Thursday, June 11, 2009

The Looming Crisis In Energy Costs

Our economy, already in serious trouble, faces yet another crisis waiting in the wings - energy prices. They are going to rise and rise sharply. How high they will get is anyone's guess. The causes will be multiple - and most of our own making. They are:

1. Obama's war on fossil fuels through cap and trade.

2. The alternative energy Obama is pushing on America is untried at scale and considerably more expensive than fossil fuels.

3. Rising global demand for oil.

4. Obama's decision to renege on his campaign promise to allow exploitation of our extensive domestic resources.

5. The expected rise in cost of shipping foreign oil to U.S. ports because of a new proposed UN tax on CO2 produced by ships.

6. Oil is priced in dollars. The devaluation of the dollar through inflation will cause a rise in prices.

7. Investment in repair and replacement or our existing energy infrastructure.

8. A wild card - global cooling?

To discuss these in some detail:


1. Obama's War On Fossil Fuels:

The direct effects of Obama's war need little elaboration. I've covered them in detail in the post, "Throwing Green Fuel On An Economic Fire." He intends to introduce a cap and trade system that will punish the use of fossil fuels for power generation, imposing a massive regressive tax that will touch every aspect of our economy and that is estimated to cost every American family just under $4,000 annually. This is completely in line with his plans, articulated in a January, 2008 interview: "Under my plan of a cap and trade system, electricity rates would necessarily skyrocket."

The cap and trade plan will also directly effect energy production in a way I did not anticipate. Obama's cap and trade legislation seems designed to directly attack our refineries. This from testimony before the House Energy Committee the other day:

If climate-change legislation passes Congress in its current form, Lion Oil Co., an El Dorado refinery, will have to shutter operations within a year and lay off 1,200 workers, a company executive told a congressional panel Tuesday.

Passage of the bill "will make our survival impossible," Steve Cousins, vice president of refining, testified before the House Energy and Commerce Subcommittee on Energy and the Environment.

. . . "This bill's treatment of domestic refiners with respect to the allocation of allowances is simply a thinly veiled attack on crude oil as an energy source and domestic refiners as a provider of energy to consumers, farmers and truckers," Cousins said.

This will be bad news indeed. We already have insufficient refining capacity in the U.S. as it is, and thanks to the left, we haven't been able to build a new refinery in the U.S. since 1976. It cap and trade marks a major attack on our domestic refineries, then this alone could have a major impact on energy prices.

2. Alternative Energy

It bears repeating that none of the Obama desired replacements for fossil fuels are cost effective or proven to scale. For example, the costs of solar power per kilowatt hour in the U.S. are 26 cents to 35 cents. That compares to about 5 cents for coal. It is one thing to move off one form of energy to another that is proven equally as reliable and cost effective. It is another thing entirely to do so when that movement is made without any such proof - but a profound belief, as Obama demonstrates - that they can be made more cost effective than fossil fuels at some point down the road. It is quite literally gambling with America's future. And, as Prince Turki al Faisal recently noted:

The U.S. has rising energy needs despite the economic downturn," Prince Turki said. "If you are going to be paying for wind, electric and solar energy equivalents that cost five or 10 times more than it costs to use oil, you are going to price yourself out of the market. You are going to lose whatever competitiveness you have in your products."

It's not like we can't see this freight train bearing down on us.

3. Supply and Demand are still with us.

The fall in energy prices since November has occurred because world wide demand has fallen in the face of a contracting world economy. Contrary to the claims of the left during the energy crisis of last year, they did not successfully repeal the laws of supply and demand. China, India, and the rest of the developing world are going to become ever more voracious consumers of oil and other fossil fuels - as will we - once we start to move again from a bear to a bull economy. As I documented in an earlier post, it was their increasing demand for oil that caused the spike in oil prices over the past two years. Even if we were to do absolutely nothing to proactively cause a rise in oil prices, we can still forecast with near certainty that oil prices will again skyrocket based on global supply and demand.

4. Obama has reneged on his campaign promises to allow exploitation of our own natural resources.

We have extensive domestic resources. Our coal reserves are the largest in the world. And as to oil, estimates are that we have: oil shale – 800,000,000,000 – 2,000,000,000,000 barrels of oil; continental shelf (East & West Coast) – 115,000,000,000 barrels of oil; ANWR – 10,000,000,000 barrels of oil.

The oil sits untouched.

During the campaign, at the height of the energy crisis and with gas topping $4 a gallon, Obama promised that he would allow for greater exploitation of our domestic energy resources. That promise did not last long after the inaguration. Indeed, within two weeks of taking office, Obama "shelv[ed] a plan announced in the final days of the Bush presidency to open much of the U.S. coast to oil and gas drilling, including 130 million acres off California's shores from Mendocino to San Diego."

