In parts one and two, I discussed how the Obama administration is hostile to the oil industry, and how the brunt of that hostility is going to be borne by the working class (the very people he and all Democrats claim to want to help!) In today's final part, we discuss
Why The Free Market Should Solve This Problem
The
shortest answer is that the free market, without a political bias, will
automatically work toward the most effective solution. This is typically based on demand for a product that is affordable for people to buy, works reliably, and creates a profit for the producer. In other words, everyone benefits from the exchange. The market is a profit driven organism, and could not care about which political ideology gets it there. If the
most effective solution to the rising price of gas was an electric car,
you would see nothing but Nissan Leafs on the road. But it isn't, and
even with a $7500 subsidy and a gas hybrid engine, there's no market for
the Chevy Volt (probably because the people who are in that target market already own a Prius). The problems with the 'if you build it, the market
will come' method is that there are too many less costly options out
there that people want (or need) to justify a a product with no demand. Using my example from part 2 of this series, it will cost me less to keep my car and
pay higher fuel prices than it will to replace it, so why bother? The
Volt has a 40 mile range on electric power, and since my commute is 22
miles round trip, and I live 2 miles from the grocery store, the
electric capacity would be fine for me for 90% of my driving. The other
10%, however (you know - the part of my life that does NOT involve going to or from work or running errands around town, which I like to call my 'real life'), involves longer trips, often cross country, and frequent needs to have the
cargo space of an SUV. As such, the Volt is not well suited to my overall
lifestyle. And there's the rub - for Obama's strategy to work, people
have to change
their lifestyle to fit
his vision. It's like Jimmy Carter telling
everyone to wear sweaters and turn down their thermostat in the winter,
except Obama is saying, change your entire lifestyle (where you go, how you get there, what you can haul. etc) to fit within the
confines of this admin's designs.
Central to Obama's
plan is the concept that the oil companies are inherently evil and will
not make the move to alternate fuels unless they experience what
economists call a 'negative externality.' An externality is something
that one party does, and that another party has to
pay for without having agreed to pay for it. An example from the book
Superfreakonomics is a person using the Club to secure his steering
wheel in his car. A thief comes by and wants to steal his car, but the
Club deters him. The thief then steals his neighbors car, not because
it's the one he wanted to steal, but rather because of the $30 Club the person
purchased, the neighbors car becomes a more attractive target. The
neighbor has experienced a negative externality.
For
Obama, the removal of the subsidies for the oil companies is supposed to
show how he's tough on the oil companies and sympathetic to 'clean'
energy companies, who will somehow be able to solve the problems that
'big oil' has been unable to solve to date despite spending billions each year on research and development. To buy into this logic you
have to suspend belief in capitalism completely (no stretch for Obama).
First, you have to believe that a company that has made it's business
model on a technology for which there is no market can thrive in the
absence of that market, if only given enough taxpayer money (Solyndra!?). Second,
you have to believe that companies that make their living delivering
energy products to market have no interest in adding additional revenue
streams to their portfolio. Third, you have to believe that somehow the
oil industry is in competition with the utility companies that produce
electricity (I am still not clear why taking money from oil companies and
giving it to unprofitable solar companies helps people why buy gas for the purpose of driving to work). Fourth, you
have to believe that the oil companies, who, again, spend billions on research
and development, are not trying to find solutions to the problems that
face the industry when it is very much in their own interest to do so. Fifth, you have to believe that some of these
companies have solutions developed - but they want them to sit on the
shelf unused, generating no return on their investment, simply to spite
the world. If you can believe in these things, you probably support
Obama's 'clean energy' agenda.
I, however, believe that
if solar power could be produced at a cost near that of coal fired
power, or that a 50 MPG engine existed for an SUV, or that bio-diesel
could solve long haul trucking's issues, the energy companies and auto
industry would be rushing them to market with ferocity before the
competition could snatch the market share. Can you imagine if Chevy
could release a Silverado that was as capable as a Ford F-150 (which rules truck sales), but got
three times the mileage? What a boon that would be for them! But these
solutions aren't viable. Gas and diesel fuel rule the roads for one
reason; they're cheaper to produce than the alternatives, they're
proven, and there are fewer limits. You can refuel a regular car in minutes, where an electric car has a shorter range and takes hours to recharge. Coal fired electricity costs about 5 cents per kilowatt; solar
costs about 20 cents, and wind costs about 12. Even nuclear energy
costs about 8 cents per KW. Gas fired plants produce at about 6 cents
per KW. And nuclear, gas and coal can run 24x7, while the wind doesn't
always blow and the sun doesn't always shine. Why would you use
anything else other than the proven technologies that are both reliable and cheaper?
That
brings us back to the negative externality concept. It's all stick and no carrot. Obama's policies
that are helping drive up oil prices are a negative externality that you
and I have to pay for. So is cap and trade legislation. Since
we can't bring solar power down to 5 cents per kilowatt, let's bring oil
and gas fired electricity up to 20 cents per kilowatt. Now solar
doesn't look as bad by comparison, right? It's this inverted economics that provides the strongest argument to let the free market work. You cannot legislate technologies into existence.
