Some Economic Aspects of America's Energy Advantage
- January 28, 2014
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A Wall Street Journal analysis of global data has apparently claimed that the United States (U.S.) will soon surpass Russia as the largest (combined) producer of oil and natural gas in the world. Normally I would be sure to pass this information to my energy economics students the next time I teach that subject, but unfortunately an "analysis" originating with that source is possibly nonsense (or worse) if the subject is energy. Consider for example the following statement by one of their editors about how global energy should develop:
Yet, beyond our merits, the Lord has recently smiled on us in in the form of shale gas...Don't bet on Mr Medvedev. Bet on the crude logic of Russia's declining energy power, which Western policy should do everything possible to exploit, to deliver better behavior in Moscow.
This gobbledygook about logic and "better behavior in Moscow" is intended to make fools of the readers of a famous U.S. newspaper. Note in particular the expression "Russia's declining energy power", although the truth is that Russia's "energy power" may eventually display both an absolute and relative increase to other energy-rich countries. One of the reasons why this could - and likely will - take place is that Russia is the largest country in the world, and a sizable fraction of its geology is similar to that of North America, which in turn means that Mr Medvedev and his friends are in position to enjoy a shale oil and gas bonanza of sorts. Another reason is an expansion of the trade taking place between Russia and the dynamic Chinese economy.
There are copious lies and misunderstandings in circulation about the availability of energy, especially in out-of-the-way locations, and our political masters may need some help from yours truly in their evaluation of the situation. Like it or not, the U.S. is or will be in competition with many countries, and to paraphrase a famous chess grand-master, the energy mistakes are all on the board, just waiting to be made.
In one of his last articles, the late editor of the Energy Tribune concluded that the U.S. government should leave the working of energy markets to the private sector, and should not continue with its present practice of interfering with the export of natural gas and crude oil. As far as I am concerned, Professor Economides was wrong to approve of exporting any part of America's energy advantage, because energy assets like oil, gas and coal are very different from the kind of items discussed in the paragraphs on 'free trade' in your favorite international trade textbooks. In addition, the majority of your favorite economics teachers know as little about the unique attributes of those invaluable commodities as they do about brain surgery.
One of the crank arguments in favor of increased American energy exports is that oil and gas reserves have become virtually unlimited in and around America, primarily because of the 'shale revolution'. For instance, I was not allowed to continue publishing on the site OilPrice.Com because I was unable to believe that there is more oil on-shore and off-shore the U.S. than in the entire remainder of the world, as claimed by a gentleman who also referred to President Obama as a liar because he rejected that goofy claim. My interference in this matter caused the editor of OilPrice.com to refer to my humble work as "garbage", which was not insulting, but instead resulted in the thrill of remembrance for me, because when I was expelled from Infantry Leadership School at Fort Ord (California), I spent a pleasant three or four months as a crew member on one of the garbage trucks on that post, which in turn allowed me to enjoy many off-duty hours on or near the beach in wonderful Carmel.
There are several ways to attack the present subject, and one of them is to proceed with the aid of some fairly complicated mathematics, which I mistakenly did many years ago when I taught from the book by I.F. Pearce (1970). Of course, the paradox is that where this topic is concerned, heavy-duty mathematics can confuse rather than clarify. This is why physicists like the former and present U.S. Energy Secretaries should be kept as far away as possible from the Washington decision-making levers. The new Secretary, Dr Moniz, claims that the time has come to allow America's energy advantage to be put on the market. ''Those restrictions on exports were born, as was the Department of Energy and the Strategic Petroleum Reserve, from oil disruptions,'' he recently said. ''Lots of energy issues deserve new analysis and examination in the context of what is now an energy world that is no longer like the 1970s.''
How would he know? I remember having to put a Catalan grandee with an advanced degree from MIT in his place when he displayed a remarkable ignorance of what nuclear energy had meant for countries like Sweden and Japan, and I particularly remember that gentleman citing some bizarre opinions about nuclear that he claimed originated with Dr Moniz. Once again I was forced to point out that the construction of the Swedish nuclear sector - 12 reactors is just under 14 years - provided Sweden with an electricity price that was almost the lowest in the world, and the correct utilization of this relatively inexpensive energy resulted in an enormous boost for the Swedish economy.
The bad news arrived when ignorant claims about the benefits from electricity exports were disseminated by lowbrow academics, which led to politicians and voters tolerating a sub-optimal configuration of the Swedish electric sector. The ulterior result of that asinine choice was a substantial financial gain for a small group of Swedish insiders, as well as varying degrees of economic discomfort for many households and small businesses.
I no longer consider the ultimate outcome in Japan of the suggested abandoning of nuclear and the increased import of natural gas, because I happen to believe that around the middle of this century, Japan will be one of the most nuclear intensive countries in the world. This has to do with culture, and the well-known preference of Japanese voters for a high rather than a modest standard of living, where the former is easily attainable for a country (like Japan) with a superior technology at its disposal, while the latter is a near certainty if nuclear is dumped.
Germany, however, may only suffer a trivial income and welfare loss if - as expected by Ms Merkel and her foot soldiers - Sweden, Norway, Belgium and Holland are dumb enough to provide Germany with large and increasing imports of electricity, since under no circumstances can solar and wind carry the present German energy load.
There is a simple logic in play here. Getting Japan on the come-back trail from the war primarily involved optimal decisions about the structure of their energy sector, and the same applies to the U.S. and every other country on the face of the earth. An oil company executive in the U.S. said that ''I think we should keep national security first, but we should export oil just like anything else.'' Unfortunately oil is not like "anything else", and in addition it may be true that oil and national security are inseparable, so why take any chances. Instead, as people like U.S. Senator Edward Markey implied, American oil should be kept in America to benefit American consumers, and as he neither implied nor said, anybody else who wants or needs oil can get it from someplace else or learn to do without.
Banks, Ferdinand E. (2014). Energy and Economic Theory. Singapore, London and New York: World Scientific.
Pearce, Ivor F. (1970). International Trade. London, Bombay and Melbourne: Macmillan & Co.
Neumann, John von, and Oscar Morgenstern. (1944). Theory of Games and Economic Behavior. Princeton, New Jersey: Princeton University Press