Friday, March 25, 2011

Morgan Housel: Alan Greenspan, Hypocrite Extraordinaire

If there was ever a great example of hiring the fox to guard the hen house, it was having Alan Greenspan on the Fed Reserve. And, now he is using his powers of hypocrisy to grace our welcoming ears:

Alan Greenspan recently characterized the slow recovery out of the recession as the result of too much government intervention, or what he likes to call "artificial restraints."

Take a deep breath...

Let the anger subside....

OK.

Screw you, Greenspan!

Sorry...slipped there for a second.

This comment is like the fox yelling at the farmer for putting doors on the hen-house. A recent article by Morgan Housel at the publication fool.com, debunked Greenspan's point by pointing out that the hesitancy to hire has been due to flagging sales, not government intervention. The National federation of Independent Businesses even wrote up a nice table, which puts government requirements at 13% of what is "holding back business," behind poor sales (33%) and taxes (19%). This number has been stagnant, according to Housel, for the last 15 years. Pricewaterhouse Cooper's annual Global CEO survey put government intervention at 8%, behind uncertainty (22%) and economic growth (23%).

What is most damning about Greenspan's comment is that he was once the head of one of the most powerful government entities, responsible for overseeing banks and finances. In the 1990s, Greenspan supported the repeal of the Glass Steagall Act, which allowed for investment and commercial banks to combine, creating the monsters of "too-big-to-fail."

Another point brought up by Housel is that Greenspan also injected liquidity into the market and dropped interest rates after 9/11, which fueled an speculative investment bubble in the housing market. While we can speculate that Greenspan was reacting to the economic scare after 9/11, its unbelievable to think that 10 years later he would be essentially criticizing that same type of intervention. Greenspan used government intervention to create what Housel calls "an artificial boost" to a purported never-ending bubble. But, when two administrations use intervention to deal with the consequences of the popping of this bubble, its going too far.

My advice to Greenspan: take your Ayn Rand and relegate yourself to obscurity.

Thursday, March 24, 2011

The Energy Debate

A near nuclear meltdown at the Fukushima plant in Japan has restarted the debate about the safety of nuclear energy. It has also marked the third time that the Obama administration has faced a tragedy after announcing an expansion of his energy policy. The first was the Upper Big Branch mine disaster and the second was the BP oil spill, both occurring after Obama pledged financial backing for "clean coal" and sustained offshore oil drilling. Now, after Obama presented a energy future that included loan guarantees for Nuclear Plants in the US, Japan's Fukushima plant faced a meltdown after being damaged by a combination earthquake/tsunami. Bad luck, man.

But, the energy debate has evolved significantly since Obama's seemingly centrist pledges. There is a disconnect between the rhetoric in Washington and the real economics of energy which connects electricity consumption, auto use and our national debt. Let's take a look at the three main energy sources which Obama has decided to expand and the underlying message behind them:

1. Nuclear - Obama has pledged over $80 billion in loan guarantees from the Dept of Energy towards building more nuclear plants. Energy advocates have called this a beginning of a new "nuclear renaissance."
Reality #1: Nuclear is too expensive. Even as the regulatory process was streamlined (operating and construction permits combined), the cost to construct and maintain a new nuclear plant with even the most basic of cooling systems is prohibitively expensive. The author of a recent 2009 update of an MIT study on a nuclear future told the LA Times that those who tout nuclear see the future through "rose-colored glasses." According to him, its all about economics, and investors are shying away from financing new nuclear, even with heavy government subsidies. Politically, it sounds nice. But, those same Senators/Reps (as the Times points out) who support nuclear also reject any policy that would make nuclear cost competitive, like a carbon tax. In another twist of irony, those who support nuclear are trying to find ways to chop the budget of the DOE, the same government agency that is financing new nukes. So, either you put in a tax on carbon and up the subsidies (political non-starter) or you look for more economically viable energy sources
Reality #2: We have no viable way to store nuclear waste. The only place that was accepted was the Yucca Mountain reserve, and those plans were scrapped years ago. Even if nuclear became economically viable, the first thing we would have to look for is a way to stably store our waste or increase funding (yet another cost) to recycling the spent fuel rods.

Which brings me to...

