around the idea that all/most future energy consumption would be domestically sourced.  In fact, sourced as close to the consumption point as technically possible.  That would be a boon economically, politically and militarily.  And would probably result in a very diverse pool of energy generation schemes.

That would be nice.

I think a lot of people don't fully grasp the scale of U.S. energy consumption.

The U.S. is an enormous producer of oil, coal and natural gas.  If we could somehow dramatically reduce our energy consumption, we would have plenty of domestic natural resources to fund a still relatively high level of energy use (much higher than most industrialized nations).  Few other countries in the world have the domestic natural resources that we do (even after decades of production).

The basic problem seems to be that energy prices increase quickly and new energy initiatives develop slowly (or not at all).

Although I am generally against government imposed solutions, it would be nice if there were stronger incentives to purchase smaller more fuel efficient cars.

[Pkg Man]

It would be nice if we could get a national consensus around the idea that all/most future energy consumption would be domestically sourced.  In fact, sourced as close to the consumption point as technically possible.  That would be a boon economically, politically and militarily.  And would probably result in a very diverse pool of energy generation schemes.

That would be nice.

I think a lot of people don't fully grasp the scale of U.S. energy consumption.

The U.S. is an enormous producer of oil, coal and natural gas.  If we could somehow dramatically reduce our energy consumption, we would have plenty of domestic natural resources to fund a still relatively high level of energy use (much higher than most industrialized nations).  Few other countries in the world have the domestic natural resources that we do (even after decades of production).

The basic problem seems to be that energy prices increase quickly and new energy initiatives develop slowly (or not at all).

Although I am generally against government imposed solutions, it would be nice if there were stronger incentives to purchase smaller more fuel efficient cars.

If this is the desired goal, and I can see advantages of having fewer SUVs on the road, higher gas taxes are the most efficient way to accomplish this goal.  The worst way to accomplish this goal is to impose CAFE standards, which provide perverse incentives to domestic auto makers.

When gas prices first hit $3+ dollars a gallon a few years ago, I saw a lot more scooters on the road.  I expect they will be brought out from the back of the garage shortly.

[moda0306]

Maybe we should start a new thread regarding whether the free market properly deals with scarce resources in the following two ways:

1) Externalities... probably the easiest question to answer... it doesn't.  The government may always screw up the solution, but externalities are very clearly a market-error.

2) Extraction pace and choice of alternatives.... given that our resources were here before we got here, is there any moral issue with simply using them all up as we see fit to leave none for the next generation?  Does the free market properly account for prices related to scarcity over a period of time?  Does government need to have any role but properly taxing aforementioned externalities?  I think we can all agree ethanol's a bad idea, but are there any things the government can do, infrastructurally, to help?  Mass transit?

Pkg, I agree on cafe... just tax the sh!t and spare us self-defeating reg's.

[MediumTex]

The energy topic is obviously of great interest to me, and I think it will be one of the defining features of our time.

One of the toughest tests to put any investment strategy against is a fuel crisis (whether short-term or long-term) and I think the permanent portfolio would hold up as well or better than any other approach in the event that any of the scenarios I am describing should come to pass.

Moda, I think the short answer to much of what you posted above is that some kind of new and improved rail system makes a lot of sense.  The problem with this solution in the U.S. is that it is not suitable in many parts of the country due to low population density.

[Lone Wolf]

Although I am generally against government imposed solutions, it would be nice if there were stronger incentives to purchase smaller more fuel efficient cars.

Aren't higher prices at the pump a fairly strong incentive to do so?  In other words, if energy prices rise due to scarcity, wouldn't this incentive occur naturally?

There's a lot of oil out there.  The issue is that it gets more and more costly to extract, driving up prices.

Interestingly, I think that the world's energy problems got a whole lot stickier due to the terrible trouble at Fukushima.  Nuclear power, once you get through the costs of getting it cranked up, is an amazingly efficient, dense energy source.  It's now carrying a lot of baggage and the only thing currently available to pick up its slack is fossil fuels.  That's a problem.

[MediumTex]

There's a lot of oil out there.  The issue is that it gets more and more costly to extract, driving up prices.

It's not the size of the drink, it's the size of the straw.

Peak oil is all about flow rates and the size of the world straw has been telling us for the last few years that about 85-90 million barrels a day may be the most the world will ever produce.  The increased production costs are not to expand the diameter of the straw, they are merely intended to keep the diameter of the straw from contracting, which is sort of discouraging.

Oil will be with us for decades if not hundreds of years, but once the flow rate goes into terminal decline, a very beneficial tailwind to human progress will all of the sudden turn into a headwind.

There are, of course, a lot of unknowns that will fill in the gaps in the future, but the thing that troubles me is the basic lack of informed discussion occurring around this issue at all.  It seems like a fringe subject that has almost no meaning to most people beyond some scary alarmist narrative they might have heard somewhere.

In many ways, fossil fuels are almost a magical substance.  One gallon of gasoline can do in minutes or hours the work it would take a single person several days (or more) to complete using just physical strength.  Other activities such as large scale aviation require concentrations of energy that are simply not available in any form other than fossil fuels.  Although we take it for granted, it's pretty amazing stuff.

Great discussion.

[Lone Wolf]

In many ways, fossil fuels are almost a magical substance.  One gallon of gasoline can do in minutes or hours the work it would take a single person several days (or more) to complete using just physical strength.  Other activities such as large scale aviation require concentrations of energy that are simply not available in any form other than fossil fuels.  Although we take it for granted, it's pretty amazing stuff.

You nailed it.  What makes fossil fuels so darn useful is their very high energy density.  In other words, you can get lots and lots of energy out of a small, compact substance.  This is why solar, wind, etc. behave as nice supplements but simply do not close the gap.

