Tag Archives: Energy policy

Energy Independence: The American Future

Last week, the International Energy Association (IEA) predicted that the global community is merely five years away from witnessing the emergence of a new leader in oil production. That can hardly be welcome news to Saudi Arabia, of course, the world’s largest oil producer at the present time, or to Russia, its longstanding runner up.

So which nation is preparing to accede to the throne? Is it Canada, with its fields of oil sands in the western province of Alberta? Or Brazil, with its newly discovered wealth of off-shore crude? Or perhaps China, Vietnam, or the Philippines, with their recent discoveries in the South China Sea?

To the surprise of many industry analysts, the IEA predicted that the United States will soon become the world’s greatest oil producer. In addition, the Association forecast that America will supply all of its domestic energy and become a net exporter no later than the year 2030.

Imagine, if you can, a world in which the United States no longer needs to import oil from the Middle East, from Venezuela, or from any other nation. An American economic super power with a stable, secure, inexpensive, and solely domestic source of energy? It could well guarantee the extension of Uncle Sam’s global dominance throughout the 21st century.

Envious Rivals

Of course, America continues to compete with a wide variety of rivals for economic dominance in global affairs. Nevertheless, none of its rivals can visualize a future of energy self-sufficiency.

China, for instance, is aggressively continuing to develop relationships with African nations in order to ensure future access to energy resources. And as a result of the Fukushima nuclear power disaster, Japan continues to struggle with its reluctant transition from nuclear power to alternative sources of energy.

Of all of the major global economic powers, Germany appears to have made the most progress thus far in transitioning from imported fossil fuels to domestic renewable energy sources. But its green energy projects continue to be plagued by massive operating costs that require significant government subsidies.

In contrast, the IEA noted that new discoveries of natural gas fields in shale rock within the United States will likely supplement its surging oil field capacities and convert America from an energy importer into a fuel exporter. The world’s largest economy, an energy exporter? For American corporations and consumers, it certainly represents an enviable future.

The Global Markets

Considering the current configuration of the global energy markets, though, it is important to note that an energy independent America would not be invulnerable to market disruptions in other nations. Indeed, the price of oil is established in the global market place, and it is influenced by factors that influence supply and demand around the world.

That has been true since the middle of the last century, when seven global companies — known as the Seven Sisters — seized control of the supply and the price of oil. Then, in 1960, effective control of supply and price began to shift towards the governments of oil producing nations when Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela formed the Organization of the Petroleum Exporting Countries (OPEC).

OPEC certainly does not exert full control over all global oil prices; West Texas Intermediate (WTI) crude oil, for instance, is traded as a commodity on the Chicago Mercantile Exchange (CME). Nevertheless, because traders and other investors can buy and sell most of the varieties of oil (as well as futures and other derivatives) that are produced around the world, the market price of oil that is both produced and consumed in the United States is affected by industry events elsewhere.

The Isolation Option

The past few years have been markedly turbulent ones for the global economy, of course, with once-reliable market pricing mechanisms struggling to adapt to new conditions. Might an energy-independent America be tempted to withdraw its oil and gas resources from the global markets and isolate itself from the price effects of external supply disruptions?

The scenario is not an implausible one. After all, domestic energy producers in the United States are already prohibited by law from selling large amounts of oil and gas resources to customers overseas. And conservative Republican politicians such as Ron Paul have long advocated for the dismantling of global market institutions such as the Federal Reserve Bank of the United States.

Likewise, many global financial analysts believe that the monetary zone of the European Union is destined to splinter because of centrifugal forces that are pulling apart nations like Germany and Greece. If the world’s financial markets fracture into national entities, the world’s energy markets may do so as well.

Would an American economy with a self-sufficient energy supply and a domestically controlled market mechanism be able to survive on its own? Conversely, would the rest of the global economy be able to survive without it?

These may represent mere rhetorical questions at the present time. In the near future, though, they may become immensely important policy issues.

