Wednesday, December 17, 2008

Higher Energy Prices, Dr. Chu?

As I've indicated in previous posts, energy prices may well drop further in the short term. The drop of almost 8% in oil prices after the announcement of substantial OPEC production cuts is testament to the downward bias of the market, worries about the economy and the ineffectiveness of the cartel. Even so, as I've also noted previously, I believe prices in the longer term will be somewhat higher, in the $50-75 range.

None of the several developments over the past few days in the energy world change that. However, one event stands out as far and away the most influential in driving the future of energy...the nomination of Dr. Steven Chu as the Energy Secretary. This development will change the energy future in significant ways, of which you should be aware.

Dr. Chu marks a departure from the old ways. Previous appointments have been from the more traditional hydrocarbon side of the energy world. Dr. Chu is from the alternative energy side, and he has made clear very strong beliefs which could redirect and clarify the direction of energy in the US for the next several years. Further, it is pretty clear his agenda is supported by Obama and the Congress. I believe his new direction will have support from the general public as well, at least until the bills come due. As a result, I believe he will be successful in implementing many of his concepts. So, let's take a look at some of his beliefs, and then explore the likely results:
  • He has stated repeatedly that coal is his biggest nightmare.
  • He has voiced support for a cap and trade system.
  • He has advocated promoting conservation by imposing motor fuel taxes similar to those in Europe, raising gasoline prices to levels similar to Europe (and most other developed countries).
  • His career has focused on alternative fuel sources, particularly cellulosic ethanol.
  • He believes strongly in improved efficiency and conservation as the way forward.

Given the assumption that many of these concepts will be implemented, what are the impacts? Let's start with coal. Coal is used to produce about half of the electricity in the US. Under a cap and trade system, coal will be under a signficant disadvantage. While in time other alternatives will replace coal, this process will take several years. As a result, the only way to utilize coal would be with carbon sequestration. My analysis (explained in a previous post) is that sequestration would approximately double the cost of power generation using coal. So, it is reasonable to assume a 50% increase in electricity cost over the next few years based on this factor alone.

The story for motor fuels is similar. Raising motor fuel taxes to levels similar to the rest of the world would increase gasoline cost to about $5 per gallon. Again, in this scenario, alternatives would begin to replace gasoline, but this process would take several years to replace a significant portion of the gasoline and diesel now being used. In the mean time, transportation cost increases would be on the order of 100-200%. Biofuels obviously are one alternative, but for the foreseeable future, they will be substantially more costly than current prices. Electricity is an alternative, but battery technology is still a problem, and increased electricity use would exacerbate the electricity issue mentioned above. Hydrogen? For the foreseeable future, it is generated only by using electricity or hydrocarbons.

On the positive side, these measures, if maintained over the long term, are likely to result in improvements in alternatives that most Americans would say they want. power, wind power, biofuels.

On the down side, it will result in several years of higher personal, as well as, business costs. The economy will be weakened relative to the rest of the world. More jobs will leave for lower cost locations.

The worst, and most likely result, is that a lot of money gets wasted before everyone realizes this will be more onerous than they thought and the whole thing comes down like a house of cards.

For the record, I too believe efficiency and conservation are a key to our energy future. But I believe this process will happen most effectively automatically, as a result of normal supply and demand. Imposing artificial factors such as cap and trade and significant new taxes to speed up the process just make it more inefficient and ultimately results in wasted resources and a reduced standard of living.

So, there you have my projection of the future. Debate. Resist. Promote. But, whatever you do, be ready. See previous posts for ideas.

1 comment:

mikehoskins said...

I know the following is a rant and that it mostly agrees with the original post, but I do want to chime in on a couple of hot buttons.

Yes, as usual, tax-and-spend is a very, very bad (evil in fact) way to "correct things."

$5.00/gallon, 100-200% transportation cost increases, electricity increases, etc., would be a death blow to the economy and would come down like a house of cards.

As EcoFundamentalists(tm) keep crying that the sky is falling on one hand, offering PieInTheSkySolutions(tm) on the other hand, nobody can win. Then there are the NotInMyBackYard or NIMBY(tm) types that make it impossible to come up with any solution. Tax-and-spend is a third way to kill off energy innovation.

It would be better to follow an "IT approach" to replacing old systems -- everything new, "going forward" should be on new systems. Eventually, old systems get retired and shut off or they get retrofitted. This way, a smaller staff with less of a hardware budget can do more with less time and money.

Not only that, you don't have to rely on things made with element Unobtanium(tm). Fusion, carbon sequestration, cellulosic ethanol, and hydrogen may be nice for the future but aren't ready in the here-and-now. However, solar and wind augmentation (not load power), nuclear power, plugin hybrid cars, switching from gasoline to diesel (plus augmenting with biodiesel), and micro-hydroelectric generation are good today or will be, in the near future. Geothermal power is somewhere close to the middle; I also believe that using landfill waste responsibly to generate electricity and biofuels (with techniques such as hydropyrolysis, plasma torching, etc.) makes trash renewable, cleaner, and safer.

I'm only weakly a fan of the T Boone Pickens' plan, but it already sounds better than Dr. Chu's and make more economic sense.

Before I get a tongue lashing, Dr. Chu does believe in nuclear power (strongly) and in solar augmentation.

It's the tax-and-spend to get us to pie-in-the-sky part that's very, very bad and the "get us off of coal now" issue. All of these are unreasonable, if not impossible.

Alas, there is no silver bullet. I do believe that oil is here to stay (but we can do better than we currently do), that we must have a multipronged energy plan, and that we must get away from foreign energy.

One of the major things that has kept our economy moving is cheap energy. Expensive energy has *always* crippled the economy. A strong economy is *required* for research, innovation, and competition. If Dr. Chu gets his way on taxes, he won't get his way on the R&D neeeded for the rest.

Worse, big government, tax-and-spend "solutions", little to no choice, carbon caps, etc., all do make us more like the rest of the world. Ergo, socialism. There need to be free enterprise solutions if we are going to have the economic engine to accomplish anything.

The government needs to throw down the gauntlet in an XPrize fashion, award contracts to companies that best meet criteria, publicize winners, set guidelines, reward competition, enforce violations, but otherwise back off. Market forces can work, when the government is less heavy-handed. The government is already too heavy-handed (too much red tape, taxes, etc.), making new energy tech very, very difficult to implement.