Energy as a demand problem, not a supply one

Very odd article in the NYT today; like many writers, this one has focused on the imperative to alter the way we generate and consume energy. Except here the writer takes a very supply-side look at things and suggests that the only way out of our current situation is to generate more energy, at the expense of everything else. Here’s his conclusion:

BUT most of all, we treat this as a true crisis. As my pal Glenn Beck, the conservative commentator, says, we need a new moon-shot mentality here. We need to turn coal into oil into gasoline, to use nuclear power wherever we can, and to brush aside the concerns of the beautiful people who live on coastal pastures (like me). And we need to drill on the continental shelf, even near where movie stars live. This must be done, on an emergency basis. If we keep acting as if the landscape were more important than human life, we will make ourselves the serfs of the oil producers and eventually reduce our country to poverty and anarchy.

In that long message sent to Congress 35 years ago, there was an outline of what we needed to do on coal-to-oil and shale-to-oil, as well as wind, solar and wave power. For a generation plus, we have done next to nothing. The hour is late. The clock of destiny is ticking out, as the Rev. Dr. Martin Luther King Jr. said. Let’s roll.

So here are my thoughts:

1) Yes, we are in a crisis

2) Agree, need a “moon-shot” mentality to address the issue. Others have been saying this for years, if not decades, but I’m glad that Glenn Beck (whoever that is) is on board.

3) Sure, we need to find new sources of energy and no good idea should cast aside. But I find it hard to believe that all good ideas mean necessarily destroying the environment around us. The various dichotomies of “economy vs. the environment” or “human life vs. landscape” are entirely false and are the basis of the “do-nothing” attitude that the writer seems to be against.

The writer tries to trivialize concern over our natural environment by saying that only those concerned are “beautiful people” or “movie stars.” These are the meaningless arguments of people who look at the energy crisis as a supply problem rather than a demand one. By looking at the problem from a demand perspective, we can take steps to reduce our consumption of energy and thereby lowering the price of oil and not destroying everything else around us.

Sure this will take a long time, but last I checked getting an oil-field up and running takes a few years as well. Beside, if we destroy landscapes in search of energy, and then we tap-out that new energy source because demand has not been curbed, what will we be left with. (Indeed, new energy sources will probably increase demand because it will bring prices down and eliminate any incentive to conserve, so we will use up energy and destroy our landscapes and an increasing rate. I don’t see how this in any way benefits human life.)

4) Earlier in the article, the writer makes reference to the gas-war anarchy of the “Mad Max” movies, hence his comment “and eventually reduce our country to poverty and anarchy.” I hate paying +$4 at the pump and I hate that my way of life is dependant on doing so (but I, like other thoughtful people, are seeking substitutes), but I don’t see this leading our country to anything close to resembling poverty and anarchy. I see it resulting in innovation and new technologies. Current economics is giving way to a rise in alternative energies and new ways of using energy more efficiently. Sure, it is a messy process (see my notes on ethanol) but the market works, and I don’t see anarchy anywhere on the horizon.

The aritcle is called "Running Out of Fuel, but Not Out of Ideas". The writer hasn't come up with any new ideas of his own, but at least has tried to be somewhat environmental by recycling old ideas, even if they are tired and discredited.

I’m kinda amazed this weak article got past NYT editors.


Everybody’s Business - Running Out of Fuel, but Not Out of Ideas - NYTimes.com

Ethanol and fundamental economics

The fact is, there is very little argument in favor of corn-based ethanol; it is expensive, its is energy consumer and, most damaging, it is not economic. I am all in favor of alternatives to fossil fuel, in fact, I believe that finding such alternatives is one of the great challenges of our times. But an “alternative” that has to be propped up by protectionist measures put in place for political purposes is no alternative at all.

Regardless of how well a government thinks in can out-wit the markets, fortunately often simple economics comes back into play to show the fallacy of ill-thought-out policies. This is no clearer than in the ethanol market today.

There are many reasons for the high price of food right now, and I’m not claiming that there is one single magical cause. But a major contributor has to be that the price of corn is shooting up because of all of the protections around corn-based ethanol.

While these protections may not be going away (they are politically valuable), they are at least being called into question. And that is having a chilling effect on the corn-ethanol industry.

"If you sell one product and the only reason there's a market for it is because the government makes a law requiring consumption - if that law goes away, obviously you're in trouble," Gilpin said.

Greenwald argues that if there are still government regulations in your favor, that could be a competitive advantage. Indeed, the corn-ethanol industry has enjoyed competitive advantage verses other ethanols (Brazilian sugarcane for example) precisely because of these regulations. However, I don’t think Greenwald or anyone else would argue that if those policies are fundamentally uneconomic, they present a long-term haven. An attack on this false safe-haven is what we are seeing now in the markets.



Ethanol Turmoil Calls for Legislative Change a Threat to Some Companies - Business - redOrbit

Ethanol and protectionism

I heard on the radio the other day about how the increase in the general price of food is being traced back specifically to the increase in corn prices. The logic is that corn is an important source of animal feed so as it becomes more expensive, there is a ripple effect that drives up the price of feed which in turn drives up the price of meat.

The cause of the rise of corn prices? Apparently it is ethanol. Because of the alternative fuel craze, ethanol producers are gobbling up supply of corn and driving the prices up. To venture backed ethanol companies, this rise in prices may not seem like such a big deal (and the farmer certainly love it!) But for the rest of us who like to eat, a rise in food prices is yet another dent in our already banged up wallet.

And with that, the two radio shock jocks went on to slam ethanol, the environmental movement, and the whole green craze for causing more trouble that it is worth.

Taking what they said on the connection between corn and food prices at face value (certainly seems plausible), it is still hard to blame ethanol producers for the run up in corn prices. This is not a green question, this is an economics question.

Agriculture is a heavily protected industry in the US (and much of the world.) As a move to boost farmers’ incomes in the Midwest, the US government has been supporting and protecting the US corn-based ethanol business.

There are however rivers of cheaper sugarcane-based ethanol coming out of Brazil. If the government were to relax protection, these rivers would flood into the US market. The result would be cheaper ethanol that would displace the more expensive corn-based ethanol. This in turn would reduce demand for corn and prices would drop. So if the market was allowed to operate unencumbered, we would have cheaper food and cheaper ethanol.

So if the shock-jocks on some random Bay Area radio station are listening, it is not ethanol or environmentalism that is driving up prices, it is agricultural protectionism.