Gas Prices, China, India, and The Failure To Plan Strategically

Are you ticked off about high gasoline prices? It is quite possible that you have not seen anything yet:

- The St. Petersburg Times recently published some gasoline information from the Energy Information Administration (from 2009, the last year data is available):

• China consumed about 8.32 million barrels of oil a day in 2009.
• To feed this demand, it produced 3.99 million barrels a day and imported 4.23 million barrels a day.
• In 2011, 40% of the year over year demand growth for oil will be caused by China.
• This translates into an additional 600,000 barrels a day in Chinese oil consumption vs. the U.S., whose consumption will rise only 130,000 barrels. In other words, the growth in oil usage in China will be almost five times the growth in U.S. usage.
• At his rate, a rough estimate would say that within 20 years or so, Chinese demand for oil will be comparable to the United States demand.

In all likelihood this last point would never happen since the suppliers of oil would have trouble keeping up with the growing demand. When supply is constrained and demand keeps going up, the only lever left to change is price which could soar.

- China is not the only potential driver of sky high oil prices. The Indian car company, Tata, has big plans for its extremely low end, basic car, the Nano. Costing only $2,500, it is no where close to a luxury car. However, given the growing affluence of many Indians and the fact that auto ownership is only about 10 cars per 1,000 people (compared to the United States where auto ownership is about 750 cars per 1,000 people), the low penetration of ownership combined with wealth growth and the right price point all point to explosive growth in demand for oil in one of the world's most populated nations.

This should have the same effect as with China. Much higher demand, limited supplies means price pressure.

- Oil is not the only energy challenge. According to a Newsweek article from 2007, as reported by Fareed Zakara, and cited in "Love My Country, Loathe My Government":

• China and India will build 800 new coal burning plants by 2012.
• These new plants will burn nine hundred million tons of coal every year.
• This burning will dump an additional 2.5 billion of carbon dioxide into the atmosphere on an annual basis.
• According to the article, if all of the countries that signed the original Kyoto Global warming treaty lived up their commitments, which few if any did, the reduction from the treaty would reduce carbon dioxide production by only 483 tons, roughly on fifth of what China and India will dump into the atmosphere just from their incremental coal plants.

Since America gets a lot of its electricity from coal plants, if you dramatically increase demand elsewhere in the world, the likelihood of price increases in this country are very high.

Not good news. No matter how much we curtail demand here in the U.S., it is unlikely that the overall demand for energy or the environmental impact will be much reduced, given the powerful economic growth around the world. Unless something is done, $4.00 a gallon will seem like the good old days.

But nothing is being done:

• The President wants to get one million all electric cars on the nation's roads by 2015. But that would represent less than one percent of all cars being used.
• The President wants to end run Congress since he did not get his way on cap and trade, by using the EPA to regulate greenhouse gases. However, it makes no sense to damage the U.S. economy with onerous and expensive regulation when the real future energy and pollution hogs/culprits are India and China. Thus, not only would the EPA regulation increase energy costs for everyone but it would have no significant environment impact, given the growth in greenhouse gases elsewhere.
• Congress keeps increasing the average auto fuel economy targets but ensures that the targets do not take effect for years and years to come in order to not endanger their re-election chances.
• The President and others have this pipe dream of building out a high speed rail system for the country but that is all it is, a pipe dream. First, the vast majority of drivers in this country do not need high speed rail to get to work or play. Second, we have over 100 years invested in our auto infrastructure, it would take decades to replace it with any kind of rail system. Third, given the financial fiasco that is Amtrak, there is no reason to believe that a high speed rail system run by the Federal government would be anything but a financial loser.

We should be much further ahead, strategically, in this area. Lord knows we have had enough warning since the oil embargo shocks happened almost forty years ago. In that time, the political class has done nothing to prepare the country for this crises. Oil and coal are the major components of our energy mix and that energy mix has increasingly been dependent on foreign oil sources, sources that are now in higher demand from China and India. What makes us think that our politicians can do any better in the next forty years, we have had no indication that they know how to think strategically and as a result, we are that much more closer of coveting $4.00 a gallon of gas.

What is needed is a whole new paradigm of thinking in this area. We need breakthrough thinking, not the tiny incremental thinking our political class has delivered in this area, if at all. Rather than centralized energy sources, maybe we need to look at decentralized energy generation and storage. The Internet is a thing of beauty because it is so decentralized, maybe that is the model we should be looking at as opposed to massive, centralized coal power plants. Maybe we should be looking at local solar and wind, not massive solar or wind fields.

Maybe what we need is a massive emphasis, a Manhattan style focus, to find a way to make cars several times more efficient which would strategically utilize existing infrastructure. This would pre-empt the need for totally new infrastructure, e.g. high speed rail, that is unlikely to be cost efficient, utilized, and profitable.

