Sunday, August 7, 2016

Whence the Republic?

Socialists understand that in order to control the economy, they must control the means of production: goods like clothing, vehicles, gasoline, toilet paper, and so on; food and beverages, along with their distribution; as well as electricity, natural gas, and other services. All of these economic resources must be grouped into a series of large corporations for two reasons: large corporations are easier to control than small independent businesses; and once control has been established large corporations become an extension of government policy through the regulation of labor, wages, prices, and consumption. The government can then control output and act as a monopolist - often at the expense of consumers who must suffer shortages and ever higher prices. Senior corporate managers become members of the elitist clique that runs the nation. It becomes politically easy and highly profitable to take from the public consumer and give to favored corporate insiders. The economy is run for the benefit of the insiders, and not for the benefit if the citizens.

Producer controlled economies eventually fail because they are non-responsive to consumer needs. Most consumers want the widest selection and the best possible quality, at the lowest possible price. But this concept appears to be alien to socialist thinking. Despite verbose claims to the contrary, most clique leaders just do not care and politicians almost never have the knowledge required to run any national economy (even if this were possible - which it is defiantly not). Greed and political power become fundamental drivers of behavior. Arrogance enables ignorance. Bureaucrats decide what is best for consumers, often based on ideological - rather than market based - factors. Individual rights are ignored unless they fit within the current identity based and media centric socialist perspective. Poverty is expected. Immoral behavior condoned. Hence, ideological blather enforced by police power becomes the norm of daily life until the whole system self-destructs because of starvation, inadequate housing, a crumbling infrastructure, rampant disease, and criminal behavior.

Examples: think Cuba and Venezuela.

Will our Republic enter a death spiral from which there is no rational recovery? Is defiant revolution inevitable? Is this the real reason people are purchasing so many guns? Will a new administration redirect our republic away from socialism?



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Saturday, July 30, 2016

Arctic Warming

The fact that the Arctic is warming faster than the rest of the plant is evidence that the warming is not caused by increased levels of CO2. Recent satellite images show CO2 does not vary by more than about 10 ppm from place to place at any given time. The greenhouse effect of CO2 is mostly masked by water vapor and water vapor is scarce at the poles, so the theory predicts more warming at the poles. But UAH temp data show that most of the warming is at the North Pole, and virtually none of it at the South Pole. This weighs against CO2 being the primary cause of Arctic warming.

Changing data to verify a model used to be regarded as academic fraud. We have nearly 40 years of the best possible observations. The satellite temperature records of the lower troposphere do show that the Arctic is warming much faster than the rest of the world. CO2 is well mixed in the troposphere. Why would CO2 cause the Arctic to warm dramatically but not the Antarctic to hardly warm at all? That is one of the best arguments against CO2 being the main driver of recent “global” warming.

CO2 caused global warming isn’t global unless it is actually global.
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Saturday, March 26, 2016

12 Criteria for Evaluating Our Energy Options


 Introduction

Are we running out of oil, coal and natural gas?

No.  We will never run out of oil, coal or natural gas. There will still be plenty of these fossil fuels in the ground when the last human turns off the lights.

So what’s the problem?

Between now and 2040, it is likely we will run out of affordable oil, coal and natural gas. And that is the problem. We humans need to be looking for low cost energy solutions to power our future and there appears to be a number of technologies that could come to our rescue.

Are they all equally viable?    

No.    The search for alternative energy resources is a road full of technology potholes and politically motivated wrong turns.  Solar and wind power, for example, are often mentioned as energy solutions, but both have serious disadvantages. We have to make informed choices. 

Can we do it?

Maybe.  However, before we start to make comparisons – one energy technology versus another – we need a frame of reference that will give us critical perspective. Let's start with four fundamental truths.

First of all, we need to remember there are two basic energy applications. We need high energy content mobile fuels for our vehicles, ships and airplanes. And we need bulk quantities of stationary fuels to generate heat and electricity. Our existing consumption has largely relied on oil for mobile applications; and coal, natural gas, nuclear or water power for stationary applications.

