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Global market conditions will shape the American energy landscape



To the Editor:

Both presidential candidates are campaigning full throttle, churning out well crafted half truths and tailored sound bite deceptions in an effort to sway undecided voters. While promoting their mildly competing visions for American energy policy, both rivals inevitably conclude with the claim that it is their distinct plan which will ultimately lead to U.S. energy independence. Such optimistic partisan propaganda requires review and clarification.

When it comes to fuel for the generation of electricity, America is largely energy independent already. We now export sizeable quantities of coal, and natural gas is poised for a major export boost via a giant new liquefaction plant proposed for the Gulf Coast. In a classic case of mixing apples and oranges, both candidates deliberately conflate sources of electricity generation with American energy independence. Unfortunately, no amount of coal, natural gas, wind or solar will bring the U.S. energy independence as long as we continue to depend so heavily upon the internal combustion engine.

Unlike the electrical grid, our vehicles run on refined petroleum products. America now imports significant quantities of oil from various sources across our planet. The global race to locate and exploit oil reserves is very intense and with the rise of India, China and the entire Pacific Rim, the intensity is escalating. Witness China’s recent claim to oil reserves discovered beneath the recognized territorial waters of Vietnam.

Despite these new tensions, oil industry analysts are now talking about a big second wind for the global supply of oil enabled by the new drilling and recovery techniques which the natural gas industry is so successfully exploiting. Many current trend projections for oil recovery predict North American oil self sufficiency during the 2020 decade, regardless of which party controls the White House or Congress. Of course, the United States will be net importing a tremendous quantity of crude oil but it will be primarily from our two net oil exporting neighbors, Canada and Mexico. Projections have China, India and other rising economies increasingly utilizing crude oil from the Middle East and Africa.

A common misconception amplified by politicians around the issue of energy independence is that you can somehow detach America from high priced oil imports. Nothing could be further from the truth. Oil is a global commodity that is traded with great intensity and world market prices are tightly integrated by high speed computer driven trading. At any given time, everywhere on the planet, contracts for crude oil are based upon the global commodity exchange price.

It does not matter if that crude exits the ground in Texas, Mexico, Saudi Arabia or Nigeria. That is simply how the mechanics of open global markets work. China can bid on oil from Texas just as American suppliers can bid on crude oil from Nigeria. Your gas prices at the pump in Kentucky will always be tethered to the global price of crude and subject to all the volatility, speculation and world political instability that affects those prices. Domestic refinery capacity as well as the cold, hard fact that demand for gasoline is ‘inelastic’ are more relevant to local gas prices. Inelastic demand means that consumers must have fuel in order to function and oil companies can take advantage of that dependency through subtle forms of price manipulation.

For any nation to actually insulate itself from global oil market prices, it has to accomplish two things. It has to be a net oil exporter and it must possess a nationalized oil industry. Venezuela is a prime example. Hugo Chavez and his government can and do artificially set pump prices for the citizens of Venezuela well below the going market value. No serious proposal for regulating gasoline prices argues that the government of the United States should nationalize oil companies and merge the Department of Commerce with its counterparts in Canada and Mexico to establish an insulated North American command economy for crude oil and mandated gasoline prices.

If history is any guide, global market conditions will shape the American energy landscape more than pre-established government directives. For example, the impacts of cheap natural gas will greatly alter the makeup of electricity generation by displacing other energy source rivals like coal, wind, solar and proposed nuclear expansion. Natural gas contracts now lock in fixed prices below the breakeven costs of their competitors in this country. Market conditions paint a different story in Europe where Russia manipulates the price and supply of natural gas. Europeans are shifting away from natural gas and into renewables and coal fired generation.

The three primary differences between the Obama energy plan and the Romney plan concern 1. the price of renewable energy, 2. the extend of federal land utilization for oil and gas recovery and 3. the federal implementation of ‘Corporate Average Fuel Effi ciency’ (CAFE) standards. Regarding this first distinction, Obama places some emphasis on subsidized renewable energy sources as smart investments in the perceived future of electricity generation.

Romney views renewables as heavily subsidized free market failures. He points out that as North American natural gas prices fall, subsidies for renewables will have to rise in order to cover the widening price difference. He also points out that the recently popular concept of ‘peak oil’ has largely been abandoned. It was this concept which forecast a dramatic rise in the price of both oil and natural gas due to diminished supply in the face of growing inelastic demand. Peak oil dynamics were supposed to usher in the transition to renewable energy sources as the cheaper alternatives. Now it must be pointed out that Romney supports oil and gas subsidies amounting to $4 billion annually while Obama wants to end these taxpayer expenditures.

Similar predictable ideological positions are taken on the issue of vehicle fuel efficiency standards. The Obama CAFE program would mandate that by 2025 each auto manufacturer would have to produce across its line of vehicles a fleet average of 54.5 miles per gallon. Consumers could still at any time purchase vehicles that do not meet this standard, but manufacturers, in meeting the fleet average requirements, would be forced to improve fuel efficiency across their spectrum of vehicle models offered. This is seen by President Obama as a giant step toward decreasing America’s dependence on foreign oil as well as a strong regulatory incentive for the auto industry to push development of new hybrids and electric cars.

Romney points out that these imposed federal interventions into the marketplace force manufacturers to focus their production on the very types of vehicles which are currently not selling well. Romney also points out that with increased drilling and recovery of oil, future gasoline prices will not climb as high as previously predicted, thereby nullifying the consumer incentives to strongly value fuel efficiency. In short, he views the federal CAFE requirements as unnecessary marketplace intrusions which inflict financial burdens on consumers and manufacturers.

This ties in with Romney’s position regarding the utilization of federal (taxpayer) land. He argues strongly that aggressive, fast track pursuit of new oil and gas leases on these lands will have a significant impact on supply and consequently keep prices down. He is probably correct regarding North American natural gas, but crude oil is a completely different matter because it is such a highly valued global commodity. Domestic refinery capacity has a larger impact on our prices at the pump. While current domestic oil production has reached its highest level in decades due to expanded production on private lands, Obama is more conservative when if comes to oil and gas leases on federal (taxpayer) lands.

Don’t expect either candidate to address foundational issues afflicting the energy business. Many economists argue that energy markets are dysfunctional because they are so fundamentally flawed. For example, the market price for most energy products does not accurately reflect the true total costs associated with their production. This constitutes a fundamental violation of capitalist economic principles and is the cause of large scale marketing distortions.

Supply and demand are price dependent. Artificially low pricing by way of externalized costs and subsidies creates artificially high demand. Even the so-called ‘green’ energy alternatives to carbon-based fuels socialize tremendous cots. The solar, wind and advanced battery industries are heavily dependent upon the mining of rare earth metals and utilize chemically intensive production methods yielding numerous caustic byproducts. These industries have prompted riots and protest in China, a country that deals harshly with civil unrest.

One thing is clear. The costs associated with energy usage are much higher than the market price we currently pay. If energy was priced honestly and accurately, the marketplace would have offered more efficient appliances, buildings and vehicles on its own long ago.

JAMES LEWIS
Whitesburg



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