TCS Daily

Taking the American Dream Off Carbon Fuels

By Craig S. Marxsen - November 20, 2008 12:00 AM

The presidential election of 2008 found Americans voting as if convinced that the concurrent once in a hundred years financial crisis was unrelated to political ambitions to hasten getting America off carbon fuels. The collapse of housing values underlying the global deleveraging of the financial system seemed self-evidently due to a bubble inflated by irrational exuberance and inadequate regulation. No one seemed to connect the sharp rise in gasoline prices to the economic plunge that followed it.

Economists such as William Nordhaus and James Hamilton point out that, in a frictionless neoclassical model, even a petroleum supply reduction as large as 10% would theoretically reduce GDP by a small amount ? well below 1%. However, both economists acknowledge that in a real world where energy supply reductions might impede the use of capital equipment and structures, the effect might be much bigger. Hamilton showed in a 1988 paper that a 10% reduction of energy inputs might also reduce the inputs from energy using capital by 10%, giving a larger impact on GDP. Indeed, a 1983 study by Robert Pindyck and Julio Rotemberg estimated that reductions in energy supply reduced the use of capital with very considerable impact. In 1999 Andrew Atkeson and Patrick Kehoe showed that a mere doubling of the price of energy reduces GDP ultimately by 33% according to Pindyck and Rotemberg's findings. Atkeson and Kehoe constructed a similar but less sensitive model leading to the conclusion that doubling energy prices might diminish GDP by only 5.3% in the long run. Effects even this large might outclass what actually happened in any of the recessions experienced since the Great Depression.

The current crisis and deterioration of economic activity seem based on collapsing housing and transportation equipment industries. The energy crisis connection for transportation equipment seems obvious enough, but there is also a strong and hidden connection to the housing crash. Baby boomers, after all, represented a very large cohort realizing their American dream as commuters from suburbia. Joseph Cortright published a rigorous study in 2008 showing that the rise in gasoline prices is what popped the housing bubble. Analyzing statistically along several lines, he showed that commuters' fuel prices forced abandonment of purchasing houses that required distant commutes from work. As evidence, Cortright showed prices of houses in suburbs more distant from city central business districts decreased the most while houses close to CBDs decreased little or even increased. Likewise, from analyzing urban core vitality measured by educational attainment statistics for residents living close to CBDs, he showed that cities with strong urban cores suffered substantially smaller declines in home prices. One might argue that there really was not a housing bubble at all but that an energy crisis in fact simply devastated the lifestyle of a large cohort aspiring to enjoy the house in the suburbs and the SUV as their means of safely accessing their workplaces downtown.

Where did the energy crisis come from? Philip K. Verleger, Jr. published a 2006 paper predicting $100 oil and the recession it would cause. He explained that environmental regulations were increasingly constraining fuels supplies ? including regulations restricting sulfur content in diesel fuel and legislation effectively eliminating MTBE from gasoline. Regulatory specifications prevented importation of more fuel from abroad. Poor profitability discouraged investment in refining capacity as regulation diverted large expenditures toward regulatory compliance instead of capacity augmentation. Antitrust enforcement forced big companies to sell refining capacity to smaller, less well-capitalized companies as a condition for mergers, resulting in efficiency losses. Verleger foresaw fuel production limitations causing inflation the Fed would have to fight, thus stifling growth.

Underlying the failure of fuels supply expansion to keep up with economic expansion was a widespread desire to reduce global warming by diminishing the use of carbon fuels. Indeed, the victors of the recent election talk as if they have only just begun to get America off carbon fuels. It now seems apparent that such a course of action may impose costs on a scale of those suffered during the Great Depression. Even if we ignore the fact that polar ice caps are currently melting on Mars also, it remains that unacceptably drastic cuts in carbon fuel usage promise only the most marginal sort of climate change impact during the future relevant to our lifetimes.



its about the supply not the drag of taxes and regulations
There is about 1,000 billion barrels of oil currently known in the ground (this number is of course an estimate). No tax or regulation changes this number.

The regulations that are limiting further development is such a small percentage of this number, maybe 10-50 billion barrels. This is insignificant.

Even if there where no regs, it might increase the total reserve by 1-5%. So what!

I will say I think the regulations SHOULD be removed, but the economic effect is negligible.

We need more tech and different sources of energy, not less regulations. Like nukes and fuel cells.

Bans in USA don't help USA economy
When the government bans energy production (no nuke plants, no drilling where we KNOW oil is waiting, like ANWR and many off shore locations) and limits the construction of refining capacity, don't you think there might be an economic impact?

