Economic Dreams - Economic Nightmares

Gas Prices Not 'Outrageous'

On mainstream news this morning I heard our Utah Governor declare US gas prices "outrageous". Memorial Day national news coverage labeled them "sky high." Wrong! Gas prices only seem outrageous to we Americans who George W. Bush correctly noted are "addicted to oil".

Europeans, by contrast, have lived with high gas prices for years, using proceeds to fund social programs, re-build infrastructure, etc. In addition, as noted in a May 21 Senate-side Congressional hearing Exploring the Skyrocketing Price of Oil (3 hrs), Europeans used gas tax differentials to correctly steer transportation systems toward diesel and away from gasoline, which proves ever-more important now that clean diesel is available. And to steer transportation system toward mass transit and away from single-vehicle transportation. Meanwhile we Americans sat around watching TV and partying until world market forces pushed prices upward, allowing most of the recent 'surplus' to be captured as record profits, record CEO compensation, etc. by what I'll call the Petrochemical Industrial Complex. Finally, Europeans are now beginning to look toward a future free of dependence on petrochemicals and their commingled carbon-loading propensities.

Even though we Americans are just now beginning to face the reality of high gas prices, the prices themselves are not the problem. In fact "sky high" prices are finally getting us to pay attention, however feebly, to alternative sources of energy that are compatible with global climate systems and human survival. As noted in the Congressional hearing, planet Earth is not in jeopardy, rather it is we humans (along with myriad other species) who are at risk. The Earth has worked its way through five Great Extinctions in the past and arguable done remarkably well. But it is in no way clear that we humans will survive the Sixth Great Extinction. Tragically, we humans may be contributing to our collective demise by clamoring for lower gas prices.

This is not to say that all is well in petrochemical industrial complex, medical industrial complex, financial industrial complex, military industrial complex America. But that is a story for another post (or several hundred posts). In the meantime 3 hours are well-spent viewing the hearing. If you want a sneak peak, go to 2:15 in the videocast and watch Senator Charles Schumer (D-NY) in action, followed by others as the hearing winds up.

Note: cross posted at Ecological Economics

Roubini Jumps on the Gas Tax Bandwagon

Last week Nouriel Roubini joined a long list of other economic "notables" by advocating a US gas tax of about $1 per gallon (phased in at about 10 cents per year for a decade):

It's High Time for a Carbon Tax: ... Think of a policy action that would:

• Help reduce the large U.S. budget deficit and even make permanent some – but not all – of recent tax cuts
• Reduce the unsustainable U.S. trade deficit
• Reduce truly – not just rhetorically - the U.S. dependency on oil and energy imported from unstable regimes in the Middle East and other regions and would improve U.S. national security.
• Start seriously dealing with the problem of climate warming induced by greenhouse emissions, a problem prominently addressed by the recent Stern Report.
• Reduce the pre-tax equilibrium global dollar price of oil and thus improve the terms of trade of oil importers
• Reduce the power of unstable “Petro-States” (to use the Tom Friedman expression)
• Reduce road congestion and our demand for gas-guzzler vehicles
• Have broad bipartisan support 

What is that policy? A “Carbon Tax”…

A long list of … economists and policy makers on both sides of the political spectrum have come in support of the idea of an energy or carbon tax including Larry Summers, Alan Greenspan, Martin Feldstein, Paul Krugman and Gary Becker.

A tax that reduces the budget deficit, the trade deficit, helps to solve the global warming problem and cleans up the environment, reduces the power of unstable regimes that export oil, strengthens the U.S. national security, has broad bipartisan support.

Economic Swan Dive

Jim Kunstler had a banker take him to task recently for failing "to appreciate the fantastic resilience of American can-do enterprise." Kunstler didn't budge, and reiterated his perception of a "chronically diseased" US economy. Adding, "It must be in the nature of a stock market melt-up, of the type we've seen the past month, to exert a hypnotic effect on herd expectations…" that has led to recent market euphoria. Here, in part, is what drew the banker's ire:

Swan Dive
Oct 9, 2006

…The trouble with finance [in a Peak Oil World] is a system that uses paper markers [that represent false] hope and expectation for the expansion of wealth. These markers are currencies, stocks, bonds, option contracts, derivatives plays, and other certificates that are traded in open markets. If there is no longer any hope of increased wealth in the world, then all those tradable paper markers become losers. Their value unwinds and imagined piles of wealth evaporate into thin air.

The unwinding process depends on the psychology of the people who own these certificates. If they do not understand the global oil situation and its implications, then they will continue to hope for and expect expanded wealth, and thus continue to regard their paper certificates as credible markers of value. And that is largely the case at the moment, since most of the playas in the financial markets are not paying attention to the peak oil story, or don't believe it is for real.

