In this week’s column for Energy and Capital, I review the crippled state of the financial markets, and address another load of horrible ideas out of Washington D.C. for how to deal with the energy crisis.
Shadowboxing the Apocalypse
Energy and the Politics of Partisan Paralysis
By Chris Nelder
(An homage to John Perry Barlow)
If it weren’t such a desperately serious situation, watching our fearless leaders trying to grapple with the energy and financial crises would be hilarious.
Anyone with more than $100,000 in their bank accounts must be having some sleepless nights right about now, as the failure of overextended financial institutions continues its brutal cascade. The federal seizure of IndyMac, and the potential federal intervention into Fannie and Freddie, have somewhat dampened the fallout, but Congress’ response on Monday to Sec. Paulson’s plan was tepid. As I have discussed in previous articles, by the numbers there is still a long way to fall before we hit bottom.
Merrill Lynch warned yesterday that the flagging faith in US financial institutions may hasten that long-dreaded day when Asia, Russia and the Middle East start dumping dollars and refuse to continue buying $700 billion of our debt every year to keep our listing ship afloat.
According to Brian Bethune, the chief financial economist at Global Insight, the situation is even worse: If the US Treasury does not push through a rescue of Fannie and Freddie within a mere two or three days, he said, it risks a financial crisis that spirals out of control. “We can’t dither,” he warned. “The markets can be brutal. We have to break the chain of contagion before confidence is destroyed.”
Free-market champions like Larry Kudlow have argued that a $1.4 trillion Fannie and Freddie bailout would only increase the “moral hazard” risk, by allowing an unsound mortgage business to go even deeper into a hole of lending to try to rescue itself. Far too few of their holdings could be called a piece of moral land, they say, and I am inclined to agree on that. On the other hand, I don’t think the economy can tolerate the risk of letting them fail.
In response to the crisis, Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson have been vigorously waving their magic wands before a weary band of bankers, but the Street seems unconvinced. The Dow Jones U.S. Financials Index has fallen 15% over the last week alone. (Of course, if you have been buying SKF, as I have recommended several times this year, you’re up 30% over the same week, and using that to hedge your losses elsewhere in your portfolio.)
Meanwhile, President Bush continues to complain that he doesn’t have a magic wand to make gas prices go down. I don’t know who advised him to keep hammering on that talking point, but every time he says it, it just sounds dumber. We don’t need magic wands, or for that matter bloody and costly attempts to secure by military means our access to foreign oil. What we urgently need is a sensible energy policy for the long run, and by that I mean a 100 year plan.
Unfortunately, I see very little of the kind offered from our energy cretins on the Hill. For your amusement and horror, I offer this little selection of their vast, bipartisan failure to come to grips with reality.
A Parade of Bad Ideas
I begin with Newt Gingrich’s soft-money PAC, American Solutions for Winning the Future, which is largely funded by Las Vegas billionaire Sheldon Adelson, a major Republican donor and fundraiser. Their flashy new web site panders to the patriotic breast shamelessly, while promoting a “Drill Here, Drill Now, Pay Less” message. Apparently, they have gathered over a million signatures in short order on their petition to Congress, asking them to “act immediately to lower gasoline prices” by “authorizing the exploration of proven energy reserves” off our coasts.
Nice try, Newt. I assume that none of my readers were among your signatories. They know that any new drilling off our coasts could not produce any significant new stream of oil for at least 10 years, and would only slightly affect prices at the pump. Even the EIA has acknowledged that “any impact on average wellhead prices” would be “insignificant” after 2030.
For his part, President Bush lifted the moratorium his father placed on offshore drilling, saying that “as the Democratically controlled Congress sat idle, gas prices have continued to increase. The failure to act is unacceptable.” Apparently he has forgotten that the Republican controlled Congresses that preceded this one, on his watch, also watched gas prices increase without actually doing anything about it.
Since Congress has its own moratorium in place, Bush knows that the gesture is purely symbolic, just as he knows that new offshore drilling would have no effect on prices until well after his successors are out of office. But it might reassure the gullible that he’s trying to do something about oil supply, and score a few political points.
Seeking to score some points of her own on the issue, Senator Barbara Boxer (D-CA) expressed her “outrage” over the presidential reprieve, saying that the oil companies should drill on the leases they’ve already got. (We’ll discuss the energy illiteracy of that claim in a minute.)
Next we have a strange and oft-repeated claim by a handful of Republican senators (and Dick Cheney) that we must start drilling in offshore Florida because the Chinese are already drilling off the coast of Cuba, and taking “American oil.” In fact, there are no Chinese firms drilling off Cuba’s coast, but according to the Washington Post, the claim is “just too juicy not to repeat.”
