Replacing Coal with Solar Energy — Let Me Count the Costs

“Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?” ~ Luke 14:28 (NIV)

– By: Larry Walker, II –

During his 2011 State of the Union address, Potus announced a new U.S. energy target: Produce 80 percent of electricity from clean energy sources by 2035. Just this past week, two and a half years later, he announced that the centerpiece of his proposal involves deploying the EPA in a new war on the coal industry. But according to Rep. Tim Murphy (R-Allegheny), the House Chairman of the Energy and Commerce Oversight Committee, “This Administration has already closed one-fifth of US coal-fueled plants in the last four years and has made no secret about its anti-coal agenda.”

Although the topic has sparked an abundance of rhetoric from the lips of Potus, there’s been no mention of the cost to American households, to taxpayers at the federal and state levels, no hint of opportunity cost (the value of the best alternative forgone), nor of any economic benefits, but merely an odd discourse involving a man-made solution for regulating the Earth’s temperature, namely through taxing and regulating our largest source of electricity, coal fired power plants, out of existence. The unanswered questions surrounding Potus’ latest craze are as follows: How much is it going to cost? Who’s going to pay for it? And, how will it benefit America?

I recently came across an interesting article on Climate Central entitled, “Replacing Coal With Clean Energy — Let Me Count the Ways” (July 2011). The author, Alyson Kenward, ponders where all the new “clean energy” will come from after Potus destroys the coal industry. She explains that coal and natural gas produce about 70 percent of our electricity, nuclear power around 20 percent, renewable sources like wind and hydro-power roughly 10 percent, and how this ratio would need to change.

According to Potus, natural gas counts as clean energy, because even though it produces CO2, its emissions per kilowatt-hour (KWh) generated are only half as much as coal. Thus, if we were to leave all the current natural gas fired power plants in place, and not build any new ones, hitting the 80 percent target means that roughly 46% of the nation’s coal production would need to be replaced. As Ms. Kenward explained, and I concur, this won’t be a simple task, since coal alone currently provides 37% of America’s electricity.

Ignoring the costs, Ms. Kenward came up with six ways the U.S. could achieve Potus’ objective. Counting the costs, I have slightly revised and modified Ms. Kenward’s analysis, while maintaining its integrity, focusing on just one of her six possible ways, which I will call Method Number 4. After weighing the costs and benefits, we will be able to decide for ourselves whether or not Potus’ idea is feasible.

Method Number 4

We could build 7,529 solar energy farms — but each one would have to be the size of Nevada’s Copper Mountain solar array.

The U.S. produces just over 4 trillion KWh of electricity each year, of which coal is responsible for 1.5 trillion KWh, or 37%. In order to reduce the ratio of electricity produced from coal to 20% would require a substitute capable of generating roughly 689 billion KWh per year. Nevada’s Copper Mountain solar farm produces around 92 million KWh a year. So to reach Potus’ target would require building 7,529 similar solar farms over the next 22 years, or 342 per year.

The Sempra Copper Mountain facility is a 55-megawatt solar farm, in Nevada, which spans 380 acres and contains 775,000 solar panels. Built between January and December of 2010, it was at the time the largest PV solar plant in the United States. One of its claims to fame was that it allegedly created 350 temporary construction jobs, yet the Las Vegas Sun pointed out some of its more glaring flaws:

  • Solar power coming to Nevada: 0. Zip.

  • Parts manufactured in Nevada: 0. Zilch.

  • Permanent jobs created: 5. That’s not a typo.

  • State incentives developer Sempra Generation received: $12 million. That’s not a typo, either.

Costs

According to the Los Angeles Times, “Capturing a free and clean source of energy is not cheap. Solar is the Cadillac of energy, with capital costs and other market factors making it three times more expensive than natural gas or coal. Ratepayers’ bills will be as much as 50% higher for renewable energy, according to an analysis from the consumer advocate branch of the state Public Utilities Commission.”

