RateWatch #433 Energy

November 13, 2004 by Dick Lepre

What's Happening

First a word about "close elections". The 2000 election was close: Bush won Florida by 500+
votes, Gore won New Mexico by 300+ votes. There are even some lunatic conspiracy theorists that are looking at conflicting data sources to suggest that Kerry may have actually won Ohio this year. For those of you too young to know (and those too old to remember) when Nixon lost to Kennedy in 1960 there were 9 states where the candidates were separated by fewer than 10,000 votes. Nixon won California only after all the absentee ballots were counted. When Ford lost to Carter in 1976 he lost Ohio and Hawaii by fewer than 5,600 votes in each state.

Some moderately good economic news: Retail Sales up and U Michigan Consumer Sentiment up have not discouraged Treasury buying. Last week's strong jobs report has set the week-to-week tech bearish indicating a generally upward movement in yields until mid-January.  The longer term
bullish market is still in play and will rapidly reassert on any weak jobs report in the near future.

The longer term bullish market would help explain how the Treasury markets sustained through
a difficult week with the jobs report, Fed debt refinancing and an FOMC rate hike.

Energy

Last week I wrote about some of the things that a second Bush administration should be concentrating on.  One of these is a comprehensive energy policy.

In 2001, California went through an energy crisis. This became a complex issue.  First, there was an actual shortage of energy supply. Second, given the shortage, suppliers took advantage by taking energy producing plants off-line and exploiting consumers.  Hopefully, litigation will both remedy this and discourage it from happening in the future.  Third, Governor Davis who had
favored energy deregulation made an ill-fated set of choices which made the problem worse and
helped lead to his recall.

A well-intended attempt to deregulate utilities by giving consumers the choice of shopping around was accompanied by two disastrous provisos that the state's utilities were held to.  One locked in rates and the other required them to sell off a lot of their generating capacity and, instead, buy power on the open market.  What was apparently unforeseen was the sharp, upward spike
in energy prices with disastrous consequences to the utilities.

Faced with having put the utilities in an impossible situation the state Public Utilities Commission
chose the political expedient of "getting tough" with the utilities by not allowing emergency rate
hikes which has created the tragic-comedy effects of driving PG&E into bankruptcy court
and having the state buy power with bonds. 

If any commodity becomes scarce because the supply-demand is out of balance the price should
be allowed to rise and the subsequent increase has two effects: it reduces demand (and waste)
and it encourages supply.  Keeping prices artificially low is the antithesis of conservation.
It encourages waste.  If electrical prices are jacked up high there will be no power shortage
because people are less inclined to waste that which is expensive. 

Conservation is something that we have long been on the path toward. During the oil embargo
of the '70's we become energy conscious.  I believe that large part of that which can be
conserved has already been actualized. 

Complaints about high gasoline prices need to be questioned.  High prices are a result of
supply/demand imbalance.  Two things can happen to bring prices down: 
1) consume less or
2) produce more.

Prices must be allowed to rise to levels dictated by supply and demand.  Only then will enough supply be available to drive the price back down.  Artificially low energy prices produce only a short term benefit to consumers with disastrous results.  Allowing politicians to take the stage and preach to the populace how they will protect the consumer against the big, bad energy wolf has had disastrous consequence.  Secondly, we need a gigantic amount of supply.  Electricity is good.  It enables me to send you this newsletter at a near-zero cost.  I want a lot more electricity.

In should be noted that, just as in the case of the California energy shortage of 2001, a situation in which consumers are fighting over the last little bit of what is left of the supply of a commodity has the effect of wildly inflating prices - thus $55/bbl oil.

Running at near-capacity has only negative consequences.  It creates a situation where short supply allows the party with the last megawatt of power the ability to charge an outrageous price.  This happens with anything in short-supply: energy, Super Bowl tickets, or any agricultural commodity. It is pointless to criticize those who made out like bandits.  The way around this is to have enough supply so that no one can jack the price.

We need:
- no price caps
- nuclear power.  This has the disadvantage of high capital cost but low operating cost with
reliable delivery and near-zero harm to the environment.

There are 437 nuclear power plants in the world. There are 110 nuclear power plants in the U.S.
Nuclear power plants produce about 1,000 gigawatts. The closest nuclear plant to where I live
is Diablo Canyon. It produces 2.19 gigawatts. An equivalent fossil plant would have to consume
20 million barrels of oil or 4 million tons of coal to generate as much power.   

In the U.S. 51% of the electricity comes from coal, 20% from nuclear, 15% from natural gas,
8% from hydro, 3% from oil and 2% from "non-hydro" renewable.

Our "energy goal" should be to reduce our dependence of oil imported from outside North
America to be zero.  We need two things to do this: nuclear power and either hybrid cars which run on a combination of electricity and domestic gasoline or cars which use hydrogen as an energy storage medium.  It must be noted that hydrogen is not really a source of energy it is a medium in which energy produced by other means can be stored.

We are much further along with hybrids but hydrogen has the potential of allowing whatever
means of generating energy is available to be converted to hydrogen.  Hybrid cars minimize fuel usage by "going electric" while stopped and by converting kinetic energy into electricity and storing it while the car is braking.  All of their energy comes from gasoline - they maximize efficiency.

What is important is getting one heck of a lot more energy on-line and dismissing the ignorance
that was fostered since the 1970's regarding nuclear power.

If you are interested in learning about nuclear energy and, especially, the problems of dealing
with radioactive waste, a great starting site is www.radwaste.org

There is a wealth of information there about the well-known disasters at Chernobyl, Three Mile Island and Tokai. Learning from the mistakes behind these events will be pivotal in forging
safe nuclear reactor design and operation.  Chernobyl was the result of bad design and
manifest operator error.  TMI was largely the result of failure to understand that a valve that was supposed to have closed had not. That produced a chain of events that created more health risk from anxiety than radiation.

As the book on nuclear power is reopened learn what you can and formulate your own beliefs.

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