September 11, 2008

Sex, drugs and energy royalties

Posted by johnmcquaid under energy, government | Tags: , , , |
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The Republican Party’s “drill baby drill” obsession is more than a little bit weird. On the surface, it’s one of those increasingly rare issues in which the interests of big-money GOP backers are aligned both with party rank-and-file opinion and with the public at large (at least as measured by polls). But because the actual economic impact of a “drill baby drill” policy on oil supplies and gas prices will occur in the future and be quite small - both for consumers and for the nation’s overall energy strategy - you have to assume the political efficacy of this issue is marginal. Anyone who drives knows that gas prices are unlikely to plunge if we throw open ANWR. It’s more like “every little bit helps.”

So, the wild enthusiasm we saw at the GOP convention and John McCain’s focus on this issue seem vaguely suspicious. Now we know why. This is more than your typical special interest gravy train. More oil and gas drilling literally equals more sex, drugs, and easy money!

Seriously, the Interior Department’s IG report is a depressing chronicle of corruption where it hurts the most - at the middle levels of government, where it can flourish with nobody noticing until it’s too late. One of the most insidious Bush legacies has been the way federal agencies were turned into full-service, one-stop shopping for various business interests. In this case, it’s not surprising that the political appointees running the Minerals Management Service, watching their lobbyist friends and colleagues rolling in dough, and seeing billions of dollars flow past their fingertips, would want some action for themselves. The lines between the regulators and the people they’re supposedly regulating were obliterated.

The broader problem here is, if we’re going to do more drilling - and hand out billions in alternative energy subsidies, and devise smart energy policies - we need a federal government that operates on the assumption that the national interest is distinct from (and sometimes opposed to!) the interests of business. A radical assumption, I know, and it will take a lot of work to reestablish it.

 

July 1, 2008

Shock to the systems, part 2

Posted by johnmcquaid under energy, environment/energy | Tags: , , , , |
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On the other hand:

The good: historically speaking, the current runup of energy prices isn’t exactly apocalyptic. The bad: prices may have to rise significantly higher to effect major changes in energy consumption, a switch to alternatives, et al.

Another way to look at this: assuming current trends continue, whoever is elected president becomes an instant Jimmy Carter.

 

July 1, 2008

Shock to the systems

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With the oil shock, climate change, and credit/finance crisis, we’ve reached a kind of historical/economic pivot point in which various interconnected systems that used to work reasonably well are no longer functioning, and each malfunction reverberates through all the systems - energy, financial, climate, environment, social/political. It’s quite a predicament, for which there’s no real precedent and no obvious solution. Lower interest rates to juice the economy and the dollar falls, oil prices rise, inflation goes up. Etc. It’s like the wiring on a sound system is all screwed up - turn up the volume, and you get a terrible screech instead. Energy prices are especially worrisome. The U.S. government has precious little say over them, and while there are obvious policy solutions (such raising the price of carbon emissions, building more mass transit, underwriting new technologies/alternative fuels) they seem likely to cause short-term pain with an uncertain long-term payoff.

Still, I became somewhat less morose after reading Daniel Yergin’s testimony before Congress’s Joint Economic Committee. There’s quite a lot to it, and it’s worth a read, but I’ll mention just one thing. Yergin has been speculating for a while about the “break point” - an oil price high enough to force a definitive break with oil - i.e., apparently where we are right now. Obviously such a “break” would be a very, very good thing, and there’s some evidence it’s already underway:

…there is much talk about “peak oil” supply these days. However, we think something else is at hand— “peak demand” —at least in terms of U.S. gasoline consumption. In our view, 2007 may well have been the top, the peak, in terms of U.S. gasoline demand. Both because of changes in the minds of consumers, and the response of automakers in terms of the efficiency of vehicles, gasoline demand may well now be in decline. This has worldwide effects. For the 9-plus million barrels of gasoline that the U.S. uses every day is larger than the total oil consumption of any other nation, including China.

…

The reality of the current oil shock behooves us, as a nation, to consider what would be required to double our energy efficiency over a certain number of years. Today, there are tools in terms of information technology to support greater energy efficiency that were simply not available in earlier decades. In terms of the nation’s gasoline consumption, savings of 7 to 10 percent—as much as 900,000 barrels per day—may be available with little or no penalty or burden on drivers.

Of course, “energy efficiency” is not a “thing”, unlike a power plant, an oil well, a windmill, or a solar panel. It is embodied in other things—changes in behavior, in technology, and in the capital stock. It can be stimulated by regulations, information, and prioritization. But, in a market system, price itself is a powerful driver, and energy efficiency will get much higher priority now than in years when energy was cheap. It is not surprising that sales of SUVs and other light trucks took off in the late 1990s. In 1998, owing to the collapse in crude prices, gasoline prices were the lowest in real terms that they had ever been.