So not only will solar power cost more than three-times as much as coal to implement and produce, but when it’s all said and done our power bills will likely be more than 50% higher, as ratepayers’ pass their costs on to consumers. This fact alone should disqualify solar energy as a viable alternative for our electric power needs.

The Nevada Economic Development Commission said the project cost $141 million. The federal government gave Sempra Generation about $42 million in tax credits, 30 percent of the price tag for Copper Mountain. When we include the $12 million in state incentives, mentioned above, we find that 38% of its total cost was provided by federal and state tax dollars. That’s all well and good, except for the fact that we would have to replicate the process 7,529 more times in order to reach Potus’ target.

Using simple math puts the total cost of Potus’ grand scheme at around $1,061,527,823,294 ($141,000,000 times 7,529). That’s $1.1 trillion, with potentially $316 billion subsidized by the federal government, and $90 billion by state governments. Although over a 22-year period this only amounts to around $48 billion per year, with $14 billion subsidized by the federal government and another $4 billion by the states, we must next weigh the economic benefits?

In the matter at hand, a politician defending costs, without considering benefits, is akin to the federal government regulating the level of mercury emissions in the atmosphere, while simultaneously forcing every household in America to install mercury laced light bulbs. Frankly, I would rather have mercury way up in the atmosphere, than in the light fixture next to my bed. In other words, if the costs outweigh the benefits, a project may ultimately do more harm than good.

Short-Term Economic Benefits

Construction of the Copper Mountain plant created 350 temporary jobs, which theoretically lasted about a year, although we don’t know how that was calculated. There could have been high turnover (i.e. 175 jobs filled by 350 persons). However, if 7,529 similar plants were to be built, in raw terms, it may result in the creation of as many as 2,635,150 temporary construction jobs, over a period of 22 years. Although that sounds great, it only amounts to 119,780 temporary jobs each year, or 9,981 jobs per month.

The catch is that because these jobs are temporary in nature, lasting perhaps a year at most, theoretically the same crew would be moving around from job to job. The net result is that only a total of 119,780 jobs are created over the entire 22-year period. How’s that you say? Well, as next year’s 119,780 jobs are created, last year’s 119,780 jobs come to an end. So in terms of temporary construction jobs, at best only 119,780 are created through the year 2035, at which point they disappear entirely. Although one might presume any amount of jobs growth a positive, because the U.S. needs to create roughly 127,000 jobs each and every month, just to keep pace with population growth, in the near-term, going solar adds virtually nothing to our ailing economy.

Long-Term Economic Benefits

According to Speaker of the House John Boehner, the coal industry is responsible for 760,000 good paying permanent jobs. If that’s correct, then Potus’ goal of reducing the coal industry by 46% would result in a loss of perhaps 349,600 good paying permanent jobs, assuming the entire industry doesn’t collapse in the process. And remember, Copper Mountain created just 5 permanent jobs (that’s not a typo). So once Potus’ scheme is fully realized, after 22 years and $1.1 trillion are squandered, the U.S. will have created just 37,645 permanent jobs (5 * 7,529).

In the long run, Potus will have replaced 349,600 (or more) permanent full-time jobs with just 37,645, for a net loss of 311,955 jobs, an 80% reduction. Brilliant! By the year 2035, assuming we haven’t plunged into the Dark Ages, we will have higher cost electricity, something we already had at a much lower cost, and the nation will have achieved a greater level of unemployment with evermore people dependent on government aid. Well, so much for the economic benefits of Method Number 4. But at least the planet will be healed, right?

Environmental Trade-Offs

Construction of an additional 7,529 Copper Mountain sized solar power plants would involve converting some 2,860,855 acres of land into solar farms (380 * 7,529). That equals an area of 4,470 square miles.

Although this may sound like a lot, according to the USDA Economic Research Service, the United States has a total land area of nearly 2.3 billion acres. In 2007, the major land uses were forestland at 671 million acres (30 percent); grassland pasture and range-land at 614 million (27 percent); cropland at 408 million (18 percent); special uses (primarily parks and wildlife areas) at 313 million acres (14 percent); miscellaneous uses (like tundra or swamps) at 197 million acres (9 percent); and urban land at 61 million acres (3 percent).

