What You Should Think About Energy Independence

August 18, 2008

“If money is your hope for independence you will never have it.  The only real security that a man will have in this world is a reserve of knowledge, experience, and ability.”

–Henry Ford

Ten years ago, the few Americans readily able to associate a concept with the phrase “energy independence” tended toward a consensus that its pursuit was a bad idea.  Energy imports were a path of least resistance sure to make the economy more efficient in the short term, and other considerations were quickly discarded.  Today many Americans contemplate issues that were once the province of academic specialists.  Today many Americans are willing to judge choices by an outlook that goes beyond the short term.

This is excellent.  In my opinion, only a great party or a terminal illness justifies failure to incorporate some sort of long term perspective into one’s thinking.  It is never responsible to look at the national economy as a great party, and it is absurdly melodramatic to look at climate change as a terminal illness.  This leaves us with a real need to look at both . . . look at them long and hard.

All the economic trends favor sweeping and swift change.  Oil prices have sustained a multiple of their peak from the 20th century.  Political responses to atmospheric carbon emissions remain undefined and shamefully belated, but they now seem inevitable.  As if those indicators were not clear enough, the American car buyer is increasingly inclined to favor smaller more efficient vehicles over uselessly large SUVs and their accompanying fuel demands.  In a sense, petrochemicals are simply going out of style.

Yet beneath the trends remain many complex problems.  Most obvious is the delay between a national committment to a new energy policy and the saturation of new technologies in the real economy.  More subtle is the role oil plays outside of combustion reactions.  Byproducts of fuel production are a primary source of raw materials for the plastics industry.  A staggering array of household chemicals also have their roots in the fractional distillation processes taking place at oil refineries.  Even if we could do without gasoline, could we also do without sandwich baggies, paint thinner, and dozens of other ubiquitous items?

I believe both major party Presidential candidates have observed aloud that the oil trade causes our nation to send large sums of money to parts of the world where “people don’t like us very much.”  To me, this says that we ought to work on our image.  To many, it seems to say that we ought to stop buying oil outright.  I suspect those views would change as the matter is examined in more detail.  Given a choice between spending $700 billion on fuel imports or spending $750 billion on domestic energy development to get the same result, and I suspect most Americans would endorse energy independence.  Put forth a choice between spending $700 billion on fuel imports or spending $2 trillion on domestic energy development to get the same result, and suddenly the price tag becomes much harder to justify.

The sticky bit here is that no honest individual can claim a high degree of confidence in pinning down the real numbers.  The science is in on climate change as an ongoing and economically devastating phenomenon.  However, the precise nature and extent of that devastation cannot even be confined to a particular order of magnitude.  Perhaps longer growing seasons will soften the impact of regional famines and expanding deserts, while transpolar shipping partially offsets losses in coastal real estate.  Then again, perhaps the Pentagon was right and global warming will be the driving force behind a new age of savagery and desperation in modern warfare.

Even if some omniscient entity were to spell out the real annual costs of climate change if status quo policies continue indefinitely, humanity would remain in the dark about the extent to which change could mitigate these harms.  Some of the damage has already been done.  Some will result from processes too far along to be stopped.  Much could be minimized or averted, but just how much?  Even for the most informed experts, ultimately it is a matter of opinion just how much economic value ought be placed on various levels of industrial emission restraint.

Also, the monetary cost of petrochemical dependence today is clearly an aberration.  Fundamental forces, like the growth of the Chinese economy, create an upward pressure on oil prices.  From a vantage point in the United States, the plunge of the dollar exaggerates import inflation.  Yet the behavior of those prices does not reflect the realities of those forces.  The real rise in the cost of this particular commodity is clearly a function of market manipulation rather than a reflection of an entirely real, but much more gradual, trend upward.  Alternative energy ventures risk having the economic rug yanked out from under them if business models marginally sustainable under present price levels must contend with much cheaper oil in the near future.

“Energy independence” has a nice sound to it.  As a principle, there is no good reason to oppose it.  Elements of any sound energy independence plan are good in practice.  Take conservation — whenever you can consume less to get the same result, scarcity is alleviated and economic conditions improve.  Research is another good example.  Our society could reach a fairly high multiple of present levels of investment in fields like theoretical physics, miniaturization, solar energy, etc. before diminishing returns would make further spending unrewarding over the long term.  Bold actions that effectively promote efficiency or discovery are entirely appropriate responses to present conditions.

