Fossil Fuel Leverage
There were interesting posts last week from Ryan Avent and Kevin Drum about the role rising oil prices played in sparking the recession and the possible comeback of rapid price escalation.
Ben Furnas released a paper for CAP earlier this week that looks at some related issues and includes this graph that I’ve poached. More recently, energy prices have stopped that kind of rapid ascent, but they’ve done so because global growth is moving backwards. If the economy moves toward recovery, we have every reason to believe that it will continue to escalate.
And this is part of what makes the failure over the past ten years to invest in a new clean energy economy so unfortunate. Instead, we wound up very much doing the reverse. At a moment in time when a lot of foreigners wanted to lend money to finance investments in America, we could have been investing in clean ways of producing electricity, in new mass transit lines, in walkable communities, etc. But instead we invested in new housing developments that for the most part are even more sprawling and car dependent than the developments we were building in the 1980s.
Basically, the country has made an enormous investment in fixed infrastructure that only makes economic sense if gasoline is very cheap. But the evidence suggests that we’ve reached a point where very cheap gasoline is inconsistent with global economic growth. At the same time, we have an electricity system that’s not doing a great job from a cost point of view, and that largely depends on a fossil fuel, coal, that while not at all scarce is ecologically disastrous. The combination is potentially ruinous, and every bit as unsustainable as a financial system that depended on the idea of ever-increasing home prices to keep running. Today’s economy is built on the idea that the atmosphere can safely absorb ever-increasing levels of carbon dioxide, and that ever-increasing quantities of cheap oil can be extracted from underground. Neither, however, is true.
29 Responses to “Fossil Fuel Leverage”
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April 23rd, 2009 at 3:24 pm
I take it then, Matthew, that you will join me in supporting ending all FICA taxes via Constitutional Amendment, to be replaced with a tax on fossil fuels? Hell, let’s go further, by making the emission of carbon the sole taxable event in the United States!
April 23rd, 2009 at 3:31 pm
I’m still waiting to hear why nuclear isn’t being more actively pursued. As I linked elsewhere, we have reactors safe enough for students, non-uranium reactors, and passive shut down reactors, with France demonstrating how to reprocess waste.
Besides, if you have a problem with CO2 just plant more trees. This is not rocketscience.
April 23rd, 2009 at 3:32 pm
“Today’s economy is built on the idea that the atmosphere can safely absorb ever-increasing levels of carbon dioxide, and that ever-increasing quantities of cheap oil can be extracted from underground”
The next thing you will tell me is that the oil “drifted” over to Alaska by some plates or something.
April 23rd, 2009 at 3:38 pm
In support of this point, James Hamilton of Brookings has drafted a fascinating paper on the degree to which a demand-driven oil shock may have touched off the current recession:
http://www.brookings.edu/economics/bpea/~/media/Files/Programs/ES/BPEA/2009_spring_bpea_papers/2009_spring_bpea_hamilton.pdf
April 23rd, 2009 at 3:39 pm
Bob Oso, mordantly, FTW.
I’m still waiting to hear why nuclear isn’t being more actively pursued.
1) The huge amounts of water required.
2) The scarcity of nuclear engineers.
3) Cost
April 23rd, 2009 at 3:39 pm
It’s a New Economy. It can too go on forever! The old rules don’t apply! The — [economic collapse]
April 23rd, 2009 at 3:42 pm
Oops–belatedly clicking through, I see Ryan and Kevin were discussing Hamilton’s work. Oh well–I still think it is worth moving it up to the front of this chain.
April 23rd, 2009 at 3:57 pm
“I’m still waiting to hear why nuclear isn’t being more actively pursued.”
Mostly because of the high construction cost, and long
construction time, of reactors.
In the 1960s and 1970s, most utilities in the USA were
effectively local monopolies. So they could suffer nuclear
plant construction cost overruns and just pass the extra cost
on to electricity consumers.
Then after Three Mile Island, the NRC got tougher, the public
got more hostile to nuclear plants and imposed longer delays,
and construction costs went through the roof.
Then in the 1980s and 1990s we had the wave of deregulation
which allowed more competition. And suddenly it didn’t look
like a good idea to spend billions of years and 8-10 years
building a nuclear plant, only to face competition from a
cheap gas-fueled plant nearby.
So right now the utilities are saying sure, we’ll build
nuclear plants – if the US government guarantees the loans.
But then it turns out to be *really* expensive to build the
first plant of a new generation, because no-one knows what
the hell they’re doing. [google Olkiluolo-3 for delays and
cost overruns in the latest plant in Finland].