If oil was running out AND all production efforts were are maximum capacity and efficiency, they supply would be of concern.

We are not there.

Using up our reserves
"There is about 1,000 billion barrels of oil currently known in the ground (this number is of course an estimate)."

When you look closely it's more like a WAG (wild ass guess). No one has any precise idea about how much oil lies beneath the surface of the planet. And the estimates of recoverable reserves by current techniques are greatly exaggerated or minimized by the producers for economic and political reasons.

With newer recovery techniques, there's a lot more oil. And with more expensive techniques, there's more expensive oil. So you could say there's a certain amount of two dollar oil, but a much greater quantity of four dollar oil. And in fact more and more of our oil is going to be expensive stuff from the Canadian Far North.

It's not just expensive in dollars either. It's energy-intensive to produce, just as liquid coal and a lot of other new best things are. Biofuels, clean coal and many other renewables and nonrenewables all pump carbon into the skies.

Geothermal holds some hope, as does solar. New developments are making these approaches look better and better. Nuclear would look a lot better if they could make some headway on the spent fuel issue.

In line with the thrust of your argument, wouldn't you say that our reserves were best left in the ground for the moment? Let's use other people's fuel for the next few years, until we develop alternatives to it. Then, if we find we still need more oil, we'd still have our reserves intact, right where nature put them.

Doing so wouldn't cost us a dime. And it would leave us with a bit of margin for the future.

Won't need any reserves
Economical alternatives will never be developed until the crude becomes more expensive to produce, in reality, not by government fiat.

Socialist producers like Mexico and Venezuela are inefficient because they are not maintaining and improving their production facilities. The governments are taking all the profit.

Sperm whale oil was not replaced until kerosene could be made less expensive.

Until you have a truly more efficient alternative, crude oil and coal won't be replaced. Government attempts to warp the market to force crude to be more expensive won't make alternatives less expensive. You can't fool mother nature.

Sperm whale oil reserves
Does anyone count our 'reserves' of sperm whale oil?

Why not? It was replaced by kerosene for lamps.

"Michael Dietz invents a kerosene lamp that forces whale oil lamps off the market."

"Electric light bulb invented by Thomas Edison eliminates demand for kerosene, and the oil industry enters a recession."

"1885 Oil burners on steam engines in the California oil fields, and later on steam locomotives, create new crude oil markets.

1886 Gasoline-powered automobiles introduced in Europe by Karl Benz and Wilhelm Daimler create additional markets for California oil. Prior to the automobile, gasoline was a cheap solvent produced as a byproduct of kerosene distillation."

Note that this was all driven by market demands, not government decree.

Crude oil saves whales?
"Prior to the 1800s, light was provided by torches, candles made from tallow, and lamps which burned oils rendered from animal fat. Because it burned with less odor and smoke than most fuels, whale oil, particularly oil from the nose of the sperm whale, became popular for lamp oils and candles. However, sperm oil, widely known as "spermaceti", was very expensive. In fact, a gallon in the early 1800s cost about $2.00, which in modern values equates to about $200 a gallon. Nonetheless, whale oil was the illuminant of choice for those rich enough to afford it.

A thriving whaling industry developed to provide sperm oil for lighting, and regular whale oil as a lubricant for the machine parts of trains. In the United States alone, the whaling fleet swelled from 392 ships in 1833 to 735 by 1846. At the height of the industry in 1856, sperm oil sold for $1.77 a gallon, and the United States was producing 4 to 5 million gallons of spermaceti and 6 to 10 million gallons of train oil annually."

"When a clean-burning kerosene lamp invented by Michael Dietz appeared on the market in 1857, its effect on the whaling industry was immediate. Kerosene, known in those days at "Coal Oil", was easy to produce, cheap, smelled better than animal-based fuels when burned, and did not spoil on the shelf as whale oil did. The public abandoned whale oil lamps almost overnight. By 1860, at least 30 kerosene plants were in production in the United States, and whale oil was ultimately driven off the market. When sperm oil dropped to 40 cents a gallon in 1895, due to lack of demand, refined petroleum, which was very much in demand, sold for less than 7 cents a gallon.

If petroleum products, such as kerosene and machine oil, had not appeared in the 1850s as alternatives to whale oil, many species of whales would have disappeared long ago. "

The motivation to replace expensive whale oil was not to save the whales, but to make a profit by selling a better, cheaper product to replace whale oil.

The reason whale oil was getting expensive was depletion and difficulty in the harvest.

