Sunday, August 31, 2008

Oil Prices and the Mayflower Problem

My latest column on Scitizen entitled "Oil Prices and the Mayflower Problem" has now been posted. Here is the teaser:

Do oil prices really tell the market what it needs to know when it needs to know it?....Read more

What my congressman does (and does not) know about energy

It ain't what you don't know that gets you into trouble.
It's what you know for sure that just ain't so.

                                                             --Mark Twain

Last week I participated in an energy forum sponsored by a congressional candidate from my district. In preparation I thought it would be useful to understand the positions of his opponent, the incumbent, on energy issues. Fortunately, the incumbent had done a lengthy interview with our local National Public Radio station earlier in the summer.

I confess that my expectations about energy literacy among most people are quite low. And, I wouldn't expect most members of Congress to understand energy very well either unless they serve on committees that deal with energy issues. But my congressman, Fred Upton of Michigan, is the ranking Republican member on the Subcommittee on Energy and Air Quality. So, I expected that he would have a pretty good handle on basic information about energy, at least in the United States.

With pen and yellow pad in hand I clicked on the interview ready to take a few notes. On the first pass I thought perhaps Upton had just misspoken on some points. But as I listened again, I realized that he was confidently spouting obviously erroneous information. Here is a man who is central to energy policy in the United States speaking glibly on a broad range of energy issues who in at least two instances got important basic facts wrong and in other cases was either misinformed or misleading. If his understanding of energy issues is a proxy for those in Congress who are well-informed on energy issues, then it's no wonder federal energy policy is in the state it's in.

Here are two instances in which he was just plain wrong. He could have discovered the correct information with a few searches on the Internet and some simple calculations.

  • On oil consumption in the United States: "Our use here in the United States is about 10 million barrels a day."

    The Facts: Average daily consumption of total crude oil and petroleum products in the United States for June 2008 was 19,552,867 barrels per day. You can calculate this using numbers from U. S. Energy Information Administration (EIA), a part of the U. S. Department of Energy. (The math is 586,586,000 barrels divided by 30 days.) I would have accepted 19, 19.5, or 20 million as close enough for radio. But 10 million is so far off that I have to believe that Upton simply has the wrong information or made up a number. How can the go-to guy in the House of Representatives on energy for the Republicans not know this piece of basic information cold?

  • On exports to the United States from the Canadian tar sands: "We need to bring in oil from tar sands up in Canada. They're producing a million barrels a day, and yet, we stop it at the border. It can't come down."

    The Facts:
    Some 99 percent of all Canadian crude oil exports go to the United States. About 43 percent of all crude oil production in Canada comes from the tar sands. Considerable amounts of refined and upgraded products are also exported to the United States. This information is available on the website of the National Energy Board of Canada. Moreover, an extensive pipeline network links the Canadian petroleum infrastructure to the United States. The pipelines carry both crude oil and upgraded and refined petroleum products. To see how extensive these connections are, check out pipeline maps from the major pipeline companies: Enbridge, Kinder Morgan, and TransCanada. Note that an Enbridge pipeline reaches right up to Fort McMurray which is the epicenter of Canadian tar sands activity and connects it with a major crossborder pipeline.

    It stands to reason that some Canadian products from the oil sands are indeed flowing into the United States. But more broadly, the implication that there is some impediment to Canadian hydrocarbons crossing the U. S. border is complete nonsense. In addition, the Oil & Gas Journal reports extensive investments are currently being made in pipeline and refining capacity in both the United States and Canada to handle increased production from the tar sands. What could my congressman possibly mean when he says that oil from the tar sands is being stopped at the border?

    Perhaps even more troubling is his assumption that oil resources in other countries are subject to whatever call the United States wishes to make on them. What if the Canadians were to decide to export more of their oil to Asia? Or, what if they decided they needed more oil for domestic use as is occurring in many of the world's largest exporting countries? Would Upton suggest that we take it by force?

In other instances he appeared to be either misinformed or misleading. I'm inclined to think that he believes what he says, and that means that he is not being cynical, but truly doesn't understand energy issues.

  • On wind power for Michigan: "Wind and solar I'm all for. But, you know, you're not going to reserve the whole state of Missouri to build these wind farms."