A second point we need to remember is that any energy resource –oil, coal, wind, biomass or whatever, is an element of a complex supply chain. Think of energy as a system from production through consumption. All of the elements of the system are interrelated and interdependent.  For example, the oil supply chain begins with the negotiation of exploration or drilling rights with the property owner (these days – often a national government), then comes the actual exploration, oil production, transportation of crude oil to a refinery, refining operations, oil refinery product distribution, and finally- consumption by user application. Break this chain at any point – and consumption stops.  In 2005, two hurricanes in the Gulf of Mexico interrupted exploration, decimated production, destroyed parts of the transportation infrastructure, shut down several refineries, restricted distribution, and almost caused consumption shortages. There is plenty of oil in Iraq, but the exploration, production, and transportation links of the supply chain are vulnerable to disruption. There is more oil in Iran, Saudi Arabia and the former Soviet Union, but geopolitical impediments could easily restrict exploration, production, transportation, and refining. The point is: every link in the supply chain is important. Even the act of consumption must be carefully evaluated in proposing an energy solution. This is one reason why, for example, the proposed use of hydrogen as a mobile fuel is so difficult to implement. We currently do not have an economical vehicle fuel cell that can be used to consume hydrogen, and the direct consumption of hydrogen is fraught with safety challenges.

A third point to consider is that all energy solutions include some level of risk. Production plant construction cost overruns, a miscalculation of operating and maintenance costs, technology snafus, changes in market demand, unanticipated regulatory actions, environmental impacts, and the availability of capital must all be considered when proposing an energy solution – particularly when implementing an untested alternative energy technology.

And lastly.  No proposed energy solution is useful unless it will be economically and structurally viable without government support.  No subsidies.  No special regulations to encourage production or consumption.  Yes, I know.  If government preferences, subsidies, military action, and so on were added to the real cost of oil, we would pay far more than we do for gasoline, diesel, and heating oil fuels. But in the long run, such preferences and subsidies are economically unsustainable. Energy technologies are viable only if they are able to provide us with a solution that can stand on its own under the political, economic, or environmental constraints that lie in our future.


Evaluating Our Energy Options

Unfortunately, not all alternative energy technologies are equal. All of the proposed alternative energy solutions have risks and drawbacks. So how do we evaluate them?  By accessing their performance against known evaluation criteria. Here, in no particular order and without making any judgment as to outcome, are some of the items that must be considered.

1. Basic Economics.  The price of energy supplied to the consumer must be affordable within the constraint of measuring the amount of money spent on energy as a percentage on income.  Yes.  This means that rich people will spend less of their money – as a percentage of income – on energy than low income people. Rather than bemoaning this fact, however, it will be more constructive to focus our research and development on energy solutions low income people can afford.

Producer costs must be less than consumer prices. Artificially restricting producer prices may make good politics, but its makes lousy energy policy. If producer costs are higher than the price they can charge in an open market, then they will be forced to stop making energy products. As a system, any energy solution must meet the criteria of economic common sense. It must be viable within the constraints of a nation's economic characteristics. Else it will ultimately fail.

2. Labor Efficiency. We keep forgetting. The high energy content of a barrel of oil has allowed us to use less human labor to do energy intensive tasks – like farming. That's going to change. We need to start thinking in terms of the hours of labor it takes to produce a given level of energy.

In Brazil, for example, much has been made of the integrated biomass energy production process where small growers cultivate sugar cane and sweet sorghum, process the crop through a distillery, and feed their cattle the residue.  The stillage and cow manure go through distillers, producing enough biogas to power a generator. There is enough electricity to power the distillery, the farm, and nearby homes or shops. But the process is labor intensive. Does this mean we humans will be spending more of our labor to produce energy, thus increasing the cost and decreasing the amount of labor we could be using for other tasks?

In 1850, more than 90 percent of our work was done by human labor and draft animals. By 1950, most of the human labor and virtually all of the draft animal labor had been replaced by other sources of energy. Absent an incredible breakthrough in energy technology, will we start to march backward in time to an age when human labor and draft animals will again become an important part of the energy cycle?

3. Process.  Engineers bless their hearts; can make just about anything work in the laboratory.  Maybe once.  Perhaps several times. But that does not mean the energy production process thus invented is scaleable, repeatable, reliable, or available for mass production, distribution, or consumption.

Furthermore, we live in a hydrocarbon environment and many alternative energy proposals involve altering the hydrocarbon chain.  Sure.  We can turn almost anything into energy. But that does not mean it’s a good idea. We can, for example, make fuel from the hydrocarbons in chicken fat. But will that process solve the energy challenges that lie ahead?   Absolutely not.

So for every alternative energy proposal, we have to evaluate the underlying technology in terms of its functional characteristics. Is it scaleable, repeatable, reliable, and available for mass production, distribution, and consumption?  And what percentage of our total energy requirements will be satisfied by this process?

