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The American (Energy) Patient

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
August 7th, 2009

I would like to begin by stating that while the subject of energy economics has still not attained its ‘critical mass’ where book-length literature is concerned, there are an increasing number of short, non-technical papers that everyone should attempt to read and understand. Where my energy economics students are concerned, I mean read and understand perfectly, especially if they prefer a passing to a failing grade.

I can name three extremely valuable contributions. Their authors are Ronald R. Cooke (in ‘321 Energy’), John Lounsbury (in ‘Seeking Alpha’), and Peter Huber (in ’City Journal’). Eventually I also plan to force my students to examine a few chapters in my energy economics textbook (2007), but one has to be careful here, because as the actress Joan Collins once indicated, people who spend a large part of their time in a Facebook or Twitter mode are generally not strongly interested in academic offerings.

Ronald Cooke’s position is that the Waxman-Markey (‘Clean Energy’) Bill that was recently passed in the U.S. House of Representatives, and which is intended to resuscitate the U.S. energy economy, may instead contribute to an industrial demise of that country. I know precious little about that piece of legislation except for its promotion of the cap-and-trade approach to reducing CO2 emissions; but since Cooke – like myself – regards cap-and-trade as a malicious scam, I can only hope that I never come into contact with its half-baked supporters in an academic milieu.

John Lounsbury’s important article covers about the same ground as Mary J. Hutzler’s short paper in the latest IAEE Energy Forum. (2009). Lounsbury makes it clear though that the attempt to convince legislators and motor vehicle operators and owners that they should be enthusiastic about replacing gasoline with e.g. natural gas has to do with strategic issues (e.g. lobbying) that in game theory are associated with the manipulation of information. Screening and Signaling are the applicable technical terms, although lies and humbug sound better to me. For instance, the bus that carried me to the jazz and dancing at Stockholm’s ‘Skansen’ a few nights ago had a notice on its side which stated that its fuel was ethanol, just as the bus carrying me to Uppsala University often displays information designed to suggest that natural gas should be thought of as the fuel of the future for public transportation.

Unless I am mistaken, natural gas made its appearance as a desirable transportation resource because in this manipulation of information game, the superficially intelligent players possess a substantial advantage over the resolutely ignorant. In game theory this is called information asymmetry.

Both Lounsbury and Hutzler deal with investment and conversion costs, however my position has been – and remains – that in addition to these expenditures, the availability of natural gas is not very different from what it was several years ago, when people like the former Federal Reserve Chairman Alan Greenspan, as well as a number of corporate executives, suggested that gas-intensive U.S. industries and activities could expect some very bad news in the near future if large quantities of new gas reserves were not discovered – and produced – in North America. Some observers seem absolutely certain that an augmentation of reserves has come about (because of such things as shale gas), but as far as I am concerned it is too early to consider this issue settled.

Peter Huber’s brilliant short paper is the kind of document that I inform my students in advance that they will encounter in the final examination. Among other things he points out that China is adding 100 ‘gigawatts’ of coal-fired electric capacity a year – which is one third of the total coal burning capacity of the U.S. The bottom line here, according to Huber, is that the U.S. does not control the global supply of carbon, and I would like to make it clear that neither does e.g. Sweden and Denmark, despite their posturing and courting attention as environmental know-it-alls and icons in the corridors and restaurants of the European Union headquarters in Brussels.

Regardless of the circus that will convene in Copenhagen this December, when experts and fellow travellers from every corner of the globe assemble for the purpose of improving the world’s environmental health, as well as to drink a large amount of beer in Copenhagen’s celebrated Tivoli, it would be nice if our famous patient began thinking in terms of an economically and technologically optimal energy sector, instead of one whose only merit is its popularity with the anti-nuclear booster club. One of the things this suggests to me is that energy should be considered a ‘public good’, because it is just as important as parks, street lights, and stupid wars thousands of miles away. In line with the title of this paper, it is very likely that the new doctor in the White House and his assistants know this as well as my good self, but unfortunately they have got to sell it to the TV audience, who to an alarming extent are increasingly captivated by phenomena without the slightest relevance for their future welfare.

REFERENCES

Banks, Ferdinand E. (2007). The Political Economy of World Energy: An Introductory Textbook. London and Singapore: World Scientific.
Cooke, Ronald R. (2009). 'The clean energy act is not going anywhere'. 321 Energy (July).
Huber, Peter W. (2009). 'Bound to burn'. City' Journal (Spring).
Hutzler, Mary J. (2009). 'The Pickens plan: is it the answer to our needs?' IAEE Energy Forum.
Lounsbury, John (2009). 'Natural gas: another great thing from a lobby near you.' Seeking Alpha (August 02).

Professor Ferdinand E. Banks
August 7th, 2009
ferdinand.banks@telia.com