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Some Economic Aspects of America's Energy

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
May 16th, 2014

A Wall Street Journal analysis of global data has apparently resulted in the claim that the United States (U.S.) will soon surpass Russia as the largest (combined) producer of oil and natural gas in the world. Normally I would pass this information to my energy economics students the next time I teach that subject, but unfortunately an "analysis" dealing with energy that originated with 'The Journal' is most likely foolishness (or worse). For example, consider the following absurdity by one of their employees.

Yet, beyond our merits, the Lord has recently smiled on us in in the form of shale gas…..Don't bet on Mr Medvedev. Bet on Western policy should do everything possible to exploit, to deliver better behavior in Moscow.

"The crude logic of Russia's declining energy power". My answer to that in a seminar room or at a conference, after ridiculing its author, would be that somebody has also smiled on Russia where energy is concerned, and after viewing the magnificent opening and closing ceremonies of the 2014 Winter Olympics, and being informed in detail about Russia's expanding nuclear intentions, and the rich Northern Energy Frontier of that country, I conclude that a bet on Medvedev and Putin might make a lot of sense for Americans. What it will make for somebody else I neither know nor care.

As it happens, the U.S. also has superior cards to play. One of these will be the revitalization of the nuclear sector, especially with the new equipment that should be ready in another decade. In addition, as my energy economics students will be informed, the major advantage of the U.S. is its technical and organizational skills, which though unknown or forgotten, were demonstrated in full during World War Two, (WW2), and which could be demonstrated again if the right people were able to give the orders in Washington. Unfortunately, I do not know who the right people are, but I know who they are not, although I will keep this information to myself for the time being.

In one of his last articles, the late editor of the Energy Tribune concluded that the U.S. government should leave the working of energy markets to the private sector, and should not continue with the present practice of interfering with the export of natural gas and crude oil. As far as I am concerned, Professor Economides was wrong to approve of the large-scale exporting of any part of America's energy advantage, because energy assets like oil, gas and coal are very different from the items discussed in the paragraphs on 'free trade' in your international trade textbook – as different as the blood in your veins is from the ink in your fountain pen. Put another way, it is not acceptable that short-term economic opportunity should become the engine of action for U.S. decision makers, because it might involve a highly unacceptable long-term cost?

One of the crank arguments in favor of increased American energy exports is that oil and gas reserves have become virtually unlimited in and around America, primarily because of the 'shale revolution'. There are two ways to greet this news. If it is correct, and these unlimited energy resources are properly used, then the one-sixth of Americans who are poor, and the one-sixth who are almost poor (or disadvantaged) can be rescued, and perhaps saved from the misfortune of living in an America in which conditions for 100 million poor and disadvantaged Americans worsen.

And if wrong, then every barrel of oil and cubic foot of natural gas increases in value for Americans as time goes by. For example, in case you didn't know, 49% of American households use gas for heating, and American families with modest incomes will gain if they do not have to compete with foreigners for an essential resource.

There are several ways to attack the present subject, and one of them is to proceed with the aid of some complicated mathematics, which I mistakenly did many years ago when I taught from the superb book by I.F. Pearce (1970). Of course, the paradox is that where many economics topics are concerned, heavyweight mathematics can confuse rather than clarify, and so I intend to avoid it the next time I teach energy economics. Mathematical skill is admirable, but a shortage of basic economic knowledge is a reason why physicists like the former and present U.S. Energy Secretaries should be kept far away from the Washington (DC) decision-making apparatus.

The new Secretary, Dr Moniz, claims that the time has come to allow America's energy advantage to be put on the block. ''Those restrictions on exports were born, as was the Department of Energy and Strategic Petroleum Reserve, from oil disruptions,'' Then he goes off the deep end. ''Lots of energy issues deserve new analysis and examination in the context of what is now an energy world no longer like the 1970s.''

How would he know, and who would be responsible for those analyses and examinations? To quote Asjylyn Loder's timely article in Bloomberg Business Week 2014), "There's a lot of Kool-Aid being drunk now." Speaking of an over-indulgence in Kool-Aid, I remember putting a Catalan grandee with an advanced degree from MIT in his place when he displayed a remarkable ignorance of what nuclear energy had meant for countries like Sweden and Japan (and also Germany, as we now see with its grotesque Energywende). I particularly remember that gentleman citing some bizarre opinions about nuclear that he claimed originated with Dr Moniz. Once again I was forced to point out that the construction of the Swedish nuclear sector – 12 reactors is just under 14 years – provided Sweden with an electricity price that was almost the lowest in the world, and the correct utilization of this relatively inexpensive energy resulted in an enormous boost for the Swedish economy, to include the Swedish welfare system, by which I especially mean primary and secondary schools and hospitals.