    The Facts: It's not clear why Upton believes Michigan would have to import wind energy from Missouri when Michigan has some of the best wind resources in the world. According a wind map of the state prepared by the National Renewable Energy Laboratory, Michigan has huge Class 5 (excellent) and Class 6 (outstanding) wind resources along its extensive shorelines. A draft report prepared for the Michigan Public Service Commission shows estimates from the National Renewable Energy Laboratory of 16.5 gigawatts of onshore wind capacity and almost 45 gigawatts of offshore capacity. The entire state of Michigan currently has generating capacity of about 30 gigawatts. A study from the Michigan Alternative and Renewable Energy Center suggests that in the central part of Lake Michigan the wind resource could be 182 gigawatts, six times the state's current generating capacity. With these resources Michigan could become a substantial power exporter.

    Upton is right when he says the national grid would have to be upgraded and expanded to accommodate transfer of power from exporters of wind-generated electricity to those needing the power. But his remark about Missouri makes it clear that he doesn't understand the wind potential of his own state nor that wind is a highly decentralized power source that can be tapped on much smaller scales than the huge wind farms he implies are necessary.

  • On oil shale: "The reserves in Colorado, Utah and Wyoming exceed a trillion barrels of what's expected down there. And, that's more than what Saudi Arabia has."


  • The Facts: The trillion barrels number that Upton cites comes from estimates of the total resource. But for economic and technical reasons only a fraction of the total resource could ever be exploited. The U. S. Energy Information Administration (EIA) believes that the amount of liquid fuel available from oil shale in the United States is closer 400 billion barrels. What Upton doesn't know or doesn't say is that oil shale, in fact, contains no oil. It is rock impregnated with kerogen, a waxy substance that is better characterized as immature oil. If the rock had been buried sufficiently far underground, higher temperatures and pressures might have cooked it until it had become oil or natural gas.

    What this means is that the "cooking" has to be done by us humans. That requires huge amounts of energy which have to come from somewhere. One of the big problems with oil shale is that it may end up taking more energy to get it out of the ground and transform it than it yields, even with new technologies. So, the question is, why not use the energy that would be used to process oil shale in our vehicles, homes and industries directly instead? We'd actually save energy by doing so as long as it takes more energy to extract and process kerogen from shale.

    Finally, the statement that there is more oil in America's oil shale than under Saudi Arabia is misleading. The absolute size of the total resource may be larger, but oil from oil shale must be manufactured using unproven, energy-intensive processes. In fact, there are no commercial oil shale processing plants in operation. Saudi oil, which is some of the very highest quality in the world, is simply pumped out of the ground at the rate of 10 million barrels a day ready to be refined into the products we want. In fact, because of the difficulties related to processing oil shale, the EIA is projecting that even in the best case scenario, oil shale in the United States will yield only about 140,000 barrels of oil products a day by 2030. That represents just 0.6 percent of the total expected consumption of liquid fuels in that year of 22.8 million barrels per day for the entire United States.

    Perhaps an analogy will help illustrate the problem. If you were to receive an inheritance of $1 million with the stipulation that you could only draw out $100 a week, you might be a millionaire, but you would never be able to live like one. It is doubtful that the huge inheritance of oil shale the United States contains will ever produce oil at a rate that will allow Americans to live like Saudi princes or even produce it at more than a tiny fraction of the rate that the average Saudi or American citizen currently requires.

  • On greenhouse gas emissions related to nuclear power: "They have no emissions. No greenhouse gas emissions at all."

    The Facts: Upton might claim that he meant only the operation of the reactor causes no emissions. But he keeps repeating this claim throughout the interview. Of course, uranium mining and processing are exceedingly energy intensive with much of that energy coming from oil, particularly diesel. In addition, the construction of a nuclear power plant releases large amounts of carbon dioxide, especially from the enormous volumes of concrete used in making the containment building and other facilities. It's true that the emissions are considerably less than those of fossil fuel plants over their lifetime, but the emissions are not zero. Solar- and wind-generated electricity has carbon emissions much closer to zero; but even solar panels and windmills must currently be manufactured, deployed and serviced using some fossil fuel energy.

  • On the French nuclear program: "The French, 90 percent of their power comes from nuclear power."

    The Facts: Nuclear advocates often tout the French nuclear program as a big success story. It is true that the French get most of their electricity from nuclear power--78 percent, not the 90 percent claimed by Upton in his interview. And, it is true that the French have not experienced headline-grabbing accidents such as those that occurred at Three-Mile Island and Chernobyl. What Upton doesn't say is that French civilian nuclear power has been entirely controlled by the French government. Electricity generation in France has long been a public trust. And, even though the country's government electricity monopoly, √Člectricit√© de France, has recently floated shares to the public, the government still retains 85 percent ownership.