Now if you really really think nuclear is the right answer,
then you need the kind of sustained commitment shown by the
French nuclear program: they keep on building reactors
steadily whether or not the alternatives are cheaper. And
the French government prefers to spend money locally on
nuclear plant construction, rather than spending money abroad
on fossil fuel imports.
That may all make good strategic sense: but the utterly
dysfunctional US nuclear industry, with its unhealthy “private”
operators heavily dependent on various government subsidies,
can’t match it.
It’s also instructive to look on wikipedia at the histories
of each individual nuclear plant in the USA – read about a
few of the plants from the 1970s and you’ll see that many had
long shutdowns due to technical or safety issues, and short
lifetimes. Quite a few utility companies went bankrupt due
to those problems.
April 23rd, 2009 at 4:11 pm
Matt Yglesias is getting close to the problem, but still, the majority of commuters drive less than 20 miles to work. Compute the cost, it is not that bad. Besides, commuters have gone through this before, and they know how to use buses and car pool effectively.
Something besides the commute sent gas prices through the roof. Whatever caused gas prices to jump unexpectedly caused a change in consumer behavior.
There is something different about this oil shock than the last one. Gas prices grew faster than economic growth and consumers changed their behavior. Both changes had a common denominator.
April 23rd, 2009 at 4:17 pm
Both changes had a common denominator.
Not really. We hit Peak Oil in 2005. That caused the price spike. The collapse in the world economy brought us back from the heights, but the collapse didn’t put anymore oil in the ground. Any re-ignition of the world economy will be slightly less than before because growth will be throttled back by the inevitable escalation in the cost of energy.
April 23rd, 2009 at 4:33 pm
Why no nuclear?
On nuclear, the single greatest source of nuclear fuel in the US currently is decommissioned Soviet nuclear weapons. But they have decided to start building more nuclear fuel facilities and will be using the decommissioned nuclear fuels themselves. They have notified the US that they will quit providing the US this fuel.
But there is no other significant source of relatively inexpensive uranium, and maybe even of expensive uranium available. Part of this is because of not in my back yard resistance to development. But the primary reason is that their are no know large deposit available to develop.
So if the US and the rest of the world start trying to develop large scale nuclear fuel we will quickly run into severe shortage of uranium that could force up the price so severely that nuclear would be more expensive than oil based fuel.
April 23rd, 2009 at 4:37 pm
But, Jeffrey, we had known about the limits of gasoline, peak oil. We knew about the rising use of oil by China and India. So, why didn’t we smoothly adjust?
For example, if peak oil was the problem, then why is a barrel of oil about $48 today and about $150 at the peak? Explain how and why we made such a dramatic change in our habits.
You might respond that car manufacturing cannot adapt fast enough, but we have had better mileage cars from the last oil shock in the 80s, we have actually decreased gas mileage. Your assumption that we simply forgot about oil shocks must be explained.
Or, put in other terms, why did oil peak so sharply rather than smoothly decrease production?
April 23rd, 2009 at 4:42 pm
Today’s economy is built on the idea that the atmosphere can safely absorb ever-increasing levels of carbon dioxide, and that ever-increasing quantities of cheap oil can be extracted from underground. Neither, however, is true.
If only the US has gotten its middle east utopia, then the reality-based New Class would be eating Dick Cheney’s dust.
April 23rd, 2009 at 5:01 pm
Or, put in other terms, why did oil peak so sharply rather than smoothly decrease production?
Peak Oil didn’t decrease production. The numbers had virtually plateaued.(Butte Oil?) The Peak was hit in 2005 and production didn’t decrease until the world economy collapse. (Did you miss that? It’s been in all the papers.) The collapse was due to financial shenanigans rather than paying the oil producers hold-up prices. I’ve no doubt that the prices would have eventually led us to a recession had their not been financial shenanigans, but that’s a different kettle of fish. Not linked.
As for your first concern, we didn’t smoothly adjust because we’re insane. Big booger cars are just pure opium.
April 23rd, 2009 at 5:03 pm
I’m with the fundies on this one: If God wants us to have more oil, he’ll make more. He’s God, after all. So I’m not worried about peak oil one tiny little bit.
April 23rd, 2009 at 5:04 pm
[laughing]
April 23rd, 2009 at 5:08 pm
“Besides, if you have a problem with CO2 just plant more trees. This is not rocketscience.”
Most of the world’s CO2 is absorbed by the oceans. It’s pretty hard to plant trees there. Planting trees is good, but it’s nothing compared to what the oceans do for us. And we’re way past the point where the oceans can keep up. You’re right that it’s not rocket science, but it appears to be beyond your knowledge.
April 23rd, 2009 at 5:12 pm
I’ve no doubt that the prices would have eventually led us to a recession
I’ve no doubt that the oil prices we encountered before the bubble burst were a major cause of the recession. We’ve been focusing on the toxic assets, but they were a contributing factor, not the trigger.