4. Infrastructure. The best alternative energy solutions will be compatible with (or adaptable to) the existing distribution and consumption infrastructure. We have to consider fuel handling, transportation, safety, security, availability, and reliability. We cannot ignore our existing vehicle and power generation technologies.  For example, one of the more serious challenges of moving to a hydrogen economy would be the development of safe and reliable methods for fuel transportation, storage, distribution, and consumption. We would need a whole new distribution infrastructure – thousands of hydrogen stations, and millions of people to be trained. That will take time, lots of labor, and buckets of money.

5. Use of conventional fuels.  Some alternative energy proposals will ultimately fail because they assume the availability of low cost oil and natural gas.  Wrong!   If oil and natural gas are in short supply, or only available at a sharply higher price, they have to be removed from the energy equation. For example, with the exception of small scale applications or devices, we cannot assume the use of natural gas to power fuel cells. We have to be careful with the calculation of net energy from biomass if the production process uses excessive amounts of diesel and gasoline fuels. Ethanol is not a good idea if it assumes increased consumption of oil or natural gas based herbicides, pesticides, and fertilizers. Natural gas is consumed in the production of oil from oil sands. Is this the best and highest use of our natural gas resources? The list of questionable alternative energy solutions goes on and on. Any alternative technology that assumes the use of conventional fuels is suspect.

6. Benefits.  We need to find some way to quantify, qualify and measure the benefits of the proposed alternative energy solution versus potentially more efficient or desirable uses of the resources employed. For example: is the use of natural gas to produce hydrogen a misuse of natural gas? Is the use of wood waste for electric power production a net source of energy? Is the use of land for ethanol crop production a good idea if we determine that the land we use is needed for food production? Is adding ethanol to gasoline a good idea if there is not a net reduction in CO2 emissions?  The energy solutions we chose cannot displace the alternative benefits derived from the resources we consume in the process.   Else – on a net basis – we have accomplished nothing.

7. Subsidies. Governments love to hand out subsidies. Spend the taxpayer's money to buy political power. But in the long term, subsidies are not economically sustainable. They bury the real cost of energy, artificially encourage consumption, and increase the cost of government (thereby increasing the risk of financial failure).  Energy companies routinely go to politicians with requests for cost sharing, debt interest offsets, payments for production, credit guarantees, direct tax incentives, and utility rate incentives. Unfortunately, subsidies will only continue to be available if government can manage the associated load of increased expense and debt.

That's not necessarily a good assumption.

8. Credits. Our government loves to cook the books. Credits are sometimes used to inflate the benefits of certain alternative energy solutions by including the indirect (non-energy) co-products in the cost benefit analysis. Granted, it is difficult to measure the direct benefits of an energy production process, and often the co-generation components are really valuable. For example, a typical Combined Heat and Power (CHP) system reduces the net energy required (100 units) to produce electricity (30 units) and steam or hot water (50 units) than separate heat and power components (which would need about 163 units of energy to do provide the same output).

So we need to pay attention to the way we calculate the benefits of any energy production or conversion process. Credit should only be given for energy efficiency or conservation.

9. Unintended Consequences. If the energy supply chain is really a system, and all of its component parts are interrelated, then we have to follow the impact of each alternative energy proposal through the act of consumption. How will the proposed automotive fuels affect fuel, engine and exhaust system life? Maintenance? Costs? Emissions? Consumer safety? We do not really understand, for example, the environmental consequences of using ethanol as a vehicle fuel. And does the proposed system solve one problem by creating another one? The most glaring example of this is MTBE, the replacement for lead in gasoline that was used to improve air quality, but which – at the same time – was found to be a potential carcinogen that easily leached into our water supply.

10. Waste.  Every energy process creates waste. Oil spills, CO2, ash, effluent, dead batteries, old equipment, and so on. Fuel cells use some very exotic chemicals. Hydrogen generation from coal means we have to use the coal. Nuclear power has left us with a legacy of radioactive material. We need a way to quantify and qualify the type and amount of waste from each energy resource so that we can make comparisons of the resulting waste disposal challenges.

11. EROEI:  Energy Returned On Energy Invested.  That is to say, the amount of energy we get from a production process must be substantially greater than the energy consumed by that process. Otherwise, each cycle of production will theoretically reduce the energy available for consumption.  For example:  an EROEI of 1 means that for every unit of energy consumed in the production process, we get 1 unit of energy to use for the next cycle of energy production.  But an EROEI of 1:1 doesn't make any sense. There isn't any energy left over to distribute to the consumer.  So we need a net gain of energy from each production cycle as follows….