Two special and transient circumstances are now propping up the financial markets. One is that for practical purposes the world is virtually at peak, meaning this is an extra-special time of strange behavior (like the point in the apogee of a steep sub orbital flight in which passengers become momentarily weightless). Supply and demand for oil are only beginning to go out of whack (that is, demand just barely exceeding supply). Even at this early stage, the oil markets themselves are showing stress, as hoarding behavior sets in and induces wider swings of price volatility. But these swings in oil prices -- such as the one we're in right now, where prices have crashed 20 percent since the panic buying (hoarding) of June and July -- send false signals to the financial playas. The main false signal is that all is well on the global oil scene...there's no real supply problem...and hence no threat to the continuing expansion of industrial production and its associated wealth-generating activities. This signal just tells the playas to buy more paper markers. Thus, the stock market goes up.

The second special and transient circumstance is that so much wealth has already accumulated along the way to peak, that financial markets take on a life of their own -- as existing wealth "invests" itself in more paper markers hoping and expecting to "grow" into even more wealth. The problem here is that existing wealth is actually being squandered, since the paper markers will only lose value as the hopes and expectations vested in them dissolve in disappointment. But we haven't quite reached that point yet.

In simply bidding the markets up, the system has spun off even more gobs of presumed wealth. Some of this "liquidity" -- say, in the checking accounts of people who work for Goldman Sachs -- has found its way into Manhattan condominiums, or Aspen McMansions, and filtered through the system to everyone from the lawyers who write up the pre-nuptial agreements to the guys who sell the furniture to the people who drive the delivery trucks that bring it to the door, to the men laying tiles in the new bathrooms.

The basic insanity of a system that presumes vastly increased wealth where none will occur, has led to further distortions in finance. The most obvious one is the so-called housing bubble. The misplaced extreme expectation in the ever-increasing value of paper wealth, led to the hijacking of mortgages by financial playas who bundled them into odd lots of tradable debt (promises to pay) and used them to leverage abstruse bets (hedges) on the behavior of other kinds of paper markers (currencies, interest rate differentials, commodity prices) -- very profitably as long as all playas believed that industrial societies that run all oil would continue to grow, to produce more wealth. The level of abstraction in these rackets -- their distance from the reality of productive activity --is self-evident.

But they were so successful that the profligate creation of ever more mortgages became an increasingly reckless and irresponsible enterprise. Contracts were made with house-buyers who had no record of credit worthiness and often no real proof of income. Contracts were made on terms (interest payments) that were deceptive, even ruinously false, for the house-buyers. The reckless reassignment of lending risk into ever more abstract layers of deferred obligation, and the ease of credit that ensued, allowed millions of ordinary people to acquire real property on unrealistic terms, which had the affect of bidding up the price of houses that these owners will eventually have to surrender for nonpayment.

That process is now underway. The reckless creation of mortgages had the further effect of stealing demand for house-building from the future. So many new houses were built and then sold to people who will probably have to surrender them, and then so many more beyond that were built in the expectation and hope that reckless mortgage creation would continue forever, that there is now a massive over-supply of total existing houses while the pool of suckers for new ruinous mortgages has shrunk to zero.

Similar excesses in all the other lending and debt sectors, including "non-performing" credit card obligations and government deficits, will also unwind and thunder through the system.

Meanwhile, the false signal from the oil markets that has been broadcasting for eight weeks will come offline and a new signal will come on as prices go back up. The pause in bidding for future oil induced by the panic over-buying of the summer will end. The heating season is here. It's 40 degrees out in upstate New York this morning and the furnace is cranking. The Chinese and the Indians and even the people in France have not stopped using oil, even if Americans have put their Winnebagos up on blocks for the season.

As the price of oil goes back up, the financial markets will get a new signal that running industrial societies has just gotten more expensive again. That will dampen hopes and expectations for increased wealth from these societies. Meanwhile, the air will be coming out of millions of mortgages, and the loss of value will spread among playas holding these bundles of mortgage debt (i.e. promises that money spent on houses is being paid back, which it won't be). At the same time the houses themselves will lose value as the pool of potential buyers shrinks to nothing. That is, the inflated value (high price) of these assets will deflate.

As this occurs, there will be far fewer wage-earners putting up additional houses, fewer furniture sales, fewer trips by delivery truck drivers and fewer tile-jobs in the McBathrooms.