On the other hand, a rush to abandon old ways could prove as costly as the inept dithering we have experienced under the sitting President’s guidance.  Imagine a huge national investment in traditional nuclear power plants is only just completed when the latest and greatest supercollider reveals a much safer and less costly method of generating nuclear power.  The United States would be hamstrung by this committment to old technology while other societies remain poised to fully capitalize on scientific achievement.  That scenario is speculative, but it is far from a worst case scenario.

President Jimmy Carter once helped guide this nation onto a course toward efficient renewable energy technology and national energy independence.  His successor promptly undid much of that work.  Many noble projects, including numerous growing businesses, were wrecked by the double whammy of falling energy prices and rescinded federal subsidies.  A long term outlook must not only consider the challenges of unresolved technology gaps, but also the pitfalls of failure to provide any new paradigm with long term support.

In the abstract, I believe trade is a good thing.  Imports and exports brings distant peoples closer together.  When conducted fairly, trade makes life better for everyone involved.  For all its rhetorical appeal, “energy independence” is nothing more than a state of doing without imports in the energy sector.  In some contexts, it offers a way to rally support for genuinely useful initiatives like raising fuel efficiency standards or funding alternative energy research.  Yet it may also distract from important priorities like addressing climate change or optimizing economic efficiency.

Energy independence itself is no big deal.  However, it intersects with several issues that are each very big deals in their own right.  To the degree that a proposed plan or policy may make our nation more economically productive, less ecologically destructive, more technologically advanced, and/or less heavily involved in resource depletion, it is likely to be a good thing.  If actual energy independence is a side effect of those gains, so be it.  The danger lies in the prospect that none of those gains will be realized even as energy independence is pursued with tremendous national zeal.


What You Should Think About Recession

November 28, 2007

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”

–William Arthur Ward

My first experience analyzing the cultural resonance of the word “recession” comes from the media treatment of conditions leading up to the 1992 Presidential election. It is clear that the first President Bush presided over a weakening American economy as the end of his term approached. Yet it is also clear (all the more with hindsight) that a some of this was the inevitable adjustment of indicators and indices tugged away from realities by the fervor of Reaganomics jingoism.

Today, jingoism is almost too soft a term for an institutional predisposition to spin economic news. Anchors with almost every major network tiptoe around the fundamentals and treat “the R word” as if it were a vulgarity that should never be uttered in polite company. In fact, recession is a technical term that should be fluently employed in any applicable discussion of economics. Alas, it is also something of an ambiguous term, made all the more fuzzy by the abuses of journalists, pundits, and politicians themselves.

Perhaps the most sensible definition of “recession” holds that it is a period of time when economic growth across two consecutive quarters does not keep pace with population growth. Yet economic growth is itself a much fuzzier concept than tends to be widely believed. If an expensive and fragile device is replaced by a cheap durable device that fulfills the same need, adopting the innovation registers as a negative on the scorecard of economic growth. Acting promptly to minimize the damage caused by a natural disaster may also compare unfavorably with the activity involved in rebuilding efforts.

Then there is the matter of war. While much of education, child care, resource conservation, domestic toil, etc. is not included in the calculations that shape growth assessments, even the most destructive of military activities registers as economic accomplishment. For years the present Bush Administration has turned out mediocre economic performance — a feat that might be considered more than mediocre in light of the damage the attacks of 9/11 inflicted on key institutions as well as public morale.

Yet it is legitimate, even important, to have some sense of context in these matters. Attributing the economic components of declining public morale to terrorist attacks seems a serious error in judgement. If anything, the United States was energized and mobilized, more than at any other time in recent decades, as a response to the 9/11 attacks. A strong national leader with real vision about how to solve real problems could have accomplished amazing things while marginalizing apathy for the foreseeable future. As our sitting leader chose a different approach to directing the resources of the nation, we have experienced a different outcome.

Insofar as there are problems with public morale today, they have little to do with fears Al Qaeda is about to take the roof off the local Pamida store and more to do with weariness. People have grown weary of the persistent disconnect between the stated purposes and the predictable outcomes of White House initiatives. People have grown weary of the persistent deference to market forces in almost all matters, as if trickle-down thinking was still considered to be a perfect panacea to all social ills. Perhaps most of all, people have grown weary of a horrendously bloody and costly counterterrorism strategy that does at least as much to produce new terrorist recruits as it does to neutralize existing terrorist operatives.