An EROEI of 1:1 means that for every unit of energy input
we produce 1 unit of energy; hence the ratio is 1:1. The energy we get must all go back into the production cycle to produce more energy.
An EROEI of 1:2 means that for every unit of energy input
We produce 2 units of energy. One unit goes back into the production of more energy, and we have a net gain of 1 unit of energy that can be distributed for consumption.
An EROEI of 1:4 means that for every unit of energy input
We produce 4 units of energy. One unit goes back into the production of more energy, and we have a net gain of 3 units of energy that can be distributed for consumption.

Remember. If the EROEI of any energy resource is equal to or less than 1, production no longer adds to our energy stockpile.

Furthermore, not all energy thus produced is equal. The energy content of a gallon of diesel fuel is (roughly) 139,000 Btu, the energy derived from a gallon of gasoline is (roughly) 124,000 Btu, and the energy in a gallon of ethanol is (roughly) 80,000 Btu. Can you guess which fuel will give us the best vehicle mileage?   If we can get 50,000 Btu from 10 pounds of dry wood, 104,000 Btu from 10 pounds of high quality coal, or 139,000 Btu from 1 gallon of heating oil, which fuel would the consumer prefer to use for heat?

Unfortunately, the average EROEI of world oil production has been declining.  I read somewhere that before 1950 the EROEI for oil was often more than 100:1. By the 1970s it had dropped to 30:1, and by 2005 the average EROEI on new production had fallen to 10:1. As we go for oil in increasingly difficult environments (deep under the ocean, open pit mining, etc.) the EROEI will decline further. We have to face the facts. Just because there is oil in the ground does not mean it will be a practical energy resource. Every energy supply chain has its cost in money AND energy.

The concept of EROEI is usually ignored by politicians, snubbed by environmentalists, disputed by alternative energy advocates, and distrusted by "Peak Oil" critics.  It's not even discussed on the DOE WEB site.  But eventually, it will become a topic of great importance.  And credibility.  Right now, there are no standard definitions of how to determine EROEI values or what should – or should not – be included in an EROEI calculation.  I believe we need a three tier model:

Basic EROEI modeling – which confines itself to energy production versus energy consumption as an energy production process.

Energy Supply Chain EROEI models – which calculate an estimate of energy used to research, develop, explore, produce, transport, distribute, and consume energy through the entire supply chain.

Life Cycle EROI Models – should include co-generation, ancillary product production, waste, and the impact on our environment. Or put another way, everything discussed in this essay (including labor).

12. Ecosystem.  All forms of energy production have environmental side-effects. Burning oil, coal, and natural gas has produced an unpleasant side effect:  emissions of carbon, sulfur, and metals. We have recognized that carbon emissions, in the form of CO, CO2, and ash, are an air quality environmental problem. Sulfur emissions produce acid rain. Metals can leach into ground water aquifers. Nuclear waste is a perennial environmental problem. Electric vehicle batteries contain some very exotic chemicals. Dysfunctional and worn out solar panels will become a waste disposal headache. Even windmills are the source of unpleasant ecological side effects. Consideration of mobile or stationary application solutions, therefore, must include a careful review of the environmental impacts.


Conclusion

It's time to stop thinking in terms of pop-culture solutions and government subsidies. Energy is a serious business.  We currently use 120 Trillion Cubic feet of natural gas, 8 billion tons of coal, and 34 billion barrels of oil each year. And our consumption is growing. Environmentalists have repeatedly demonstrated they do not understand the magnitude of human energy needs. Most do not understand the basic physics of energy production and consumption. We need better communication. It is time for all of us to look into the future, take a more realistic view of our collective energy needs, and accept reality.  And then deal with our challenges in a positive, proactive and constructive way.

We need practical and affordable solutions that can be retrofitted into our existing energy chain. We must continually seek to increase the efficiency of converting energy into heat and power. And we must somehow get our respective governments to get serious about a program of international energy research and development.

By 2040, it is highly likely oil, coal or natural gas will be too expensive to use for stationary or mobile fuel applications.

We don't have much time to develop viable alternatives.

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Tuesday, March 22, 2016

NIRP: Precursor of Economic Doom?