    Part of the success of the French nuclear program can be attributed to the fact that the French government chose what it believed to be the safest reactor design available, deployed it throughout the country, and was able to apply lessons learned in operating that design to the safe and efficient operation of its entire reactor fleet. In the United States, a public-private partnership in the nuclear industry spawned many reactor designs with differing operational trajectories which meant that lessons and insights gained from one type of reactor were difficult to apply to other reactor designs. The French nuclear power industry has been operated on behalf of the citizens of France, while the American nuclear power industry has been operated on behalf of its shareholders. Theoretically, the privately owned nuclear utilities should have outperformed their government-owned equivalents. In practice, they have not.

    Would that Upton's newfound love for all things French extended to another government-run success: the French system of universal health care which the World Health Organization rated as the best in the world in its last assessment of health systems. But that's another story.

Sunday, August 24, 2008

Prof. Harold Hill's America

Drill!
    --Homemade yardsign

Optimism sells. It is one of the staples of American life. And, it makes it difficult to tell Americans bad news.

I was reminded of this on a recent trip to Canada for a week of theater performances. Two of the performances were American musicals and one of those musicals was The Music Man written in 1957. For those who haven't seen it, a professional confidence man arrives in the mythical town of River City, Iowa in 1912 with a plan to separate its citizens from their money by convincing them that they need a boys' band. The con man, going by the name of Prof. Harold Hill, says that the band will provide a wholesome alternative to the new pool table at the local billiard parlor, a pool table that is leading to the degradation of River City's youth. Hill plans to make his exit after the instruments and uniforms arrive and he collects his money.

But when the instruments arrive first, Hill has to contrive a reason for not conducting lessons for the children who will play in the band. He says he will have them use the "think method." They will just think about the melodies, and they will be able to play them.

Now we have the underlying pathology of American life. You can get something for nothing. You can learn without effort. Mere thinking, or perhaps more appropriately mere wishing, is a substitute for action or, in this case, practice.

The very odd part about The Music Man is that when the people of River City find out they've been swindled, they are convinced not to punish Hill by the only real intellectual in the town, Marian, the librarian. She suspected Hill from the beginning and then confirmed with a little research that he was a fake. So, why did she defend him? Because his optimistic salesmanship lifted people's spirits, especially that of Marian's young brother who is painfully shy, in part, because of his lisp. People came to feel better about themselves. Even Marian feels better.

This self-esteem training comes to us from 1912 via a 1950s musical. And, it ends like so much self-esteem training. Everyone feels better for a while, but no one actually becomes competent to do anything. The boys' band is a complete flop. Not surprisingly, no one can play a note.

Now, humans apparently have a peculiar evolutionary susceptibility to optimistic pronouncements. Nate Hagens wrote a piece on human motivation recently on The Oil Drum explaining that people attain a certain level of euphoria just from anticipating a reward. The chemicals which signal a reward begin to cascade through the brain before the reward even arrives.

Our fictional Harold Hill couldn't have known anything about brain chemistry, but he seemed to understand that optimism and pleasant promises sell. Of course, the Harold Hills of America have not disappeared. In the current presidential campaign, John McCain offers relief from high gasoline prices by exhorting that "we need to drill here and we need to drill now." He claims that this could lower gas prices "within a matter of months." As Harold Hill might have intoned, no one has to lift a finger. They just have to think about drilling here and drilling now, and gas prices will drop.

Many already know McCain's claims are false, and that the amount of new oil from offshore drilling, which is what McCain is talking about, would be small compared to our total consumption. The oil would arrive some 10 years from now and have a negligible affect on prices.

But so many euphoria-inducing chemicals are now flowing in the brains of America's low-information voters, that McCain's opponent, who at first resisted what he regarded as bad policy, has now agreed that some drilling offshore ought to be allowed as part of a comprehensive package of energy policy reforms. (For those unfamiliar with the term low-information voters, these are voters who barely pay attention to political campaigns and get most of their information about them from television and radio. Also, let me say here that Barack Obama's energy proposals, while better than McCain's in my view, fall woefully short of the crash programs I believe we need in energy efficiency, renewable energy and electrified transportation.)