Since the Mojave Desert, which spans parts of California, Nevada, Utah, and Arizona, comprises an area of 22,000 square miles, a sufficient amount of land is not a problem. The only issues are ironically environmental. With all the CO2 hysteria these days, we won’t likely know of the negative effects of pointing thousands of square miles of polycrystalline, monocrystalline and amorphous silicon panels directly at the sun until something bad happens. After all, we’re just finding out that wind turbines aren’t all they were cracked up to be: “Rare bird last seen in Britain 22 years ago reappears – only to be killed by wind turbine in front of a horrified crowd of birdwatchers.” Not that environmentalist’s care about the needless slaughter of wildlife.

And, you may recall that it was only after implementing the corn, sugarcane and soybean ethanol fads that we discovered the concept of carbon debt – that large amounts of trapped carbon are released into the atmosphere when vegetation burns or decays as land is cleared, and that this up-front carbon debt could take centuries to break even with emissions gradually avoided by substituting bio-fuels in place of fossil fuels. Oops!

What would happen if every other nation across the planet were also to implement Potus’ program, turning several hundred thousand square miles of the Earth’s surface into a gigantic silicon light reflector? Would the atmosphere fry? Would people go blind? Would an ice age ensue? Would the number of violent storms, tornadoes and hurricanes escalate? Would the Sun explode? Are unknown negative effects of solar panels already having an impact on Planet Earth, and we’re just unaware? Is global warming propaganda really just a self-fulfilling prophecy?

Industrial-scale solar development is well underway in California, Nevada, Arizona, New Mexico, Colorado and Utah. The federal government has furnished more public property to this cause than it has for oil and gas exploration over the last decade — 21 million acres, more than the area of Los Angeles, Riverside and San Bernardino counties put together. And even if only a few of the proposed projects are built, thousands of square miles of wild land will be scraped clear, and several thousand miles of power transmission corridors will be created. But many of these power plants will fail, as new technologies render older models like Copper Mountain obsolete, and the desert will be scarred well beyond a human life span. In fact, according to scores of federal and state environmental reviews, no amount of mitigation will repair it. But isn’t solar power the most efficient use of Earth’s resources?

Capacity Factors

Capacity factor is a general term for all power generating systems and refers to the difference between what a system can achieve at continuous 100% output (its power rating) versus what it actually achieves under normal (less than 100%) operating conditions.

The capacity factor for solar panels varies between 15% and 40%. This means, if a solar panel has a capacity factor of 25% its average energy output will be 25% of what it was designed to achieve. For example, a 100 watt solar panel with a capacity factor of 25% has an average energy output of just 25 watts. Thus, if you need 100 watts of power, you’ll need to install four 100 watt solar panels. Well, so much for efficiency!

The capacity factor of a power station is the ratio of average output power to peak power that the station could deliver. Due to fluctuations in the availability of the primary energy source and outages due to maintenance of the equipment, the capacity factor is never 100%. In fact, for renewable energy sources, it is mostly below 50%. The capacity factors of solar power plants are particularly low, mainly because the sun is only above the horizon half of the time. This matters, because electric power plants are more cost efficient when they can be run at high capacity, with less fluctuation.

At full capacity, the 55 MW Copper Mountain plant would produce around 482 gigawatt-hours (GWh) of electricity (55 MW times 8,760 hours, where 8,760 equals 24 hours times 365 days). But since PV solar plants in that part of the country only have a capacity factor of around 19%, actual output is reduced to around 92 GWh. In other words, it’s not a 55 MW plant, it’s at best effectively a 10 MW power station (55 MW times 19%). With that in mind, according to the U.S. Energy Information Administration (a) and other references (b), in 2009, the capacity factors for the various sources of electrical power were as follows:

  • Photovoltaic solar in Massachusetts – 13% to 15% (b).

  • Photovoltaic solar in Arizona – 19% (b).

  • CSP solar in California – 33% (b).