This is why I view the fall melt-up of the stock markets as a swan dive. We're at the apogee now, just as the world is at the apogee of its oil production. I confess, I thought the reality of our economic predicament would be recognized by the playas and their markets sooner than it has. It turns out the the chief luxury of the final cheap oil blowout has been the artificial support of unrealistic hopes and expectations. [empahsis added by Iverson]

Perpetual Economic Growth and Cheap Energy Myths

Columnist Charley Reese is often insightful. In his May 19 Be Prepared, Reese sums-up mistaken, yet pervasively held notions of perpetual economic growth fueled by cheap energy that prove "particularly difficult to dislodge from the American mind."

One of the most pervasive and damaging myths in modern society is the belief in perpetual economic growth. Like the perpetual-motion machine, perpetual economic growth is an impossibility.

This notion is particularly difficult to dislodge from the American mind because economic growth has been part of our lives. We've seen it with our own eyes. Of course, part of what we've seen is an illusion of growth created by gradual devaluation of the currency and statistical games played by the government.

But nevertheless, there has been real economic growth, and it has been powered by cheap fossil-fuel energy. "Cheap" is the operative word here. Subtract cheap fossil-fuel energy, and the life we know will be altered drastically — perhaps, if we don't prepare for it, catastrophically. …

[O]ur cheap fossil-fuel energy is on the verge of running out. According to essayist Wendell Berry, 99 percent of the oil burned has been burned in the lifetime of people still living. Something that took nature thousands of years to create is being consumed in decades. …

How did the notion that 6 billion people couldn't deplete Earth's resources ever get started in the first place? The constants in human nature throughout history have been selfishness, greed and a willingness to sacrifice the future for short-term gain. That's exactly what we are doing by laying a trillion dollars' worth of debt on our posterity. …

Energy represents a temporary value. … Military expenditures represent yet another ghostly and temporary value. … Paper is another impermanent value. If you think the paper your shares of stock are printed on has any permanent value, ask the people at Enron, who one day were well off and the next day were flat broke.

We just need to start thinking about the post-cheap-energy era. If your house, for example, is 25 miles from work, what will happen to its market price if gasoline is $6 a gallon? What will happen to public education if cheap energy becomes a thing of the past, as it surely will? Can we then afford to power the buses and the air conditioners and the lighting? …

Cross-posted at Ecological Economics

Ethanol: Whose subsidy? At what cost?

Foreign Policy, March 7, 2006 features The Green Bullet by Lester B. Lave, W. Michael Griffin. The authors begin: "There's a straightforward way for Washington to end America’s addiction to foreign oil, while reducing greenhouse gas emissions and resolving the impasse on international trade: Turn farm subsides into fuel subsides." Then they offer up minor "economic" and "environmental" roadblocks, that they easily dismiss:

...So what’s the catch? Corn farming is rough on the environment. Soil erosion due to wind and water is rampant. Fertilizer and pesticide runoffs produce algae blooms that result in “dead zones,” including one in the Gulf of Mexico that is so polluted it cannot support aquatic life. Furthermore, building the ethanol processing plants will take 3–4 years, and gas stations would have to commit to providing ethanol. And, because ethanol uses only the starch in corn, not the oil, protein, or other components, converting corn into ethanol is attractive only if there is a market for the byproducts. Opinions differ, but some estimate that byproduct markets could saturate well short of 11 billion gallons of production.

Fortunately, the surplus corn that isn’t economic to convert to ethanol doesn’t have to be grown, because it could easily be replaced with switchgrass. The prairie grass that President Bush mentioned in the 2006 State of the Union Address is naturally resistant to many pests and diseases, requiring far smaller amounts of chemicals and fertilizers. It’s also drought-tolerant and can grow in poor soil. Most important, it can be used to produce ethanol. If the current federal subsidy given to corn were extended to switchgrass, farmers would realize approximately the same income per acre as they do growing corn today. The new crop would use less fertilizer and pesticides, resulting in less erosion. Fertilizer and pesticide runoff would be dramatically reduced, and much of our motor fuel would be renewable.

To be sure, producing ethanol from switchgrass uses new technology that isn’t fully developed. There are pioneer plants in Canada and Brazil, but the costs of commercial production are unclear.

… And the best part: It can be done without Washington spending a dime more than it already does.

Others are not so sanguine. Robert Bryce's Corn Dog, Slate, July 19, 2005, is subtitled "The ethanol subsidy is worse than you can imagine." Bryce cuts quickly to the chase:

...The stickiest question about ethanol is this: Does making alcohol from grain or plant waste really create any new energy?