This suggests that our systems don’t have all their wires crossed, and that we may be able to adapt relatively quickly, if not painlessly, to an oil-poor world. Of course, this will require some affirmative, aggressive policy fixes from Washington, and in Washington it’s still the 1990s in many ways, the 1980s in others. When Dick Cheney said that energy conservation “may be a sign of personal virtue,” but was otherwise useless, he was articulating a widely-held belief among the political class, one that current circumstances have probably not eroded all that much - yet. Check back after the election.

 

June 25, 2008

The death of sprawl

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Historically, America = Mobility. Now, apparently, no longer. America’s built landscape is ill-suited for $5 or $12 gasoline, plus all the other costs associated with scarce, expensive petroleum:

Decision by decision, dear petrol is having a transformative effect on the American household.

But the full extent of the changes underway may not become clear for years, or decades. The structures of America’s cities and towns, its economy and way of life were formed during a long era of cheap petroleum. But for the oil scares of the 1970s and early 1980s, the price and availability of petroleum have never been issues we’ve needed to think much about. But now we must, and we will likely be shocked by the pervasiveness of petroleum in our society.

Among other things, we’re likely to see a reversal of the Sunbelt migration patterns of the past generation, while compact Northeastern cities with robust public transportation systems make a comeback. And the global supply chains and just-in-time production techniques that bring stuff from China to your door may become financially unsustainable. (In other words, the Wal-Mart retailing model is likely doomed.) At least in its physical configuration, 21st century America is starting to sound something like 1950s America.

 

June 23, 2008

The not-so Strategic Petroleum Reserve

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The Strategic Petroleum Reserve is apparently not all that strategic, according to this Foreign Affairs piece, which notes that many of the world’s Western democracies stockpile oil as a hedge against an energy crisis, but then cannot decide what actually constitutes such a crisis. As a result, the SPR and other reserves are used quite sparingly, sometimes randomly, sometimes for political gain, and almost never effectively.

Oil supplies are so tight than any disruption in production can cause a huge economic shock. Yet we handle our strategic oil reserves like we’re socking cash away in a mattress, occasionally pulling out handfuls of it as needed, and usually after the bills fall due.

The piece argues that the nations with strategic reserves depoliticize and coordinate the management of them - that is, attempt to respond to dramatic, potentially catastrophic shifts in the oil markets as they happen. As the world economy has become more integrated, oil prices are no longer determined by the whims of a few sheiks but actual market conditions. You can’t anticipate every market emergency, obviously. But we ought to treat them as we aspire to treat other kinds of disasters - something we actively prepare for, manage proactively and avert if possible.

Markets process information. Is it too much to ask that our government at least attempt to do the same? Unfortunately, the answer is probably yes - as oil prices rise, it’s doubtful that either Barack Obama or John McCain will want to hand their discretionary power over the SPR off to a board of technocrats insulated from politics.

 

May 12, 2008

The undulating plateau

Posted by johnmcquaid under environment/energy | Tags: , , |
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We are, it now goes without saying, living in an era of huge environmental and economic transitions. Until recently these still seemed comfortably abstract, just over the horizon. But starting with Hurricane Katrina and the crazy 2005 hurricane season, it’s become clear that we have already crossed that horizon and the big changes are underway right now.

The latest of these transition points is high oil prices. Until this year, there was plenty of speculation about peak oil - the notion that worldwide energy demand would outpace the ability to extract petroleum from the ground. But many reputable experts, most notably Cambridge Energy Research Associates, thought we had not reached that point, and might not reach it for a number of decades. (You can quibble about what, exactly, is meant by a “peak” - CERA doesn’t like that imagery, preferring to call it an “undulating plateau.” But the bottom line is essentially the same.)

But now it appears oil prices are high and will keep climbing. CERA is saying we are approaching the break point where high prices force major changes in consumption, innovation, and the development of alternatives:

We are in the sixth year of an extraordinary run-up in oil prices. During the 1970s—a decade that saw two oil shocks—prices rose for eight consecutive years before falling. Break Point envisages prices rising for more than a decade amid increasing industry costs and extreme competition for oil supplies and upstream assets. Only then does the world reach a “break point”—the point at which policy, technology, and alternative fuels everse the oil price rise and oil loses its near monopoly in transportation.

The massive scale of the oil industry and the infrastructure to deliver oil products means that any paradigm shift in liquid fuels supply and consumption will take many years to unfold, not months. Few transitions are smooth—and certainly not one that involves a commodity that is the cornerstone of personal mobility and the enabler of global trade. But the seeds of change are being sown. And, as the swift arrival of Break Point prices has proved, some of the results may come sooner than anticipated.

High gas prices are already reducing driving and swelling mass transit ridership. And these shifts will soon reverberate through the political system. I’m betting, for instance, that the proposed transit line that may pass within a block of my house will soon become a certainty.

This is going to be bumpy and painful, with many unpredictable side-effects. The problem is, our political system is heavily invested both in the oil industry and corn-based ethanol - i.e., dead ends. As long as these subsidies and the ossified political entanglements that maintain them remain in place - and in the U.S. government, they are only two among many - they will be huge obstacles to a successful transition, sucking resources from both sensible conservation measures and promising alternatives.