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All the Wrong Moves on Energy Markets
In a world of sane energy policy, the following three precepts would take pride of place: (1) the forces of supply and demand would allocate scarce energy resources to their best possible use; (2) constant competitive pressures should lead energy suppliers to reduce their costs of extraction, refinement, and sales, just as it should lead purchasers to economize on the use of fuels; and (3) a set of careful taxes and restrictions should be imposed proportionate to measurable externalities, and only where the benefits from government imposition exceeded the costs of running the regulatory system. The combination of market and regulatory measures is not perfect, but it should lead to steady improvements, as the price system should prove resilient enough to absorb the full range of exogenous shocks, whether from natural events like storms and volcanoes or from political sources like the stress of the Russian invasion of Ukraine.
By every measure, the energy market is fraught with vulnerabilities, virtually all of which stem from high levels of government interference in the production, distribution, and sale of goods. The source of the distress is the unannounced, but readily apparent, decision of the Biden administration to dethrone fossil fuels from their central position in energy markets. There is no single tool used to achieve this end, and certainly no explicit acknowledgment of the overall agenda. But the dire consequences of these policy changes become more evident by the day. Multiple reports point to systematic shortages in diesel fuel nationally, but particularly in the Northeast, where refining capacity is down by half from 2009. The national diesel fuel shortage will start this summer and continue indefinitely. Right now, the electricity industry also faces planned and unplanned blackouts because of a decline in energy sources from nuclear and coal, which is placing excessive dependence on unreliable wind and solar sources. Gasoline prices have already spiked to record levels, most recently at $4.43 per gallon and climbing, driving a core inflation rate over 6 percent, while the energy inflation rate remains over 30 percent per year.
In the face of this energy crisis, the one imperative is to increase the supply of energy to both meet the post-COVID jump in demand and fill the supply gap left by the much-needed strategic effort to shut down Russian natural gas sales to the West. However, the Biden administration has not taken any steps to bring more US energy online in the short run.
One striking development was the administration’s recent announcement that it had canceled the proposed oil and gas leases in excess of one million acres in the Cook Inlet in Alaska and in the Gulf of Mexico “[d]ue to a lack of industry interest in leasing” these potential sites. This lame excuse is too true, but for all the wrong reasons. One might ask the Biden team: why does the entire industry have no interest in leasing new sites when high prices signal robust demand?
The explanation is that the successful bidder will face a nonstop set of legal challenges from environmental groups and a series of unidentified obstructionist actions from the Biden administration reflecting its hostility to fossil fuels. This hostility has been evident ever since the administration posited a set of climate change objections to fossil fuels when it nixed the Keystone XL pipeline on its first day in office. Yet, at the same time that these oil and gas leases went begging, the Biden administration celebrated the successful leasing of new properties for wind energy toward its “goal of deploying 30 gigawatts of offshore wind energy capacity by 2030.” It is not difficult to connect the dots. Private firms know that it pays to invest only in energy sources that have government support, and to shy away from those projects that do not.
At this point, the administration does have its own plan to increase fossil fuel supplies, which is to release one million barrels per day from the nation’s reserve of energy sources, without consulting our international partners. But this Band-Aid approach does not generate any new energy supplies, and it dips into reserves that were intended for short-term emergencies when it is not possible to gear up production. This unwise approach plays into the hands of people like John Kerry, who thinks that “the climate crisis cannot take a backseat to short-term fossil fuel growth while the world figures out the energy crunch.” That is no excuse for many government initiatives, including the misconceived mandatory disclosure program of the Securities and Exchange Commission for climate-related investments.
Other actions taken on the energy front by the Biden administration are every bit as destructive. The administration and its allies think that the key need under these circumstances is to rein in what misguided pundits like Robert Reich call the “staggering profits” made by large oil companies in the face of current global shortages of energy, and thus this coalition eyes the passage of some windfall-profit tax on oil and gas. The current proposal of Senator Sheldon Whitehouse (D-RI) and Representative Ro Khanna (D-CA) would strip away from producers a substantial portion of their gains by imposing a tax of 50 percent on any profits that are over a $66 baseline, equal to the average price for a barrel of oil in the 2015–19 base period. This tax would apply even to companies that have suffered taxable losses during this period, and thus would operate as an excise tax whose only consequence could be to induce the targeted firms to cut back on their production, thereby exacerbating the current malaise.