2. Coal - Coal power accounts for about 50% of the US electricity generation. And, if you live in Los Angeles, it accounts for 44% of electricity consumption. The price of coal from the ground to the mouth of the mine is cheap. 40% of our coal comes from the Montana/Wyoming Powder River Basin. On average, the mine-mouth price is $12-13/ton. The Dept of the Interior recently announced coal leases of over 758 million tons for this area. Coal also comes from Appalachia, Alaska and Utah/Colorado area. Obama has pledged, as part of his "all-of-the-above" strategy to inject government subsidies towards building up "clean coal" and Carbon Capture and Sequestration projects.
Reality #1: Coal pricing does not take into account a myriad of externalities, all of which are reasonably quantifiable. Wha?! Translation: There are secondary effects of coal that are not often reported in the publicized "political price." These include the:
a. Environmental degradation caused by strip and underground mining
b. The health affect associated with mining and burning of coal (run in the tens of billions/yr)
c. The transportation costs of shipping coal (can be more expensive than the mining costs, esp. in the case of the PRB and Alaska)
d. Costs of pollution retrofits to reduce particulate, mercury, sulfur, nitrogen and carbon dioxide pollution from burning coal
e. Costs of maintaining coal waste ponds/landfills and preventing water contamination by any of the highly poisonous chemicals that are leached (Include, but not limited to Arsenic, Chromium(VI), Boron, Magnesium, Lead and Molybdenum).
f. Fines for coal mine/plant violations
Reality #2: Clean coal is a myth. From "cradle-to-the-grave," coal is a very dirty energy source. Strip mining, mountaintop removal and underground mining all make a myth out of the idea of "clean coal." Mining coal leads to high particulate emissions which can contaminate the water and the air and lead to chronic respiratory conditions, like the infamous pneumoconiosis (Black Lung). Mining also destroys the local environment and vital water sources by inundating them with waste. The transportation of coal creates hazards for local communities with particulate pollution from uncovered coal cars and diesel pollutants from train exhaust. When coal is burned, it releases toxins and waste that contribute to climate change and negatively affect the health of local communities (mostly low income or underrepresented). Toxins like mercury, nitrogen oxides, sulfur dioxide and particulate matter can cause cancer, neurological disorders, birth defects and chronic and short term respiratory illness.
Reality #3: Carbon Capture and Sequestration (CCS) is too expensive. Like nuclear, even with heavy government subsidies, plants with CCS are prohibitively expensive and investors are moving away. Example: The FutureGen plant, a joint venture between private utilities and the Dept of Energy has overshot its budget 3 times, and its still not operational. There are no economically viable pilot projects that even prove CCS can be done, even on a small scale (>50 MW). And, geological pore space to store tens of billions of tons of carbon dioxide does not exist. Even if it did, there is a chance that it will escape and contaminate local aquifers and drinking water sources.
Reality #4: The US is shying away from burning coal and the cost for a new coal boiler (even without CCS) is too expensive. The new announcement by the Obama Admin to bid out new coal leases is a plan to tout his international economic cooperation initiatives instead of his energy policy. The PRB has been a good driver of plans to export coal to China and India, where markets are growing rapidly (about 9%/yr even during the recession). Most of the coal mined in the PRB will most likely follow that trend. Costs and regulations in the US have made it difficult to add new coal boilers. For example, a 100MW coal boiler in WY added in 2009 caused the local utilities to raise their rates a whopping 26.6%. Coal plants are traditionally up to 10 times that size.

3. Oil/Natural Gas Drilling - In his trip to South America, Obama touted an energy partnership with Brazil to help it harvest its offshore oil reserves. With the BP spill set squarely out of sight and out of mind, the Dept of the Interior announced new offshore gas leases in the Gulf of Mexico. These leases will fill the US market with domestic oil/gas and stop our dependence on foreign oil. That dependence has hit consumers with $4/gallon gasoline.
Reality #1: Drilling for oil offshore will not make gas prices go down. There is not enough viably drillable reserves to affect the market. Without a highly stable supply, the price of oil will not be affected at all.
Reality #2: Drilling for oil offshore furthers our dependence. In a recent blog, I mentioned that we can achieve independence from oil. Oil and gasoline burned by automobiles, trains and planes are a main cause of global climate change, ozone and particulate pollution. Like with coal, taking into account these health costs, the cost of more oil drilling is much higher and avoids the bigger picture of moving towards a cleaner energy future. We also do not have enough domestic reserves to wean ourselves off of foreign oil. We supported regimes in the middle east because instability has caused the kinds of price volatility we have seen in the last couple decades. Increasing a dependency on oil, coupled with consumption growth only makes our oil demand higher and necessitates further foreign oil injections.
Reality #3: Natural Gas fracking causes your water to catch on fire. While it is cheaper than coal and nuclear, natural gas hydraulic fracturing releases pollutants into groundwater and makes local community water supplies undrinkable. Also, the cocktail of chemicals that companies inject in the ground, along with a helluva lot of water (scientific measurement - many thousands of acre ft), are exempt from the clean water act, clean air act and myriad of other regulations aimed at keeping drinking water safe. This exemption was muscled into the 2005 Energy Policy of the Bush Admin by Dick Cheney. This allows for the cocktail to stay unknown to regulators because it is a "trade secret." Only recently, have people found out what is in the cocktail by testing their drinking water after it caught on fire. I recommend seeing "Gasland" if you would like to know more.