Like River City's hapless mayor who warned the townspeople to be careful about Harold Hill, many newspapers have criticized McCain's claims including one that says his proposals amount to "an energy plan for suckers."

Despite the widespread criticism of McCain's claims about drilling, his proposal seems to have lifted him in the polls. Members of the peak oil movement take note! Gloomy Gusses have a hard time elevating dopamine levels in people. For the few who will listen, careful explanation and credible evidence will overcome those increased dopamine levels and provide appropriate perspective on these dubious claims. But when it comes to mass communication with millions who are barely paying attention, promises of relief will get the pleasure centers going even without anyone actually delivering that relief. And, if McCain gets elected, he might very well be forgiven when he can't deliver on his promise just as Harold Hill was. But, of course, McCain provided some uplift when people needed it. That will seem more important to many compared to his incompetence when it comes to energy policy.

The lesson is this: Those intent on spreading the truth about our oil predicament will need to study Harold Hill's techniques which are widely used by the likes of Daniel Yergin and other oil optimists. With brain chemistry working against you, it won't be easy to figure out how to counter them.

Sunday, August 17, 2008

Taking a short break--No post this week

I've just returned from a week in Canada and am now catching up. I expect to post again on Sunday, August 24.

Sunday, August 10, 2008

Does queueing theory explain oil's wild price swings?

To paraphrase Mark Twain, rumors of the oil bull market's demise have been greatly exaggerated. With crude oil down a mere $30 from its recent peak, many economists and financial analysts are proclaiming the end of the oil bull market. They seem to have forgotten that not too long ago the entire distance from zero to the oil price was only $30. While no one can predict the future of oil prices with certainty, there are explanations for the recent price decline consistent with an ongoing bull market.

First, let's summarize the arguments for the bears. The proximate causes of oil's pullback are said to be a slowing world economy, demand destruction and new supply. Certainly, there is some evidence of a slowing economy, and this very well might reduce demand for oil. Then, there is demand destruction. High prices force some users to cut back on consumption, and this also may have happened. Finally, there is new supply. Large finds now going into production are believed to be putting downward pressure on the price.

Trouble is, all of these explanations are as speculative as the oil market itself these days. Not until many months have passed will it be possible to ascertain whether and how much any of these factors are acting on the price today.

For those who are inclined to the view that the world is approaching peak oil production and therefore restricted supply is the key factor in soaring oil prices, Princeton geologist Kenneth Deffeyes offers a compelling explanation for wild price swings.

An acquaintance from years ago, Suzy Sachs, pointed out an additional consequence. As a systems engineer, she knew that queueing theory predicts that queues behave in a noisy and chaotic manner when demands approach the system capacity. In the grocery store, in the bank, or at the airport, queues tend to be unpredictably very long or very short. Instead of energy prices rising to a new stable level, wild price oscillations will result from short-term changes in demand. There will be a tendency, the first time that prices go down, to announce that the crisis is over and oil and gas are now cheap and abundant again.

The above explanation comes from 2003, so it is not an after-the-fact appraisal. Instead, queueing theory predicts this kind of price behavior in systems that are near 100 percent capacity. In the same way that lines for bank tellers can unexpectedly move from very short to very long, prices in markets can move quickly higher and then lower in very short intervals when the capacity in those markets is near the maximum.

It is largely accepted that there has been a very slim margin of spare oil production capacity worldwide for perhaps the last three years. In other words, the world's petroleum system is running close to 100 percent. This along with robust oil demand has almost certainly contributed to rising prices. But if queueing theory as applied to oil demand is correct, this same lack of spare capacity may also be responsible for sudden, jaw-dropping declines in the oil price as well. As users and speculators crowd together on the "buy" side of the market waiting to be serviced by the producers on the "sell" side of the market, they create a bottleneck. The surest way to get to the head of the line is to offer a higher price. That, of course, begins the bidding as each buyer weighs how important it is to gain access to oil immediately or at least to lock in a price at the current level. This is classic crowd psychology.

Naturally, the whole process can work in reverse. As everyone who wants to bid on oil gets satisfied by the sellers of it (or its derivative contracts), the line on the buy side dwindles. Now the sellers are a bit panicked and offer lower prices as the few buyers left wait to see who can offer the best price. The price moves quickly and wildly up and down, but the system remains near capacity.

