2014 – The Year Ahead

First, let me wish all my loyal followers a very happy and healthy new year!  So what exactly does 2014 have in store for us on the energy and environment front?  Below is a list of things that I am watching, please comment and bring any topics of interest to my attention.

  • Keystone XL Pipeline – Just today the State Department announced in their report that the Keystone XL Pipeline would have a minimal impact on the environment.  This report was greeted with calls for Obama to approve the project by Republicans and even some Democratic lawmakers much to the chagrin of environmentalists.  Critics of the report said it did not pay enough attention to the harmful practice of extracting the oil from the tar sands in the first place.  The proposed $7B project would carry 830,000 bpd of crude oil from the Western Canadian Sedimentary Basin and the Bakken Shale formation to Steele City, NE before moving on to refineries on the Gulf Coast.  Issuance of this report now begins a 30-day comment period for the public and a 90-day comment period for government agencies, as well as puts the heat on President Obama to take action.  As recently as June 2013 Obama stated, “Our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution.  The net effects of the pipeline’s impact on our climate will be absolutely critical to determining whether this project is allowed to go forward.”  Environmentalists have called approval of the pipeline “game over” for the planet.
  • California Drought – 9% of California is now in a state of “exceptional drought”.  While this might not sound like news to anyone who has seen the images of the forest fires in the Bear Republic, this is an extremely concerning issue.  In fact, “Thanks to the magic of science (and tree rings), we can now safely say that California hasn’t been this dry since around the time of Columbus, more than 500 years ago. What’s more, much of the state’s development over the last 150 years came during an abnormally wet era, which scientists say could come to a quick end with the help of human-induced climate change.”  Lack of rain combined with abnormally low snowpack could leave much of the state virtually dry within 60 – 120 days.  If you think this is just a left coast problem, think again – California is responsible for almost 12% of the country’s agriculture.
  • Emerging markets – If you have been watching the markets lately you have seen a dramatic reaction to perceived threats from emerging markets.  I’ll make it quick: Fed removes the free money punchbowl from the party; possible slowdown in China; currency trouble from Brazil, Turkey, South Africa and Argentina.  So what does this all mean?  Stay tuned and I will keep you posted.

Plus we have Super Bowl XLVIII, the winter Olympics and the World Cup all coming up.  What a great year this is going to be.

Welcome back Greenbacker’s!  It’s on!

Stay Classy,

Mr. Greenbacks.

In their own words

“The world is caught in a dangerous feedback loop – higher oil prices and climate disruptions lead to higher food prices, higher food prices lead to more instability, more instability leads to higher oil prices.  That loop is shaking the foundations of politics everywhere.”

-Thomas Friedman


“Fortunately, we are not doomed to eternal punishment, as Prometheus was for stealing fire for humankind.  Nor does the dwindling of the old fire of fossil fuels mean a return to the Dark Ages.  Instead, we can create a safer, stronger, fossil-free world by tapping into a far greater resource than fossil hydrocarbons.  The real underlying fuel of America and of modern civilization is innovation and ingenuity.”

-Amory Lovins

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.

What Goes Up, Must Come Down

“Mr. Greenbacks, Back in March you said oil prices are on the rise and we could see $5 gas by summer.  What happened?”

Well, Europe happened. . . and China happened.  So basically, fear has taken over.  When I posted Pain at the Pump back in March, Europe was but an afterthought for the world’s markets.  After years of worrying about Greece, people began to forget about it and concentrated more on the good news rather than the risks that lay ahead.  Then all of a sudden Greece became a very real and imminent problem.  Spain and Italy also contributed to this fear and finally it appeared that China was going to come in for a ‘Hard Landing’ – meaning that their rapid growth rates of >10% a year may not continue.  China in fact has been the engine that has been driving most of the worlds consumption, whether it be oil from the Mid-East or Africa, iron ore from Brazil, or coal from Australia.   So now fears of a new global turn-down seem very real, hence the drop in crude prices.  As of 6/6/12, the spot price of BRENT and WTI have come in to $100 and $84 respectively.  This drop will soon reflect in lower prices at the pump, but lets not forget what $4/gal of gas felt like.  Lets use this opportunity to continue our push for more efficient usage of our resources.  After all, this too shall pass, and the economy will begin to grow again.  When demand kicks up you will see an increase in prices yet again, and we will be back to square one.

Reinventing Fire – Transportation

Back in March, I promised you a review on Amory Lovins’ new book Reinventing Fire.  Well, Mr. Greenbacks delivers!  Sort of.  This book is an absolute monster – a game changer of dramatic proportions . . . and I only have limited time on my hands between work and school to share it with you.  So, I am going to dissect this book and write about it in stages, but in return, you have to keep checking in and giving me feedback – letting me know if you think this is something we, as a country, can do and what challenges we might face.  Reinventing Fire is rational, thorough, and extremely impressive.  I think we all owe it to ourselves to hear Mr. Lovins arguments, maybe THE BEST I have read thus far. 