Maybe what we need is a break through approach to burning coal since coal is not going away, given the demand for cheap electricity in China and India.

However, what we really need is to get the politicians and embedded industry lobbyists out of the equation. Their lack of success in this area precludes giving them many more chances.

Three steps in "Love My Country, Loathe My Government," Steps 23, 24, and 25 would be the processes needed to get started and would address the issues discussed above. We need to think entirely differently than we have ever as it relates to energy. Why? Because with the rise of China and India, the world is entirely different than it has ever been before. By not changing our approach and way of thinking, we are actually moving backwards vs. the rest of the world. However, our political class is entirely the same as it was in during the 1970s oil crises, ineffective, self serving, and unable to think strategically.




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The Blame Game - Part 1

Let's look at the blame game that the political class loves to play on the taxpayers. The blame game involves blaming the other political party's members for the woes of the country, absolving themselves of getting anything done. We decide what "team" we want to be on in the blame game, feel good about ourselves that our team was not responsible, and nothing ever gets done since the politicians spend so much time trying to blame others or duck responsibility for their own incompetence:

1) The latest instance of the blame game comes from Howard Dean who somehow always gets press coverage despite losing his bid to run for President and currently holding no elected political office. He recently stated that the free market and capitalism was the cause of the recent economic meltdown and that regulations were needed to avoid future problems. His specific quote was "I think we had quite enough of capitalism." Blaming capitalism may get him points with his left leaning friends but this blame game does not stand up to any logic:

Consider a few Washington agencies: FDIC, SEC, Fannie Mae, Freddie Mac, HUD, House of Representatives committees on housing and banking, Senate committees on housing and banking, Treasury department, Federal Reserve Board and lord knows how many other Federal and state regulatory and oversight political entities exist. Given all of this oversight, no one in the political class had the smarts or the guts to stand up and say we had a banking and housing problem brewing. Howard Dean is wrong, capitalism did not fail and is to blamed, the political class and its associated government bureaucrats failed to see the biggest economic tsunami coming until it hit them in the face, they are to be blamed. We paid dearly for this extensive government oversight as taxpayers and got nothing in return except a deep recession. How Dean can blame the free markets when the markets were not free and were oversaw by everyone, show either a pandering to the left and its socialistic tendencies or just plan stupidity.

2) The market did exactly it was supposed to do so you can not blame capitalism. Over leveraged banks and overpriced real estate is not the blame, it was simply reality. It is a reality that many banking executives ignored. In a new book, "A Colossal Failure Of Common Sense", Lawrence McDonald, a former vice president at Lehman Brothers presents an insider's view to the crisis. According to McDonald, as early as 2005, some experts at Lehman's were sounding the warning about a coming crisis. These experts even correctly identified the companies that were likely to get pummeled when the market correction came. Despite their expertise, they were ignored and some were even fired for speaking up. If this was happening at Lehman, it was also probably occurring throughout the banking industry. Thus, these high paid executive are to be blamed for the horrible wreckage that occurred to their companies, some of which, including Lehman's, went out of business despite being told what was likely to happen. In this version of the blame game, these same idiots that ignored the warning signs, are rewarded with multi-trillion dollars worth of bailout money. Sometimes the blame game is not logical: everyone is pretty aligned with the fact that the bankers and such brought this on themselves and the country, i.e. they are to blame, but many of them are still in the same positions and enjoying their taxpayer fueled bailout.

3) The Democrats love to avoid responsibility for the economic downturn by blaming Bush. Now, I am not defending Bush. The origins of the crisis festered and grew during his time in office. However, let's remember that the Democrats controlled Congress for the two years before the crisis erupted and did nothing to address the pending disaster. The Democrats ran all of the relevant banking and housing committees in Congress and NONE of them saw the problem coming until it exploded in their face. The chairperson of the Senate Banking Committee, Chris Dodd (seems we heard his name in less than flattering circumstances in a previous blog) was the biggest recipient of campaign donations from Freddie Mac. A little conflict of interest here possibly? The very housing entity that he was supposed to oversee was paying him more than $100,000 for his re-election campaign. Despicable. By the way, Obama was the second biggest recipient of campaign funds from a Federal agency that he should have also been overseeing as a Senator.

Do not get caught up in the blame game. In "Love My Country, Loathe My Government". several steps would address all of these blame issues including term limits, campaign finance reform, and a severe streamlining of government since having a lot of government (see the list of failures in point one above) do0es not seem to work. By limiting the government and the political class to a much smaller set of duties and responsibilities, maybe they can get something right for once and avoid a future economic crisis.

Tomorrow: The Blame Game Part 2 - Who Knew What and When Did They Know It?