A Free Market Solution
You can't legislate advances in technology, but you can
innovate them into existence. I promised to show an example of how the free market can do a better job at this than the government can. The main gating factors for solar power effectiveness is the conversion rate of solar power into electricity, and the land available for use. At current conversion rates (10%) a square meter of photovoltaic cell will produce about 180 KWh per year (on an average of 1800 hours of usable sunshine; will vary depending on how much sunshine your area gets). An average home uses 10,365KWh per year, which would require 60 square meters of PV to meet those needs. My roof only has about 60 square meters of southern exposure, so 100% of my usable roof would have to be PV cells. At a cost (installation + materials) of about $8 per watt, we're talking more than $80,000! Not very attractive, is it?
Here's where innovation comes in. A company started in California is monetizing solar energy, and they're partnering with large corporations like Wal-Mart to do it. The CEO is a young woman, and her plan goes like this: she gets Wal-mart to let her use their roof space for free and in return, she installs the solar array for free. She then sells them the electricity a rate that is competitive with (but slightly more than) traditional energy. Walmart wins because they get electricity at a guaranteed price for the terms of the contract, avoiding the fluctuations typically seen in the market, and allowing them to therefore forecast operating costs with much greater accuracy. (this is called a POSITIVE externality - or the carrot, not the stick). The solar company wins, because they produce about 600,000 KWh MORE electricity (enough to power about 60 typical US homes for a year) than Walmart will use, which they can then sell on the open market, all without having to buy the land upon which the array resides, thus reducing their operating cost and increasing profits. Think about the number of strip malls and stores (and government buildings!) with large, flat roofs that are ripe for a solar array, and there is a tremendous amount of power that can be generated. It's the kind of symbiotic relationship that only the free market can provide, and this solar company has acquired more than $400,000,000 in PRIVATE venture capital based on this business model. It's success is not proven, but they're using free market solutions to solve a problem for a customer, and are not using taxpayer money to do it (though to be fair, I am sure they get some tax benefits, but at least that is something that they get after conducting their business, not something they get to KEEP them in business!). Since a 5% improvement in solar panel conversion to electricity yields a 35% increase in space efficiency meaning more power generated in the same space), bright things (no pun intended) lie ahead for companies that can identify these kinds of symbiosis.
To make this argument complete, you have to tie it back to our demand for oil. If you can reduce the amount of natural gas needed for electricity production, the demand and hence the price for it will drop. The natural gas producer need to find something to fill that void - hey, how about the automobile!!??. More so than electric cars, natural gas powered cars are already in use extensively in commercial fleet vehicles for municipal governments and small and large businesses. If your house can have the refueling equipment installed (and why couldn't it?) you would never have to go to a gas station, unless you were on a road trip - and then there aren't many fueling options available, but that will change as the FREE MARKET demands it. You can see how the symbiosis of the solar, natural gas and automobile industries could help relieve our dependence on foreign oil - if the government would get out of the way. Instead we keep pumping money into companies that fail all in a Quixotic belief that the government can do it better, when time and again it demonstrates that it can't.
The Economic Wasteland
If you haven't heard, we're in the middle of a massive recovery in America! The 'recovery' Obama and his lackeys in the Ministry Of Truth (aka the mainstream media) is as real as the effects of a Hollywood blockbuster. It looks good, but it's not made of anything real. I call it Obama's "greenscreen" recovery - where he provides the talking points and the background numbers are changed and altered at will to suit the purpose. In February 227,000 jobs were created, but unemployment rates did not change. Why? Because 300,000 people 'previously discouraged' began looking for work again. This is how Obama has dealt with the unemployment rate...as people become 'discouraged' the government just quits counting them, masking the real unemployment rate, which is somewhere around 11%.
So while the 'recovery' (and any time you use that word, you must use quotes) is largely an illusion, Obama's
energy strategy, if it pans out, is going to destroy any hope of real recovery. As costs
of oil continue to rise, the costs of everything will rise. This will
only affect people who have to drive from one place to another, buy
goods that are brought to market by a vehicle, or eat foods produced
with the help of tractors, harvesters, and then brought to market in a
truck. If you aren't one of those people, you'll be fine!
Of
course, as companies see their operating expenses increase, some of the
cost gets passed on to their workers so they can attempt to keep their
products prices down. This means lower, or no, pay increases. Smaller
annual bonuses. More layoffs. In turn, this will drive consumer
spending down, which further hurts the companies and expands the
destruction. Stock prices will fall. More people will lose their homes, and we're back in
November/December 2008. The high gas prices in the summer of 2008 were a
contributing factor to the speed of the economic meltdown, and this
go-round, the economy is already on crutches and will not take much to
topple into the abyss. The good news for Obama is that if we're all
reduced to subsistence farming and eating Soylant Green, he can at least
say he leveled the playing field...all the way down to the ground.