Category Archives: Oil

The Clevelands of the World

Today I watched a documentary on Cleveland’s decline. The tone was generally morose, though there were shimmers of hope
from all the new construction. New exurbs, renovations in the sururbs, even a brand new neighborhood in the city itself.

The documentary must have been finished up this summer, because then reality hit Subprimes — that disastrous result of government subsidies to social engineering and credit card companies, took down Cleveland. The flow of investment increased consumption, but it did not create real development.

A similar dynamic is working in many countries that export oil and natural gas. Reality is hitting. Hugo Chavez’s region ally, Ecuador, is now bankrupt. Market economies punish the “Clevelands” of the world — those governments that are unable to generate wealth, and can only provide a good life if someone else is financing it.

Of course, not everyone agrees. Tom has a post decrying that low oil prices means that Kazakhstan now has to generate wealth, instead of just pumping it out of the ground. This blank check financing is as out of date as when it was first proposed in United Nations garb in the 1970s and 1980s. Outside the subprime mortgage, oil finance, and UAW, however, I think most people realize this.

Don’t throw away money on the Clevelands of the world. Foreign oil dependency is a threat to American national security. We need to build a new electrical grid, both on land and under the sea. We need hydrocarbon substitutes, such as ethanol for flex-fuel vehicles and solar and wind for replacing natural gas powerplants. We need biodiesel stations and in-town electric vehicles.

We don’t need more Clevelands in this world.

About “Peak Oil”

Back during the summer gas crisis, I mentioned that peak oil was an irrelevent concept because at high gasoline prices, the cost of substitutes approach the cost of gasoline. That is, the higher oil prices go, the relatively cheaper substitues appears, to the point that a rising price of oil increases the effective supply of products just-as-good as gasoline.

Further, some of the rise in oil prices may have been speculation by oil producing countries. As Paul Krugman points out, the higher oil prices go, the more incentives oil-producing countries have not to pump oil.

Venezuela’s ouptut slumped 25% in the run-up to the oil crisis, by the way.

The cratering of oil prices may be a product not only of lower prices themselves (which increase incentives to pump oil), but also rising spending in oil-rich countries. Gulf Cooperation Council states need oil at about $50/barrel to pay for government spending, and a fall in oil prices naturally encourages them to either pump more or to cut back on spending.

We have a deeply warped energy market, and a heavily subsidized transportation market. Those who argue to let ‘the market’ decide our energy policy are short-changing our futures to save some money in the present.

My thanks to Calculated Risk for the excellent piece on oil that provided some of the links for this post, and to Coming Anarchy for a hilarious ad noting how oil has been running out for 30 years.

The Wealth Recyclers

Tom makes the good point that only the disconnected ‘win’ in the global recession.

Recession touches China (Thomas P.M. Barnett :: Weblog)
You see the pattern: only the disconnected see any “win” in a global recession.

But the biggest losers are not those who are truly and deeply connected, but rather those who recycle wealth without generating any of their own.

The falling price of oil is putting pressure on gap states such as Russia and Venezuela, and destabilizes those regimes far more than that of governments under international protection (such as Ukraine, Hungary, and so on).

Wealth recyclers do not create anything. They produce nothing, and only collect rents on the transportation of wealth placed by God under their lands (oil, natural gas), and needed by more productive peoples in order to create wealth.

We should use this opportunity to accelerate the end of the age of hydrocarbons. We have to make sure that the market for biofuels stays attractive, so that ready alternatives to gasoline and natural gas are available. This means both helping domestic producers and encouraging the new core economies to do likewise.

Sales of the Detroit 3 automakers are off 47% for Chrysler, 41% for GM, and 31% for Ford.

If these companies go bankrupt, it will clear out dead wood in the auto industry, making it easier for other auto makers to survive and meet higher fuel economy standards.

If we do decide to save these companies, we should use the leverage their bad policies have given us to enforce change.

The Credit Card Bailout

The Bush-Pelosi bailout has now officially jumped the shark.