All of this means that we will become ever more dependent on foreign oil to power the engine of America. Our dependence on foreign oil, already at 70%, will continue to rise, with implications for both our economy and our national security. That means $250 a barrel oil within a few years, if one Gazprom executive is correct, and $300 a barrel oil within a decade if T. Boone Pickens is right. Those types of numbers would put a stake into our economy.

5. Shipping Costs

The cost of shipping foreign oil to U.S. ports - and the costs to ship all of the other 80% of world trade that is shipped - are set to rise dramatically as the UN pushes through an international CO2 tax on shipping. We rely on foreign sources for 70% of our oil. Of that, on a typical day, we get from Canada and Mexico about 3,403,000 barrels of oil. The rest must be shipped considerable distances. This includes:

Saudi Arabia - 1,530,000 barrels
Venezuela - 1,227,000 barrels
Nigeria - 1,215,000 barrels
Iraq - 508,000
Angola 408,000

A typical supertanker carries two million barrels of oil. I do not have the figures yet to tell just how much this rise in shipping costs will be, but according to David Smick, writing at the Washington Post, "[t]he U.N. agreement last October on sulfur-burning levels for ships . . . are expected to send shipping costs skyrocketing."

6. Oil and devaluation of the dollar

Four months ago, oil was at $30 a barrel. It has already climbed to $72 a barrel, in part because of a weakening dollar, and looks to climb higher quickly. With oil priced in dollars, a weakening dollar means rising prices for oil. That said, Obama seems to be doing his best to devalue the dollar. He has created a mountain of debt and the Fed has turned on the money supply spigots like never before seen outside of the Weimar Republic:

As Q&O points out, quoting economist Arthur Laffer:

It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S. To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. . . .

The bottom line is that we may well see the collapse of the dollar. As that happens, the price of oil will be forced drastically upwards.

7. Repair and replacement of our energy infrastructure.

Our energy infrastructure needs to be constantly repaired and replaced. But from where will the money come to repair and replace fossil fuel burning plants if Obama is threatening them with massive taxes and refusing to grant permits for the creation of new plants? For example, only a few months ago, Obama's EPA took the extraordinary step of recalling a permit issued under the Bush administration for the building of a coal fueled generator plant in a Navajo reservation in New Mexico. According to Hot Air:

The EPA . . . said that the Navajos should have proposed using a gasification process that’s still in the experimental phase and hasn’t been proven at all. In fact, Al Gore called it a myth just this month, so apparently the EPA expected the Navajos to include a mythical system in order to retroactively justify the permit they had in their hand.

If that is what is required to build or improve our fossil fuel based energy infrastructure, we will see our nation in serous trouble in just a few years. Lest there be any doubt as to Obama's ideological stance on coal, he said in a January 2008 interview, "if somebody wants to build a coal plant, they can — it’s just that it will bankrupt them, because they are going to be charged a huge sum for all that greenhouse gas that’s being emitted." Hot Air has the video.

This is not yet a problem, but it can quickly become one and add appreciably to the cost of energy in America. And Obama is leading us on the exact same path as Britain in that regard, where the failure to repair the fossil fuel based infrastructure is bringing that nation ever closer to a severe energy crisis. EU Referendum has the details.

8. Global Cooling

Here is a real bit of irony - and a wild card. What if, instead of global warming, we stand on the cusp of another "Little Ice Age." The sun's near total inactivity and the seven year decline in average temperatures point to that far more than they do to global warming. If that is so, if we see a drop in average temperature of 3 degrees Fahrenheit equal to the Little Ice Age during the medieval period, than we can expect a sustained increase in the need for energy - not to mention a sustained increase in the need for CO2 to improve crop yields, but I digress.


The bottom line is that we face, with near certainty, an energy crisis in the coming years, if not in the fairly near future. This is a situation that demands we act and act now to minimize the effect on our economy. But Obama and the left are so bound up in their ideology and so invested in the belief of anthropogenci global warming that, not only do they refuse to acknowledge the signs, but they are all set to compound the problem exponentially. It is the same sort of dysfunctional psychology you can see at work here. This will get much worse before it gets better.

1 comment:

suek said...

The only good news here is that there's an election in 2010.

The Dems will have to mount a really substantial defense campaign to overcome the dissatisfaction that's bound to occur. Question is whether they'll somehow manage to successfully blame it on the GOP. The GOP needs to stick together and vote as a block against everything the Dems in Congress are doing. It may not be enough, but it's something.