Central banks continue to labor under the unrealistic fiction economic activity can be managed by adjusting the supply of money. Cheap credit is supposed to stimulate a robust economy and the central banks have used quantitative easing to create trillions of digital dollars. The American Fed’s balance sheet ballooned to ~ $4.5 trillion. The ECB is headed toward more than 3.5 trillion Euros. Cheap credit was supposed to stimulate a robust economy. But did all this credit do any good?

Wealthy investors and investment companies used cheap dollars to bid up the value of stocks and bonds. Many companies borrowed cheap money to buy back their own stock. Business activity, however, has remained flaccid. GDP growth is sluggish. The fracking boom has come and gone (at least for a while), leaving a pile of questionable debt. Cheap credit has created a financial bubble. One prick and --- poof!

Perhaps national bankers are lemmings in disguise. It is apparently unpopular among the elitists to give any serious consideration to the concept that what is wrong with our economic system is STRUCTURAL. That would require independent thinking and (gasp!) a realignment of banking activity with the freedom of a capitalist economic system. No. No. No. John Maynard Keynes is right even if he is wrong. We must absolutely ignore any evidence that our socialist financial ideology is leading us down the road to economic disaster.

Do anything to remain an insider elitist.

Having failed to adequately “stimulate” the economies of several nations with low interest rate policies, those in control of national banks are toying with the idea of Negative Interest Rate Policy (NIRP). That is government speak for stealing money from our savings and checking accounts. Stimulate the economy by forcing increased consumption. NIRP, it is believed, will force consumers to take money out of their bank accounts and spend it. Ignore the fact that consumers and nations already have far too much debt.   

Thus another banking crisis is inevitable. Negative Interest Rate Policy will fail because a fully implemented NIRP will decimate pension plan and insurance retirement account values. Government and private industry workers will demand redress. The only recourse for many organizations will be bankruptcy because they will be unable to fund the losses. What the hell are central bankers thinking?

What is the solution for failed monetary policy? What happens when there is another massive bank failure? Repeat the ignorance. Plunder consumer bank accounts to save the banks. It’s called “bail-in”. Steal from the working class to save the wealth of the elitists. Smart investors will get the hell out of the banks. If they can. If the banks will let them have their money in CASH.

It should be clear to any rational person the Keynesian belief one can control economic activity by merely controlling the flow of money is a ridiculous failure. Unfortunately, the ignorance of ideology compels those who control our national banks to compound obvious failure with even more senseless failure. Socialist ideology, the darling theology of insider elitist intellectuals, will prevent the adoption of any realistic measures to solve the structural problems that curse the vitality of our economy. 

Do anything to remain an insider elitist.

Central banks are losing control of the money supply. Despite brave words to the contrary, they cannot control inflation because they are beholden to the politics of their respective host nations, and current political reality favors currency devaluation. That’s inflation spelled with a “d”. Combine the wild west economic impact of competitive devaluation with trillions of dollars hidden outside the banking system and we have the ingredients of a financial Armageddon.

We need a paradigm change. Our respective national political leaders and central bankers need to rethink their pet answer to the age old question: What really drives economic growth? Is it possible entrepreneurial activity creates a demand for investment? Should we sweep away several hundred thousand pages of restrictive rules and regulations and replace them with a sane economic policy? Are we ready to admit the freedom of independent action is far more likely to create economic growth than socialist planning?

Probably not.

Change won’t be easy and is - perhaps - unlikely. Failure is a repetitive symptom until revolutionary change upsets the status quo.

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Thursday, January 14, 2016

Rethinking the UN’s Objectives on CO2


Global Warming is Not the Problem. As science has shown, our planet will continue to warm or cool according to the interaction of natural forces. These trends of cooling and warming have been going on for millions of years, and they will continue to occur - with or without human activity.

Carbon Dioxide (CO2) is Not the Problem. As science has shown, carbon dioxide is a natural component of plant growth through the process of photosynthesis. Plants, including trees, shrubs, grasses, and the plants we grow for food (including wheat, rice, rye, corn, and beans), need CO2.

Energy IS the Problem. Much has been said and written about the Intergovernmental Panel on Climate Change (IPCC) CO2 reduction proposals. The UN believes that national climate plans, called Intended Nationally Determined Contributions (INDCs) will form the cornerstone of a binding, global treaty on climate change among 146 nations. In order to limit temperature increases to 2 degrees C, the Intergovernmental Panel on Climate Change (IPCC) wants to reduce Green House Gases by 40 – 70% by 2050 and go to ~ 0 % GHG by 2100. Although most of what the UN has said or written about global warming is “factually challenged’, our world leaders are making a politically expedient pretense of reducing CO2 emissions. This, of course, translates into burning less coal, oil and natural gas. But are these pledges realistic?