Hank Paul, empowered by George Bush and Nancy Pelosi, now present: The Credit Card Bailout.

What is disturbing about our President, and our even worse Congress, is that we are throwing good money after bad in a way that is not only wasteful, but also foolish.

The purpose of the credit card bailout is obviously to increase spending. The credit card bailout does so by socializing the losses that individuals and banks have taken because people bought things they could not afford, while allowing the individuals to keep those toys and the bansk to keep collecting interest payments.

Without the credit card bailout, less bad offers would be made, and more people would forced into bankruptcy by institutions desperate to get whatver cash back is possible, as soon as possible.

However, instead of rewarding bad behavior, this money can be spent on ways that will help our country and our world.

For instance, while the government maintains a large fleet of flex-fuel vehicle, 92% of them consume pure gasoline because they are too far from E85 stations. We could spend money to subsidize nearbye stations putting in E85 pumps, which would immediately create work and then reduce the flow of capital from us to petro-states.

Instead, we do a credit card bailout.

We subsidize men like Hugo Chavez, who recently threatened to send in the tanks if a friend lost an election, in order to bailout credit cards.

The financial crisis is an opportunity: money will have to be spent to limit the pain, and this money can be invested in mediating the destructive influence of oil and natural gas. However, the same forces make alternative energy sources (ethanol, wind, etc) less attractive in the short term.

The Democrats may be ready to do their part.

Unfortunately, with Bush we get more of the same: a credit card bailout.

Update: While I was writing this, the fed announced a $500 billion plan to bailout bad mortgage-backed securities. The quicker we can get the Bush financial team out of office, the better.

Hidden Costs

The discussions on two threads, “Protectionism and the Detroit Bailout” and “Do-Over,” have made me think about the hidden costs of transportation.

Of course, the hidden costs of transportation matter a great deal. For instance, the hidden costs of gasoline and natural gas allow thugs like Hugo Chavez to destroy the civil society of Venezuela, and reckless men like Vladimir Putin to invade his country’s neighbors.

Hidden costs come in terms of infrastructure investments. For, so instance, the Dwight D. Eisenhower National System of Interstate and Defense Highways is essentially a subsidy on the price of gas, because it makes gasoline for cars much more useful than it otherwise would be. Similarly, a Detroit bailout would also subsidize consumption of gasoline, by taking capital that would otherwise be invested elsewhere, and using it to build SUVs like the Cadillac Escale and the Hummer.

However, things don’t need to be this way. Instead of building infrasturcture and supporting bailouts which empower destructive men like Hugo Chavez and Vladimir Putin, we could build a better fuel infrastructure. We could turn the hidden costs to be on the side of the good guys.

Projects like…

… point the way forward. Now, there are policy choices to be made. Should for instance, we encourage electric cars which use no gasoline, or hybrids that can scale faster? Likewise, to what extent should America lead alone, and what extent should the move off fossil fuels come from global cooperation?

Future threats are not from massive coordinated nuclear strikes that made the interstate highway system necessary, or even resource wars between rising countries.

Washington has an unusual amount of power during this crisis, during this inflection point in our economic history. Let’s hope that Barack Obama proves himself to be a forward-looking President, and helps move us off of oil and natural gas.

Do-Over

With the meltdown in foreign hydrocarbon prices, the panic gripping Detroit, and the rise of Obama and Waxman, we are in a Great Do-Over. This summer, we saw how out-of-sync the world can get through an exclusive focus on economic growth. We let parasites like Russia grow unchecked in power, and we did not have the infrastructure we needed to free ourselves of them.

Supposedly serious analysts announced an end to peace, and urged us to accept the reality that oil- and natural-gas- rich nations would be invading their neighbors as they like from now on. Accept it, we were told.

Fortunately, we no longer live in that world.

Now, while oil and natural gas prices are low, we have the opportunity to act. We should raise the national gas tax to at least $1/gallon more, but refund it through the tax code so it does not hurt the poor. We should build light rail in and between our cities. We should mandate flex-fuel vehicles, both to lower the structural demand for gas and to allow us to quickly move off it in the event we have to for national security reasons.