One equally unwise possibility is the Democratic proposal to prohibit an increase in prices whenever the president (currently Biden) declares that there is an energy shortage. People who advocate for such a proposal have short memories of the long queues that developed throughout the United States when then-president Richard Nixon put caps on oil and gas prices. The price caps generated long lines at the pumps while benefiting foreign producers who faced less new entry from the United States.
The illusion behind both proposals is that somehow the oil and gas companies have (in a deconcentrated industry), the power to dictate prices. This theory purports to explain the current price increases, but a quick look at this Bloomberg graph shows that it cannot explain the equally precipitous declines:
The only way to stop the excessive prices is to increase fuel supplies in global and domestic markets, as these political efforts to get even with alleged price gougers will only prolong the crisis. Unfortunately, led by Chuck Schumer and Nancy Pelosi, the Democrats are instead determined to take the wrong way out—all because they refuse to expand supply to meet rising demand.
In addition to the misconception that fossil fuel companies have the power to control prices, a second flawed justification is that major interventions, which foreclose the option of increasing supply, are needed to control harmful environmental externalities. There are two elementary propositions at play. First, that it is necessary to take into account the substantial externalities that arise when solar panels chew up a large portion of the landscape. Solar generation will require, by one estimate, some 8,800 square miles of land to reach the Biden administration’s goal of deriving some 40 percent from solar sources by 2035. Second, that those losses are just a down payment on other externalities that arise from solar, such as having to mine for exotic rare earths on one end and to dispose of used facilities on the other. Wind presents a similar story, where the dead birds, the noise levels, the visual blight, along with the high costs of fabrication, construction, and decommissioning must also be taken into account. Shockingly, there is no mention of these costs in any of the Biden administration documents.
Ironically, the same can be said of the administration’s near-obsessive concern with the effects of climate change, because these are largely ignored as well. There is rarely any mention of the positive effects of climate change, for the rise in carbon dioxide levels is associated with an increase in global greening, which makes extremes in temperature less likely. Nor is there any discussion of exactly how the measures now in place will reduce total emissions, much less the effect that this reduction will have on overall global temperatures, given that the Chinese have decided to expand their reliance on clean coal. Nor are the voluntary efforts by American firms to address climate change given much weight. Instead, there are just statements that since this is the sixth-warmest year globally, the doom must be greater than ever, even though the plateau at current temperatures is not likely to produce major catastrophes. Once again, there are wild gyrations in annual losses from natural catastrophes, which suggests that smallish annual changes in carbon dioxide levels cannot account for the variation.
A coherent energy policy cannot merely posit huge losses from climate change in some indefinite future, but instead should seek to estimate how the Biden administration policies will fare when the full range of effects from all sources is considered. We know that the market losses from shunning fossil fuels are enormous. What evidence is there that net climate change loss justifies those losses? The Biden administration won’t say.
© 2022 by the Board of Trustees of Leland Stanford Junior University.Published in Energy, Law
Have we figured out our government doesn’t like us yet? Read down through the feed and count the ways they prove it every day.
No, they’ve been quite explicit about it. Just listen to Granholm’s excuses. This is deliberate pain at the pump as we transition to green energy.
The Biden administration is the enemy of the people and must be removed from power immediately.
And anyone still parroting the AGW line is a rube or in on the take.
Right off the bat, Granholm blames Putin — hoping you won’t notice that gas prices went way, way up long before Putin invaded Ukraine. She’s also pre-blaming the EU and China.
And then she repeats her statement that this is all about accelerating the transition to electric vehicles.
It’s nonsense riding a pancake.
You’re being cruel to innocent pancakes.
Even if it were a good idea to transition away from fossil fuels, the US is two decades away, at least, from being able to build out the electric generation, transmission, and distribution infrastructure to support the administration’s targeted goals to move to electric vehicles.
That won’t happen. I work in the utility industry. There’s absolutely no way to get enough qualified people to do long-planned and active infrastructure investments (linemen don’t grow on trees) that are already in flight, much less a wholesale change in the industry, nationwide, all of which operate under different regulatory structures and geographical distributions.
These idiots in the WH are only in charge of their lips, not reality. Keep talking, boneheads. You’re all idiots, and we all know it. Those of us living in the real world, anyway.
I’ll go farther: Those idiots don’t care about the harm they cause. Millions could starve to death and they would not give up their delusions. They’re like the high speed rail fetishists who refuse to look at–much less admit–evidence that their dreams are dope dreams; they want their trains and damn the consequences. Or the BLM /CRT zealots who refuse to face harsh facts. Or any of numerous other leftist delusions.
