May 25, 2008

Energy and Reality (Or, What to do about high gas prices)

With gas prices approaching or exceeding $4.00 all over the country, it's pretty obvious we're all in for some rough times. I know I've had to make sacrifices (moving from Grand Marnier to Cointreau) and I'm sure you've had to make adjustments as well. Like getting the kids to like cat food instead of Cheerios.

Politically, it's the Democrats year as long as gas stays above $3.00/gal. Actually, I think the pain threshold is probably around $2.50/gal. That being said, this isn't a post about high gas prices and hurray for Democrats in November. This is about what the hell we're going to do.

This is going to be a little different from my usual posts. This is policy and not terribly exciting. I'm going to break things down into two areas of focus... what to do in the short term and long term fixes. Obvs, this issue touches on a hundred issues and disciplines, so please bear with me. While it may not be readily apparent where I'm heading, I promise it'll all come together.

The Short Term Solution

People are hurting now and something has to be done. Sure, it's great to focus on CAFE standards and expanding public transportation. Both of those things have to be done, but before they'll start affecting things, gas will be $9.00/gal. Both of these take years to cycle through the economy.

What? You doubt me? Think about hybrids and diesels. Both are available now and have been for about 4-5 years. Still, they haven't made a dent in demand. Because people are pretty strapped right now and spending money on a car is, for many, impossible. That being said, what do we do?

  • Raise taxes on capital gains made on non-real estate investments with a holding time of less than 18 months to 75%.
  • Balance the federal budget and run surpluses, half to shore up social programs, half to start buying down federal debt
  • Remember that thing about disparate ideas coming together? Here it is. Basically, in the energy markets right now there is a tremendous amount of money sloshing around due to lax policy from the Fed. That's creating inflationary pressures in various classes of investments which is especially evident in commodities. Low capital gains taxes are making it extremely easy for people to trade the market and constantly make profits. Who wouldn't like to be able to invest $1 mn and come away in 6 months or less with $10 mn? Oh, and pay practically nothing in tax?

    Low capital gains and lax monetary policy are driving speculation in the energy markets. The only way to stop it is to tax the hell out of it and starve out the short term traders. That will deflate the bubble and take us down to around $95/bbl.

    The second part, balancing the federal budget, will help to stabilize the dollar and lead to it's reappreciation. That should strip about $20-35 out of the price of oil, taking us down to a far more manageable $60-75/bbl. YES, it will mean raising taxes. Get used to it. We've been paying in the minimum for years and as a result our infrastructure is crumbling, our schools are deteriorating and our currency is in functional freefall. It's about time liberals AND conservatives come together and realize we need to make some investments in the future.

    The next part is a little more tricky...

    The Long Term Solution

    We've now got oil down to more affordable levels and we didn't even have to go begging the Saudi's. So why isn't it back down in the $20's? Simple. There's still instability in many areas of the world where we get oil and demand is still high. That's the dirty little secret... we've apparently reached global peak and new discoveries aren't offsetting declines in major fields. In other words, while we're not running out of oil, we're running out of cheap, plentiful easily marketed oil. Which means we have to do something now before we go through something analogous to the worst of the 70's dystopia movies.

    We could start drilling in ANWR. It contains about as much oil as we use in 18 months and the costs to produce it full out could top $75/bbl. Not exactly a bargain and it's not a long term solution, despite what the R's may have told you. And everyone else.

    What about shale oil in the Rockies? Sure. There's a ton of oil trapped in shales, but the cost to produce will easily top $90/bbl. Why do you think none of the major integrated oils are clamoring over the prospect? Oh, yeah, and it also tears up the mountains. And pollutes the hell out of the environment BEFORE you've even had a chance to refine the first gallon of gas.

    Oh, but the Athabasca oil sands (not to mention those in Venezuela's Orinoco Belt) are our savior, right? Sure, the oil there's being produced for around $30-40/bbl. Which is fantastic until you realize the environmental damage that's done to get at that oil. That, and it's not exactly the yummy West Texas Intermediate Equivalent that we've all come to know and love. Nah, this a dead end with escalating costs and nasty environmental effects.

