US Government Is To Blame For The Energy Crisis

July 9, 2008

Here is my summarized view of how we got into this mess: since I’m a believer in the power of incentives, I think the blame goes to the US Government.

Cheap energy in the 1980’s and 1990’s was a huge driver of the economic growth in the US during those decades. Our economy and lifestyle as a nation became dependent on cheap oil. As a result, the suburbs expanded and we severely under-invested in mass transit.

Because so much of our energy is imported, the economy is very sensitive to price increases. With oil priced at $140 a barrel, we are transferring a tremendous amount of our national wealth to oil exporting countries – most of whom hate us. Because of oil imports – and the trade deficit generally – we are experiencing a depreciating currency, inflation, and weak/no economic growth.

We got here because of a severe lack of leadership from the US Government. Gasoline never should have been so cheap because it incentivizes the wrong thing: relying on foreigners for 70% of our oil. For this reason alone – never mind the environmental reasons – we should have had high consumption taxes on gasoline.

Adjusting to the new reality will force many of the changes European countries have made years ago. The adjustment will be painful. It’s a shame we’re being forced to make them at gunpoint (and at great expense) rather than incentivizing people to conserve energy in the first place.


We Should Live More Like Europeans

May 21, 2008

Paul Krugman spells it out:

Europeans who have achieved a high standard of living in spite of very high energy prices — gas in Germany costs more than $8 a gallon — have a lot to teach us about how to deal with that world.

If Europe’s example is any guide, here are the two secrets of coping with expensive oil: own fuel-efficient cars, and don’t drive them too much.

Still, if we’re heading for a prolonged era of scarce, expensive oil, Americans will face increasingly strong incentives to start living like Europeans — maybe not today, and maybe not tomorrow, but soon, and for the rest of our lives.

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Perhaps I’m biased because I live in New York City and don’t own a car, but conservation seems to be the most sensible way of dealing with high oil prices. Problem is, so much of our economy and our lifestyles are dependent on cheap energy – changing the way we live would be a massive undertaking.

Let’s get on with it then! Looking at the supply/demand fundamentals for the next 20 years suggest that oil is not likely to get any cheaper.


Fertilizer Shortages

April 30, 2008

* Today’s NYT has an interesting article, filled with pictures, charts and video describing the global fertilizer shortage.

* For help understanding “scarcity economics”, read Jim Jubak’s latest article: Why we’re stuck with insane prices

As with every market bubble, we’re all looking back with 20/20 hindsight and thinking: “this agriculture boom was just so obvious!” In this case, I feel pretty good because I’ve owned Potash and John Deere for about a year, catching huge gains in both stocks. Even so, of course I wish I had been a couple years earlier!

Setting aside moral concerns for now (and I certainly have some), the recent sell-off in the sector could be a good time to initiate or add to positions. The demand for agricultural products — especially fertilizer — is white hot and not likely to decrease anytime soon.


Real Price Gouging At the Pump

June 21, 2007

I usually roll my eyes at people who make allegations that oil companies are gouging consumers. Most of these people have no evidence, just outrage at the high profits oil companies earn when prices are high. This article from MSN Money actually makes some solid points and shows how gas stations (not necessarily oil companies) are ripping off consumers in the summer months:

As Mercury Rises, Motorists Get Burned: As the temperature rises, gasoline expands, and the amount of energy in each gallon drops. Because gas is priced at a 60-degree standard and gas pumps do not adjust for temperature changes, motorists often get less bang for their buck in warmer weather.

Almost a century ago, the industry and regulators agreed to define a gallon of gasoline as 231 cubic inches at 60 degrees. But as the mercury rises and gasoline expands, it takes more than a gallon of gas to produce the same amount of energy. The opposite is true when gasoline contracts in colder weather.

Gas retailers ignore the temperature swings and always dispense fuel as if it’s 60 degrees. As a result, gas is an average of about 5 degrees warmer than the federal standard, according to a study analyzed by Dick Suiter of the National Institute of Standards and Technology.

In frigid Canada, where cold temperatures were giving consumers an edge, many gas stations voluntarily backed a program to add pumps that automatically adjust volumes based on temperature.

During the energy crisis in the 1970s, tropical Hawaii decided to set a base fuel temperature of 80 degrees, meaning that consumers there get more bang for their buck because retailers now dispense 234 cubic inches of gas per gallon rather than 231. The federal government is considering a similar change as well. The National Conference on Weights and Measures is to vote in July on whether to allow temperature regulation by retailers.

The upcoming decision is worrying some fuel distributors, who say the new equipment could force some independent dealers out of business. NATSO, a trade group representing truck-stop owners, estimates that each retrofitted pump could cost between $1,500 and $3,800.

“The average truck stop has 20 pumps,” said Mindy Long, a spokeswoman for the group. “The burden on them would be phenomenal.”

Lobbyists are paid to represent their constituents, but this Mindy Long must have no shame. Her argument is essentially this: “it would be a phenomenal burden on gas stations and truck stops to treat their customers fairly.” Hahaha!

Her argument is even more ridiculous because, according to the article, gas stations in Canada have retrofitted their pumps. The reason they did so is that they were giving consumers too much gas (because the gas is denser at lower temperatures). So it’s ok for gas stations to retrofit their pumps so they do not get ripped off but it’s a “great burden” for them to retrofit their pumps so the consumer doesn’t get ripped off.