The answer, of course, depends upon whom you ask. The ethanol lobby claims there's a 30 percent net gain in BTUs from ethanol made from corn. Other boosters, including Woolsey, claim there are huge energy gains (as much as 700 percent) to be had by making ethanol from grass.

But the ethanol critics have shown that the industry calculations are bogus. David Pimentel, a professor of ecology at Cornell University who has been studying grain alcohol for 20 years, and Tad Patzek, an engineering professor at the University of California, Berkeley, co-wrote a recent report that estimates that making ethanol from corn requires 29 percent more fossil energy than the ethanol fuel itself actually contains.

See also Science Daily, April 1, 2005 , Study: Ethanol Production Consumes Six Units Of Energy To Produce Just One,
And, especially, Ted Patzek's collection of Biofuel Literature.

Obviously my bias lies with the skeptics. Are we wrong?

Posted first on Ecological Economics

Economics and Politics of Global Warming

On today's ABC News "This Week" George Stephanopoulos interviewed Gov. Brian Schweitzer, D-Mont. about global warming, after they touredGlacier National Park via helicopter. Then Stephanopoulos put together a panel including Katrina vanden Heuvel (The Nation), George Will ( ABC News), and Fareed Zakaria (Newsweek) to discuss the issue. The discussion follows on the heels of, Time spotlighting global warming on the cover of their April 3, 2006 issue with the catchy title: Be Worried. Be Very Worried.

Montana's Gov. Schweitzer is a "global warming" believer and advocates a massive effort to develop coal liquefaction as a means to both wean us from what George W Bush elsewhere referred to as our addiction to foreign oil, and to help in the battle against global warming. Schweitzer stressed that CO₂ released in the liquefaction process could be effectively sequestered underground so as to negate one frequently noted drawback to coal liquefaction. Schweitzer too stressed the need to help the China and India to avoid adding the number of currently planned power generation plants using conventional technology, warning that we just can't afford, environmentally, to add that amount of carbon to already stressed planetary systems.

As usual, George Will was steadfast in his opposition to global warming, saying that even if we were experiencing human caused warming, we couldn't afford to do anything about it.

The other two panelists considered global warming a high-priority policy issue, and didn't allow Will the upper hand in the discussion. Katrina vanden Heuvel thought that a carbon tax might help in the weaning process. Fareed Zakaria noted that he believes scientists have declared the debate to be over, that only the "loonly" are found among those scientists still debating whether or not we humans are causing a major problem with our continued carbon loading.

Beyond Peak Oil: Teaming Up Wind with Nuclear Power?

In Scientists Offer Hydrogen Fix, David Shiga of Wired News reports, "Two scientists say they have come up with a way to make hydrogen fuel cheap enough to compete with gasoline, by combining nuclear and wind power. " Shiga adds:

In the system envisioned by Alistair Miller and Romney Duffey of Atomic Energy of Canada, nuclear power plants would be paired with wind turbines to power electrolysis cells, which make hydrogen by passing an electric current through water.

Wind on its own is too variable, Miller says, leaving electrolysis equipment frequently idle and driving up costs. "The economics just don't work," he says. "It produces very expensive hydrogen."

Pairing it with nuclear would keep the equipment operating closer to full capacity and bring the cost down, he says. A bonus is that when the wind is strong and electricity demand is high, excess power can be sold at a profit to the grid. This means that, unlike traditional electricity-based hydrogen production, Miller's system actually makes hydrogen cheaper as the cost of electricity goes up.

Using time-varying electricity price data from Ontario and Alberta, Miller and Duffey calculate that their system can produce hydrogen at $2 per kilogram, easily meeting the U.S. Department of Energy's goal of $2 to $3 per kilogram by 2015. One kilogram of hydrogen is considered equivalent to one gallon of gasoline.

Miller and Duffey recently presented their system, which they call NuWind, at the 2005 Canadian Chemical Engineering Conference in Toronto.

Other hydrogen advocates aren't thrilled about the idea of building nuclear power plants to produce hydrogen, however. …

Miller argues that radiation from nuclear power plants is tiny compared to what people get from natural sources and that there are cheaper paths to nuclear proliferation than building a nuclear power plant. He also maintains that the risks of terrorist attacks are overblown. "You can fly a 747 into a nuclear reactor and it's very bad for the 747 but it won't actually do anything to the meter-thick concrete around the reactor core," he says.

And given growing concerns about climate change, he says, society can't afford to dismiss any options for reducing carbon emissions. "We need all the carbon-free sources we can possibly lay our hands on." …

Nearly all hydrogen today is obtained from natural gas in a process called steam methane reforming. But unlike electrolysis, this method produces carbon dioxide, and is growing more expensive as natural gas prices rise.