When listening to the debate in Washington about Energy, take it with a grain of salt. The rhetoric means nothing, if a dose of reality is not included. We have heard about the coal mine explosion in West Virginia and Kentucky, the explosion on the Gulf Oil platform that killed 11 and soaked the beaches with 200 million gallons of crude, the flammable water in Dimock, PA from gas exploration, the radiation in Fukushima and the thousands of coal miner deaths in China. These events should show that we need to move away from expensive and destructive fossil fuels and towards a clean energy future.

Tuesday, March 15, 2011

Oil Prices: National, California and Los Angeles

Here is something to ponder:

US Average Gas Price - $3.567/gallon
CA Average Gas Prices - $3.954/gallon

The price for gas in California is around 40 cents higher than the national average and Los Angeles is around 10-20 cents higher than the California average. So, if gas price were to reach a national average of $5.000/gallon (which is not impossible), someone in the San Fernando Valley might be paying around $5.50-5.60/gallon.

For a car with a 12.5 gallon tank (size of the tank in my car), the cost to fill up the car would be: $68.75 - $70.00. Think about that before buying yourself a Humvee.

Friday, March 11, 2011

Independence from Oil and Oil Independence

"Why should a dried little country like Libya with a crazy dictator play havoc with America's economic security?"
-Arnold Schwarzenegger

Yup, Arnie's got it right. His speech at the ARPA-E conference in Washington, DC (embedded in the blog before this one) charismatically laid out the obstacles we face because of our dependence on foreign oil. Unlike those who occupy 1600 Pennsylvania Ave, Arnie has no qualms about boosting green jobs, renewable energy and pollution reduction. He wears his environmental accomplishments as a badge of honor, not to be undermined by special interests, especially those who funded the ill-fated Proposition 23. He is the antithesis of the Kochs and Valeros. He knows that our National Security is directly connected to our oil consumption and the stability of regimes in the Middle East.

But, that's old news. Presidents going back to Eisenhower have called for an end to our dependence on foreign oil. As Arnie so eloquently put it, when Eisenhower told the US to end its consumption of oil from the Middle East in 1959, imports accounted for 20% of consumption. The random drawing of borders that ignored cultural, religious, social and ethnic boundaries after WWI amounted an inherent instability in the Middle East. Our hands on support of dictators created a legacy of enmity in oil rich countries like Iran, Libya, Egypt and Saudi Arabia. Now we see that instability magnified to its "nth degree," represented by the protesters who have fought and died in successful and ongoing attempts to topple regimes in Tunisia, Egypt, Yemen, Bahrain, Saudi Arabia and Libya. Just recently, a single protest that led to the injuring of 5 by Saudi Arabian police caused an increase in oil prices. You can imagine what their "day of rage" will look like.

While it is appropriate for Obama to stress Eisenhower's point of eliminating our addiction to foreign oil, I think he can go a step further. It is time, not just for Oil Independence, but Independence from Oil. Congressman might use this time of instability to tout opening up the Arctic, Alaska and the Outer Continental Shelf to oil/gas drilling. Congressman will use this time to tout the Keystone XL tar sands pipe line as energy independence. But, these are a dying breed. These are opportunistic excuses of the past.

Here is what Obama can do:
1. Use CAFE standards to increase efficiency of cars
2. Support the expansion of electric car infrastructure
3. Support for T Boone Pickens plan to expand the use of Natural Gas for trucks
4. Support environmentally safe standards for Natural Gas Fracking
5. Fund efficient and public transit
6. Fund infrastructure projects that make cities more accessible
7. Tell the State Dept to reject the Keystone XL pipeline
8. Remove or lower subsidies for oil companies

These steps will create jobs, improve efficiency of cities and transit and put us closer to both Oil Independence and Independence from Oil.

Arnold Gives Keynote Speech at ARPA-E