  • Wind farms – 20% to 40% (b).

  • Natural Gas – 10% to 42% (a).

  • Oil – 7.8% (b).

  • Hydroelectric – 39.8% (a).

  • Coal – 63.8% (a).

  • Nuclear – 90.3% (a).

Since coal has a capacity factor of 63.8% versus solar energy’s 13% to 33%, when Potus speaks of replacing 46% of coal generated electrical plants with solar, what he really proffers is to replace our second most efficient source of electricity with the second worst. If efficiency were the goal, then it seems to me investing more towards nuclear power would be the best use of our resources. But what do I know?

Nuclear power plants produce electricity 90.3% of the time, which trumps all other sources of electrical power. But sadly, per the table near the top, the U.S. only produces 19% of its electricity from nuclear, compared to 37% from coal, 30% from natural gas, 7% from hydro-power and just 0.11% from solar. What gives? Are we at war with efficiency too?

Considering capacity factors, since there are 24 hours in a day, solar farms in the U.S. can at best deliver power for 8 hours out of 24 (33% of the time), and at worst for just 3 hours per day (13%). On the other hand, coal delivers power 15 continuous hours per day (63.8%), natural gas 7 hours a day (30%), and nuclear energy for 22 out of every 24 hours (90.3%). I don’t know about you, but I’ve grown accustomed to the convenience of electricity 24/7 (twenty four hours a day, seven days a week). Sorry, but going backwards isn’t a viable option.

Summary

Today, 37% of our electricity comes from coal and just 0.11% from solar. Replacing 46% of coal fired power plants with solar, as Potus presupposes, would necessitate building approximately 7,529 Copper Mountain sized power plants at a cost of around $1.1 trillion, with potentially $316 billion subsidized by the federal government, and another $90 billion by the states. It would also require scraping and clearing 2,860,855 acres of land (4,470 square miles) for conversion to solar plants, and several thousand miles more for power transmission corridors to deliver the product to market, irreparably damaging to the planet.

As far as benefits, on the one hand, we’ll have electricity, something we already had, so nothing is gained. On the other hand, since solar electricity costs three times as much to implement and produce as coal, unlucky consumers living in solar districts can expected to see at least a 50% hike in energy costs, and that’s on top of the additional taxes and fees all of us (including unborn generations) will be forced to pay in order to subsidize the scheme.

And although as many as 119,780 temporary solar construction jobs will be created and lost over the 22 year cycle, when it’s all said and done, only 37,645 permanent jobs will remain, while some 349,600 good paying coal industry jobs are destroyed. Finally, we will have reduced by 46% our second most efficient source of electricity, coal, which has a capacity factor of 63.8%, shifting reliance towards solar, which is at best only reliable 13% to 33% of the time. So the net economic benefits of going solar are less than zero (zilch minus).

But at least the Earth’s temperature will theoretically drop by a fraction of a degree in a thousand years or so, unless it turns out that mankind really doesn’t control nature (i.e. solar activity). For all we know the Earth’s temperature could vary wildly, between several degrees warmer or cooler, depending on the effects of converting thousands of square miles of the planet into a gigantic silicon light reflector.

Conclusion

But then there’s this: If coal is so horrible, then why not just eliminate its use entirely? Well, one reason might be that we need a reliable source of electricity in order to make the more than 5.8 billion solar panels required to pull off Potus’ scheme (775,000 times 7,529). And if the goal really is the elimination of coal as a natural resource, then just take my figures above, multiply them by 2.18, and you’ll have a good approximation of the costs and benefits. What you will discover is that in order to eliminate coal entirely, we would need to build approximately 16,386 solar farms, covering an area of more than 9,729 square miles, at a cost of more than $2.3 trillion. Anyone have an extra $2.3 trillion lying around?

