Oil Economics: Increased Supply But Higher Prices Plus Global Warming

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IEA World Energy Outlook 2012The International Energy Agency (IEA) World Energy Outlook for 2012 has received tremendous media attention by forecasting that the U.S. is posed to displace Saudi Arabia as the world’s largest oil producer. This is great news for our economy because imported oil acts as a tax retarding our economic growth. However, the other IEA key findings were that energy prices are going up and our energy system, even with more oil, is still unsustainable.

Oil Prices Still Going Up
The IEA analysis confirms that oil prices will continue to rise even with increased oil production. This continued price rise is due to the incremental increase in world oil demand exceeding the incremental increase in oil supplies.More oil from U.S. producers does stimulate economic growth for the United States but it does not mean lower pump prices.

Our World Energy Path Is Unsustainable
2035 global energy demand is forecasted to increase by over a third. The EIA estimates this energy consumption increase will generate enough new greenhouse gases to raise climate temperatures by 3.6%. This means warmer air holding more moisture. This means warmer oceans. These two factors combined to create Hurricane Sandy and Katrina. Global warming will also deliver more droughts, more floods plus higher prices, increased property loss and human suffering. The cost of energy is swiftly moving past the price at the pump and the size of our utility bills.

Fossil Fuel Subsidies Distorting Market Decisions
The IEA specifically cited financial subsidies provided by governments as a key factor in the world’s unsustainable energy path. In 2011 the world subsidized the cost of fossil fuels by $531 BILLION. This is a 30% increase compared to 2010. By comparison the electric utility industry reports spending $6 billion in 2011 on ratepayer-funded energy efficiency programs. In a defiance of logic the world is subsidizing climate change.

Trucks Driving Oil Demand
Vehicle transportation accounts for 40% of world oil demand. Increased truck freight is a key component driving the growth of world energy demand and increased greenhouse gas emissions. A major reason is that trucks lag compared to cars in government established fuel energy standards.

Coal-Fired Electricity Is The 800 Pound Gorilla
Coal is the most polluting of the fuels available for electricity generation. It is also rapidly growing in use for electricity generation due to power plant expansions by China and India. Coal’s attraction for these countries is its comparative low price and transportation advantages over great distances. There are two serious flaws to China’s and India’s expansion of coal power. One is water. Running a coal-fired power plant requires a lot of water. HSBC recently reported their analysis that China does not have enough water to support China’s plan to add coal-fired electricity generation equal in size to Russia’s entire electric generating capacity. Greenhouse gas emissions are the other flaw to expanding coal-fired power generation. At some point the environmental consequences of buying from China and India will hit home for China’s and India’s global trading partners. In addition, coal-fired generation’s competition for water is already creating a farmer backlash in India. In comparison, the United States’ use of coal for electricity generation is declining due to natural gas price competition and increased pollution regulations. Europe is actually increasing its coal consumption as it shifts away from nuclear power while focusing longer term upon energy efficiency and renewable energy. But overall coal continues to be the 800-pound gorilla the world must confront if the world is going to address global warming and climate change.

There Is A Sustainable Energy Path
An analysis of the IEA forecast points to natural gas, renewable energy and energy efficiency as three components for a sustainable energy path. Natural gas is projected by the IEA to win global growth delivering a lower environmental footprint compared to coal. Renewable energy continues to grow as its costs fall through economies of scale. But it is energy efficiency that is the resource offering the greatest potential for a sustainable energy path.

The typical return on an energy efficiency investment is shorter than the capital recovery time period of any electricity power plant investment whether its coal, natural gas, nuclear or renewable. IEA’s estimated world investment in end-use efficiency of $11.8 trillion produces $17.5 trillion in fuel bill reductions plus the savings of $5.9 trillion in supply-side investment. The more efficient allocation of resources increases global economic growth by $18 trillion or an amount equal to combined annual Gross Domestic Production of the United States, Canada, Mexico and Chile. However, even with these compelling economics the IEA estimates that four fifths of the world’s buildings and half of its industrial plants will not be invested in energy efficiency due to non-technical barriers to implementation.

U.S. Leads World In Energy And Environment
Even without a national energy policy the United States is again assuming global leadership on energy and the environment. The United States is posed to recover its global leadership in oil production. Hydraulic fracturing is turning the United States into the Saudi Arabia of natural gas reserves. The competitive price of natural gas is enabling a switch from coal-fired electricity generation resulting in the United States leading the world in reducing greenhouse gas emissions. Our adoption of an aggressive vehicle fuel mileage standard will save money at the pump and cut emissions.

Fiscal Cliff And U.S. Pricing Of Climate Change
The key question for the United States is how to use its emerging leadership to influence sustainable energy behavior by the rest of the world? A potential answer is in our leadership as the world’s largest economy plus our looming fiscal cliff. The world wants to trade with us. Too many countries sell us “cheap” goods that undercut our own manufacturers because these countries allow their manufacturers to disregard environmental and human consequences in pursuit of our dollars. The win/win for our economy and environment is to place a tax on pollution and waste tied to everything sold in the United States.

Taxing the pollution and waste of everything sold in the United States enables a fiscal cliff consensus solution. It moves the focus from taxing employment when we want jobs or increasing the tax on income when we want increased consumer saving and spending. The solution is to the tax pollution and waste tied to everything sold in the United States.

Who wins if we tax pollution and waste? The obvious answer is that we all do in terms of the environmental and human health benefits. But there is an economic justification for this proposal. The price at our cash register is not telling the full story of the total life cycle cost for the products we buy. In our current system the most efficient producer does not have a competitive advantage because pollution and waste are not reflected at our cash register. It is paid through our taxes. And currently there is no economic consequence for importers who win business by not investing in pollution and waste controls. Taxing pollution and waste at the cash register will help all Americans make more informed choices in terms of what is really the lowest priced product over that product’s life cycle by including a price at the cash register for the pollution it takes to make it and the waste stream that results at the end of the product’s life. It is an economic signal only the United States has the power to send that will enable a global shift toward sustainability.

Bill Roth is and economist and the Founder of Earth 2017. He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues.

About Bill Roth

Bill Roth is the founder of Earth 2017, author of The Secret Green Sauce and a nationally-followed contributor to Entrepreneur.com, Triple Pundit, The Green Economy Post and Media Post on best business practices emerging from the smart, healthy and green global economy. He coaches entrepreneurs, business and community leaders on how to grow revenues, profits and jobs by going smart and green.
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