Saturday, April 26, 2008

More coins in the fuse box

Even as the signs of a growing oil crisis gather around us, there are those who prefer to put coins in the fuse box. I am referring, of course, to the very dangerous practice of putting a coin in a fuse box where the fuse ought to go.

Sometimes foolish homeowners whose electrical systems are prone to burn out fuses do this out of frustration or as a temporary expedient until they can get to the hardware store. In doing so, they deny themselves the feedback that keeps electrical fires from starting. (I have used this analogy previously and couldn't resist trotting it out again given recent developments.)

Perhaps the most visible current coin-in-the-fuse-box proposal is John McCain's gas tax holiday. Its irresistible political appeal in a campaign year means it is likely to be enacted. By lowering gasoline prices his proposal would, of course, send a price signal to people to use more gasoline. That's hardly the message they ought to be receiving when the peak in world oil production is growing ever closer. McCain and many others have also called on the U. S. government to cease its oil purchases for the country's Strategic Petroleum Reserve. The move would eliminate one sizeable source of demand from the oil market. (Never mind that such a reserve might be especially important now when a major oil supply disruption could cripple the weakened U. S. economy.)

The result of suspending gas taxes and oil purchases for the Strategic Petroleum Reserve would probably be a brief period of lower prices followed by another runup set off by increased demand. So, instead of the money going into the federal highway trust fund, it would then go into the coffers of oil producers. (Perhaps the failure to repair roads and bridges would reduce incentives to drive more. But that hardly seems like an efficient and proper way to encourage less driving.)

Coins in the fuse box make for an addictive habit. As long as things continue along smoothly, the temporary fix feels great. That's why it is almost certain that as the date for resuming collection of the gas tax approaches, there will be a call to extend the tax holiday. And, if gasoline prices don't decline sufficiently by the time that extension lapses, there could be further calls to extend it.

In other important areas we are also being deprived of necessary feedback. The recent bailout of Wall Street investment banker Bear Stearns by the U. S. Federal Reserve tells Wall Street once again that the Fed will always come to the rescue if things get bad enough. Such actions create what in financial circles is called "moral hazard." It is the hazard that financial institutions will engage in ever more risky behavior to seek higher returns, secure in the knowledge that the government will rescue the financial system if it becomes vulnerable to systemic collapse.

This is not a new development, but one that has been growing in proportion for many years as I explained in a previous piece entitled, "When Socialists Take Wall Street." The fact is that as such bailouts become more certain over time, they become more necessary to avoid catastrophic financial collapse. That's because risk taking expands with each cycle of crisis and government rescue. As a result of decades of indulgent U. S. policy toward financial institutions, such risk taking has now expanded to the point where it would have been too risky for the Federal Reserve not to bail out Bear Stearns. Removing the coin from the financial fuse box--that is, letting Bear Stearns go down--would not simply have cut power to Wall Street; it might have made the entire world economy go dark.

But perhaps the most insidious of the current coins in the fuse box is the one that is in the mind of most Americans and perhaps many others across the globe. It is the idea that the high oil prices of the last few years are simply a cyclical phenomenon and that lower prices are sure to follow as the market brings forth new supply. While the market is indeed bringing forth new supply, the question now is whether that supply can keep up with depletion. The evidence increasingly is that it will not and that high prices will become a permanent state of affairs.

The public is aided and abetted in this belief by the soothing pronouncements of the great majority of economists that the operations of the market eventually cure all high prices. It is a message that the public wants to hear and wants to believe is true. And, while it has turned out to be true on many occasions, neoclassical economics is not physics. There are exceptions to its precepts and this exception, if that's what it turns out to be, could be highly destabilizing to our global society.

Waiting for the market to resolve the oil problem on its own may have financial consequences just as severe as regulators feared would have occurred had Bear Stearns gone bankrupt. Imagine for a moment what $200- or $300-a-barrel oil might do to the economy. (In saying this, I am not advocating government actions that would lower prices. Rather I support deep subsidies for a rapid transition to renewable energy funded perhaps by higher taxes on nonrenewable energy.)

Because they are in power for a limited time, it is the habit of politicians and policymakers to temporize. They are simply trying to make it through to the next election. I do not expect any of them to take the coins out of the fuse box. If we want that to happen, we are going to have to do it ourselves, community by community.

Tuesday, April 22, 2008

Can the natural gas economy become a reality?