Just like all other brilliant recommendations emanating from the mouths of crony politicians, solar energy turns out to be the most expensive, the least economically beneficial and the least efficient means to an end. An end which in their minds is just another way to game the system and cash in on the ignorance of the masses. Fortunately, just as the corn ethanol boondoggle of the last decade has now faded, this solar power fad too shall pass. If our goal is a return to the inefficiencies of the 19th Century, then perhaps we should follow the dictates of Potus, but if we are really serious about cleaning up the environment and producing reliable, efficient and abundant electrical power, it seems to me we should be moving towards Thorium (nuclear energy without the waste).

Other References:

Helpful Energy Comparisons, Anyone? A Guide to Measuring Energy – Climate Central

Total Electric Power Industry Summary Statistics, 2013 and 2012 – U.S. Energy Information Administration

Sacrificing the desert to save the Earth – Los Angeles Times

Energy from Thorium – Nuclear Energy without the waste!

Photo Credit: Homeowner Robert Phipps Says Neighbor’s Solar Panels Are Blinding

High Gasoline Prices and the 2012 Recession, Part II


Artificial Demand ::

“Real demand is not artificial. We should resist as much as possible the notion of providing things that are not actually demanded by anyone.” ~ American Consensus

– By: Larry Walker, Jr. –

The price of any product or service is normally determined by two variables, supply and demand. In economics, prices rise as demand increases, as supply decreases, or a combination of the two. It’s only when supply keeps pace with demand that the price of gasoline stabilizes or declines.

Since we know that the world’s population is increasing, not decreasing, more gasoline production is constantly required, not less. It doesn’t take a rocket scientist to figure that out. Thus, the only way to reduce gasoline prices, in the face of rising global demand, is through greater production. Yet, U.S. oil production has been on the rise since 2009, while demand has declined. So, why is gasoline stuck above $3.25 a gallon?

Was there suddenly a great demand for solar panels, biofuels, windmills and electric cars in 2009? The answer is no. Do cars and trucks run on solar panels and wind turbines? The answer is no. Yet, the 2009 stimulus set aside $80 billion in deficit financing to subsidize politically preferred green energy projects, which had little or no demand at the time. In fact, there is little demand for such products today. What the world demanded in 2009 is the same thing it demands today, more gasoline. So why is the federal government involved in providing things that are not actually demanded by anyone?

According to the Energy Information Administration, global oil consumption declined slightly in 2008, 2009 and 2010, while global supply has kept pace with demand (see chart above). In 2010, global supply actually exceeded demand, but as of 2011, the latest statistics available, world demand set a new record of 87,421,000 barrels per day, up from 83,412,000 in 2010. Yet global supply has kept pace with demand. So why have U.S. gasoline prices climbed by more than 90% since January 2009? The answer doesn’t involve oil supply and demand, it has to do with the decline of the U.S. dollar.

The purchasing power of the consumer dollar has declined by 24.3% since 2001 (see chart below). The dollar actually strengthened for a brief 5-month period, from September 2008 to January 2009, but then resumed its decline, having fallen by 8.9% since January 2011. What happened to the price of gasoline during the five-month’s that the dollar strengthened? It declined dramatically, from $3.72 a gallon to $1.64 (see Part I). And what happened to the price of gasoline after January 2011? It shot past the $3.25 per gallon breaking point, where it remains today.

What caused the dollar to decline? The U.S. monetary base, the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank’s reserves, has increased by 324.2% since 2001. The money base grew from $616.7 billion in 2001, to $2.6 trillion as of September 2012. You can see in the chart below, that $256 billion of this increase occurred between January 2001 and September 2008. But from September 2008 to January 2009 the monetary base increased by $858 billion. However, this initial increase actually strengthened the dollar, and was, evidentially, the precise temporary stimulus needed at the time. The only problem with this brilliant strategy was that it wasn’t temporary.

Instead of winding down at the end of January 2009, what had been a well timed temporary stimulus was unfortunately doubled. Since then, the monetary base has been jacked up by another $886 billion. Instead of a temporary stimulus, what we wound up with was a permanent doubling-down of the original amount. Is this what the economy needed? What was the result? This time instead of strengthening, the purchasing power of the dollar plummeted.

