Posted by: bmeverett | February 27, 2009

Pennies from heaven (or in this case Washington)

Washington is currently taking advantage of our tendency to believe that a billion dollars is a lot of money. It is, of course, for an individual, but the US Gross Domestic Product (GDP) is currently about $14 trillion. The GDPs of all the countries in the world now total over $50 trillion. Over the next 10-15 years, the world can expect to generate a quadrillion dollars of wealth.
Ever since he started running for our highest office, President Obama has talked about transforming our energy industry into a green utopia. When governments promise (or perhaps threaten) to reengineer our energy economy, they are facing a daunting task. Setting aside for the moment whether the US energy industry actually needs to be converted into a green paradise, governments of both parties have been wildly overpromising for the past 40 years.
During the first oil crisis of 1973-74, President Richard Nixon launched Project Independence – a massive effort to eliminate our dependence on foreign oil by 1980. The result: nothing. Market forces increased global oil production and reduced demand. Price fell, and we all lost interest. Every president since Nixon has promised energy independence. In 1973, the US consumed about 11 million barrels per day (MBD) of oil, and imported about half the total. Last year (2008), we consumed over 20 MBD and imported more than 55%.
President Obama is more cautious, speaking only about “the road to energy independence” on which his recent stimulus package is presumably the first step. Let’s look at what’s in there for energy markets. First of all, we should note that actually reading the thousand-page stimulus bill is impossible, so I have relied on the New York Times which outlined the stimulus provisions related to energy (See the editorial entitled “An $80 Billion Start” on February 18). So what do we get for $80 billion?
First, we have $25 billion for energy efficiency, half of which is targeted at weatherization for one million low-income households and refitting of public buildings. The Energy Information Administration (EIA) has extensive data on US household energy consumption obtained through surveys. Let’s assume that $6 billion of stimulus money is spent improving the energy-efficiency of a million homes and that all those homes are heated by oil. According to the EIA data, the average home classified as “poorly insulated” or “uninsulated” for people classified as “eligible for federal assistance” uses 721 gallons of heating oil per year for space heating. Most of these people would be in the northeast. The $6 billion would be about $6,000 per household. Let’s assume that with that money we could add proper insulation, double-pane windows and a programmable thermostat. The EIA survey suggests that these steps would reduce space-heating requirements by about 14%. The result would be a savings of about 100 gallons per household per year or 100 million gallons of heating oil. At 42 gallons per barrel, these savings would reduce US oil imports by about 6 thousand barrels per day – approximately 0.06%. If the “road to energy independence” is a mile long, this step is about 3 feet.
How about upgrading public buildings? Here we have to make more assumptions, since the EIA data are not very detailed. In 2003, there were roughly 15 billion square feet of government office space in the US, including 2 billion federal, 4 billion state and 9 billion local. The average electricity use is about 14 kilowatt-hours (kWh) per square foot. If we give ourselves a budget of $5 per square foot and assume we can reduce electricity use by 25% as a result of better lighting and air conditioning systems, as well as insulation, the $6 billion in the stimulus package would allow us to save 3½ kWh per square foot on 7% of the total floor space. That’s a total savings of about 4 billion kWh – 0.1% of our total electricity consumption. Looking at the problem another way, the EIA is projecting that US electricity demand will increase by 860 billion kWh per year over the next 20 years – over 200 times as much as these savings.
The target of the remaining $13 billion of the stimulus package’s $25 billion for energy savings is unclear, but it’s likely to have a similar effect.
The package includes another $25 billion for renewable energy and various technology support activities. While it would certainly be wonderful to find an economically viable alternative to oil, the US Government has spent roughly $150 billion (in $2008) over the last 30 years and has come up with nothing of any commercial significance. It’s great to talk about the Manhattan Project and the thrill of putting a man on the Moon, but those were both efforts to solve technical challenges that allowed us to do something a few times at enormous cost. Finding commercial technologies is a different problem, and the government has never been very successful..
Another $17 billion will be for grants and loans to modernize the electric power grid and allow it to accommodate more renewable energy. OK, but a recent report by The Brattle Group estimates that US utilities are currently spending $25-30 billion every year just to maintain the grid and allow for minimal upgrades. According to the report, these investments are not keeping up with demand. The main reason our electricity grid is underperforming is the lack of market forces. Electricity transmission is, in general, underpriced in the US, which always leads to underinvestment. Truly modernizing the grid and keeping pace with growing demand will require fundamental market reform (not likely from this administration) and investments probably on the order of a trillion dollars over the next 20 years. Again, the stimulus spending is a drop in the bucket.
Finally, we have $17.7 billion for mass transit and high-speed rail. Public transportation makes a number of contributions to society. Subways in densely populated cities move large numbers of people quickly and minimize congestion. Commuter rail systems allow people to move from suburbs to cities without taking their cars. Bus systems provide options to lower-income people who do not have cars. All good things. However (and it’s a very big however), public transportation is not particularly energy efficient. Public bus systems use on average as much energy per passenger-mile as private cars. Buses are very efficient when full, but they’re rarely full. Intercity trains, such as the proposed Los Angeles-to-Las Vegas Express, use about 20% more energy per passenger-mile than private automobiles. Subways use about 25% less energy, but most of that energy is electricity generated partly from natural gas and partly from coal. On balance, subways save oil, but generate just as much carbon dioxide and pollution as private cars. Public transportation is extremely expensive except in the downtown areas of our densest cities and accounts for only about 1% of our total travel.
We need to think about the global energy economy in its proper scale. For example, the total commercial value of all the oil, natural gas and electricity sold in the world in 2008 was over $6½ trillion. The infrastructure in place to produce, transport and deliver this energy has a value measured in tens of trillions of dollars. $80 billion spread around the US will have little impact at all, let alone produce some kind of transformation.
The Stimulus Bill is just government spending, nothing more. President Obama should be very careful when he promises dollars worth of impacts from a penny’s worth of policy.



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