So has Richard called for Biden to resign yet? I don’t think January 2017 had ended and he was calling for Trump’s resignation. That wasn’t based on anything substantive.
President Biden is anti American. There’s a market for X. X will be produced at a profit to meet the demand. You don’t have to be super patriotic to prefer that the profits are earned by American companies instead of foreign companies.
But he’s not looking to Canada or Mexico. He’s literally begging our enemies in Iran and Venezuela and Saudi Arabia. What has he offered these tyrant-run kleptocracies to increase production?
Price controls are a child’s response to the situation. Are non American producers suffering while American companies are swimming in cash? Or do companies dealing in commodities with inelastic demand tend to always prosper during global shortages?
The power to regulate is a serious responsibility that leads to serious corruption all around the world. The US regulatory apparatus seems increasingly more interested in punishing its charges than protecting the interests of ordinary Americans.
Fundamentally transforming America is a bad idea.
You mean @richardepstein the post author?
Only for Americans. And what do WE matter to them, anyway?
Yeah ke, I’d say the average American is experiencing a decline in standard of living due directly to Brandon policy. He knows it, in fact he says he can taste it. But if this was accidental or unintended, we’d have seen a course correction by now. He is deliberately, expressly anti-American.
Oh wait, Puuuuuuuutin!
Millions dying is a feature for a lot of the Lefties. They are Gaia worshipers and Malthusians that thing humans are a plague upon the planet.
Another thing the Dems do that you will never see in the headlines, is that they create regulatory uncertainty. Nobody is going to invest $2B to build coal powered generation that 30 years to recover your investment, when the next Dem in office can willy-nilly shut it down. Who knows how many plants won’t be built, because of the regulatory risk. How many pipelines won’t be planned, because it just isn’t worth the hassle. The Dems have also built a legal framework that allows eco-commies to sue any project into submission.
Electric utilities companies are a disaster too. I don’t know if they are magnets for fools and/or eco-Commies, but they spend money poorly. We heard last week that some nuclear power plant being built by some Georgia utilities, is expect to cost $34 B. That is an insane amount of money. It is about the same amount that China spent on the 3 Gorges dam, which generates 10 times the electricity. I think it is the most expensive construction project ever in the USA that does not orbit the earth (ISS) or claim to be a high-speed train.
One thing that might help a lot with such foolishness, is for places that do build such project to refuse service to any state that opposes such facilities and refuses to build their own. Let California be dark, hungry, and cold. Serves ’em right.
More generally, they are utopians: They love their theories far more than they love people (if at all). And all their theories are simplistic fantasies, but when the facts do not conform to what the theories predict, they demand that the world (and people!) be made to conform to the theories.
The other side of the coin is that these theories are convenient tools for seizing power and wealth. (The only sorts of theories that the left likes.)
Biden isn’t calling the shots – those that remain invisible are. It is appalling that no one on either side of the aisle is shouting how this administration’s policies, energy and otherwise, are destroying us from within. These manufactured crises, one after another that affect each other (like energy affects supply chain), are bringing tremendous hardships, and this is AFTER all the lockdowns.
Why aren’t our elected officials (find one) doing anything to stand against the WEF’s Klaus Schwab’s plans to push people into a corner and accept their un-elected fake-utopian insane new rules???
First of all you can tell they don’t care about AGW at all because they have excluded the only non-carbon base load power generation option, i.e. nuclear, altogether. Second you can tell they have no concept what so ever of how things work in the real world because they have engineered a diesel shortage. Everything you eat, buy, or consume in any way was either produced with or traveled to you in a vehicle that runs on diesel. As far as I know there aren’t a lot of electric big rig trucks. There are no all electric container ships. I don’t believe their are any electric combines or other modern farming equipment. The shortage of diesel will immiserate a vast portion of Americans and cause further economic decline in this country. Thirdly every one in the administration touts electric vehicles; however, because they can’t engage in second order thinking, no one can tell us how that is going to work. Our electric grid can’t produce enough power reliable for current usage in some areas. How is it going to charge a 20x increase in electric cars? Especially as we transition to less energy dense fuels. Apparently every square foot of land in the US is going to need to have either a wind turbine or a solar panel on it.
The Democrat party is the Party Of Scarcity™
Biden’s only buying votes with this garbage – if your product is based on a commodity, and that commodity’s price goes up, that just passes through to the customer. Margin % doesn’t change (or change much) because commodity prices rise.
