Tonight’s the Night: Will the President Speak on Renewable Energy and Climate Change

Seal of the POTUSThe State of the Union speech marking the beginning of a Presidents second term has historically been a chance for the President to lay out big, hairy, audacious goals for the upcoming administration.  Reagan had tax reform, Clinton had education, and GW had Social Security reform.  Some were achieved while others failed.  So too tonight, Obama will lay out his agenda for the next four years.  Given the economic condition of the US right now, it is rightly expected that jobs will be a major theme of the speech, but some others for consideration:

  1. Jobs, Jobs, Jobs
  2. Deficit Reduction
  3. Economic Growth
  4. Immigration
  5. Gun Violence

Missing from this list is Climate Change.  Will the President even mention those words tonight?  With North Korea’s nuclear test last night, I expect the President to devote more time and attention to foreign policy issues rather than outlining climate initiatives.  Prove me wrong Mr. President.

Question for my readers:  Will Obama mention Climate Change or Renewable Energy in tonight’s State of the Union address?

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World Energy Outlook 2012

The International Energy Agency released their 2012 version of World Energy Outlook today and it featured some interesting highlights.  Here are some of the points that peaked my interest:

  • In 2011, fossil fuel subsidies grew 30% to $523 billion while renewable energy received just $88 billion.

Fossil fuels according to the New Policies Scenario:

  • The US will become the largest oil producer by 2017, a net exporter of natural gas by 2020, and will be almost energy-self-sufficient (in net terms) by 2035.
  • Global oil demand increases by 7mb/d to 99mb/d in 2035 at which time price reach $125/ barrel (real terms) = (over $215/ barrel nominal terms).
  • The gas boom in North America will reverse the direction of the international oil trade, with almost 90% of Middle Eastern exports destined for Asia. 
  • Natural gas demand increase by 50% in 2035, with most of the production coming from the US, Australia, and China.
  • By 2035 we can achieve efficiency savings equivalent to 20% of global demand in 2010. 
  • By 2015 renewables become the world’s second-largest source of power generation, closing in on coal as the primary source by 2035. 

In the Efficient World Scenario, greater efforts are placed on energy efficiency measures that would cut the global demand by half.  Other benefits realized in this scenario include:

  • Global oil demand would peak by 2020 and be 13mb/d lower by 2035. 
  • “The accrued resources would facilitate a gradual reorientation of the global economy, boosting cumulative economic output to 2035 by $18 trillion, with the biggest gains in India, China, the United States and Europe.”

This is all well and good, but there are a few things to note about the conclusions:

  1. Energy sufficiency does not mean that we will be insulated from the price spikes on the global market.
  2. Approximately 55% of America’s energy self-sufficiency is from increased production – the remaining 45% is from increased energy efficiency measures such as better gas mileage in cars and trucks, more efficient buildings, and smarter appliances.
  3. Electricity prices in the US will be about half that of Europe as power plants switch to cheap natural gas.  This will be a huge boom for the economy as heavy industry repopulate parts of the mid-west.  However, in terms of climate change, increased use of natural gas will be offset by increased coal usage in the developing world.

Finally, and very sobering, the report concluded that the unless a global emissions agreement is implemented by 2017, the planet will not remain within the 2 degree Celsius range that most scientists agree is the upper safe limit on warming.

Believe in Competition

One of the key components to having renewable energy achieving price parity with fossil fuels is the growth in global demand. As more systems are manufactured, efficiencies attributable to the learning curve and to economies of scale will allow the cost of RE systems to come down. However, in order to reach the global markets, you need a reputable product that meets the customers needs. By investing in science, technology, engineering, and physics the USA can lead this developing market for renewable energy products. While our political leaders debate the existence of climate change, the rest of the world has gotten busy developing products to meet this challenge. In a globalized market, the spoils are going to go to the leader in any given industry. Each firm has a duty to make a product better, cheaper, or leave the marketplace if they can not do this. If not, a hungrier competitor will definitely step forward to take your place.

Subsidies to the Energy Industry

“I am a big fan of clean energy, but I am bigger fan of a robust economy.”

-Mr. Greenbacks, 2012

Subsidies to the energy industry are nothing new, they have been around for decades.  Generally speaking, subsidies fall into three main categories: Direct Spending, Tax Expenditures, and Loan Guarantees.   For most of the 20th century, fossil fuels have enjoyed a long run of subsidies such as tax breaks, tax credits, tax exemptions, and deferred depreciation, just to name a few.  This extended period government support firmly entrenched fossil fuels as the sole providers of energy by making renewable energy prohibitively expensive by comparison.  The roles reversed in 2009 with the passage of the American Recovery and Reinvestment Act that eliminated some subsidies for fossil fuels and expanded subsidies for renewables.  However, as you can see below, the level of support to fossil fuels is still 6x greater than renewables.

  • The IEA estimates that in 2010 worldwide fossil fuel subsidies totaled $409 billion.  That number is expected to rise to over $650 billion by 2020 unless changes are made.
  • By comparison, only $66 billion was spent to subsidize renewable energy.

Misguided Policy?
So what is the role of subsidies?  Subsidies should be used to level the financial barriers for new and emerging technologies in order to compete in the marketplace.  Once these technologies are mature enough to stand alone, the subsidy should be removed in order to let the market forces take over and determine a true price for the product.  The support should then go on to fund another technology that could possibly compete with the first one in order to advance a competitive marketplace.   By keeping the subsidy in place for too long, one can create artificial demand that encourages waste and can quickly drain government coffers.  This could apply to any industry, but right now we are focused on the energy industry.

