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The Meaning of “Government Motors” in Energy and Economic Policy - Example of a larger tale

As of last week, the United States government will own just nearly 72% of General Motors (GM) after going through a bankruptcy procedure. Additionally, new Corporate Average Fuel Economy (CAFE) standards will be targeting nearly 35.5 miles per gallon (MPG) of gasoline, or approximately 15 kilometers per liter. The 35.5 MPG by 2016 is broken down as 39 MPG for cars and 30 MPG for trucks. Taken together, free market capitalists are appalled at these actions early in President Obama’s tenure. People discuss how political motives, mostly those pushing environmental agendas, are unduly forcing consumers to “buy cars that they don’t want”. They say the profit motive of a car company will best guide the decisions. Environmentalists say we are simply incorporating external costs, such as greenhouse gas emissions (global scale) or emissions of particulate matter and smog-forming gases (local scale).

First of all, GM had been losing money and market share for the last couple of years. The typical capitalist will tell you that private industry will make better decisions about making cars than the government, and I agree. Unfortunately in this case, GM made enough incorrect decisions over the last decade that they are now a failed company. GM was out-marketed and out-designed by Japanese and German automakers that focused broadly on the overall world market and were not over-committed to the US consumer who wanted to buy light trucks and sport utility vehicles. This is not to say that Toyota does not have top-selling full size pickups and SUVs that supported the sales of their flagship hybrid Prius.

Secondly, GM suffered from general short-sidedness of mainstream economics. There is a major disconnect between the time frames of interest in economics and the time frame of energy resource development. The lure of making large margins when selling more light trucks and SUVs in the short term (think of quarters to years) was just too great. When global forces significantly increased the operating cost of these vehicles - interpret that as high oil and gasoline prices - people “wanted” more fuel efficient cars. Then when US gasoline prices dropped from over $4/gallon in the summer of 2008 to near $2/gallon by the end of 2008 (a tremendously quick change) people were again considering relatively low fuel-efficient cars, and now one can buy a hybrid vehicle off a car lot instead of needing to pre-order a Prius months in advance.

I believe we are crossing into a new era of less prosperity governed by increasingly expensive energy resources, and most politicians and economists do not comprehend the situation. The prerequisite of available energy for economic growth is simply not universally understood well enough. For instance, the usual reason cited for the tremendously quick increase and drop of oil prices in 2008 was that “speculators” were pushing up the price. Well, speculators are part of the market system, so you can’t say that the system was being “gamed” by part of the system itself. For the first time in the history of oil, the world market found out what price of oil was so high that consumers would legitimately begin to alter their lifestyles … and that means a lower lifestyle in the form of lower purchasing power. Because this oil price increase (and subsequent crash) was not politically driven, as during the 1973 OPEC oil embargo, it is a much more important data point. What most people neglect to discuss is that world oil production was essentially level from 2005 to 2008 hovering in the range of 85 million barrels per day. This is after world oil production experienced an annual increase of 1-1.5 million barrels per day from 1990 to 2005. This literally means that the demand continued to increase, as evidenced by increases in consumption in China and the US, as oil production did not. The price of oil had to go up.

So we have a market system that can cause the price of oil to rise and fall over 300% within the span of 1 year. The oil resource and the technologies for extracting oil cannot possibly change that quickly and at that magnitude. It takes up to a decade for investments in the oil and most other energy industries to come to fruition. In making investments, or incentives for investments, in energy production and generation infrastructure or energy consumption infrastructure - such as automobiles and buildings - governments and businesses cannot judge success or failure based upon time frames of only a few years. It takes approximately a decade to see the benefits of changes in energy investment. This time frame is much longer than quarterly financial reports and election time scales. There is much evidence that suggests US presidents lost reelection (e.g. Carter) or lost much popularity (Nixon) made good energy policies for the long term, but that caused pain in the short term.

Elected officials in the United States, the European Union, and around the world, must focus energy policy on time scales longer than fiscal and election cycles because the market is not set up to perform this necessary function. Putting a price on greenhouse gas emissions, or carbon, is the major option to connect long time scales (centuries) of energy and the environment with short time scales (years) of economic markets. A price on carbon will be the most influential change to the economic system since banking began. It combines externalities of energy resources and environmental impacts to economics in a way that has never been done. Some detractors say it will destroy the economy to have such a “tax” on carbon, but what it really does is redefine what the economy is.

The economic influence of a price on carbon will be more of an artifact of the abundance and quality of current and future energy resources. In other words, the abundance of energy resources will dictate economic prosperity many times more than a tax/price on carbon. After all, if there were limitless fossil fuel supplies, we could (1) capture 90% of the CO2 emissions from all fossil fuel combustion at centralized power plants and (2) use the electricity to power industrial machinery and run homes and businesses as well as electrolyze water to create hydrogen as a stored fuel for transportation. In this case, the price on carbon wouldn’t matter because we could use our limitless energy supply to take prevent the carbon from being emitted. Unfortunately, we know that do not have easily accessible and limitless supplies of fossil fuels.

Posted by Carey King on June 1, 2009 7:00 AM | Permalink