Why doesn’t Biden start an investigation into restaurant gouging? Their prices have gone up, way up. Is Big Restaurant profiting off hapless Americans? JOE decides!
They really think we’re all monkeys, screeching at the obelisk.
Yes, but I don’t think he reads the comments.
He doesn’t even post. Somebody does that for him — unless that has changed.
If anybody thinks that the left’s plans are supposed to do what they say; they’re still buying half the lie. A leftist plan to get us onto electric cars is actually plan to reduce our mobility, to force us into centrally-run neighborhoods with only the necessary stores, barracks, community kitchens, and no need to go anywhere we cannot walk. How? By taking cars away, and forcing us to trim our lifestyles. They don’t give orders to the sailor — they simply change the wind. So arguing about whether their plans will “work” is missing the point. They’re not supposed to work. They’re supposed to fail. The plan is there just to get us off the current thing, whatever it is.
And it’s Gods of the Copybook Heading all the way down.
We did remove Biden, at the very start of the 2021 Second Term For Trump.
But between the Never Trumpers who were happy to freep on about how it cannot be proven that the election was stolen, to the overpowering daily slam of the lamestream media and also our non-profit media** like NPR, a major treasonous crime against the American public was committed.
All that has happened so far is the average citizen who did not want to vote in Communism-American style can turn to Dinesh’s documentary for indications of what election crimes were perpetuated in the state of Georgia.
Already people like Catherine Austin Fitts are warning us that once the WEF/WHO treaty takes effect in the next ten days, it is game over. There are full indications by this time in June, The WHO will be able to institute Shanghai-inspired lockdowns in the weaker states in the Republic. (Illinois, NY, Calif, Oregon and Washington. )
Just as is currently happening in Australia, the media will again tell us 24/7 the COVID-case rate is doubling every five to ten days. (What is really happening is that because each vaccination decreases the body’s natural and protective immune factors, so once 70% of a population has had two jabs plus boosters, the average citizen has the same inability to throw off a minor cold or flu as a cancer patient who has is dealing with chemo and radiation.)
The vaccine program is creating an entire populace of “bubble-people.” (Not my opinion, but official statements by the late Montaigne, by VandenBossche, who commented on the phenomena just last week, as well as McCullough, Yeadon, Malone, Dr Ryan Cole and Delores Cahill of Ireland.)
Ineffective vaccines create a host of problems on the biological level. But for the PTB, this was never considered a glitch but a damn feature.
** Both mainstream media and “non-profit media have been financially propped up by Bill Gates. On the social media side of things, Mark Zuckerberg unleashed hundreds of millions of dollars to key battleground states in the 2020 election. These monies fell into Dem-controlled coffers across the nation, where the monies were used to set up “training centers.” There hand-picked Democrat youth leaders were instructed in how to best use the ballot drop boxes, and how to dis-qualify Republican ballots.
Richard thank you for this excellent compendium of the facts around the “fuel shortage.”
One thing though – Biden may not have “announced” that this was where his Presidency would take us.
He didn’t need to.
After all, anyone following the hysterics of those Leftists promoting the “CO2 will destroy life on the planet in ten years” Crisis Theory knew that installing Biden in the Oval Office was a total endorsement of what teenager Greta was hoping would happen.
Of course thirty percent of the public thinks we don’t need fuel for the truckers, because “the local grocery is where I get my food – not the rural area two states away.”
I thought the Biden Administration made its anti-fossil fuel agenda very clear in how many of the Executive Orders issued in the first day and a few subsequent days of the administration. The Biden Administration quite effectively conveyed a message that investing in fossil fuel activities would be either blocked immediately, would be made very expensive, or would carry a lot of risk of future regulatory risk.
It is not that the WHO can do anything, it is that they will recommend something that a Lefty administration will gladly do. The same as it was with the CDC lockdowns. The CDC can’t order California to lockdown, but they can recommend it and Gov. Newsom will happily do it. Afterwards they both point to each other as being responsible.
It’s barely bumped out of the 80s in Florida this May. I think it’s one of the coldest Mays on record for the state.
I find that just as with Churchill, if I have trouble with a passage by Epstein, reading it aloud to myself in my highly entertaining Epstein voice makes the meaning clear.
You laugh now…
Yep. Within days they set the stage for where we are now.
And after decades of promoting UHaul, spreading families wide and far, the sudden collapse of cheap energy is going to lead to severe isolation. It’s important to find a way to locate to your community. While I’m still further from my family than I’d like, I do still have a community.