The hype about oil shale must also grace our list. Bush and other boosters are trying to whip up public support for a new run at turning low-grade shale into liquid fuel (the fifth such attempt in our nation’s history), touting the deposits as being three times the size of Saudi Arabia’s reserves. As my readers know, such assertions are extreme exaggerations. The oil shale resource, while large, has never proved to be commercially viable and is unlikely to ever deliver more than a trickle of very expensive, synthetic fuel, which will have very little impact on American supply or prices while incurring as-yet-unknown environmental damage. Unfortunately, the appalling ignorance about energy that burdens most of America makes such wild claims useful political fodder.
On the other side of the aisle, House Speaker Nancy Pelosi struck her own pandering pose, claiming that the current economic “emergency” justified releasing oil from the SPR. Clearly, Pelosi is no more up to speed about the realities of the oil business than anyone else on the Hill. As I have explained before, the SPR is already far too small an emergency reserve, and should only be tapped in the event of severely disruptive actual shortages. It’s bad enough that the Democrats were able to stop the filling of the SPR some months ago. Anyone who isn’t in total denial about peak oil knows that trying to use the SPR to moderate prices is a terrible idea.
The Democrats, of course, have a growing list of terrible ideas on how to address the energy crisis. I’m sure it scores political points with angry voters to say they’ll crack down on oil price “gouging” and excess speculation, but as I have written repeatedly, I don’t believe either of those things are a significant factor in today’s prices, if they’re happening at all.
But the crowning idiocy of Democratic suggestions must remain the legislation that makes it possible for Congress to sue OPEC for price gouging, an idea so stupid that whoever conceived it should win a Darwin Award. In a way, I hope they actually try that some day. Maybe the blowback will slap some sense into them.
And so the shadowboxing continues, with both sides of the aisle feinting and jabbing against straw men, and getting us exactly nowhere in terms of real solutions. Each side blames the other for being in this predicament, while none dare whisper the one word that ought to be the first on the list: conservation. Our addiction to oil is too great to even talk about.
A silent war rages within the very breast of America. Will we continue to insist, with the mentality of a two-year old, that all the oil we want should be ours, that we have some birthright to endless growth and cheap energy? Or will we grow up, and realize that we’re neither immortal nor wise, and that the world has real limits we have to live within?
While politicians do their level best to ensure that America is as confused as possible about energy, spreading their spins and racking up pander points, there are at least a few experts in the energy industry who are telling the story straight.
John Hoffmeister, former CEO and president of Shell Oil’s US operations, told CNBC yesterday why he supported lifting the ban on drilling the outer continental shelf (OCS). Recognizing that OCS production is “not gonna make any material difference” in the short term, he noted that America has resisted developing those areas for 30 years, and that we’re now “paying the price” for that.
He went on to explain that all of our options—including drilling for more oil and gas domestically, swapping out 200 million liquid-fuel burning cars for ones that run on electricity, and growing the 2% share of renewably generated energy up to a much more significant level—will take decades to achieve. But politicians, with their short term motivations, simply can’t grapple with the long time horizons of the energy business.
Our 30-year failure to develop a sensible long-term energy policy, a period that has seen both Republican and Democratic presidents and majorities in Congress and a long history of shortsighted solutions, is ample demonstration of his point.
Regarding the Democratic assertion that the oil industry isn’t using its existing leases, Hoffmeister remarked, “The industry is pursuing the leases it has, but to be blunt, the prospective nature of many of those leases is very low. And you don’t go drill oil where you know it doesn’t exist.” That, I believe, is a true statement.
Hoffmeister explained why he chose to leave the oil business and found a nonprofit group called Citizens for Affordable Energy: to start “doing what’s right in America.” “Doing what’s right in America is listening to the citizens that are in great pain,” he said, “making the tough political choices to go after more oil and gas, and—and, as T. Boone Pickens would say, all those other forms of energy that are out there, and do it all.”
That has been my position all along, because the way I tally the numbers, even if we do it all, and do it well, we’re still likely to come up quite a bit short.
Decrying the “politics of partisan paralysis,” Hoffmeister said “It’s not helping the American consumer or the American economy one iota. We really have to look at this as an American problem. It’s not a Republican problem, a Democratic problem…It’s an American problem, and I wish the two branches of government would work together.” He went on to say, “The great American public has said ‘enough, let’s quit the political rhetoric, and get on with solutions.’”
I only hope that’s what we’re saying.
(To those of you who caught the references: hey now!)
Until next time,