Absolutely not.

All this discussion and concern has ignored a critical point:

In order for poor nations to improve the living conditions of their respective populations, they will need copious quantities of energy. They will need mobile fuels for farm and construction machines, trucks, and other vehicles, as well as bulk quantities of stationary fuels to generate heat and electricity. Although estimates vary, it is likely we humans must (at least) double our available fuel resources in order to provide the energy these nations need. Assuming no disruption from war, violence, disease, famine, and other assorted human chaos, most of the nations of the Asia Pacific region would like to triple their economic base by 2035, followed by a doubling of economic activity in the Middle East, South America, Central America, and Africa. Because they have a larger base to start with, the percentage growth of the North American and European-Eurasian regions will be somewhat less.

Although for various social and political reasons it is unlikely these economic goals will be met, most national leaders are firmly committed to programs of economic growth. The majority of national governments are fully aware that their continued political power depends on delivering economic well-being. Failure is not an option. And that creates a problem for those who think we should burn less coal, oil and natural gas. Economic growth takes energy. There is a close correlation of economic activity and energy consumption. The modern State cannot exist unless it consumes an ever increasing quantity of energy, and that fact is never going to change.

This improvement to the human condition will not happen without new forms of energy. We desperately need an international research and development program that will encourage new technologies, production resources, distribution systems, and consumer products. We have to ask ourselves: Is this a task for the United Nations? Is it time to rethink our objectives? What do we want to accomplish? Since a program of CO2 reduction is a program to provide less energy, does that really help people who live in poor nations?

If we really want to increase the wealth of poor nations, we need to rethink our future collective energy requirements, and then lay out a plan to achieve our goals.


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Wednesday, November 25, 2015

CO2 Reduction: Potential Economic Disaster?

Introduction
The IPCC has warned we must reduce the consumption of fossil fuels in order to save the planet from the consequences of global warming. Although most of what the UN has said or written about global warming is “factually challenged’, our world leaders are making a politically expedient pretense of reducing CO2 emissions. This, of course, translates into burning less coal, oil and natural gas. But are these pledges realistic?

Absolutely not.

The following table shows the estimated potential economic growth of each geographic region from 2015 through 2035. Assuming no disruption from war, violence, disease, famine, and other assorted human chaos, most of the nations of the Asia Pacific region would like to triple their economic base by 2035, followed by a doubling of economic activity in the Middle East, South America, Central America, and Africa. Because they have a larger base to start with, the percentage growth of the North American and European-Eurasian regions will be somewhat less. (Note 1)


Projected Economic Growth
2015 - 2035


Asia Pacific
164.9%
North America
75.3%
Europe and Eurasia
70.3%
Middle East
116.7%
South and Central America
95.6%
Africa
91.1%


Source: TCE



Although for various social and political reasons it is unlikely these economic goals will be met, national leaders are firmly committed to programs of economic growth. Most national governments are fully aware that their continued political power depends on delivering economic well-being. Failure is not an option. And that creates a problem for those who think we should burn less coal, oil and natural gas. Economic growth takes energy. Until the 19th century, slavery was a primary source of commercial energy. Slavery was largely replaced in the 20th century by machines which either burn fuels, or are driven by electricity generated by the consumption of fuels. As a result, there is a close correlation of economic activity and fossil fuel consumption. The modern State cannot exist unless it consumes an ever increasing quantity of energy, and that fact is never going to change.

Let’s consider the implications for oil. The President of the United States, without consulting Congress, has committed America to reducing its emissions of CO2 in 2025 by 26 percent less than they were in 2005. That commitment is not without consequences for both the United States and for the world oil market. In 2014, America consumed roughly 20 percent of world oil production. Reducing consumption by any amount means a surplus of oil will be placed on the market, depressing oil prices, and encouraging other nations to consume more of this lower priced oil. It also will endanger the American economy.

