This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.
Andrew Clancy says:
How can our economy recover from recession if the price of oil continues to climb? In 2007 we entered what appears to be a perfect storm of out-of-control commodity prices, cost-push inflation, and the simultaneous collapse of commercial and consumer credit. The recession declared by the NBER officially began in December 2007, but it was preceded by a year-long period of rising commodity prices.
I watched the price of oil rise from $60 a barrel in the beginning of 2007 to over $140 in July 2008. At the same time I saw the effects of the credit crisis. The Bear Stearns collapse in March. Lehman Brothers in September. Both companies failed because investors lost confidence in their ability to meet short and long-term debt obligations. This happened, in large part, because they invested in risky credit derivative products linked to the sub-prime credit market.
The price of oil continued to rise as the sub-prime mess unfolded. Demand from developing nations as well as speculation on higher prices contributed to the increase. I suspect the declining dollar didn't help either. Oil ultimately reached about $147 per barrel before crashing to as low as $35.
So what happens now? In the midst of our economic recovery from the "financial crisis", oil has steadily climbed from around $35 per barrel in January to over $70 today. I remember $4 per gallon gasoline in 2008. I remember how consumers cut back their spending and how the price of just about everything rose in response to the higher energy prices. At the time oil was approaching $80-$90 per barrel there was talk of stagflation. I see gasoline prices inching up again. I know that housing, credit and employment issues have left consumers hurting. I see increasing demand for raw materials, especially from China. I see the world population increasing and I know that will lead to an increase in demand for commodities. I'd love to think that we (government) could just spend our way out of the mess we're in, but that may not be enough.
What do we do with a failed energy market? We've ignored the issue for so long that, at the very least, the solution(s) will be both difficult and expensive. Maybe government incentives for private industry to develop alternative energy would be a good, albeit expensive, start. Maybe nuclear fuel will make a comeback. Perhaps we can make a dent by recycling more, "buy local" programs, higher fuel efficiency standards, regulating corporate negative externalities, a resurgence of public transportation, etc. I'm not an expert, but my sense is that these things are not enough. If peak oil is a reality (Dr. King Hubbert predicted peak oil now [pdf]), then the rise in the price of oil is inevitable. Alternatives will take dozens of years to develop and implement, and we will suffer the economic, social and political consequences in the mean time. Maybe government spending on a "green revolution" helps us get out from under this mess, or maybe that's not enough, and rising energy prices throw us right back in to recession.
Bottom Line: There are social costs associated with the use of fossil fuels and for not developing alternatives. Many of the costs are known, but many are not. However they are ultimately quantified, the costs are compounding with time. The longer you ignore a problem, the worse it gets.
7 comments:
Very interesting and complex topic. You laid out parts of the story very well.
One difficulty is the discount rate on future disasters or potential disasters. The discount rate by your average human appears to be 100%--If the disaster is not affecting me today, I will not worry about it until it affects me. This high discount rate makes it hard to get long term things accomplished.
For Congressmen, the discount rate is low for about a month when they are 9 months into their term and start to understand the problem and then goes to 100% when they have to start to focus on getting reelected.
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Thanks
Change one period to a long dash or a colon, and you'd rate 4.0! (You have two fragments in paragraph three). Otherwise, an astute observation and commentary of the causes of the downturn and effects of our dependence on fossil fuels. Now, graduate and solve the world's problems!
Andrew is ready to write for any major newspaper in the US (and probably in the EU). However aphorisms and cliches are not substitutes for analysis, even if populism is gaining support in the US and sells newspapers, books, and magazines.
Let's just look at the second sentence, "perfect storm", "out-of-control" and "cost-push inflation" are all populist terms with little analytical value. Addressing "cost-push inflation", this I believe is a Keynesian term and is quite at odds with Milton Freidman's view that, "Inflations is, everywhere and always, a monetary phenomenom." Freidman devotees, please excuse me if the quote is not exactly correct.
