Why is it that nothing seems to turn the key in our economic engine? The president and his band of merry economic advisors have been furiously manning the handle of the Keynesian pump, “Zimbabwe” Ben Bernanke has been sloshing drums of ink into the Fed printing presses. We have sold the future of our children to China for debt like a drunk sells his last drop of blood for just one more drink of Mad Dog 20/20. Congressional Democrats have been busy lowering our health care bills by giving birth to Obamacare (the one time we wanted them to be pro-abortion, they let us down). What went wrong? Why is the economy not moving forward? Why is unemployment still over 9%?
All of it can be explained in two words – energy policy. Many would say that it is the lack thereof but that isn’t true. As with so many things that this current administration does, an energy policy exists, it is just being enacted in a back-handed, de facto manner.
One of the most significant hurdles that our economy has to overcome is the lack of fuel to feed growth. Keynesians believe that government involvement in the economy by “incentivizing” consumption via “stimulus” (government) spending is an appropriate way to initiate growth. Part of that is true, an increase in demand does spur consumption and generates economic growth but the caveat is that there must be a reason for the consumer to spend. The big fallacy in the Keynesian proposition is that not all spending is equal, especially if debt is involved. Government creating debt has an impact on the market for leverage by crowding private sector instruments out. If debt must be generated to spend and the net consumption is not greater than the cost of the debt, the net effect on the economy is at best zero and at worst negative…and the availability of leverage to finance growth disappears.
That is the reason sustained growth and recovery simply cannot be generated by short term bursts in government “incentivization” via public works projects that yield no economic impact (repaving roads is nice but it does not provide a benefit as long as the old road is adequate for purpose), cash for clunkers (replacing a serviceable asset with a new, more expensive one only serves to reduce static inventories and the destruction of usable assets drives supply down and prices up in the secondary markets) or direct payments/tax credits to citizens who are cautious or uncertain about the future (they use that to offset current expenses or save the money and reduce spending).
Then how do we increase demand and what has that to do with energy policy?
Energy is the key. Energy in its various forms – electricity, oil, natural gas and coal – is at the root of every product, process and environment in the world. Things are made from it, it is required to fuel the processes used to create and it is required to make harsh or uncomfortable environments habitable or more comfortable for living beings. Take a basic item, food, as an example: production productivity relies on the fuel for mechanized equipment to cultivate, harvest and process, it requires the use of chemicals – seed coatings, fertilizers, herbicides and insecticides, processing and packaging requires energy to keep factories running, transport it to market and to make the sanitary packaging for mass distribution…it is clear that an increase or decrease in energy costs can have a significant impact on the cost of food.
The best way to generate sustained demand is to make a product less expensive without sacrificing quality or availability. This means that working on the price side of the equation, as Keynesian economics does, while ignoring the cost side will never produce a sustained recovery or period of growth. Lower costs mean people can afford to buy more at a given level of income and not only will they buy “more” in quantity, they are able to buy “more” in relation to the quality as well.
What we are seeing today is a relatively unique situation where energy costs are rising even though supply is high and demand is low. Based on any economic model, this is the recipe for lower prices – but with energy, that is not the case. As the chart below shows (it tracks GDP, unemployment rate, the cost of unleaded gas per gallon excluding taxes, natural gas per thousand cubic feet and residential electricity cost per kilowatt hour since 1974), prior recessionary periods were not accompanied by rapidly rising energy prices, in fact, in most of the recessions, energy costs were fairly stable indicating that supply and demand were in balance.
What is keeping the cost of domestic energy high? Is it unrest in the Middle East? Undoubtedly that has some influence on the market price of petroleum but petro products are only a part of the total energy picture in America. According to the US Energy Information Administration, in 2009 only 1% of the total electricity generated in America was fueled by liquid petroleum. Almost 45% was by coal fired power plants, 23.4% by natural gas and 20.3% by nukes, hydroelectric was 6.9% and renewable accounted for 3.6% – the important statistic here is that 99% of electrical generation was supplied by domestic sources.