    All of the 'solutions' mentioned above do nothing but exacerbate the increase in atmospheric carbon. Even in the case of Athabasca, where they are using nuclear power, just pulling the oil up releases carbon. Before you even refine a gallon of gas, you're already increasing the carbon load.

    The only solid long term solution is biofuels. Forget soya diesel and corn ethanol, two biofuels that are about as useless as tits on a boar. The future is cellulosic ethanol made from miscanthus and biodiesel made from cassava. The best solution is algae and cyanobacteria. However, there's a lot of land that should be converted from corn and cotton production (hello West Texas) to biofuels. And you can do it in a way that will lessen water requirements and make farming more dependable and profitable. Still, the biofuel panacea is going to be either cyanobacteria or algae held in suspension and contained in mile after mile of snaking tubes.

    The best part? While it's making the transportation fuel, it's also scrubbing the atmosphere of CO2. You could even sequester CO2 from utility plants to juice growth. All around, it's THE solution, at least until we have practical fusion, solar panels with 70% efficiency that are commercially produced and ultra high density capacitors and batteries. While this doesn't do a lot to get rid of the carbon already floating around, it does put a stop to emissions growth. At that point, the environment will take care of the rest.

    Now that we have the blue sky solution, how the hell do we implement it. Therein lies the rub... it's not easy and it'll take the kind of political acumen that few in Washington have. On our side. The Republicans are absolutely hopeless, bleating on as they are about offshore drilling, ANWR and shale.

    For one thing, increasing the capital gains rate is going to make the investment banks and hedge funds very angry. Short term gains are their bread and butter, they're rich and they love donating money. And spending some of it on lobbyists. Still, our long term prosperity depends on shifting from a focus on short term to long term gains. In all honesty, if we allow them to buy into what's going to be the next big growth industry, they'll fall into line. And that's the key... the horse trading on this is going to be an absolute nightmare and the reality is that it's going to require getting everyone to buy in. Most of the integrated oils will, but Exxon will be unhappy with any solution.

    That's where the power of government comes into play. Until now, it's been used to hold back advances in public policy that will benefit the country. This time, we can use to play hardball with those companies that are uncooperative. Don't like our solution? Forget about patent protection, for example.

    The market is eventually going to go with this solution. However, it'll take them 20-30 years. That's why we need the government to step in and force the market's hand. This is going to require some monstrously intelligent people. The good news is, we have them. The bad news is that most of them are narrowly focused on one solution, not to mention that the vast majority of them have extraordinarily shallow knowledge bases. They're going to have to stop listening exclusively to the echo chamber composed of their fellow classmates from grad school.

    Finally, what's all this going to cost? My estimates are upwards of $2 trillion after you hand out all the lulu's and get everyone happy with the outcome. You can do it now, but that kind of borrowing in addition to current fiscal insanity would promptly drive interest rates up to 12% or more. That would put consumer rates in the 17-20% range which would effectively kill commerce in the US. And employment. That's where that whole fiscal responsibility thing comes from and the certain knowledge that this will have to gradual so as not to cause a sudden shock to an already shaky financial system.

    Of course, there's something else that makes the cost palatable. Biofuels keep our existing infrastructure mostly in place which reduces the cost to build out the production facilities. It also creates jobs which we desperately need, it lowers the cost of transportation fuel AND strengthens the dollar just from the simple fact that we'll not have to send as many of them out of the country to buy energy.

    There will be moaning and whining about this from all sides. We'll have to ignore it, especially when it comes from the National Review, The Washington Times and R candidates. Eventually though, it'll become evident that this is a good solution that will readily benefit everyone.

    Posted by mcblogger at May 25, 2008 11:40 AM

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    Tracked on December 5, 2008 12:41 PM


    Great analysis. Spot on. I agree that it will take the full force of the government to implement. I also agree that short term trading is mucking about with the prices we are paying. In addition, the Petro-dollar versus Petro-euro is a catalyst for war with Iran as it was for war in Iraq. Iran choosing to sell all its oil in a currency basket other than dollars has the effect of an economic attack on the dollar.

