Aug 02 2011

Obsolete Expertise and the US Economy’s Energy Problem

August 2, 2011

If you came of age in the twenty years leading up to the millennium, it’s likely you will treat energy as a non-limiting input to the US economy. As a journalist, policy maker, or economist, you are far more likely to produce political explanations when faced with economic dilemmas. The Great Recession has offered the perfect occasion to witness the phenomenon, a financial crisis which specifically kicked off amidst 150 dollar oil in 2008. Instead of advising the President that the country faced debt-deflation, with a nasty overlay of high commodity costs, the White House economic team has drawn from the post-war playbook which holds that if you stimulate the economy generally then the system will magically reorganize itself. Well, that hasn’t happened and it’s not going to happen.

The barrier to understanding the US economy’s structural problem was hatched in the previous two decades of declining energy costs. Those were good times. Unfortunately, this inculcated the view that our problems were most often discretionary, of our own making. Well, guess what. The US economy did not choose to stop growing in 2007. Thus, the recommendation that we simply “choose” to starting growing again rings rather hollow. But that is the nature of obsolete expertise, which will flog the same prescriptions ad infinitum, well past failure.

For over two years now, this blog has recommended a more targeted version of Keynesianism. In contrast to Whatever Keynesianism—which advises we throw as much money as possible at the whole system, a quickly depleting process that makes the status quo only more sclerotic—I have strongly advocated for policies which would attack energy input costs. Indeed, as illustrated in the chart above, if you agree the decline of energy expenditures from above 10% of GDP to just below 6% of GDP boosted the US economy, you must agree the quick trip back to 10% must have hurt. Worse, the stubborn levels post 2008 during high unemployment are nothing but painful.

–Gregor

Original chart, pre-annotated at Gregor.us, can be seen here: US Annual Energy Expenditures, as of July 2011.

Source: EIA Short Term Energy Outlook.

• Comments (15)
Author: Gregor Macdonald   Posted in: Policy   Tagged:          
  • David Stern

    Well, I got my PhD in 1994 but I remember the previous energy crises as did those who taught me…. but an interesting diagram. Will follow this blog.

  • jonathan

    I consider this post to be pure genius.  I first saw it at Business Insider and reposted it to my blog (real economics) with instructions to take it seriously.

    http://real-economics.blogspot.com/2011/08/debt-ceiling-debate-distraction.html

    I fell like I have met a kindred spirit and hope we can pool out efforts in the future.

  • http://twitter.com/NormCycles Norman Michaels

    Being an old Coot trader, seeing real time over many years how issues are somewhat solved after a crisis is in full swing, this “Obsolete Career Building” may in fact be part of that cause and effect.

      Actual policy makers paying to much homage to the obsolete career built Economists/Generals/Advisers Etc…may also be why each working generation has it’s own set of crisis which rhyme with past events yet are solved in different ways – or not solved.

    Going off point slightly but pertaining to Oil:

     Gregor, did you happen to see or read the Chesapeake Energy ‘CHK” earnings report and the announcement of the major Utica Shale find linked below which claims an Oil, Liquids and Nat. Gas find of huge proportions. http://www.chk.com/News/Articles/Pages/TV_20110801_AKM.aspx

     In my opinion this could bring more drilling and in theory over time bring carbon based energy costs down and stretch Hubberts Curve again delaying once again commercial alternative’s build out in the USA.  My questions to you are when does H.C. become a nice Soap Box Derby race track and what do you think the lead time will be before this Utica Shale can be monetized and how long do you think it takes before drilling equipment can be brought online to large daily product production?

     Thanks Gregor, hope you Love Portland!

    @Normcycles:disqus
     

  • I Gimlet

    Targeted Keysenianism would include releases of IEA stocks–and which appear to be doing their work.

  • gregor.us

    That’s a good point. I have been alternately more favorable to the idea that the IEA action would eventually put downward pressure on the oil price. And yet, equally supportive of the idea that it’s a band-aid at best, that would eventually show up later in the form of reduced stocks–and thus increased price risk.

    That said, what’s clear is that Bernanke and the OECD have started to accept the cost of oil inputs as critical to their economies–especially in a time of fragility.

    Of course, this is not the targeted Keynesianism I seek. I seek the killing of a third of the Pentagon’s weapons programs, a swing of 20% of Armed Forces to civilian infrastructure projects, the halt of all new investment in highways, and the rebuilding of US rail transport–matched by the construction of solar power to cover every new gigawatt of electrified rail demand.

    How’s that grab you?

    G

  • gregor.us

    Thanks so much. I am currently neutral on North American NG recoverability. I am skeptical of the claim we can significantly increase NG production from shale regions without a concurrent escalation of costs–both in capital and enviro. terms. However, I am equally skeptical that the resource cannot be accessed for years to come, or that it will collapse or turn completely uneconomic. As for CHK, well, I sort of got turned off Aubrey’s game years ago: issuing tons of stock, buying resources, posting higher reserves, but never really banking cash, on top of complex hedging programs. But I wish CHK holders well and have not looked at them much since 2008.

    G

  • gregor.us

    Cheers. The subject matter here is much broader than is treated in this short post. As you no doubt understand. Thanks for the kind words.

    G

  • gregor.us

    Yes, that’s part of the phenomenon. Those who understand are few. But the generation as a whole marches forward with certain broad frameworks, and a sense of inviolable laws. We still see this very much in technology, and in economics. To make the puzzle even more intriguing, oil industry technology itself has been truly incredible and amazing in the past 30 years–alas–the successes have been more specific and have helped stave off production decline more than creating net production increases.