It is no secret that small changes in supply or demand in the oil market can have outsized effects on prices. The key element in queueing theory which explains the wild price gyrations is the fact that buyers arrive randomly. If buyers of oil arrived on the scene at only regular, known intervals seeking predictable amounts of oil (or its derivative contracts), then the oil price curve over time would move smoothly and only languorously up and down. Or, if the spare capacity in the market were large, then sudden increases in demand could more easily be accommodated and prices would not be nearly as jumpy. But with spare capacity razor thin, when a large group of buyers shows up unexpectedly, the only short-term rationing mechanism is price.

Doug Noland, an analyst for David W. Tice & Associates who posts his commentary on the firm's Prudent Bear site, provides an analysis that parallels queueing theory, but also adds more detail. Noland believes that the oil and commodities price break is not really the commodities bubble bursting, but rather the burst of what he calls a bubble in the "leveraged speculating community." He is referring to large speculators in the form of banks, hedge funds and even well-financed individual investors who borrow huge sums of money for the purposes of speculation. Some borrow 80 percent or more of their funds. That means a move of 20 percent or even less against them can wipe out their capital.

Many of these leveraged players have been heavily invested in the commodities market. So, it is no wonder they headed for the exits en masse when prices started to decline. Of course, their rush to the exits only exacerbated the decline and then caused other frightened investors to follow suit. The same is true in reverse for the financial stocks which many of the leveraged players had been short. The spectacular rebound of the battered financial sector is due in large part to the unwinding of short positions held by these same players. They were forced to buy back the financial shares they had borrowed when a small bounce in financials threatened them with total annihilation. The bounce in prices began when the U. S. government and the Federal Reserve announced a rescue of America's two largest mortgage lenders, Fannie Mae and Freddie Mac. The sudden move upward in financial shares lured other investors into those shares which led to further rises. All of this came in the face of continuing horrific news for the financial sector, news which is now being dismissed as backward looking.

Noland expects a reversal of recent trends in the not-to-distant future. But if current trends go much further, the coming reversal, he believes, could produce a major market crisis.

In the longer run, little on the oil front has changed. In fact, little on the commodities front has changed. Demand for commodities remains robust and Asian economies which are fueling that demand growth continue to grow, though perhaps at a little slower rate. For metals and food crops, there is confidence that new mines and additional plantings will eventually result in a glut and bring prices back down to pre-bull market levels. And, while prices for both metals and food crops are down for the moment, a glut doesn't seem likely to materialize anytime soon.

But for oil the forecast of an eventual glut may be misplaced as we head into the peak oil era. Surely, prices will continue to fluctuate, probably wildly. But it seems doubtful with peak production likely within the next decade that a long-term glut will develop in oil unless the economies of the world collapse sending demand into the cellar or a miraculous substitute for oil is found and quickly deployed.

As is so often the case in markets, price makes the news rather than the other way around. Prices move and then an army of paid analysts and financial journalists create explanations for the move after the fact. The only sure explanation for a move up is that there are more buyers than sellers, and the only sure explanation for a move down is that there are more sellers than buyers. Queueing theory doesn't go much beyond this except to add system capacity to the equation.

Like so many other phenomena, price moves in the oil markets are often read to mean what people want them to mean. The fact that so many have opted for the most optimistic explanation for the sudden turnaround in prices is an indication of just how much the religion of neoclassical economics still permeates the market watchers. Price is supposed to fix all problems according to this religion.

However, it may soon be demonstrated that the map is not the territory. Price movements in the short run contain very little information of importance for long-term planning. To pay too close attention to every decline in the oil price would be the equivalent of halting construction on one's home every time the sun comes out believing that a new era of permanent sunshine and balmy weather obviates the need for shelter. It is just such thinking that has prevented us to date from deploying the vast amount renewable energy we'll be needing in the not-to-distant future.

Sunday, August 03, 2008

The problematic future of U. S. energy investment

Can the current financial system in America help us make the energy infrastructure investment we need for a transition away from fossil fuels?

First, let's look at how things are going right now. As investors have watched like deer in headlights while their stock portfolios melted down in recent months, the many flaws of America's peculiar form of cowboy capitalism have been revealed. Perhaps most telling is that we now know that the swashbuckling traders and bankers of America's new era financial system are not the rugged individualists they purported to be. Instead, they are pampered members of America's ruling teenager class who, having received no ethical guidance or discipline during the boom years, are now being coddled by regulators and bailed out by the country's central bank and the U. S. Treasury Department. All this comes after they have gambled away investors' money on what amounts to a Ponzi scheme in mortgages.

