Saturday, April 30, 2011

Why fixing energy policy is so difficult

Posted on April 25, 2011 by gailtheactuary

Everyone would like to fix the US energy policy, *but doing so is almost impossible, in my view, primarily because we need to be planning for a much bigger change than most people can even imagine.* [italics added]

***It seems to me that our international financial system is at this point, inching closer and closer to collapse. It needs growth to operate. Now that world oil supplies are virtually flat (and China and India and oil exporters are getting more of the oil), the financial system can't get enough growth momentum. The US has applied various sleight of hand techniques to try to cover this problem (see my post
What's Behind US Budget Problems?), but *at some time in the not too distant future, the techniques are going to stop working, and there is going to be a major financial crash, with debt defaults.* This could happen when QE2 ends, or maybe QE3, QE4, or QE5. The timing may vary by country, with some countries holding out for a while longer.*** [italics added]

*The reason I point this out is because after such a crash, as far as I can see, everything is going to go downhill quickly.* [italics added] This is a graph of my view of one such scenario of oil supplies, if a country that imports all its oil undergoes such a collapse:
Figure 1. Type of drop in oil consumption that could occur, if a country gets shut out from buying oil because of debt problems.

***The point is that the oil consumption goes down very quickly, not over a period of many years, because the decline in supply is determined by something quite different from what oil is in the ground--it is determined by ability to pay for the oil.*** A potential buyer can be cut off very quickly, if its credit is no good. We have gotten used to the idea of being able to keep running a tab, but at some point, this whole process is likely to come to a halt--something that can't go on forever, won't. Some international trade may continue, especially when a country has goods to trade for oil (rather than an IOU), but the level of free trade we have now can't be expected to continue indefinitely.

***The problem I see with a collapse scenario is that a plan that uses less oil and tries to make it go farther really isn't helpful. Thus, a gas tax, or cap-and-trade, or fuel-efficient cars, or more fossil fuel extenders like wind and solar PV really aren't helpful. Instead, we need to put our effort into figuring out how we would get along without fossil fuels and nuclear, rather than get along with less. Arguably, we may have some supply for a while, but if we do, we need to use it to help with the transition, not to expect such supply to continue forever. This is the big problem I have with energy policies and transition plans--they assume we are planning for a slow decline, when it is likely that we will not have such a decline.***
In the case of an oil producer rather than an oil importer, perhaps the situation is better, but even here, there is a question of how much will continue to be produced, if there is major political upheaval. We know that the USSR broke up at the time of its collapse. There would seem to be a substantial chance of that happening elsewhere.

***Everyone would like to add new and more complex systems to help--for example, more wind with upgraded transmission systems, smart grids, and electric cars. As nice as these might seem, the new systems become more and more complex, and more dependent on everything working together exactly correctly. As we lose ability to import spare parts, they will become very difficult to maintain, and will likely collapse within a few years. While they seem appealing, I don't think they will add very much for very long.***
*Moving to a new system will require a lot of other changes:* [italics added]

1. A different financial system, that is not dependent on debt and growth.
2. More even distribution of incomes. With much less wealth, it won't make sense for a few to have such a disproportionate share.
3. More even distribution of land. Without fossil fuels, it will not be possible to farm nearly as large plots. This also goes with more even distribution of wealth.

*Changes such as these would be very difficult to make within our current structure. But without making such changes as well, it is hard to see that the new system would work.* [italics added]

In a post a while ago, I explained some of the things that seem to me to need to be done. I called the post,
What President Obama Should Have Said Regarding Energy Policy. ***I don't know that there is a real way that we can make major changes, without actually hitting a financial wall first. Perhaps a few people can work on such changes, and implement their own local versions of them.*******************************************************************************************************************************

Courtesy of William Tamblyn: 
China Proposes To Cut Two Thirds Of Its $3 Trillion In USD Holdings

Submitted by
Tyler Durden on 04/24/2011 11:05 -0400

All those who were hoping global stock markets would surge tomorrow based on a ridiculous rumor that China would revalue the CNY by 10% will have to wait. Instead, China has decided to serve the world another surprise. Following last week's announcement by PBoC Governor Zhou (
Where's Waldo) Xiaochuan that the country's excessive stockpile of USD reserves has to be urgently diversified, today we get a sense of just how big the upcoming Chinese defection from the "buy US debt" Nash equilibrium will be. Not surprisingly, China appears to be getting ready to cut its USD reserves by roughly the amount of dollars that was recently printed by the Fed, or $2 trilion or so. And to think that this comes just as news that the Japanese pension fund will soon be dumping who knows what. So, once again, how about that "end of QE" again?

***China's foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.***

***Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.
And as if the public sector making it all too clear what is about to happen was not enough, here is the private one as well:
China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday.

The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high.

Tang's remarks echoed the stance of Zhou Xiaochuan, governor of China's central bank, who said on Monday that China's foreign exchange reserves "exceed our reasonable requirement" and that the government should upgrade and diversify its foreign exchange management using the excessive reserves.

Tang also said that China should further diversify its foreign exchange holdings. He suggested five channels for using the reserves, including replenishing state-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investment, issuing foreign bonds and improving national welfare in areas like education and health.

However, these strategies can only treat the symptoms but not the root cause, he said, noting that the key is to reform the mechanism of how the reserves are generated and managed.
The last sentence says it all. ***While China is certainly tired of recycling US Dollars, it still has no viable alternative, especially as long as its own currency is relegated to the C-grade of not even SDR-backing currencies. But that will all change very soon. Once the push for broad Chinese currency acceptance is in play, the CNY and the USD will be unpegged, promptly followed by China dumping the bulk of its USD exposure, and also sending the world a message that US debt is no longer a viable investment*** opportunity. In fact, we are confident that the reval is a likely a key preceding step to any strategic decision vis-a-vis US FX exposure (read bond purchasing/selling intentions). As such, all those Americans pushing China to revalue, may want to consider that such an action could well guarantee hyperinflation, once the Fed is stuck as being the only buyer of US debt.

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