My latest column on Scitizen entitled "Can the natural gas economy become a reality?" has now been posted. Here is the teaser:

Natural gas has often been prophesied as the fuel of the future, one that will fill the gap when oil declines and give us the time we need to transition to a renewable energy economy. But can the assumptions behind this characterization stand up to scrutiny?....Read more

Sunday, April 20, 2008

Disaster in progress: North America's home heating transition

With natural gas prices creeping higher on a daily basis, some homeowners dependent on natural gas for heat are starting to look for cheaper alternatives. In my area the outdoor wood burning furnace which is designed to supplement existing home heating has become a major source of friction among suburban residents.

The main complaint is the smoke produced by these furnaces as they heat water that is then pumped to the owner's house where a heat exchanger disperses the heat. A loophole in U. S. Environmental Protection Agency rules has left such furnaces unregulated though many municipalities and states are now seeking to ban them or at least regulate them. Part of the problem is that some furnace owners don't just burn wood; sometimes they burn household trash. Emissions from these furnaces have been measured by one government agency and the results are rather startling:

A 2006 report from the Northeast States for Coordinated Air Use Management, a nonprofit association of Northeast air quality agencies, found that average particulate emissions from one outdoor wood boiler equaled that of 22 wood stoves, 205 oil furnaces or as many as 8,000 natural gas furnaces.

The last wood heating craze occurred in the 1970s and abated when energy prices plunged and stayed mired in a 20-year bear market. But this time natural gas may be heading for a permanent decline in North America, and many homeowners throughout the United States and Canada will be scrambling for a more affordable source of home heat.

In rural areas, wood heat may become more widespread. But in heavily urbanized areas, coal may be the fuel of choice. It remains cheap relative to natural gas, and it is abundant. Moreover, some of the same manufacturers who make outdoor wood burning furnaces also make versions that will burn coal. Even indoor coal-burners are already available for homeowners. Finally, there are indoor and outdoor grain-burning furnaces.

The move to alternative sources of heat will put pressure on the remaining forests in North America as demand for wood and wood products for burning increases. This transition will also threaten the climate and air quality as coal-burning expands, and it has the potential to push grain prices even higher as homeowners compete for increasingly scarce grain to feed grain-burning furnaces. Electricity may also become a source of heat via portable electric space heaters, especially in the case of an acute crisis, and their use could potentially threaten the electrical grid.

There is, of course, solar space and water heating, and some people who have the resources will choose these options. But these options are not necessarily optimal for retrofitting in much of North America, and they can be costly to install (but not to run).

Neither heating oil nor kerosene will likely turn out to be good alternatives. Oil prices seem almost certain to remain high as we approach the all-time peak in world oil production. Propane, butane and liquefied petroleum gas (generally a combination of the first two) are simply products of natural gas wells and so will face the same depletion problems and price pressures as natural gas.

The alternative to this unfolding disaster would be an aggressive, subsidized energy efficiency retrofitting program for North American homes and a campaign to get people to use less natural gas by changing their behavior. But neither the Canadian nor the U. S. government seems even vaguely aware of the approaching crisis.

When an acute crisis arrives in the form of a very cold winter or a persistent decline in natural gas production, the result will inevitably be serious demand destruction. Many more homeowners will gravitate away from natural gas because of price uncertainties. Perhaps not so obvious is that whole industries dependent on natural gas for process heat or as a chemical feedstock will be forced to shut down and, where possible, may move operations closer to sources of cheap natural gas overseas, possibly to the Middle East or even to Russia where supplies remain abundant. (In fact, this has already happened for much of the nitrogen fertilizer industry and for parts of the chemical industry.)

The damage to the economy and the environment will be immense. And, the tragedy of it all will be that it could have been avoided or at least greatly mitigated by a sensible conservation program.

Sunday, April 13, 2008

Manufactured foodscape

For many in North America food has become essentially a manufactured item, carefully packaged in colorful plastic and cardboard wrappers. The packages list the ingredients in small type as if they were elements from the periodic table rearranged by some present-day equivalent of the Star Trek replicator.

Few consumers realize the remarkable chemistry that does, in fact, take place in the farm field and in the ocean that transforms carbon from the air into the myriad compounds we recognize as food. And, except in those rare North American households where it remains an economic necessity, cooking itself has become something of the domain of wannabe gourmets with Martha Stewart fetishes.