Not only did the Federal Reserve's easy money policies fuel a dramatic increase in housing prices, it also fueled an increase in commodity prices (and stock prices). When additional money is injectected into the economy, it is not always manifested in consumer price increases.
Bottom Line: Journalists often have little training in economics so we should not learn our economics from popular journalists.
Thank you all for the constructive comments.
Eric - Good point. If representatives felt more public pressure to resolve the energy issue they might be less inclined to “discount” it. I think the average person is generally unaware, doesn’t have time or energy to deal with it, doesn’t believe they have the power to effect change, doesn’t believe it’s an issue at all, or some combination thereof. I’ve always thought education is key in a democracy and this is a good example of why. Part of why I’m studying economics is so that I can learn how to approach this and similar issues given the realities of the public, the political “system” and life in general. This is a big, complicated, important and at times overwhelming issue, but that’s why I’m interested.
FMF - lol. That’s been pointed out to me before, but the fragments were by design. I figure it’s OK to be somewhat informal on a blog posting. I’ll keep that in mind though. If it turns out that they annoy enough people I’ll reconsider. Thanks.
Jay - I think your point is a good one and I expect my analytical skills to improve as I move forward. Keep in mind, though, that I am neither a journalist nor an economist! I’m just a student studying environmental economics & policy. You make a good point about popular journalism/journalists that I happen to agree with, and I hope you write “letters to the editor” to help keep those unruly journalists in check.
I truly appreciate the feedback so far and want to encourage anyone interested to send their thoughts - pro or con.
Andrew
Andrew,
Thanks for being so good natured in accepting my comments. In retrospect my comments did seem a little harsh. Yes, I should have remined myself that as an Econ 101 student you are just begining to learn how to do analysis. In my humble opinion you have an outstanding teacher, much better than the Econ 101 teacher I had. I'm glad that you understand my point.
Bottomine: Saying things that a lot of people agree with does not make you right.
Duh, the whole point of Green Power in California is to embargo cheap coal and hydropower so that the price of oil, gas, and renewables can rise without competition. It's called INFLATION. And it's not cost-push but Public Policy Push Inflation.
After deregulation and price caps failed, the 2001
California Energy Crisis was resolved by folding $42 billion - of stranded assets on mothballed polluting power plants to meet EPA clean air standards - into a general obligation bond to be paid off by overmarket long-term electricity contracts due to expire in 2012.
Cal's Green Power law not coincidentally kicks in on 2012 to capture the overmarket premium in those electricity contracts for green power. But those overmarket prices can't be "sustained" if cheap coal and hydropower pull the prices down. Hence, under Cal's Green Power Law coal and hydro are banned.
Prop 23 to stop Green Power in California to delay Green Power Law was just shot down at the polls and backed by hedge fund manager for CalPERS which is heavily invested in dirty coal, oil, gas and nukes in Texas energy companies. Once Cal's Green Power Law kicks in CalPERS stands to reap a windfall in energy stocks to bail out its ailing pension fund.
Go back to school and learn about Enron and its political-capitalist model -- now ripped off by California to bail itself out of budget problems. Cash strapped cities and counties are eagerly awaiting higher electricity prices to siphon off 10% of everyone's electricity bills via Utility User Taxes into their deficit General Funds to pay for salaries and pensions a la City of Bell.
There is no environmental benefit to wind and solar plants in California which are located in remote areas where they don't improve air quality in urban air traps. Moreover, backup power has to be kept spinning in conventional power plants because the wind doesn't blow or sun shine when you want it to. Much of California's electricity comes from imported power anyway which doesn't pollute California's cities.
Wind power doesn't work very well unless it is regionalized so that if no wind farms are generating power for L.A. then maybe a wind farm in Oregon is and those electrons can be shipped to L.A. via the Pacific Intertie. The Obama Admin. has now called on FERC to regionalize (i.e., socialize) the western energy grid. But that would involve the surrounding states to California being able to capture the over-market prices of the California Cartel to build out Green transmission lines in their states. If FERC regionalizes the grid this may pull the plug on California's plans to inflate electricity prices to bail themselves out of their financial problems.
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