When better, cheaper alternatives to oil are found, oil will be worth very little. To find those alternatives, entrepreneurs need the motivation to find them.

Untouchable reserves
Estimated reserves that cannot now be drilled due to state and federal restrictions, in Alaska and U.S. coastal waters, exceeds 100 billion barrels. Every new drilling even in those areas where it is not explicitly prohibited requires government permission, often from multiple organizations.

Let cost determine such a policy
What remains to be shown is that recoverable oil on US continental shelves can be produced more cheaply than available oil purchased on world markets.

If not, the sensible approach would be to keep our reserves as untapped reserves. Some day we may need them.

Never know until it is tried.
When the government won't let anyone try.....

For some reason, oil off the Brazilian coast at significant depth appears to be worth developing.

Is this satire or what?
I just don't understand how anyone can take articles like this seriously. Its a novel thought, perhaps even worth exploring, but the glaringly missing points of information, you can drive a whale through the holes in this argument. I don't think its exploration at all. Its cheerleading. The conclusion came first and everything after that was only bits of truth to make the conclusion seem plausible. And it would seem plausible to 2 types of people: those who don't know any better and those who live for the cheerleading. I'm forced to conclude no better method has been used in recent times to ensure an ideology is maligned and ignored. Thats why conservatives have to shout so much. But its not their fault, it never is.

I'll try to fill in some holes.

Housing prices were highly inflated, overvalued. Thats a bubble, and bubbles burst. Did you notice the ridiculous rise over the preceding years of the value of houses?

"One might argue that there really was not a housing bubble at all but that an energy crisis in fact simply devastated the lifestyle of a large cohort aspiring to enjoy the house in the suburbs and the SUV as their means of safely accessing their workplaces downtown."

And I thought CRA caused the housing debacle! LOL

Yes, suburbia-heads got in over their heads. All they had to do was dump their SUV - problem solved. And suburbia-heads have a lot of wealth, they would cut back on discretionary spending to make up for fuel costs - what does that have to do with their homes? Nothing. The suburb homes inflated in price more than any others, its not a bit surprising they're also dropping the most.

"Verleger foresaw fuel production limitations causing inflation the Fed would have to fight, thus stifling growth."

The Fed FOUGHT inflation??? Rates are/were historically low, how does that fight inflation? "Verleger foresaw" - so a foresight applies more to understanding than reality of experience? Now i know the author is a conservative.

"Underlying the failure of fuels supply expansion to keep up with economic expansion was a widespread desire to reduce global warming by diminishing the use of carbon fuels."

Ah, yes, the global warming bogeyman. The author missed the facts that people want less pollution in their air and water, not more. That makes it rather difficult to build more refineries and coal plants near populations, also serves a pretty strong motivation to remove MBTE and other poisons from fuels that do leak out and pollute water sources. Thats a much bigger factor than fighting global warming. But it doesn't spur emotional outrage so its ignored by the author. What farce.

We should all hope our next President takes us back on course to end our dependence on fossil fuels. Sure, it would be good to help alleviate global warming, it would also strengthen our national security, create jobs, advance technology, and position America to be a leader for the long-term.

Kid from the DR
Hey, rb. Did you call a certain conservative radio show, and being prompted by the host thereof, do you send $22 per month to a kid in the DR named Carlos?

Access vs usage
It still might make sense to make them ready for use?

Brazil is in a different circumstance
Excuse my tardiness in responding. I'd forgotten about this thread.

Brazil is in a very different situation than we are. Brazil desperately needs money for development. And it has to be earned money, not borrowed money (they've fallen into that trap before).

We've got lots of money. What we fear we may be short of is energy. So for as long as it's cheaper to buy oil from others on the open market we should do so. And the moment it becomes cheaper to tap our own reserves, we should start doing that.

I agree
It's fair to say that seismic surveys might be in order, yes.

Exploratory drilling's a different thing. Considering the deep reef systems off the NC coast, I would keep that kind of destructive behavior to a minimum.

Still, I agree that the problems risked would be minimal compared to other problems we've been letting slide for years. The coast is a mess from overdevelopment and water mismanagement. An occasional drilling accident is small potatos in comparison.

Sure, we have lots of money. We can just print more.
It is just plain stupid not to develop all resources and create more wealth which creates more opportunity and more innovation and more wealth and ......

Unlimited energy
We have the capability of producing unlimited energy, now, and it is technically possible for any place on earth to have unlimited energy resources.

Do you oppose this concept in general?

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