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Wednesday, January 06, 2010

Economic Suicide 101

Bloomberg:
Drilling for oil and natural gas on government land will face increased scrutiny of possible environmental impacts under requirements to be announced today by U.S. Interior Secretary Ken Salazar, according to three people with knowledge of the plans. Proposed drilling will undergo more thorough reviews for the effect on air quality and so-called categorical exclusions, which allow drilling without detailed environmental reviews, will be harder to obtain, said the people, who asked not to be identified because the plans haven’t been announced.
Let's take a quick look at one of the main drags on growth during recent recoveries from recessions - the US trade balance:

Click on it to get a larger version.

As the trade gap has slowly widened, recession recoveries experience slower growth. Consumer spending on products no longer made in the US widens the trade imbalance during recoveries.

That is one reason we are so dependent on things like consumer housing for a strong economy; we do not import houses.

Also see the last edition of the trade report: In aggregate:


The full report (pdf, long). See internal page 11, Exhibit 9 (which is external page 16) for a breakdown of imports and exports by petroleum and non-petroleum end use categories.

In 2008, total imports for Jan-Oct were 1.8 trillion for a net deficit of 723 billion. Of that, 406 billion in imports were for petroleum. In 2009, total imports for Jan-Oct were 1.27 trillion for a net deficit of 416 billion. Of that, 200.8 billion was petroleum.

Obviously some of the drop was usage, some was pricing, and some was increased domestic production. According to the crude inventory report, domestic production overall increased at least 7% (and consumption dropped) leading to a net reduction in imports of way over 10%.

A net drop in 100 billion in imports a year would, over ten years, yield over 1 trillion in increased funds for other domestic uses. And we badly need that money.

Looked at one way, this admnistration does not have an energy policy. Looked at another way, it does, and its energy policy qualifies for the Darwin Awards. Drilling for oil domestically does not mean we will not conserve:

And it does not mean that we will not have higher prices on average:

But it will tend overall to limit speculative activity, and it will help the world economy.

There is a formidable lack of realism in many quarters over what can be done in terms of reducing our dependence on fossil fuel energy. Our transportation and food production system is heavily dependent on fossil fuels, and trucking and food production, in particular, requires diesel. We also use petroleum for chemicals, especially ag chemicals.

Close to 10% of the US population is on food stamps. It is time to recognize that we have lost sight of both national security and welfare when it comes to our fossil fuel policy.

We need offshore drilling - look at this:

But we deliberately shut that down, and this administration is hell-bent to keep it shut down.

And now the drive is on to prevent on-shore expansion of production. In terms of concerns over the global environment, producing the stuff under strict US regulation closer to where it will be used is by far the most environmentally responsible thing to do.

Not only don't we have any way to replace our transportation infrastructure with electric vehicles, we don't currently have any plan to sustain our current electricity production. We have thrown immense amounts of money into "green" sources and we are getting very little out for our efforts.

If we are concerned about carbon, nuclear power plants should address that issue.

If we are concerned about safety, coal plants are the way to go.

If we are concerned about air quality, both nuclear and NG plants are the way to go.

If we are concerned about the environment, then more hydropower is the way to go; any new projects are currently blocked by environmentalists.

If we are concerned about national security and the economy (and they are now one and the same issue), then it would be something like all of the above. Oil is not used to produce much in the way of electricity, and to the extent that electric vehicles are viable, we will need the electricity production to operate them.

If we want to be poor, hungry, sick and generally vulnerable, then our current policy is the best possible option and just keeps getting more optimal all the time. The more US energy policy looks like California policy, the more US finances look like CA finances. Is that any way to run a country?

Comments:
M.O.M.,

Energy supplies actually spook me more than our ponzi debt system. You can't fix a lack of energy with federal reserve credit. Real output needs real energy.

I'm not sure the world can ever produce more than 90 million barrels/day of oil. And even if we can, I doubt we could do so for long.

There are some very compelling studies that our debt money system is simply not viable in a world with shrinking and increasingly costly energy. In such a world the future would be smaller economically and thus too many promises to pay could NOT be met.

Peak oil may or may not be here, but the lack of any major oil finds for the past few decades is certainly a cause of conern. If nothing else, I think the low hanging fruit has already been picked.

Barring a deflationary bust, the age of cheap oil is gone imo. And though it may sound odd too many, the end of cheap oil makes me deflationary.
 
MoM,

Just wanted to say you have been hitting it out of the park with your recent posts. I appreciate all the time, analysis and insight you put into these, and the fact that you share your them with us. I feel compelled to say this because I used to be a Wall Street money manager (okay, I admitted it!), and I rarely came across macro analysis as good as yours. Maybe that's not saying a lot given the quality of Wall Street research!

