Wednesday, March 14, 2012

Obama's War On Prosperity - Part 3

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 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.

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