As mentioned, America is a net importer of oil. We now import 60% of the oil that we consume versus around 28% a mere 30 years ago but what most people are surprised to learn is that the country from which we import the greatest amount of oil is not in the Middle East, it is Canada. In recent years, the United States has imported approximately 200 million barrels of crude oil annually from Canada. Oil imports into the United States from Saudi Arabia come in at second place with about 160 million barrels of crude oil annually from Saudi but we also bring in about the same amount of oil from Mexico on an annual basis. Other countries from which the United States imports oil are: Venezuela, Nigeria, Iraq, the United Kingdom, Norway, Angola, Algeria and Colombia, most of which are politically stable and not subject to unrest.
So what’s the deal? Remember that earlier I mentioned a de facto energy policy…well, as Bill Shakespeare would say; “aye, there’s the rub.”
The policy of the Obama administration is one of subservience to the “settled science” of climate change, radical environmentalism and a feckless attitude toward the utilization of our own natural resources.
The issues surrounding the deepwater oil industry in the Gulf of Mexico are well chronicled. BHP Billiton just announced that they have brought the first Gulf well into production in the 14 months since the Macondo blowout and subsequent drilling ban, the Shenzi prospect:
The world’s biggest miner BHP Billiton says it is the first operator to bring a new well online in the Gulf of Mexico since last year’s BP Deepwater Horizon oil spill.
An oil well on the Shenzi field was brought into production on May 30 and was producing about 17,000 barrels a day, the company said in a statement.
How important is the Gulf?
According to the U.S. Energy Information Administration, the Gulf of Mexico area, both onshore and offshore, is one of the most important regions for energy resources and infrastructure. Gulf of Mexico offshore oil production accounts for 29 percent of total U.S. crude oil production and offshore natural gas production in the Gulf accounts for 13 percent of total U.S. production. Over 40 percent of total U.S. petroleum refining capacity is located along the Gulf coast, as well as almost 30 percent of total U.S. natural gas processing plant capacity.
In the face of the discovery of more and more domestic oil reserves (in the Gulf, West Texas and North Dakota’s Bakken Formation), government entities are doing the bidding of the environmental lobby by attempting to ban safe and proven processes like hydraulic fracturing (fracking):
The EPA has proposed examining every aspect of hydraulic fracturing, from water withdrawals to waste disposal, according to a draft plan the agency released Tuesday. If the study goes forward as planned, it would be the most comprehensive investigation of whether the drilling technique risks polluting drinking water near oil and gas wells across the nation.
The New York State Assembly on Monday passed a one-year moratorium on hydraulic fracturing, a method of natural gas drilling already under a temporary ban in the state due to concerns that it might pollute drinking water. The moratorium on new drilling permits would run through June 1 2012, replacing the current ban set to expire later this summer, when state environmental officials are expected to release a report on potential hazards of “hydrofracking”.
The administration is also implementing “Kyoto Protocol” level constraints on the domestic coal industry via EPA bureaucratic rule making, rules with the force of law but without the debates or votes in Congress. These rules are serving to burden the coal industry and thereby increase the cost of coal and the products that are derived from it.
Paul Bedard, writing in US News on June 8th, states:
Two new EPA pollution regulations will slam the coal industry so hard that hundreds of thousands of jobs will be lost, and electric rates will skyrocket 11 percent to over 23 percent, according to a new study based on government data.
Overall, the rules aimed at making the air cleaner could cost the coal-fired power plant industry $180 billion, warns a trade group.
Obama continues to push for government funding for “green energy” and boondoggles like ethanol subsidies even as data reveals that energy from these sources are inadequate to replace fossil fuels that are safe, plentiful, and transportable and generate more energy output per unit than any form on the face of the planet.
In a UK study carried out by the conservation organization, the John Muir Trust, it was found that:
Over the past two years UK wind turbines metered by the National Grid ran at just 10 per cent of capacity for more than one-third of the time.
And they ran at less than 20 per cent of their capacity for more than half the time, it was claimed. Yet the Government is committed to building thousands more taxpayer-subsidized wind turbines in the quest for greener energy.
The report, carried out by consultant Stuart Young for conservation charity the John Muir Trust, said wind power “cannot be relied on” when electricity is most needed. It said that once a week on average the wind dropped so low that the turbines produced enough energy for “a mere 6,667 households to boil their kettles for a cup of tea”.
During the four highest peak demands last year, the best wind could manage was 5.5 per cent of capacity.
It is energy policy folks. Unlock the energy and we unlock the economy.