Hurricane Sandy: Debating Economics

Hurricane Sandy swept across the northeastern and midwestern regions of the United States last week, destroying thousands of homes and rendering more than eight million individuals without electrical power. The news might become even more grim this week, as a midweek storm threatens to dump several inches of snow on homes that still remain without any heat or light.

Although the immediate priority for government officials is the restoration of the existing power grid, long term planners are beginning to suggest innovative approaches to strengthen the region’s energy infrastructure. After all, such “storms of the century” are attacking the region with more regularity, with Hurricane Irene causing massive damage on August 27, 2011, and an unnamed nor’easter dumping over 21 inches of snow on New York State on Halloween Day, just two months later.

Some commentators attribute the recent onslaught of freakish weather to climate change that is caused by our own carbon omissions. Others believe that the region might be experiencing a naturally occurring shift in climate cycles. All would undoubtedly agree, though, that a new long term strategy may be needed to confront this meteorological threat.

Distributed Generation

During the past few years, government officials in Connecticut and New York State (as well as in California) have studied the possibility of developing innovative programs to address climate change. Connecticut, in particular, has aggressively launched a pilot program to develop clusters of microgrids at the local level.

Microgrids? What are microgrids? The term refers to relatively tiny power generation systems that serve very limited geographic areas. When a large region relies on many small microgrids instead of a single massive facility to produce power for its entire population, it is employing a strategy known as distributed generation to serve the needs of its citizens.

A few years ago, for instance, Toshiba developed a proposal to build and maintain a miniscule nuclear power plant for Galena, Alaska, a village with a population of 470 citizens. Although safety and other concerns led to the discontinuation of the project, such microgrids could nevertheless serve as back-up systems in the event of a massive regional power failure.

Economics: Theory Vs. Theory

Is this a good idea or a bad idea? Unfortunately, the discipline of economics does not offer us a clear answer to this question. Instead, it provides a pair of conflicting theories, one in support of each position.

On the one hand, the law of economies of scale would imply that a single large regional facility would be far more cost-efficient than a large number of tiny facilities. In other words, according to this law of economics, a widespread microgridding strategy might drive up the costs of generating power to unsustainable levels.

On the other hand, clusters of microgrid facilities would not necessarily focus exclusively on supporting the primary regional power grid during times of crisis. The small generation plants could produce power during times of normal operations as well. In fact, they could easily feed power into the primary grid on a continuous basis, and even compete with each other to sell energy to local customers.

A large number of small suppliers, competing on the basis of cost, service quality, reliability, and other factors? Classical economists would call such a model capitalism. Although each individual supplier may fail to achieve significant economies of scale within such a system, the “invisible hand” of market competition — as first described by Adam Smith in his classic text The Wealth of Nations — would nevertheless regulate the industry and produce optimal results.

From Banking To Health Care

In a sense, this “micro vs. macro” debate over energy production and distribution strategies is similar to policy disputes that are raging across many other industries. In the banking sector, for instance, many industry experts have noted that the Dodd Frank regulatory structures that were developed after the 2008 global financial crisis may have actu­ally punished relatively healthy regional banks, while the “too big to fail” institutions that precipitated the collapse have grown even larger in size.

Likewise, in the American health care sector, arguments continue to flare about whether the provisions of the Affordable Care Act (i.e. “Obama Care”) will save the system or destroy it. Whether or not the Act is implemented in its current form, hospital systems and insurance companies in the United States are likely to continue with their consolidation activities, hoping that the effects of economies of scale will outweigh the impact of diminished competition.

Regrettably, such economic debates will not benefit the victims of Hurricane Sandy, who are awaiting next week’s approaching snow storm with immense trepidation. Nevertheless, in consideration of their plight, our government officials may wish to consider a microgridding strategy as a means of building additional power capacity. After all, in this situation, the economic cost of service redundancy may be outweighed by the human (and humane) benefit of financing it.

Gasoline Prices: Driving Economic Prosperity?