So should we remove all subsidies to the energy industry?  No!  The renewable energy industry has seen more ups and downs than the Cyclone on Coney Island.  Most of these Boom and Bust cycles have been created through a rush of investment in good times (subsidy ON!) followed by a lack of capital (subsidy OFF!) when the music stops.  A clear and definite subsidy policy should be implemented in order to remove the uncertainty faced by investors of clean energy projects.

Subsidies to Renewable Energy
I am a big fan of clean energy, but I am bigger fan of a robust economy.  In today’s economic climate, governments must be extremely careful how they spend their resources.  The current policies offering subsidies to the renewable energy industry have done a wonderful job of creating widespread deployment of clean energy projects.  However, many of these projects are only profitable because of the subsidy.  Current policies should be revamped in order to drive innovation and cost reductions so that renewables such as wind and solar can compete with cheap natural gas WITHOUT the subsidy.

In order to maximize the value of taxpayer dollars the following objectives should be implemented:

  1. Remove subsidies to the fossil fuel industry in order to establish a true market value that takes into account the negative externalities of these resources.  A small fee can be added to fossil fuel transactions to help fund clean energy research.
  2. New subsidies should promote efficiency gains and cost reductions through the use of steadily improving, performance-based standards.
  3. These subsidies should target advanced technologies, decrease as the cost declines, and be temporary in order to deter ongoing support.
  4. The US must increase its investment in R&D as well as leverage talent from universities and the private sector in order to establish public-private partnerships and regional clusters of advanced research and manufacturing.
  5. Utilize the strength and size of the DOD to drive commercialization of technological advances made through ARPA-E.

Implementing these policies will go a long way toward maximizing public dollars, creating a competitive clean tech industry, and ending the addiction to fossil fuels.

Gas Prices (again)

Mrs. Greenbacks asked me an interesting question this morning, “Do you think the recent drop in gas prices has anything to do with the election this year?”  The short answer is – No.  It is probably a dream of every President to be able to control gas prices in an election year, but the simple truth is that they do not have that ability.  The oil market is a worldwide phenomena driven by consumption, much of it coming from emerging economies.  I explained some of the reasons in an earlier post – What goes up.  The only thing POTUS can do to ease pain at the pump is to open the Strategic Petroleum Reserve, but even that wouldn’t make much difference.  As of 6/8/12 the SPR had approximately 695 million bbls in the quiver – about 36.5 days worth at current usage rates.  Even if President Obama ordered a full drawdown of the SPR we could only withdraw 4 mil bbls per day for up to 90 days when the rate would slow.  However, tapping into the SPR to ease high gas prices defeats the purpose of the reserve in the first place.  Energy efficient cars and smarter cities would have a much bigger impact on the price of gas.  However, as less consumption forces the price of oil to go down, we must not fall into the trap where we increase usage again.

Simpson-Bowles on Charlie Rose

Back in March, Charlie Rose had on Erskine Bowles and Alan Simpson, co-chairs of the National Commission on Fiscal Responsibility and Reform a/k/a the Deficit Reduction Committee.  Their view is that spending cuts and tax increases alone are not enough to get us out of our fiscal hole.  We must make difficult choices as a nation in order to pull through this.  However, those choices are not politically feasible and the plan was discarded.  Here is a clip from the 3/29/2012 interview where Mr. Bowles states why the Simpson-Bowles plan has not been adopted.  I can only urge you to watch the full interview at http://www.charlierose.com/view/interview/12265

Sideways Market

If there is one question that keeps coming up from within my loyal fan base, it is “Mr. Greenbacks, how far into the Great recession are we?”  Well, Grasshopper, that depends.  Right now things seemed to have stabilized at least in terms of the stock market and job losses.  I truly feel that the word “recovery” is a bit strong and premature for where we are right now.  Basically, I feel that we are about half way into this sideways market.  The theory of sideways markets has been put forth in a book by Vitaliy N. Katsenelson called The Little Book of Sideways Markets.  In his book, Mr. Katsenelson proposes that there are no real bear markets, except for the Great Depression.  All the subsequent downturns have been part of an extended “Sideways Market” where the market has ups and downs but remains flat until the next bull market kicks in.  A sideways market is characterized by P/E compression and generally lasts 20 years.  Historically, the P/E of the stock market has been about 16x earnings and we are currently around 20x.  During the height of the Great Recession in 2009, the P/E ratio dropped below 15x.Seeking Alpha Currenly, we are on the more expensive side of the chart as pictured below, but we are also experiencing record company profits due to the lean operations they are running.  Once businesses start hiring again, the margins will shrink and the P/E rations should come down as well.  One of the points that Katsenelson makes is that the only way to play a sideways market is to buy solid companies with strong brand recognition when they are undervalued, and get out as soon as they reach full valuation.  As a buy and hold investor, this goes against my principles, but I do agree on buying financially strong, dividend paying companies when they are beaten down.  In order to accomplish this, patience must be practiced.  If Mr. Katsenelson is correct, we are about half way through this sideways market (he argues that the current sideways market began in 2001) and can expect plenty of ups and downs in the near future before the next bull market takes over.  Until then, my suggestion is to make a list of desireable companies that you want to own, and strike on the dips.  Only time can tell whether we are in a sideways market or not, but buying strong companies when they are out of favor with Mr. Market is always a good idea.