Nuclear energy is amazing in that it is many times more efficient even than fossil fuels.  That's why I did (and still do, in spite of recent events) hold out great hope for it.

Whatever the eventual replacement for fossil fuels is, it's got to be something dense.  Until then, fossil fuels just aren't going anywhere.

[TBV]

Electricity seems to have a lot of flexibility as an energy source.  It works for machinery, transportation, HVAC, lighting, cooking, etc, etc.  If we could focus (as a country) on maximizing a preference for electricity usage, then the choice of what to make it with could be left up to local option and future innovation.

A stable, predictable and more easily defendable energy system would have many advantages.  Cost should not be a primary focus, since I think supply interruptions are more disruptive to our economy than price increases.  Also, the price of commodities like oil can be (and have been) manipulated to inhibit the adoption of alternatives.

[Lone Wolf]

Electricity seems to have a lot of flexibility as an energy source.  It works for machinery, transportation, HVAC, lighting, cooking, etc, etc.  If we could focus (as a country) on maximizing a preference for electricity usage, then the choice of what to make it with could be left up to local option and future innovation.

Yeah, I could see a lot of advantages to doing this.  For example, imagine you have an electric car (that doesn't suck) and an electrical grid based on some super-efficient source of power such as nuclear.  This would be much more practical than trying to drive around with a personal nuclear reactor or Back to the Future-style "Mr. Fusion" in your car.

The next problem, then, is decent battery technology.  Unfortunately, it has been very hard to move the ball forward on battery technology.  A sudden innovation in battery tech could, I think, create the preference for electricity that you're seeking.

[MediumTex]

It's important to remember, too, as LoneWolf touched upon, that electricity is not a source of energy, it is a means of transmitting energy that has been produced using some other means.

While I agree that nuclear power can produce very large amounts of energy, I think that we have failed to fully appreciate the complete life-cycle cost of nuclear power.

The basic problems with nuclear power, in my view, are that it results in catastrophic system failures far more often than the risk management models suggest, and it involves a commitment to store and monitor waste materials for longer periods that any human society has ever existed.

Thus, what one would expect to see going forward would be far more nuclear power station partial or full meltdowns than expected and more or less continuous nuclear waste-related environmental damage.

If you factor these realities into the overall cost of nuclear energy (which already has very high startup and decommissioning costs) I don't know if it is as cheap a form of energy as we think.

[TBV]

It's important to remember, too, as LoneWolf touched upon, that electricity is not a source of energy, it is a means of transmitting energy that has been produced using some other means.

While I agree that nuclear power can produce very large amounts of energy, I think that we have failed to fully appreciate the complete life-cycle cost of nuclear power.

The basic problems with nuclear power, in my view, are that it results in catastrophic system failures far more often than the risk management models suggest, and it involves a commitment to store and monitor waste materials for longer periods that any human society has ever existed.

Thus, what one would expect to see going forward would be far more nuclear power station partial or full meltdowns than expected and more or less continuous nuclear waste-related environmental damage.

If you factor these realities into the overall cost of nuclear energy (which already has very high startup and decommissioning costs) I don't know if it is as cheap a form of energy as we think.

Assessing overall energy costs and dangers should not be the sole responsibility of the nuclear power industry.  For example, burning coal and fossil fuels puts 2,000 tons of radioactivity in the air every year.  The amount of nuclear fuel released into the atmosphere each year as a result of coal combustion exceeds the amount of nuclear fuel used to generate power in nuclear reactors!  Now that's wasteful!!  The amount of radioactive material released by coal plants each year is 100 times the amount released by nuclear plants.  The number of serious mishaps at nuclear plants has actually been extremely rare.  In fact, the number of fatalities related to wind power production dwarfs anything related to nuclear.

Let's recall that the Fukushima reactor was not destroyed by the biggest earthquake in Japanese history, even though the earthquake vastly exceeded the plant's 40-year old design specs.  Nor did the tsunami breach the reactor core.  Instead it was the loss of power to run the pumps and the on-site storage of spent fuel (not secured under the core dome) which led to the excessive heating, explosion and subsequent releases into the atmosphere.  Had the backup generators and spent fuel not been placed in so vulnerable a location, this event would probably not have occurred.

Bear in mind that spent nuclear fuel is the one form of waste that the environmental lobby refuses to recycle. 95% of the material in used fuel rods can be recycled, vastly reducing both the cost of nuclear fuel and the volume of waste.  However, current federal regulations prevent this from being done and directly leads to the prevalence of on-site storage.  Not very smart.

Part of the problem with nuclear fuel is the hysterical reaction that people have to anything involving radiation.  They overlook the fact that radiation is naturally occurring and is to be found all around us every day in our water, air and soil.  Media reports about Fukushima radiation levels being XXX% above "normal" overlook the fact that typical levels are practically zero and even elevated levels of the sort found in Tokyo or other distant locales were less than what one receives getting a dental X-ray or flying in a plane.  Today, I see reports that Japanese authorities now "admit" that Fukushima is equivalent to Chernobyl.  Well, what if it is?  Even after decades of research, the number of documented deaths attributable to Chernobyl is surprisingly low, far lower than the Texas City disaster of 1947.

Lastly, money spent on costlier forms of energy production is money not spent on education, infrastructure, health care, transportation, urban renewal, or food and shelter. The moral burden of selecting clean, efficient fuel sources involves these considerations as well as any other.  Choices have consequences, and big choices should be the result of calm public deliberation, much calmer than the sort we are often exposed to.  (Pun intended.)


http://www.ornl.gov/info/ornlreview/rev ... lmain.html

http://www.foxnews.com/story/0,2933,318688,00.html

http://www.ask.com/wiki/Deaths_due_to_t ... l_disaster

http://en.wikipedia.org/wiki/Texas_City_Disaster