(Incidentally, none of them is being asked to give back the bonuses they earned during the boom years. They take the risks; somebody else gets the bill when things go bad.)

To add insult to injury, the public found out just recently that two of the biggest teenage Ponzi schemers are Fannie Mae and Freddie Mac, the country's two largest mortgage lenders whose names make them sound like a perfectly innocent young couple. While pretending to be freestanding independent organizations for many years, they have always been, it seems, wards of the state. Having been effectively nationalized via a promise from the U. S. Treasury to extend additional credit and buy equity in the firms if necessary, taxpayers may now pay for the crimes of both institutions.

This then is the American capitalist system that is supposed to allocate capital to the areas of highest return which are presumably the areas of highest need. But as we have seen, high returns can be manufactured--that is, for a time--and thus attract vast pools of capital to areas already suffering from a glut. So, what does this portend for the future of energy investment?

Let us think for a moment about where Americans have their savings, that is, the raw material for investment. Some $22 trillion is tied up in real estate (a figure which is now declining). Financial assets make up $44 trillion of which $12 trillion are in pension funds and $9.6 trillion are invested in mutual funds and directly in stocks. These are stupendous numbers, and one would think that America would have more than adequate savings to fund future energy investment.

Now let's look at the incentives for investing that money in something energy-related. Certainly, investors have been well-rewarded if they put their money in all manner of fossil fuel-related investments. Oil, natural gas and coal have all skyrocketed in price in this decade. Investors have also been rewarded if they picked the right wind and solar companies although funds which invest in alternative energy have not fared as well compared to fossil fuel investments. While the American Stock Exchange's Oil Index has vaulted more than 200 percent in the last five years, a sampling of alternative energy investment funds shows returns ranging from 50 percent to just under 100 percent.

Both industries' returns were dwarfed by that of major American coal names such as Peabody Coal and Arch Coal, and metallurgical coal producer Fording Canadian Coal Trust, which rang up 5-year returns (as of July 31 including dividends) of 876 percent, 468 percent and 1,294 percent respectively. (To see a comparison chart, click here.)

Of course, investments in these stocks and funds didn't necessarily put money directly into the companies themselves. That only happens during an initial public offering or private placement. But investor interest in stocks and mutual funds does provide a positive backdrop for those wanting to raise capital. Clearly, the most favorable backdrop has been for the fossil fuel industry.

This makes sense since 86 percent of the world's energy comes from fossil fuels. Since all fossil fuels deplete, it is imperative that new supplies be found and developed. But that, of course, doesn't help the United States or the world make a transition to a renewable energy economy. At least the profits of fossil fuel and alternative energy companies are not "manufactured" in the way they were for subprime mortgages. And, there is some hope that as the cost of fossil fuels rise, investment in alternatives will become even more attractive and profitable.

But this, of course, only deals with questions of supply. Two other important questions, demand and infrastructure, are largely outside the purview of the American financial system. True, high prices will to a certain extent ration demand. But existing public and private infrastructure puts lower limits on how much energy can be saved. And high prices alone do nothing in particular to facilitate a transition away from fossil fuels.

As for the public infrastructure, the construction and maintenance of roads, for example, on which so much of our fossil fuels are consumed, is as much of a political decision as an economic one. And, right now the political climate in the United States continues to favor more consumption of fossil fuels. Road building remains a priority over public transportation. The electrification of transport, which could significantly reduce oil use, is largely absent from funding priorities.

The key question about investment is how quickly it must be made to insure a smooth transition away from our fossil fuel energy system. There are those who believe the marketplace will mediate this transition by raising fossil fuel prices to a level that encourages investment in alternatives while reducing demand. To a certain extent this is already happening. But those market believers had better hope that Robert Hirsch, author of what is now commonly referred to as the Hirsch Report, is wrong about the lead time we need to make a transition away from oil-based liquid fuels. He suggests it will be necessary to launch a crash program for alternative liquid fuels 20 years prior to the worldwide peak in oil production to avoid economic disruptions. But the peak is looking much closer than that and right now there is no crash program even being mentioned in the halls of government or corporate power. The market believers must also hope that Hirsch is wrong that our experience with regional peaks in oil production is not a harbinger of what the world peak will look like, namely a sharp, unanticipated peak with a high decline rate. If Hirsch's fear proves correct, the most important market mechanism will be demand destruction for oil even as substitutes remain elusive.