For the second time in two generations, the hydrocarbon-rich states were given the power of high commodity prices. Of course, they blew it again, maximizing their short-term profit and helping drive the world economy into a global recession.

We were fortunate that most of them (Russia excluded, of course) were just greedy, and not irredentist.

We may not be so lucky the third time.

How much does the $25,000,000,000 bailout of Detroit cost?

(I’m talking about the proposed second bailout. We already gave Detroit a $25 billion bailout in September.)

Over the next few years, several Plugin Hybrid Electriv Vehicles (PHEVs) will come on the market, from Toyota, Nissan, and other manufacturers.

(You’ve heard more about the Chevy Volt than any others, in a desparate attempt by GM to make up for lack of innovation with an expensive marketing push. We were making plug-ins a century ago, when they competed against flex-fuel vehicles. GM’s position on innovation is better shown by the EV-1, where GM threatened to sue Western Washington University for driving theirs)

So how much does the $25,000,000,000 bailout of Detroit cost?

Well, consider than such a plug-in electric vehicle can achieve greater than 100 miles per gallon in normal driving conditions. Swap out the standard gasoline engine with one capable of running an 15% ethanol blend (E-85), and you should get about 500 miles per gallon of gas (with the bulk of the power typically coming from either electricity or ethanol).

So how many vehicles capable of 500 miles per gallon could we subsidize with the funds needed for the $25 billion bailout? How many PHEV-E85s could we help America purchase for the money that is going to go into saving the skins of people ot put the Detroit Three in this mess?

If we make the provide a subsidy of $1500 for each plug-in ethanol-burning electric, that means we could subsidize the purchase of 1,666,667 500 mile per gallon of gas vehicles for the cost of the Detroit Bailout.

President George Bush and President-Elect Barack Obama have a choice: investing in saving GM and the UAW, or invest in freeing ourselves from foreign oil.

Bush’s job seems easier: all he needs to do is hold tough through January 20, by which time GM should declare bankruptcy.

Obama has to choose between investing in the future or investing in the latest and greatest in 1950s ideas.

I hope both of them are up to the job.

Socializing General Motors for the Public Good

The news that Deutsche Bank considers GM shares to be worthless helps us understand the Detroit bailout talks that are underway.

If GM shares are expected to be worth nothing regardless wehther or not there is a bailout, then the choice is not between rewarding shareholders or punishing them: the choice is between whether we should process the bankruptcy of General Motors through the exeuctive or judicial systems.

Thus, the question becomes more technical, and the ranges of possible answers less troublesome.

Still, some things are clear. GM has attracted workers through a system of unsustainable benefits, and those who “gambled” on a company being able to pull it off are in the same boat as those who gambled on housing pricies always going up. From this disaster we need to build a national health care system that business can love.

It also means that we should use this opportunity, where the corporate structure of GM is dependent on federal generosity and shareholders are going ot be wiped out anyway, to optimize the American auto industry for hydrocarbon efficiency. Cars like the Saturn Vue plug-in hybrid should not be delayed. Likewise, any support for GM must work alongside a geogreen stimulus to get us off foreign hydrocarbons and help protect us from Gap states like Russia,

I have said before that Russian leader Vladimir Putin is notable incompetent. Tom even calls him “stupid.” He is a Saddam Hussein with nuclear weapons and an economy the size of Portugal. Putin and leaders like him are nothing to fight a “new Cold War” over — but we need to think hard about every dollar we send to Putin and buddies.

Why Foreign Hydrocarbon Prices Matter, Part II

The Good Signs:

Amidst a downturn, hybrid market share is up.
The geogreen gas tax is >picked up by CNBC.
Volkwagon’s 117 mile per galleon vehicle.
California invests in bullet trains

The Trouble:

Talk of an OPEC for Natural Gas
South Africa slows production of electric cars
California rejects renewable and alternative energy

The opportunity

GM is desparate for cash

The sort of people who get rich from high oil and natural gas prices:

Putn ’09?