The war in Iraq continues to bleed this nation, both literally and economically, to a significant degree. Yet that significance also registers as a net positive in the Gross Domestic Product. An end to the wartime spending binge would mean less spending to stimulate economic activity (unless policy also called for expensive peaceful initiatives like universal health care, universal access to higher education, and whatever else could be funded with the mountains of money funding the occupation of Iraq.) A short term thinker cannot help but see perpetuating the war as vital from the perspective that it also perpetuates wartime spending.

Yet focusing exclusively on short term thinking is almost never a sound approach to economics. So much spending creates more government debt. More government debt means more difficulty in securing creditors for the Treasury. Other than raising interest rates, there is little legitimate action a government can take to expand support from investors. Yet this all happens against a backdrop of interest rate cuts. Even now, Wall Street svengalis continue to promote loose credit as a way of encouraging business growth.

Somewhat like a balloon, applying hard restraints to the economy in one area at best merely transfers pressure to a different area. If our nation spends more and more while issuing bonds that are less and less rewarding, ultimately the medium of exchange itself takes a hit in value. While this eases debt pressure by reducing the real value of that debt, another inevitable consequence is increased pressure on working class citizens (or really all citizens with ordinary levels of personal income.) Less value in the dollar means more dollars are required to obtain goods or services of value — but the process does not provide more dollars to income recipients until terms of employment change.

On top of this great tangle of fundamental problems, oil speculators have driven energy prices up, and thus by extension made inflation that much more severe. If there is any bright spot in the big picture here, it is that the speculation cannot persist indefinitely. Unless the Bush-Cheney team starts a shooting war with Iran, the climb of oil should be arrested in spite of the continued decline of the American dollar. In fact, a general sense that U.S. belligerence is a declining phenomenon could drive a long-needed correction in the price of that particular commodity.

Still, when President Bush’s chief economic advisor Allan Hubbard declared that the prospect of a recession was more likely now than it seemed one year ago, he was doing so with some awareness of these hard facts. As this moment of frankness was almost immediately followed by a resignation, it is hard to say if many others inside the administration have even tried to wrap their minds around the particularly complex and particularly messy state of the national economy today.

Will the unraveling of Dubyanomics have such a severe impact as to bring about a national recession? This is a difficult question to answer, even if one accepts a concrete technical definition for the term “recession.” It may well be the case that American industriousness will sustain some measure of real growth even as the ongoing series of small shocks continue to reduce the median purchasing power of the American consumer. It may even be the case that a sense of hope brought on by a pending change in national direction could inspire major changes for the better.

Yet there should be no doubt — military aggression and widespread corruption fostered by this President have done no favors to the American economy. If we fail to get out economic house in order relatively quickly, the price we have already paid for his follies will be multiplied as it rests on the shoulders of future Presidents and even future generations of American taxpayers.


What You Should Think About Oil Prices

November 18, 2007

“Time destroys the speculation of men, but it confirms nature.”

–Cicero

When expressing hostility toward the Carter administration, critics often fault the former President for poor economic conditions, with particular emphasis on high oil prices, that he left behind after losing the 1980 election. Since most of this hostility comes from devout political partisans, it is hard to imagine how they will rationalize a strikingly parallel scenario unfolding as the second Bush administration comes to an end.

At least in Jimmy Carter’s case, the machinations of OPEC and a largely unjustified surge of anti-American sentiment in the Middle East could be blamed. Today, supply throttling by OPEC is virtually a non-issue, and there is the matter of tens of thousands of dead Iraqi civilians (among other things) to justify strong anti-American sentiment throughout much of the Middle East. Even so, this phenomenon clearly has its roots in something much bigger than inept American leadership transforming a long-standing culture clash into a seething pit of perpetual warfare.

Clearly there are many factors driving the price of oil to new heights. Perhaps foremost among them are concerns about the prospect of a war between the U.S. and Iran. It is no secret that the same folks who brought us the current Iraq policy are drooling at the prospect of violence against Iran. The problem is that, while the world community united in the 1990s to ban Iraqi development of weapons of mass destruction, Iran is a sovereign nation that has not violated the territory of any other nation since the Iran-Iraq war of the 1980s (itself a direct result of Saddam Hussein’s attempted invasion of Iran.)