So, what about government initiatives? Certainly, the U. S. government could provide much greater incentives for say, the installation of wind and solar. It could mandate net metering that is highly favorably to homeowners to encourage them to install wind and solar on their homes. And, it could greatly increase funding for public transit including an vast expansion of intercity rail. But all of this would have only a modest effect on the consumption of petroleum fuels unless transportation is electrified. For that we would need a wholesale transformation of our transportation infrastructure. This would likely mean much more public electrified transport rather than private automobile transportation.

But perhaps the most profitable use of government dollars would be to encourage large energy savings at home. Businesses react to energy prices quite a bit more easily than homeowners. Spending money up front makes sense to business owners when the payoff in energy efficiency also means a payoff in financial savings sufficient to fund the efficiency upgrades and create ongoing savings. But quite often homeowners who would like to make their homes more energy efficient simply can't get the needed upfront money. Modest energy efficiency measures may be affordable to many, but a so-called deep retrofit that can reduce energy use by two-thirds can cost $20,000 or more. A reduction of this magnitude would make a huge difference in energy demand since about one-fifth of all energy use in the United States is residential.

But instead of recognizing how precarious North American supplies of natural gas are, instead of acknowledging how close the peak in world oil production might be, and instead of making preparations for an energy transition away from fossil fuels, the financial institutions in the United States with the blessing and encouragement of federal authorities and their policies have spent the better part of the last decade bankrolling one of the largest suburban expansions in history. That wouldn't be so bad if we could now take the institutions we used to do that and turn them toward making our economy more energy efficient.

At some point in the past it might have been possible for say, Fannie Mae, the huge mortgage lender mentioned earlier, to administer a loan program in conjunction with utilities to do deep retrofits of America's homes. The lender might have tapped into the giant pool of private capital available by issuing guaranteed bonds that would pay for it. The loans themselves would have to be set at low rates and payable over a long period, perhaps through utility bills. As such they would require a modest government subsidy to bring the return up to market levels to attract investors. But doing this could have unleashed large amounts of capital looking for a safe, steady return and thereby allow even average investors to participate in an extremely important energy infrastructure project.

Instead, the gamblers at Fannie Mae have now nearly bankrupted it (which is what forced the government to acknowledge explicitly its backing of the company). Its sister organization Freddie Mac, the other huge mortgage lender is suffering the same hangover from a night at the mortgage casino and is also in no shape to embark on a new, ambitious program.

The U. S. federal government itself has been hobbled by tax cuts and expensive wars which have been financed by huge borrowings (much of it from abroad) that have almost doubled the national debt in that last eight years. Of course, the country and its leaders could decide that the tax cuts were unwise and that the defense budget ought to be slashed dramatically and money reallocated for an emergency energy program. But this seems highly unlikely no matter who controls the U. S. Congress or the presidency. Nor does it seem at all likely that lenders, especially foreign lenders, would, absent some showing of fiscal discipline, be willing to loan the government money for a major new initiative involving energy.

Meanwhile, back at the casino that now passes for the American financial system, average investors have little to say about where their money is invested. This is especially true if they don't manage their own retirement savings. But even if they do manage it, the choices they have are often limited. It is well-nigh impossible for amateur, part-time investors (which is what most Americans with savings are) to know which companies in the alternative energy race will be winners or to be able to invest in them if those potential winners are traded overseas. And, it would be imprudent of these investors not to diversify and especially not to include companies that benefit from the rise of fossil fuel prices, companies that are easy to identify and have a steady, mature base of business.

One thing that average investors can almost never do is invest in socially and economically wise infrastructure development such as the deep energy retrofits described above. There simply aren't institutions set up to make this possible.

So, what we are left with is a federal government fiscally unable to act in ways that respond effectively to the growing energy crisis (even if it now wanted to), a financial system under tremendous stress that is geared primarily to moving funds into investments that encourage further dependence on fossil fuels, and a public that collectively has enormous amounts of capital it cannot effectively move into areas that will reduce fossil fuel dependence or create an infrastructure that runs on renewable energy.

We have in essence a dysfunctional investment system, both public and private, that seems to be providing the equivalent of very expensive end-of-life care to the moribund fossil fuel economy without much consideration for what comes afterward.

The market fundamentalists will say, of course, that this will all sort itself. Just give it some time. But this sidesteps two key questions: How much time will it take to sort itself out and, more important, how much time do we have?