The food manufacturing process has created effortless meals that often require nothing more than a little boiling or heating in the microwave to make them palatable. The cost is in nutrition and overall health, costs which often don't show up for decades when they are detected in the physician's office or on the operating table--usually without any recognition of the link. But even the immediate economic costs of food seem virtually hidden from the public which in the United States pays less than 10 percent of its income for food both inside and outside the home. Only recently have rises in food prices began to appear on the radar of the average food buyer in America; still, don't look for any food riots soon.

Not so with the rest of the world. According to The New York Times Indonesians spend half their income on food, Vietnamese spend 65 percent and Nigerians spend 73 percent. A doubling of grain prices in the last three years is not something that can easily be shrugged off by families living in these and so many other countries. Unrest related to food prices has already been seen in Haiti, Burkina Faso, Cameroon, Egypt, Indonesia, Ivory Coast, Mauritania, Mozambique and Senegal.

There are the usual suspects: demand for meat in places with huge and growing middle class populations such as India and China, drought in Australia (one of the four remaining major grain exporters in the world), and demand for biofuels made from food crops. But it is the pricey manufactured foodscape invented by wealthy countries that has helped to create what is fast becoming a food crisis in the rest of the world. It is the industrial mentality itself which regards food as if it were just another input into the industrial system. One obvious result is that we treat food and fuel now as if they were simply interchangeable. Another is that we have streamlined agricultural and food processes by employing the same just-in-time manufacturing principles used to make steel or plastics. The result has been a reduction of world cereal stocks that are expected to fall to 25-year lows this year. As of the end of 2007 we have a 75-day supply of grain and that is expected to fall to around 69 days by the end of this year.

Michael Boskin, chairman of the first President Bush's Council of Economic Advisers, is reputed to have said, "It doesn't make any difference whether a country makes potato chips or computer chips." At the time he was pilloried for having suggested such a thing when it was accepted wisdom that a high-tech economy was the desired goal. But Boskin may actually have been wrong for reasons of basic food security. A country held hostage to the food exports of another may find itself without needed food just at the time when supplies are shortest. Witness the banning of rice exports from Vietnam, Thailand, the Phillipines, Egypt and now India as rice prices have rocketed to new highs. In Argentina the government has attempted to keep domestic soybean and sunflower seed prices down by enacting huge new export tariffs that would effectively curtail exports of the crops. Farmers reacted by bringing the country to a halt.

Cereals are obviously not interchangeable with computer chips. Some 80 percent of all our calories come directly and indirectly (primarily in the form of meat and dairy products) from grain. People prefer to eat first and compute later, but only if there is time and money left over. No government or people seems to believe that strictly market forces ought to govern the price of staples. And, no one is actually willing to say in public that if you can outbid me for basic foodstuffs, then I have no right to complain even if it means my family and I starve.

It has been a truism from the beginning of civilization that cities require stocks of grain, surpluses that can last a year or even two to sustain them through drought or war. In the last two decades, the champions of the globalized trade system have turned that truism on its head and foolishly convinced governments and their leaders that food production and storage can be largely left to the marketplace.

All that is changing rather quickly. Governments are now temporizing as they try to address brewing revolts in the streets. At the World Bank there is talk of trying to raise yields over the long term. But that hardly matters to governments with hungry populations on their hands now. And the long-term yield raisers are assuming a growing supply of petrochemicals which are integral to our current farm productivity. Such a plan is called into question even by the most optimistic forecasts for oil supplies.

What then of the manufactured foodscape that has become such an important feature of North American life? It will likely succumb to the realities of food and the limits of the biosphere. There will be less manufacturing and more home preparation as the manufactured foodscape becomes too expensive to maintain. The limits we face in arable lands, in fossil fuels, and in the ability of the atmosphere to absorb greenhouse gasses will compel more people to grow and harvest some of the food they eat. These limits will compel us to eat less meat for no other reason than it will become prohibitively wasteful to feed valuable grain to livestock instead of eating it.

We will be forced to listen to the landscape once again and follow its dictates on how to raise food. And, we will be obliged to abandon much of the giant industrial food system that provides a freakish cartoon-like foodscape made up of "fun" foods, fast foods and frozen meals designed to cater to our most childish cornucopian fantasies.

Sunday, April 06, 2008

Flu conquers writer -- no post this week

I have been mostly horizontal for the past seven days with an astonishingly bad case of the flu. As a result, I've been unable to get any writing done. I expect to post again on Sunday, April 13.