Schools and hospitals, almost full employment, long vacations and an efficient pensions system, as well as benefits for the physically, mentally and socially handicapped. Things began to change for Sweden when ignorant claims about the advantages from electricity exports were disseminated by lowbrow academics with 'runaway' inferiority complexes, which were accepted by politicians and voters, which in turn allowed a sub-optimal alteration of the Swedish electric sector to begin. The ulterior result of exporting Swedish energy was a large financial gain for a small group of Swedish insiders, as well as varying degrees of economic discomfort for many households and small businesses.

In the U.S. The Treasury says that about half of employed American have no pension saving plan. According to Stephen Foley, The Treasury hopes that "persuading low-income households to save even small sums will be habit-forming, and they might then graduate to more realistic retire planning." This is a superb idea if it had been offered decades ago before the U.S. became overpopulated, and before the jobs for low-income men and women were taken by immigrants, just as many jobs for higher income families will someday be lost to immigrants. And in case President Obama did not know, which is very likely, the top 5 percent of earners were responsible for a huge chunk of the consumption of goods and services in the U.S. in 2012, and for those ladies and gentlemen it seems to be getting better all the time.,

What about the rest? The only thing I know about them is that many of them would vote in favor of exporting more oil and natural gas if given a chance, and they would also accept an incorrect argument recently offered in the Bloomberg Business Week called "FACTORY JOBS ARE GONE. GET OVER IT". It would take a battalion of Ivy League psychiatry professors to explain what has gone wrong with American voters, and in particular their inability to comprehend that energy (and technological efficiency) and good schools go together with good paying factory jobs, and these in turn lead to good paying jobs in other sectors of the economy. As for oil and gas, legislators in the nation's capital see nothing wrong in telling American voters that selling oil and gas to motorists and factory owners in Asia will benefit Americans as well as adding millions to the incomes of energy company executives.

An oil company executive in the U.S. once said that ''I think we should keep national security first, but we should export oil just like anything else.'' Unfortunately, oil is not like "anything else", and in addition oil and gas and national security might be inseparable, so why take chances? Instead, as people like U.S. Senator Edward Markey implied, American oil should be kept in America in order to benefit American consumers, and as he neither implied nor stated, anybody else who wants or needs oil can get it from someplace else or learn to do without. Add to that Michael Levi's statement: "Something seems upside-down when we say energy security means producing oil and sending it somewhere." Not upside down Michael, but just plain stupid, because it insinuates that the future has no value for American voters.

Many Americans in the large percentage of the population who are falling behind, strangely want restrictions on exporting things like oil and gas to be removed. What are they thinking about? Why do they play the fool for what George Packer (2013) calls "organized money"? Isn't it clear that shipping coal and natural gas and oil to foreign countries to help them fuel their factories, and to out-compete American industry, is grossly self-destructive. (The same applies to Swedish electricity exports.) Some Americans would gain, but increased exports of energy resources threatens aggregate American incomes and welfare. If the U.S. really has an enormous amount of e.g. shale oil and gas, it is needed to ensure that no American will have to worry about his or her country facing an energy shortage in the future, to upgrade the U.S. educational system, to provide the loans and subsidies that the U.S. industrial sector might need, and to make it unnecessary for Americans to participate in stupid wars for energy.

One more item might be useful here. Geoffrey Styles has always impressed me as a knowledgeable student of the energy markets, but not when he thinks that the argument for keeping oil and gas in the U.S. to use in e.g. refining and the production of petrochemicals does not make economic sense. (But please note that both refined products and petrochemicals can be exported without restrictions if the price is right.) He states that OPEC countries preferring domestic investment in physical capital (e.g. refining and petrochemicals) should instead have bought shares (i.e. stocks) and bonds in North America. I'm sorry Mr Styles, but unfortunately that is absolutely and/or completely wrong, as I make clear in my forthcoming textbook (2014). Actually it is goofy! Investing in capital assets is and always has been the road to economic development. That applies to the United States of America as well as OPEC countries.

REFERENCES

Banks, Ferdinand E. (2014). Energy and Economic Theory. Singapore, London and New York: World Scientific.

Neumann, John von, and Oscar Morgenstern. (1944). Theory of Games and EconomicBehavior. Princeton, New Jersey: Princeton University Press.

Loder, Asjylyn (2014), 'Junk bonds fuel the shale boom'. Bloomberg Business Week.

Pearce, Ivor F. (1970). International Trade. London, and Melbourne: Macmillan & Co.

Packer, George (2013). The Unwinding: Thirty years of American Decline. London and New York: Faber and Faber.

Styles, Geoffrey (2014). 'The pros and cons of exporting U.S. crude oil'. The Energy Tribune (29 January).


Professor Ferdinand E. Banks
ferdinand.banks@telia.com
May 16th, 2014