    Getting the bankers to go along with your suggestion will be the hard part. I'm a Peak Oil believer. I didn't want to join those ranks and in fact, did so...kicking and screaming. But, for all the reasons you mentioned and the fact that India and China are increasingly bidding for the world's supply of oil I have to admit that the Peak Oil proponents are right. Once one admits that sort of thing, then we must begin to do as you have done...figure out some practical sollutions. Moreover, we have to do it quickly.

    Much of Europe is making a national effort at moving to alternative fuels, primarily solar. It will require that sort of national focus to get this job done. We need leaders up to the task that realize the futility of ignoring the problems in the hope that they somehow magically go away. Critical problems don't simply vanish because we deny they are a problem. They have a tendency to get worse.

    I heard Pelosi on CSpan in the last day or two talking about an alternative energy initiative added as an amendment. I haven't read the proposal yet but I hope it is more reality based than the law about OPEC anti-trust measures.

    Menopausal Mick

    Posted by: Menopausal Mick [TypeKey Profile Page] at May 25, 2008 02:35 PM

    well, pooh... I mistyped "solutions"...I do actually know how to spell the dang word.

    Posted by: Menopausal Mick [TypeKey Profile Page] at May 25, 2008 02:41 PM

    $4/gal is not nearly enough. I am still constantly passed on I35 by SUV, Trucks with single occupants doing 10+ the posted limit. It is going to take a LOT of pain at the pump to break the American addiction to the gasoline powered private vehicle. The working stiff is going to take it in the shorts. It is going to be tough love to make democracy work after 30 years of GOP "You can have your cake and eat it too"

    Posted by: cowanl [TypeKey Profile Page] at May 25, 2008 08:36 PM

    Thank you, Mick! What I'd like to see is for Americans to take the lead on biofuels. I would posit that we're uniquely position to do that given our available resources and need.

    Cowan - You're seeing people like me who aren't really effected. It would take $8+ for us to feel some real pain. However, the majority of the country, more than 60%, are already feeling it.

    Posted by: mcblogger [TypeKey Profile Page] at May 25, 2008 11:33 PM

    Raising the short-term cap gains tax to 75% to wring the $20-30 speculation premium out of the oil price is like brushing a gnat off your shoulder with a stinger missile. It's also a good idea for ensuring that Republicans make a comeback in the next election. Our entire financial system is based on risk management via hedging and the benefits of short-term gas cost reduction aren't going to make up for the unintended consequences, imo.

    Other than that, most of the ideas seem good, though "balance the budget and run surpluses that will pay for increasing social spending and paying off the debt" is at best an exercise that cannot be left up to the reader and at worst contradictory policy. Getting out of Iraq will help on the fiscal side, but that's not a simple task and won't be sufficient. You seem to be talking about more tax hikes than just cap gains. I think raising the top marginal income tax rate higher than 45% or so is going to get you in trouble with Dr. Laffer.

    I honestly think there are few things we can do in the short-term to even reduce the problem. We're going to feel the pain for some time. We need to do all the alternative energy stuff you mentioned (I'm much more in favor of solar and electric power in general than biofuels) as well as get both our fiscal and monetary house in order. Better land use (damn you suburbanites!) and public transportation are going to help, but as you mention are quite slow to take effect.

    In short, we're screwed for the next 3-5 years (barring global recession), and we're screwed after that if Democrats don't enact sensible policy in the meanwhile. The track record so far on that front isn't too hot (corn-based ethanol in every pot!), but hopefully the Presidential change will help that.

    Posted by: Kedron Touvell [TypeKey Profile Page] at May 26, 2008 12:36 PM

    Wow! I'm printing this out so I can study and quote you.

    Posted by: TXsharon [TypeKey Profile Page] at May 28, 2008 09:41 AM

    Don't poo-poo my capital gains fantasy. Keep in mind that those hedging strategies were invented to cope with enhanced volatility from, wait for it, asset churning and speculation. Suck that out of the market and the players in it can focus on long term hedges as opposed to expensive insurance every time some hedgie decides to take the nat gas market, for example, for a run.