The first sector of our economy that Mr. Lovins takes on is transportation, and he does so with panache.  Currently the US uses 13 million barrels of oil a day on our transportation needs.  Thats almost a billion dollars a day, every day, and much of it is wasted on low mpg vehicles.  In order to get the most mpg from our cars, we need a complete revamping of the car building process.  Using integrative design and advanced materials such as alloys and carbon fiber we can dramatically reduce the weight of the frames, using stronger, heavier metals only where it is needed.  Composites allows for even lighter and stronger frames that can be molded instead of assembled, thereby reducing costs and parts.  The integrative design means that a lighter body allows for a smaller engine and so forth, further reducing weight and costs.  The final boost in efficiency is created by switching to an electric powertrain (engine and transmission – what makes the car move), that can be run on battery power, fuel cells, or a hybrid engine.  Electric motors are lighter, smaller, cheaper, quieter, cleaner, and more efficient, and can even recover more than half of the energy lost as heat from the brakes.  By taking these actions, we should have no problem not only reducing demand for oil for personal transportation, but eliminating it all together. 

The biggest issues that I see with this transition is the costs associated with the new materials and ways of thinking.  However, we can overcome this by utilizing economies of scale and ramped up production.  Please keep in mind that these ideas are based on currently existing technologies and will create new jobs as these industries expand.  It should also be noted that innovations will abound as we being to master these new processes and technologies, thereby creating more room for improvement.  So what do you think, can we do it?   

235 mpg

From OPEC to CHAOS: How Petro-Dollars Fueled the Arab Spring

Alright, let’s get back to the economics associated with climate change here.  More specifically, the economics of oil and how the accumulation of petro-dollars by oil-producing nations (almost in some cases, did in others) bring about their downfall.  Most everyone remembers the “Arab Spring” that began in December 2010 when a 26-year-old street vendor named Mohamed Bouazizi set himself on fire to protest his continued harassment by the authorities.  As the protest spread among the arab world, the grievances highlighted the lack of opportunity for the youth, state corruption, economic decline, human rights violations, censorship, and other wrong doings on behalf of the ruling party or dictators of these countries .  By March 2011, protest had erupted in 17 countries in the region. 

(Black = Government Overthrown; Dark Blue = Sustained Civil Disorder and Governmental Changes; Light Blue = Protests and Governmental Changes; Red = Major Protests; Beige = Minor Protests)

Now we know the reasons for the protests and the scale of the uprisings, lets take a look behind the scenes at the conditions that set the stage for this upheaval. 

Current Account
In Economics, the Current Account is the broadest accounting of a country’s trade and investment with the rest of the world.  The Current Account measures 4 areas of trade – Merchandise Trade (goods), Services, Investment Income Flows, and Unilateral Transfers such as foreign aid or remittances from workers sending money back home.  The Current Account provides a snapshot on the financial health of the country, and of how much the country is importing and exporting of each area measured.  While there is no direct impact on the stock or bond markets, the Current Account does show how much money is coming in (surplus) or leaving (deficit).  Consistent and increasing deficits could impact the value of the dollar if creditor nations begin to doubt our ability to pay back the borrowing.  If other countries balk at our debt levels, the dollar will depreciate.  Below is a graph of our current account since 1980.

Now when you think of the America’s current account deficit, you probably think of China’s account surplus.  Images of container ships filled with cheap, disposable goods probably came to mind.  But in fact, the largest creditors of America’s current account deficit have been oil-producing nations.  I was recently brushing up on some economic terminology and this theory was confirmed by my Macroeconomics textbook from 2008.  Amazing that the problem was identifiable even back then.  Recently, The Economist published an article called Petrodollar Profusion that contained the graph outlining the current account surpluses as a percentage of GDP for these oil-producing countries.

So what is the problem?  The problem is that the oil exporting countries have been hoarding these dollars instead of spending them.  They could either spend them on imported goods from oil importing countries (machinery from USA for example) or they could put them to use by investing in their own economies and building out infrastructure, improving education, healthcare, housing, or agriculture, thereby creating jobs and building a middle class.  Spending on imports from other countries would grease the wheels of the global economy and balance out the payments.  After all, that is what keeps the world trading.  Instead, most of this wealth was transferred to sovereign wealth funds who further line the pockets of the ruling class.  For more info on sovereign wealth funds and the rise of state capitalism, please see the book The End of the Free Market by Ian Bremmer.  The point is that building the middle class was not what they chose to do, and the protests continued.  