The ‘73 embargo led to a downturn, as I believe the later shocks did as well.
Why did it take till the recent paper to get economists to look to energy prices rather than the loans? There is plenty of historical data to support energy price rises as a primary trigger of recession.
April 23rd, 2009 at 5:13 pm
“(Did you miss that? It’s been in all the papers.) The collapse was due to financial shenanigans rather than paying the oil producers”
Jeff, you did not follow the link back to the original source, Jim Hamilton’s study showing the gas price rise undoubtedly was the catalyst for the recession. That was the whole point that caused Kevin Drmm to cite the article. DTM did follow the link back and mentioned Jim’s work.
This is important because if banks did not cause the recession, then our actions with the banks will likely cause a depression.
April 23rd, 2009 at 5:14 pm
“Part of this is because of not in my back yard resistance to development. But the primary reason is that their are no know large deposit available to develop.”
There’s plenty of uranium in Australia. Most of the world’s uranium resources lie in remote areas of Australia. And NIMBY isn’t a problem in The Outback or the bushlands. Few people live there, and those who do are mostly redneck miners who want jobs. Uranium scarcity is not a problem for the foreseeable future. Prices will go up because fewer weapons are being decommissioned. But so far, the expected uranium boom in Australia has been a disappointment.
April 23rd, 2009 at 5:21 pm
Besides, if you have a problem with CO2 just plant more trees. This is not rocketscience.
Man. You know, I think uninformed is fine, and most of the time, harmless. But uninformed and confidently spewing their ignorance as though it’s gospel. You could make an argument that that’s how we got to where we are today.
April 23rd, 2009 at 5:43 pm
Snowman,
As discussed in Hamilton’s paper, I think part of the reason why people weren’t looking closely yet at oil prices as a trigger is that this time, the spike in oil prices had a different, and not entirely clear, cause (not entirely clear because of the role speculation may have played). I think people were also so focused on the immediate causes of the catastrophic period in late 2008 that they weren’t thinking back as much to late 2007 and early 2008, but one of the interesting things about Hamilton’s paper is that he finds the relevant price effects could actually explain a lot of what happened even at the end of 2008 (not all, but a lot).
April 23rd, 2009 at 7:03 pm
Re: Something besides the commute sent gas prices through the roof.
The same thing that sent real estate through the roof: speculation and the machinations of Big Finance. Last year especially, as real estate collapsed, the big banks fled into commodities. Goldman Sachs and its confreres (here and abroad) left their fingerprints all over that bubble.
April 23rd, 2009 at 8:05 pm
I can believe that rising oil prices contributed to the perception that people had less money for housing than they thought they did.
April 23rd, 2009 at 8:17 pm
Because my Oldsmobile won’t run on Uranium. And neither will a Prius.
Also, did anyone hear the news about China? They are now the largest car market in the world, overtaking the title the US has held for the last century. A sign of the end of the American century and the beginning of the Chinese century?
April 23rd, 2009 at 10:16 pm
I went back searching for more evidence. As Jeff says, we reached peak oil about 2005, and production begin to level off. Driver miles also leveled off, tracking the oil production chart. Oil prices continued to climb.
The climb in oil prices reflected future expected demand by oil producers, hence we can call it speculation. There was a debate at the time between Krugman, who saw no evidence of speculation and others who claimed future oil was way over-priced. Krugman rejected traditional speculation because there would be inventory build up in supply storage.
Here is the catch. Even as local retail began to suffer the recession, on line sales continued to grow at 10-20% per year. The online venue was able to continue operating with oil prices up over $100/barrel. On-line sales actually became more efficient for a year or two as the economies of scale increased, while local retail suffered enormously.
And that is what made this oil shock different than the last. The consumer abandoned the car and local retail; using online purchases to gain the extra edge. The consumer unexpectedly changed the consumption model by switching to a different transportation mechanism, the classic recipe for a depression.
April 24th, 2009 at 3:41 am
It’s a clusterfuck, no doubt, but the predictable result of syndicates running key industries and overly influencing politics. More important than anything is deescalating the control of these syndicates on both markets and politics, only then can intelligent policy changes be enacted and implemented.
April 24th, 2009 at 11:42 am
2001. Energy Task Force. Dick Cheney. Any questions?
April 25th, 2009 at 9:43 am
Re: Something besides the commute sent gas prices through the roof.
The same thing that sent real estate through the roof:
Absurdly low interest rates from the money generator (the Fed)?
speculation and the machinations of Big Finance.
Which is another way of saying “Absurdly low interest rates from the money generator (the Fed).”