    Let me be blunt... I hate speculation. Period. I'd love nothing more than to see the IB's trading desks shrink precipitously.

    AS long as the D's stick to the 'we're going to starve the speculators' message, they'll hit the R's hard.

    On the increase in the income rates, yeah 45 is the max. Frankly, it's also all we'd need. I included decoupling of of the 'unified budget' and building up an asset fund because it'll further strengthen the dollar and our debt as the market realizes we won't suddenly need to access credit markets for trillions in 2017. As for paying off the debt, I'm talking primarily about retiring treasuries. It'll give us some flexibility in the future.

    I'd LOVE solar and electrics. But you need better batteries and high efficiencies out of the PV systems. Until then, think of CB and Algae as a solar battery. It'll help you feel better:)

    Posted by: mcblogger [TypeKey Profile Page] at May 28, 2008 01:42 PM

    Even the most optimistic EROEI estimates for biofuels are way too low to provide the long-term solution you envision here. It's going to have to be a combination of things - but a BIG part of it is going to be a sea-change where people stop buying tract homes that require a 50-mile single-occupant commute by automobile (even with a Prius, fuel will cost too much to make that work for most people).

    You did real good by nailing the wishful thinking on the other "suboptimal oil". The same stuff applies with biofuels, even cellulosic ethanol - it's going to cost too much energy for what we get out of it for it to be more than a small help.

    Posted by: mdahmus [TypeKey Profile Page] at May 28, 2008 02:41 PM

    MD - most of those studies are dubious at best. Even corn ethanol has a positive return. However, it's low and the land use issues are way to high. If we got to biofuels, it'll primarily be either CB or Algae with cellulosic (mostly because we have the land and farmers) being used as well.

    The funny thing is that the speculative tech is not the algae, it's the cellulosic. However, we could allow ag to continue in marginal areas (West Texas) without putting a huge burden on the environment and allow the farmers to make a living.

    As for the change-over in living situations, as soon as you have those affordable high rises, people will be thrilled to buy them. Well, some people. There are always going to be some who actually want a yard.

    Posted by: mcblogger [TypeKey Profile Page] at May 29, 2008 09:23 AM

    I wasn't implying a negative EROEI, just one that's not high enough to allow anything like today's pattern to continue, even if everybody drove Priuses.

    If we just hacked away the parts of the zoning code which prohibit everything but suburban sprawl, we'd eventually and fairly painlessly move to a model where people who want to live in apartments and people who can't afford anything but apartments can do so in about 10% of the space their apartments take up today. That, alone, would be a huge improvement (just look at what a waste of space the typical suburban apartment complex is - twice as much real estate spent on parking as on housing before you even count the interior circulation; useless green space in medians which doesn't actually help nature _or_ people; etc.)

    Then you get another huge bump up from people who might like to garden but would be real happy with something like a rowhouse (suburban-style living space with far less space, especially if done a traditional grid setup). Both are low-hanging fruit - there's lots of people who want to live that way who simply can't today because we outlawed both styles of development in 1948.

    Posted by: mdahmus [TypeKey Profile Page] at May 29, 2008 02:08 PM

    Well, it's less a matter of the technology and more a matter of practicality. Corn based ethanol requires 80 mn acres of production at a minimum.

    Algae requires less than 5 mn acres, and none of it has to be especially good land (meaning we could use the desert).

    Efficiency is obvs going to climb, but I don't think the end game is going to be caused by fuel.

    Posted by: mcblogger [TypeKey Profile Page] at May 30, 2008 09:20 AM

    Great article. Here’s an update. Several firms have begun to commercialize giant miscanthus in the US. This after all the news out of Illinois about it. This should allow easier, more cost-effective, and quality controlled growing. The notable one I’ve run across is SunBelt Biofuels ( They’ve branded a high-yielding cultivar from Mississippi State University. 25 tons per acre is the claimed yield, but all yield numbers I've seen for miscanthus blow corn and even switchgrass out of the water.

    Posted by: C Patterson [TypeKey Profile Page] at January 22, 2010 03:47 PM

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