One of the most prominent cries coming out the protests was the lack of opportunities for the young population.  In many of these countries there is a young (age 15-24) and growing population but a disproportionate lack of jobs for them.  Throughout the Middle East, the unemployment has historically hovered around 12% overall, but the unemployment rate for the youth is averaging 27%.  Aside from the high unemployment rate, there is the mysterious fact that there is an inverse relationship between education level and employment.  This means that the most highly educated young people are also the most likely to be unemployed.  Of those with jobs, many find themselves working in the public sector instead of the private sector where market forces would spur innovation and growth and thus create more jobs.  Across the region, the labor force participation rate is at 48%, compare that to 63.6% in the US, our lowest level since 1981.  

Over a year later we have seen significant changes in the mid-east (except Syria where the fighting continues) but only time will tell what results the arab spring ushered in.  One thing is certain, the oil keeps pumping and the money keeps flowing.

I know it is horrible to think about, but every time we fill up at the pump, we are sending our dollars overseas to strengthen these regimes and prolong the behavior that has kept them in power for so long.  It is a brutal reality, but it is the world we live in.  Until we develop a clean and renewable source of power, our money is going to chase the fossil fuels that power our lives.  But when you follow the money to the source, it isn’t a very pretty picture at all.

Pain at the Pump

Like Method Man, I came to bring the pain hard-core from the brain, but I’m talking about gas for your car, bus, and plane. Unless you walk to work and don’t have a TV or radio, you are probably aware of the rising price of gas the past few weeks. In fact, since January 2012 the average monthly price of gas has increased almost 14% from $3.380 in January to $3.852 per gallon in March. The price per gallon normally goes up during the spring as people drive more, but according to the U.S. Energy Information Administration, this is the highest price level we have seen this early into the driving season. Many commentators have already predicted $5 per gallon by the summer. That would be just the beginning of our troubles as higher gas prices force consumers to cut back on spending thereby jeopardizing our budding recovery.
Point the Finger
So who is to blame? Blame Obama? Blame Bush? Blame Iran? Blame the Democrats? Blame the Republicans?  Blame the oil companies?  Actually, we can only blame ourselves because we continue to choose to pay $4 a gallon. . . and we haven’t learned anything from our mistakes over the last 10 years.  As long as there is demand, companies will charge whatever price the market dictates.  So while we are quick to say “drill baby drill” every time the price per gallon nears $4, we have simply not changed our behavior.  What we should be doing is purchasing higher mpg cars, utilizing public transportation systems, and simply driving less.  We should be investing in and researching natural gas engines.  These steps would diversify our transportation sector away from its reliance on oil as well as free up demand.  It is simple economics – reduce demand and the price will fall. 
Demand from Emerging Markets
The reality is that we live in a truly global marketplace where one country is no longer a market in itself.  This means that even if the US did start drilling everywhere for oil, it would actually only have a small impact on the world markets.  China, India, and Brazil are all energy hungry and have enough clout to move prices ever higher.  A major contributor to the recent spike in oil prices is the tension between Iran, the US, and Israel.  However, Saudi Arabia said it would offset any decrease in Iranian supplies that result from sanctions.  This still creates uncertainty, and therefore a risk premium. 
The Real Reason for Higher Prices
Actually, there are a combination of reasons for higher gas prices.  1) Increased demand from emerging markets; 2) Tensions in Middle East; 3) Lower production levels worldwide and 4) Price spread between Brent and WTI.  The first three reasons listed here are pretty self-explanatory: it is becoming harder and harder to find the black gold at the same time that global demand is rising.  The oil rich region of the Mid East underwent an upheaval with the Arab Spring and production has yet to come back to prior levels.  Basically, the lowest hanging fruit has been picked from the tree and now we must take on ever riskier (i.e. expensive) projects to access our bounty such as deep water drilling, tar sands, etc.  As long as the price per barrel stays high, these projects make financial sense and encourage exploration and production.  
Refinery Problems
Several major refineries in the northeast have shut their doors in the last few months exacerbating the pain at the pump.  The reasoning behind the closings has to do with the price difference between the benchmark for the different grades of crude.  As of 3/30/12, the spot price for Brent is $123 per barrel and the spot price for WTI is $103 per barrel.  Historically, these two benchmarks have traded within a few dollars of each other.  With the spread over $20 per barrel, the refineries outside Philadelphia that process the Brent are simply not profitable.  These refineries were set up years ago when Brent was the standard benchmark.  Now there has been a shift to WTI as the standard, but the refineries in the northeast can not process that type of crude which is typically refined in the midwest or gulf coast.  This means that a lot of refining capability has come off-line and does not look like it is coming back. 
Until we come up with abundant, renewable energy and scale it to meet our needs, we will fall victim to price shocks for our natural resources.  The US has been doing a great job of decreasing its energy usage through efficiency measures, but there is still plenty of room to improve.  Behavior affects markets, and the law of supply and demand always produces equilibrium.  If we want to avoid being in the same predicament next year, 5 years from now, or 20 years from now, we must realize that we need to end our dependence on the same resources that put us here in the first place.  After all, $5 per gallon won’t hurt so bad when you car runs 100 miles per gallon.