I spend a lot of time trying to aggregate your more "micro" posts on credit, the consumer, and fiscal health into a macro message. I guess its that we are correcting some downside overshooting in inventories, but that the underlying problems in credit and real incomes are still there, only now accompanied by a very large fiscal shoe that has to drop, plus a reckoning for the Chinese bubble. IMO, all of this comes to a head with long term Treasury yields. The dynamic has been for them to rise and fall with real GDP growth expectations. If and when the RISE on declining GDP expectations, that will be the time to start stocking up on essential supplies. I say this because the government is busy hoovering up our problems at zero cost -- low long term rates have been a proverbial "free lunch". In emerging markets, this isn't the case: the more trouble, the higher rates go, the higher rates go, the higher the deficit and the lower capital investment, the higher the deficit and the lower capital investment...

Will 2010 be the year we get charged for the lunch? I don't know, but I do know that's the signal that I'll be looking for.
 
A barrel of oil, 42 gallons, produces about 20 gallons of gasoline - say 50%. The other half is used in more than 10,000 other products. These include diesel, aviation fuel, asphalt, plastics, kerosene, lubricants, pharmaceuticals, cosmetics...

If all cars were switched to electric tomorrow we would still consume the same amount of oil unless we also reduced the consumption of all the other products. It ain't just the gasoline.
 
Outstanding post, M.O.M. You would make a great Secretary of Energy.

Our economy floats on a sea of secure, reasonably priced energy. When energy is too expensive or not secure we cannot have an economy that's functioning at its best.

Even if CO2 was a problem, we should still drill for our oil because it will help us financially and security-wise until we can transition to the fuels of the future. As Roy points out even when we no longer need oil for transportation fuel, we will need it or a substitute for all those other products.
 
I think what will actually happen is that more and more power generation will migrate to natural gas. (After all, Nancy Pelosi has assured us that nat gas is not a fossil fuel.) Hopefully the supply expansion won't be crippled by irrational regulations on new frac-ing procedures, but I wouldn't put it past this crew.

My post Powering Down deals with this issue.
 
Jimmy - "Even if CO2 was a problem, we should still drill for our oil because it will help us financially and security-wise until we can transition to the fuels of the future."

Amen. Alternative energy is probably in the same stages that computers and networking were in the mid-1970s. Somewhere out there, somebody is designing the Altair computer of energy, and somewhere else the Apple 1 is about to be born. But it's going to be 15 years or so before this stuff really takes off. If the government forces us to use current technology, we'll wind up with the Minitel of energy infrastructure.

David - "After all, Nancy Pelosi has assured us that nat gas is not a fossil fuel."

Oddly enough, it's possible that she's right. The "Deep Hot Bioshpere" proponents are getting mainstream attention now. They're probably wrong, but they've identified some data that apparently isn't explained by biogenesis theories. This has implications for the sustainable use of nat. gas.
 
David - I remember your post. It made me quite wistful when I first read it; at some level, we have evolved our body politic into a navel-gazing fantasia.
 
Angry Saver - your comment about the net effect of oil prices is so germane to the world economy that it needs to be taken up properly in a series of separate posts.

There is a lot of current mythology on this point. One cannot have prices below the cost of production, but one can cut overall production to accommodate increased prices in necessities. Inflation in some costs inevitably leads to deflation in some other costs.
 
All your comments are interesting, but in particular, Roy's remark about the splits in a barrel of oil is important.

Because some of the fixed uses of oil in the current economy are related to heavy engines - trucks, farm equipment and so forth - diesel is the main driver of pricing.

And the synthfuels (such as generated from tar sands or shale) are far more appropriate to diesel production.
 
David - "Hopefully the supply expansion won't be crippled by irrational regulations on new frac-ing procedures, but I wouldn't put it past this crew."

The enviros are already in full throated outcry against the frac-ing techniques. Their claim - it pollutes the ground water. Most of the frac-ing is done below 4000 feet. By the time the water used in the process percolates back to the subsurface water table, the impurities will have been removed. But they do not want to take a chance! The precautionary principle and all that.

So, if we are going to tap all this natural gas, it will be over the objections of some very powerful green lobbies.
 
My understanding is that the mix of products produced from a barrel of oil (how much gasoline? how much diesel? how much jet fuel?) is in fact subject to some adjustment because of the catalytic cracking process. Is there anyone here who is knowledeable enoughabout the refining process to address this issue?
 
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