The United Nations Security Council may be able to agree that Iranian nuclear weapons are a bad idea in principle, but in practice taking action against such a program involves setting a dangerous new precedent in which military aggression by powerful nations is permitted for no reason other than the crudest possible approach to preventing nuclear proliferation. The idea that the government of Iran would provide nuclear weapons to terrorist organizations is (as with much of the public rationale for war in Iraq) bogus on its face. Yet that misinformation is, in some circles, a more popular idea than the notion that military aggression to destroy foreign nuclear facilities would push future nuclear research so deeply into realms of secrecy that it would become much more vulnerable to abuse by madmen.

Yet the price of oil is as much influenced by Iranian leverage as American belligerence. Iran controls a great deal of coastline along the Persian Gulf. A hostile Iran has a range of options including rocket attacks on outbound oil tankers and rendering the Strait of Hormuz extremely perilous to navigate. Among other things, such an action would put a serious restriction on Iraq’s already troubled capacity to get oil to consumers abroad. Whether the U.S. backs off on pressures to let American corporations control Iraq’s most valuable natural resource or those pressures somehow wind up producing results, none of it will matter if the oil cannot be floated safely to markets abroad.

What all this means is that every time the President and his associates say something profoundly ignorant about World War III, they also say something that is certain to intensify the speculation driving up oil prices at present. This is certainly a key consideration — the current price of oil is as much a reflection of investors’ willingness to bet on even more extreme instability in the Middle East as it has anything to do with supply and demand. The more opportunists see a chance to make a fast buck by speculating on further increases in the price of oil, the more that price will continue to climb without regard for underlying realities.

Of course, the underlying realities are no cause to dance a jig. Decades of vigorous consumption have put an end to most of the “low hanging fruit” in petroleum economics. The world’s reserves are still enormous, but they are increasingly remote and increasingly difficult to process into useful fuel. These complications of supply are paired with increasing demand. The United States under President Bush has made a habit of forfeiting opportunities to engage with China and other rapidly growing economies in pursuit of global accords that might conserve resources or hasten the rise of alternative energy enterprises.

This means that there are real fundamentals driving oil prices higher. This also happens in the context of real fundamentals driving the value of the dollar lower. Years of poor economic stewardship and even poorer foreign policy have changed financial realities within the United states while radically transforming public perceptions abroad. Once unquestioned in its reliability, the greenback is no longer the Old Faithful of international currencies. Toothless government oversight of American capital markets (with mortgage debt resale being the tip of the proverbial iceberg) shakes confidence on one level while years of nonsensical proclamations and actions from the White House rattle a different set of analysts.

A view I find myself on the fence about is that the war in Iraq was really all about the petrodollar. Equal parts sensible analysis and kooky conspiracy theory, it holds that the real reason for all that violence was that Saddam Hussein was on the brink of orchestrating a Middle Eastern oil market that pegged prices to euros rather than dollars. There is much more evidence the Iraqi regime had such a plan in the works than there ever was evidence that they were developing weapons of mass destruction. On the other hand, wouldn’t launching a profoundly ill-advised war do at least as much damage to the world’s faith in American stability as any new commodities exchange ever could?

Fortunately, there are many factors that could bring the price of oil down, or at least seriously restrain its ascent. If saner heads prevail before a U.S. attack on Iran occurs, speculation based on the likelihood of that conflict will have been in error. Astute observers of world events are also suggesting that China may go green of its own volition — the waking dragon may simply skip a filthy phase of industrial development and strive for a leadership position in the realm of economic sustainability. Then there is also the prospect that, one way or another, chaos in Iraq will subside and Iraqi oil fields will produce a noteworthy surge in supply.

As with so many other geopolitical issues, the price of oil is clearly influenced by a range of complex factors. Yet for years now, conventional wisdom among speculative investors has held that “the smart money” is on increases. It is fair to question if the latest wave of increases would have happened at all if not for the scandalous losses and shameless deceptions major American financial institutions have sustained from abuse of an underregulated capital markets. If the Bush administration is able to go forward with aspirations of unilateral military aggression against Iran, then I believe the sky is the limit on the price of oil.

Yet in the absence of such a disaster, it seems increasingly likely that this conventional wisdom is a suckers’ bet. In spite of all the valid pressures pushing the price of oil upward, rampant speculation means that this price is overdue for a serious correction. Even if the coming winter is harsh in New England or OPEC should decide to play their strong hand with deliberate slowness, tremendous pessimism is already factored into the current price. The world would have to become screwed up in some additional, severe, and unexpected way for those soaring numbers to continue such a steep climb.