Tuesday, March 24, 2009

Alternative Fools

I was chatting with a friend t'other day and it surprised him somewhat when I made the statement that we can never really "run out of oil"--a phrase beloved of the crowd that is obsessed with "renewable" energy. This shibboleth is untrue because virtually any biomass can be converted into just about any sort of hydrocarbon one needs with the proper catalysts and genetically engineered enzymes. Not that producing a hydrocarbon feedstock would be cheap, it definitely would not, but it's certainly feasible and economically viable at some given crude price level. My guess is in the $120-$150 a barrel range which was seen last summer but did not last nearly long enough to promote much investment in such efforts.

A Progressive's natural reaction is that government should tax motor fuel up to a level that makes such synthesis economically viable. The big problem is that this sort of artificial forcing of a commodity price always has an array of unintended consequences that the oil-is-evil brigade never considers. Dragging commodity prices out of the economic sphere and shoving them smartly into the political sphere, in this case taxation to advance a political agenda, subjects the whole process to the kind of uncertainties that investors tend to avoid if at all possible. If the next administration, or even the current one, due to public pressure, eliminates or sharply reduces energy taxes then those companies who've invested in projects that depend on artificially high prices will rapidly fold their tents.

To expect companies to make major multi-billion dollar investments in serious bio-fuel production facilities in an atmosphere of intense political (and regulatory) uncertainty is hardly rational no matter how huge the subsidies of the moment might be. It will take crude prices being "normally" elevated for an extended period before grandiose plans for alternative fuel production are justifiable in any sane economic sense. Even then it will still be a significant gamble. Motor fuel prices in Europe have been taxed to multiples of U.S. levels for decades without stimulating large alternative fuel infrastructure investment. Big corporate investors will respond to real economic signals but will properly view with suspicion the most recent example of the breathless petulance of the political class.

And make no mistake it will take big, really big, corporate entities to marshal production facilities that have any hope of meeting the immense motor fuel demands of the U.S. market. Those big corporations will have to be reasonably sure that they will be able to make money on large scale synthetic hydrocarbon production before committing the required hundreds of billions of bucks that will be needed. Yes that dirty nasty filthy money. How un-progressive of anyone to want to make a profit on a commercial enterprise but that minor detail will be a necessity if adequate capacity is ever developed to address the huge need. Even then it will require decades at least. The sum total of annual alternative fuel production in place now would hardly cover the fuel needed to transport fans to the Army/Navy game.

Complicating these issues, perhaps fatally, sundry efforts, however extensive, at replacing crude oil as a motor fuels feedstock may be doomed by Economics 101 in the short to medium term--i.e. 10-50 years. Recessionary lowering of demand has already taken place and every gallon of alternative fuel created will likely further reduce demand for crude based fuel. What inevitably happens to a commodity price when demand goes down? Duh. The price goes down as well thereby further reducing "demand" for expensive alternatives. Also reducing oil demand is every hybrid, pure electric, and high mileage vehicle sold. Seesaw Marjorie Daw. Progressives naturally think that raising fuel prices by fiat is crucial to repealing the iron law of supply/demand. Which brings us full circle. How progs are going to force big corporations to sink hundreds of billions of dollars into alternative fuel production in an atmosphere of rampant political uncertainty is a puzzlement.

Unless the ever burgeoning nanny-state is willing to use methods with a strong odor of National Socialist/command economy coercion then "weaning us off our crude oil addiction" will take a long time indeed. Before it can happen we will need to weaned off of sizable chunks of our lamentable addiction to democratic pluralism. Well heck why not? Isn't the fact that the Maldives may see a sea level rise of a couple of inches sufficiently alarming to require hobbling the CO2 emitting economies of the industrialized West? No problem right? After all as good little enlightened Progressives are we not supposed to be sympathetic to the trope that climate change extremism in the defense of the goddess Gaia is no vice? Well sure but only if you're "hobbled" by economic and technological sanity and are even fleetingly aware of the concept of unintended consequences.

Oh happy happy are we with our phantasmagorical visions of splendidly productive "green economies" and "sustainable" ecologically balanced Edenic planetary habitats. Happy happy are we to embrace the sustainable road to economic serfdom paved with recycled old tires and unblemished by the tread of anyone's carboniferous feetprints.

Meanwhile little old apostate moi is in the grip of a powerful urge to track down a 1969 Hemi-Challenger for my daily commute.

Monday, March 2, 2009

Economy On The Rocks With A Twist

In many corners the nattering over The One's stimulus bill grows ever shriller but in all but a few libertarian fever swamps not many argue for the course of action that will in all likelihood prove as efficacious as any putative governmental attempt at reviving an economy by flinging trainloads of cash at it. That course is--to do nothing. Nothing in the sense that unless and until the ocean of bad debt can drain from the financial sector in a "normal" fashion, i.e firms crashing, burning, and bankrupting, will the hyper-leveraged investment landscape return to sanity.

Mr. Ponzi himself would blush in the face of how high the speculative pyramid has grown, and how wide has become its base. Bets piled nearly endlessly on top of bets on top of etc. etc. etc, whilst somewhere down there, two, four, or maybe six layers removed, the whole shaky business crucially depended on several million unsuspecting schlubs paying their over-financed mortgages on time. Add to that insane scenario the endless shilling of complex, arcane, likely purposefully opaque, financial instruments--derivatives, hedge funds, credit default swaps, ad nauseum--speculation quadruply removed on everything from credit card debt to insurance premiums, fund performance, bond earnings, and probably the take from the New York three-card Monte syndicate

Now one Fannie/Freddie sub-prime default too many and AIG, Lehman Bros., and virtually every pinstriped man-jack in the financial hustle is in the hole for the equivalent of about 478 Astrodomes crammed full of hundred dollar bills.

The whole business makes the fatal over-leveraging of the infamous 1929 market look like small spuds indeed. We are about to see if a dozen trillion dollar economy can handle a debt sucker punch of about those same dimensions. This thing is so big that the "stimulus bill", gigantic as it seems, may well be like turning a garden hose on a burning gasoline tanker. It is sobering, to rather understate the case, to realize that however perversely huge the wad the government can fling at this debt monster it may well be not even slightly better than doing nothing. Worse the "oversight" being demanded by livid liberals is likely to do far more damage than merely deferring the debt management to decades hence. Uncle Sugar's feckless meddling in the day-to-day operations of large financial firms bids fair to nudge the situation from the merely catastrophic to the irretrievably cataclysmic.

And oh yes cries of more and more regulation resound in the salons of the left. Peachy. Regulation and increased oversight in response to a crisis almost always is cursed by the "fighting the last war" syndrome. Who the hell can know what kinds of risky esoteric holes the financial community will contrive to dig for itself in years to come?

Golly gee the financial landscape is in nuclear blasted ruins. What to do, what to do? I've got it. Let's take the situation out of the hands of the hubris soaked suits who leveraged their way to ruination and hand it to a group famed in song and story for its selflessness, econometric competence, and sterling rectitude--Politicians.

Sure. Why not? After all what could go wrong?