The Ten Percent Reduction Scenario
Let’s look at a scenario where America reduces its oil consumption by just 10 percent by 2025. The consumption results can be seen in the following graph. North American oil consumption (remember – North America includes Canada and Mexico) declines by 3.4 percent from 2014 to 2025, and then continues to decline slightly each year. The European Union has made a totally impractical CO2 emissions reduction promise. Net immigration into Western Europe, along with increased consumption in the nations of the former Soviet Union, will put upward pressure on the Eurasian demand for oil. Our scenario assumptions project a net decrease of 2 percent by 2025. Oil consumption in the Asia Pacific region will have increased by 36 percent by 2025 and will continue to increase through (at least) 2029. Oil consumption within the nations tabulated as the Rest of the World (most notably the Middle East and South America) is projected in our scenario to grow by 25 percent by 2025, and will continue to increase thereafter. Given the assumptions used to create our scenario, it is likely available supply will exceed demand until ~ 2021, depressing gasoline and diesel prices all over the world. Cheap fuel prices stimulate increased demand. That means, any reduction of American oil consumption will have to be through the use of consumer coercion tactics – rationing gasoline and diesel fuels, increasing the tax per gallon of fuel, and so on. By 2025 however, our scenario model projects demand will begin to exceed supply, and world oil prices will increase. (Note 2)


As shown in the following graph, inflation within the United States would be relatively tame through 2021 and then higher oil prices, combined with the inflationary effects of restrictions on the consumption of gasoline, diesel, jet, and other fuels, would send the rate of inflation sharply higher. Although it is likely projected oil prices and the rate of inflation have been underestimated, it is – for purposes of analysis – sufficient to illustrate the results of our scenario.

 
North American oil consumption and GDP adjusted for inflation in 2015 dollars is, as shown in the following graph, quite volatile. Actual statistical data has been used 1970 through 2015. The estimated economic impact of a 10 percent reduction is shown for 2016 through 2035. One cannot rationally separate American oil consumption from “Real” GDP. After flirting with a recession in 2018, the American economy begins to slide into a long term recession in 2020.



Although there is a brief pause from economic malaise in 2022, the downturn trend would last for several years. Adjusted for inflation, American GDP increases through 2017, bounces a bit, and then declines. In 2030 real GDP is roughly the same as it was in 2014.



 A lethargic or declining economy causes higher levels of unemployment. Despite the feeling our scenario estimate may be too low; a chronic unemployment of 6 to 8 percent is consistent with prior periods of oil shortages.




Conclusion
One can question the timing and magnitude of these projections, but according to historical data, they are consistent with past experience.

  • Oil shortages in 1974 led to a 252 percent increase in the price per barrel of oil (gasoline went up 37 percent), an inflation rate of 10.97 percent, and a Real GDP of (minus) – 2.47 percent. Unemployment, which tends to lag changes in GDP, jumped to more than 8 percent in 1975.
  • A war in the Middle East unsettled the oil markets enough in 1980 to cause a 167 percent increase in the price of oil (gasoline went up 39 percent), led to an inflation rate of 13.5 percent, and dumped Real GDP by a (minus) - 4.7 percent. By 1983 unemployment had climbed to 9.6 percent.
  • A 39 percent increase in the price of oil in 2008 helped to decrease Real GDP by minus – 1.63 percent, increased the price of gasoline by 37 percent, and was a cause of food riots in several nations (because the cost of fertilizer, soil amendments, and motor fuels made it impossible to sustain food production).
If anything, our two scenarios have probably underestimated unemployment, and overestimated Real GDP.

Three points: Economic growth takes energy. A commitment to reduce CO2 emissions could lead to an economic disaster. Do we believe our political establishment has sufficient knowledge to understand the implications?

And- do they care?




Note 1: Economic Growth
Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.

Note 2: Scenarios
The insights presented in this report are based on the analysis of two scenarios. Scenarios are not predictions.  Rather, they permit us to make, and then test, a hypothesis. We will then be able to challenge the assumptions, encourage debate about the model, and profile the probable result of our analysis. Scenarios are tools that give our evaluations focus, permit us to deal with the unexpected, and characterize the results of dynamic circumstances.

These two scenarios were created using a very complex computer model of annual oil production and consumption by global region, other liquids and refinery gain, barrels of oil in transit or storage, the net difference between production and consumption, the price of oil per barrel, the price of gasoline per gallon, national rates of inflation, current dollar GDP, current dollar GDP adjusted for inflation, rates of unemployment, and actual demand versus natural demand. Actual data was used from 1970 through 2015. Data sources include the World Bank, the International Monetary Fund, the Energy Information Administration, the International Energy Agency, and BP.
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