It has been a while since I’ve picked on an economist for his or her seemingly foolish statements and theories (other than the Ben Bernanke but I’ll get back to him later).
Ed Dolan, university / government wonk, states in an interview that there is no lock-step relationship between economic growth and energy cost. Rather, the world’s best performing economies have substantially increased their energy efficiency in terms of energy consumption per gross domestic product (GDP). He states while the OECD countries (Organisation for Economic Co-operation and Development) – about 35 mostly free countries – increased efficiency by an average of 55%, the United States did “a little better” at 81%. A little better? That is enormous.
Ok. There is a lot to chew on here. First, of course the economy does not move in lock-step with energy prices. If it did, our GDP growth would have been 200% cumulative over the past few years since the hydraulic fracturing boom for natural gas began. Instead, we’ve been growing at the glacial pace of less than 2%. Like carbon dioxide and global warming, “experts” argue whether ambient CO2 levels are a function of global temperatures or if global temperatures are a function of CO2 – what follows what in other words. No comment, because I don’t know and I’m burned out on that topic. But I would say energy prices and economic growth are barely related except in extreme long term cases, perhaps more than a year. The economy can impact energy prices or energy prices can clearly affect economic growth, despite Mr. Dolan’s assertions. Consider what the fracking boom has resulted in:
- Royal Dutch Shell is building a $10 billion plant in Louisiana to convert natural gas to diesel fuel.
- Pennsylvania recently won a three-state contest to land a multi-billion-dollar chemical plant, again from Shell. This plant will make ethylene, a feedstock for plastics.
- Several years ago, ammonia plants were being dismantled and shipped overseas for re-assembly and production. This is reversing, and ammonia production is booming in the US again. Ammonia is a key ingredient for nitrogen-based fertilizers as well as a refrigerant.
- Chevron Phillips will be building several chemical plants in Texas and Louisiana.
- Nucor is building a $750 million steel plant on the Mississippi in Louisiana. The feedstock for this is iron ore. I wonder where they may get ore?
- Even textiles, yes, textiles, are moving back to the US. Brazil’s Santana is building a denim plant in Texas.
Then there is the incredible job machine to drill for the natural gas and manufacture the stuff to support it. Despite the political class fighting to claim credit for the low unemployment in Ohio, it is the hydraulic fracturing boom that is soaking up the unemployed and drawing business from around the country/world. Economists at Citigroup estimate 3.6 million additional jobs from the fracking boom by 2020. This is moving the needle and not just helping out a few obscure businesses.
Back to Mr. Dolan’s commentary – he seems to imply that energy costs don’t matter but energy efficiency does. What is the difference in using a million decatherms at $5 (low cost) or a half million decatherms at $10 (efficient) in his context. This is the case we have compared to Europe where natural gas prices are triple or more than we have here in the states. Since the efficiency difference is a little higher compared to some countries and a little lower compared to others, cheap natural gas gives the US enormous advantage in a broad swath of the economy.
Natural gas is not like petroleum, the price of which is set in the global marketplace. At this point, natural gas is primarily a land-locked commodity transported by pipelines and not cost effectively by ship, although this will be coming. Therefore, low natural gas prices are a boon to the countries that have it. Natural gas prices are thus just as effective as efficiency at lowering production costs and improving profit. Obviously, I’d advocate for efficiency as a risk mitigation strategy in this case.
I agree with many things Mr. Dolan states. One is that traditional mineral rich parts of the world are less free and less industrious; in my opinion because they have wealth to spread around, and that wealth is controlled by thugs like Hugo Chavez and Vlady Putin. I agree with his concerns about environment-be-damned, “low-competence” Russia. With massive conventional sources, they can waste it and be competitive, and take that energy to the world market with very little margin for environmental disaster – see Chernobyl.
The interviewer then asks about the Ben Bernanke’s money printing, romantically known as quantitative easing, which sounds like a laxative. Mr. Dolan says it isn’t the magic bullet. This is correct. It isn’t a bullet at all. It’s a stool softener.
Just like energy prices, interest rates can lead or follow the economy. Unlike Mr. Dolan, the Bernanke seems to think interest rates are virtually the only parameters of economic fuel. It’s like having a pig of a building and all the Bernanke knows is lighting. He retrofits the lighting with T8 lamps (tubes). Still a pig. He replaces them with 28W lamps. Still a pig. He removes lamps. Still a pig. He limits fixtures to one lamp per fixture. Still a pig. He cuts the wires in the panel and gets electrocuted. Still a pig. And there remains a plethora of unintended consequences due to sheer ignorance, like people can’t see and have to walk across the street to use the restroom. Possibly, the pig is running its chiller all year because the outdoor air dampers were wired shut and half the heating valves are shot requiring the discharge temperatures to run at 48F all year. Possibly something else is wrong. Do ya think? Forcing one parameter to obscene levels cannot make up for Everest size problems and barriers elsewhere.