The American economy has been stuck in a rut for a very, very long time. The unemployment rate, for instance, has been lodged above 8% since February 2009; it has remained there throughout President Obama’s term of office. And the Dow Jones Industrial Average has yet to surpass the 14,000 point level that it first reached in the pre-crash days of July 2007.

At first glance, last week’s news of a retail sales increase appeared to represent a rare signal of hope. But then it was reported that the increase was attributable, in large part, to a recent surge in the retail price of commercial gasoline.

The rise in the price of gas is particularly surprising, occurring in the post-Labor Day period when prices customarily decline as Americans return to work from their summer driving vacations. But is it possible that higher gasoline prices might actually help lift the United States out of its economic rut?

An Addiction To Imported Fuel

Traditionally, high gasoline prices have been detrimental to the American economy. The spike in energy costs during the 1970s, for instance, wreaked havoc on the financial security of the United States; it led President Jimmy Carter to declare that the development of a national energy policy represented the moral equivalent of war.

But that was a time when the American energy industry was focused on the importation of fossil fuels from foreign sources. Under such circumstances, any increase in the price of fuel would inevitably draw funds away from alternative domestic uses and fuel the profits of foreign providers.

For a while, America’s domestic nuclear power industry appeared to offer a home-grown solution to the nation’s addiction to foreign fuels. But the specter of nuclear disaster that was imposed on the nation’s psyche by the Three Mile Island crisis in 1979, stoked by films such as The China Syndrome that year, locked the American energy industry into a strategy of importation.

Energy Independence

So how has the American economy evolved during the past few decades? Why might higher fuel prices actually trigger an increase in domestic energy output, and ultimately lead to economic prosperity, today?

A primary reason, first and foremost, is that the United States is now producing a significant amount of energy resources to meet its own domestic needs. North Dakota has surged past Alaska to become the nation’s second largest energy provider, trailing only Texas. Pennsylvania, a major producer of crude oil in the late 1800s, is again producing energy resources with the use of fracking technologies and methods. And soon, the southern tier of New York State may begin doing so as well.

Furthermore, the Canadian province of Alberta has also recently become a major producer of fossil fuels. Given the extensive integration of the national economies of the United States and Canada, additional upstream energy activity in the Albertan region inevitably stimulates the economies of the northern American states too.

These developments have prompted Republican Presidential candidate Mitt Romney to declare that North America would achieve “energy independence” by his prospective eighth year in office, i.e. by the year 2020. Although some analysts believe that full energy independence may not necessarily represent an achievable (or perhaps even a desirable) goal, most do acknowledge that the emerging domestic energy industry is strengthened by higher energy prices.

A Gas Tax For The Deficit

High fuel prices generate indirect benefits as well. When the costs of fossil fuels are very high, the (generally always high) costs of renewable energy begin to represent competitive alternatives in comparative terms, and American consumers and businesses shift to these new “green” technologies.

The demand for solar panels, for instance, has increased in tandem with the recent spike in the costs of oil and gasoline. Although American panel manufacturers like the ill-fated Solyndra have yielded market share to Chinese producers lately, all panels (even those manufactured in Asia) require installation and maintenance in the United States, necessitating new jobs for the American economy.

Some well known commentators are actually advocating for higher retail taxes if the cost of gasoline drops back towards historical norms. Thomas Friedman, a global columnist for the New York Times and the author of the book The World Is Flat, has repeatedly called for an American taxation policy that imposes a retail gasoline surcharge of $1.00 and then applies all government revenues to reductions in the federal budget deficit. The United States, interestingly, has never paid a tax that is explicitly designed to reduce its accumulated debt.

Considering the aversion of America’s Republican Party to any new streams of taxation, it is unlikely that Americans will experience a national $1.00 per gallon gasoline tax at any time in the foreseeable future. Nevertheless, they shouldn’t be surprised if the recent surge in retail gasoline prices eventually produces some unexpected (and yet quite welcome) benefits for the American economy.