    G

  • gregor.us

    Yes, that’s part of the phenomenon. Those who understand are few. But the generation as a whole marches forward with certain broad frameworks, and a sense of inviolable laws. We still see this very much in technology, and in economics. To make the puzzle even more intriguing, oil industry technology itself has been truly incredible and amazing in the past 30 years–alas–the successes have been more specific and have helped stave off production decline more than creating net production increases.

    G

  • http://pulse.yahoo.com/_4BDEKF43NVPM7XUGUOHREGQ6C4 George Marchetti

    Clean coal should be the target of the new Keynesian energy discussion because the energy return on energy invested (EROEI) for coal is twice as much as any other potential fuel source. See, http://www.motherearthnews.com/renewable-energy/net-energy-zm0z10zrog.aspx. Coal is too valuable a resource to burn. Rather, coal should be processed to yield synthetic natural gas (SNG) using the Great Point Energy technology. See, http://www.greatpointenergy.com. The process removes heavy metals and sulfur. The radioactive elements, thorium and uranium, in the coal ash contain 1.5 times as much energy as the coal itself. These elements can be “mined” from the ash and recycled to yield even more energy. To mitigate the atmospheric effects of carbon dioxide, a simultaneous biochar program would be required, which would improve agricultural soil quality, sequester atmospheric carbon, and reduce irrigation and fertilizer requirements. A clean coal/biochar program should be seriously considered as a promising path to reconcile capitalism with environmental responsibility.

  • http://pulse.yahoo.com/_4BDEKF43NVPM7XUGUOHREGQ6C4 George Marchetti

    Clean coal should be the target of the new Keynesian energy discussion
    because the energy return on energy invested (EROEI) for coal is twice
    as much as for any other potential fuel source. See,
    http://www.motherearthnews.com/renewable-energy/net-energy-zm0z10zrog.aspx.
    Coal is far too valuable a resource to burn. Rather, coal should be
    processed to yield synthetic natural gas (SNG) using the Great Point
    Energy technology. See, http://www.greatpointenergy.com. This “clean coal” process removes
    heavy metals and sulfur. The radioactive elements, thorium and uranium,
    in the coal ash contain 1.5 times as much energy as the coal itself.
    These elements can be “mined” from the ash and be recycled to yield even
    more energy and increase EROEI.

    To mitigate the atmospheric effects of carbon dioxide, a
    simultaneous biochar program would be required, which would improve
    agricultural soil quality, sequester atmospheric carbon, and reduce
    irrigation and fertilizer requirements. Overall, the carbon in coal (less the heavy metals and sulfur) would be recycled as biochar. A clean coal/biochar program
    should be seriously considered as a promising path to reconcile
    the EROEI requirements of capitalism with the environmental responsibility that we owe future generations.

  • gerry.croce

    It’s always interesting to read your commentary Gregor.

    Off topic from your post, I was wondering if you consider electrical power blackouts a growing possibility in the U.S., given the climatic high temperatures many parts of the country are experiencing.  Why have we not seen significant blackouts recently?  Is this inevitable at some point in the future, or will coal fired plants fill the gap?

    A blackout inconveniences both wealthy and common folk alike.  It would be interesting to speculate on the political dimensions chronic blackouts would have if the upper class and business owners were forced to develop their own power generation systems, while average people would not have the means to do so.  This could result in changing the whole public dialog on energy planning.

  • gerry.croce

    It’s always interesting to read your commentary Gregor.

    Off topic from your post, I was wondering if you consider electrical power blackouts a growing possibility in the U.S., given the climatic high temperatures many parts of the country are experiencing.  Why have we not seen significant blackouts recently?  Is this inevitable at some point in the future, or will coal fired plants fill the gap?

    A blackout inconveniences both wealthy and common folk alike.  It would be interesting to speculate on the political dimensions chronic blackouts would have if the upper class and business owners were forced to develop their own power generation systems, while average people would not have the means to do so.  This could result in changing the whole public dialog on energy planning.

  • Anonymous

    Thanks for this post. I’ve been following the Krugman/Delong/Thoma axis on the need for stimulation and well accept that it is needed. But I have the same misgiving that you have that if we aren’t directing stimulation towards reducing energy demand then we would be throwing good money after bad.

    When it comes to reducing energy demand my reading has been focused on the building energy efficiency side. I shake my head at how poor our building codes are with respect to energy when there are standards out there like Passive House (Passiv Haus). And there is a lot of good building science out there that can help us retrofit the existing housing stock to profoundly reduce energy demand (deep energy retrofit).

    Reducing the energy demand of our existing building stock may well have the lowest technical challenges, lowest requirement for complicated engineering and be best placed to employ the most people (construction workers) of other projects that could both stimulate the economy, get people working and reduce our North American energy demand.

  • Anonymous

    (WTF… trying to post 5th time.)

    The emphasis on PV probably isn’t cost-effective right now.  Wind, maybe.

    The drag on the economy isn’t electricity supply (we’ve got plenty), it’s oil prices.  Replacing oil with electricity is one sure-fire way to improve our economy at the expense of oil producers.  And the new scheme for low-frequency RF power transmission from road to vehicles (links:  NBF,  GCC) appears to be a relatively low-cost, fast-response, high-payoff scheme for doing that.

    It doesn’t matter where the electricity comes from.  Heck, we could burn oil in 60%-efficient CCGT’s and come out ahead in the short term.  The important thing is to get started.