Thus, by the time Barack Obama was inaugurated, the economy had already received the temporary stimulus it required. How do we know? The proof is the decline in the price of gasoline, to near its historic inflation adjusted norm of $1.73 a gallon (see Part I). But ever since then, the price of gas has risen from $1.88 to $3.65. That’s the proof. What we have witnessed during the Obama Administration has been reckless and unnecessary deficit-financed spending, which not only added six-months to the Great Recession, but has lead to a prolonged period of stagnation.

The Federal Reserve should have started reducing the monetary base in February 2009, but was unable to, due to the Barack Obama’s unprecedented $832 billion stimulus plan. In addition, as a result of Mr. Obama’s $1 trillion-plus annual budget deficits for the past four consecutive years, instead of being able to control the money base, the Fed has been forced into the unlimited printing of dollars, vis-à-vis QE3.

Based on the current trajectory, what we can expect with another four years of Barack Obama is a continued decline in the purchasing power of the dollar, and higher gasoline prices, in spite of improved U.S. supply and falling demand. The problem with high gasoline prices is they lead to recessions, while lower prices foster economic expansion. The target price for gasoline is the 1992 inflation adjusted price, $1.86 a gallon. The current price is $3.65.

In the midst of the Great Recession, the average price of gasoline only exceeded the breaking point ($3.25 a gallon) for a total of 31 weeks. In contrast, the current price has remained above the breaking point for a total of 86 consecutive weeks, from February 28, 2011 to present. What does that tell you? It leads me to believe that the U.S. is currently in recession. The cause: Inflation due to excessive money printing, necessitated as the result of an $832 billion stimulus, and unprecedented trillion dollar budget deficits due to Barack Obama’s inability to govern. Is there a witness?

One month ago, the Economic Cycle Research Institute (ECRI), the same organization which successfully predicted the last recession, and which over the last 15 years has gotten all of its recession calls right while issuing no false alarms, declared that the U.S. is in recession. In an article entitled, The 2012 Recession: Are We There Yet?, ECRI stated, “Back in December, we went on to specify the time frame for it [the recession] to begin: if not by the first quarter of the year, then by mid-2012. But we also said at the time that the recession would not be evident before the end of the year. In other words, nine months ago we knew that, sitting here today, most people probably would not realize that we are in recession – and we do believe we are in recession.”

The policies of Barack Obama didn’t deliver us from the Great Recession, they prolonged it. The $832 billion stimulus plan merely created an artificial demand for U.S. dollars, and is directly responsible for re-inflating the same imbalances that existed prior to the recession. How can we tell whether or not we’re better off than we were four years ago? Well, here’s what’s different today. We are more than $16 trillion in debt, 25 million Americans are either unemployed or underemployed, instead of reducing the money base the Federal Reserve is printing more money to purchase mortgage-backed debt on an unlimited basis, our tax and regulatory structure is mired in uncertainty, we are suffering from a foreign policy meltdown, and the price of gasoline has remained over $3.25 for a record 86 consecutive weeks.

The Obama Administration has done everything in its power to hide the truth from us, but we’re just not going to take it anymore. Americans can take a lot, but one thing we won’t tolerate is government officials who try to deceive us. The federal government can easily manipulate unemployment statistics, since the numbers are basically made-up anyway, but it cannot so easily engineer the price of gasoline. To do so would entail releasing oil from the Strategic Petroleum Reserve, which is in place to mitigate national emergencies, not sway elections.

Four years of Barack Obama’s policies solved nothing. We are currently teetering somewhere between back where we started from, to worse off than we have ever been. And with a looming fiscal cliff, another four years of Obama will only make things worse. America can’t take another four years of trifling rhetoric, high gasoline prices, or another government-prolonged recession. It’s time to wash our hands of the Obama Administration, and time to turn toward mature, experienced, and responsible leadership. You know what time it is!

“A lie hides the truth. A story tries to find it.” ~ Paula Fox

Reference:

Weekly U.S. All Grades Conventional Retail Gasoline Prices | U.S. Energy Information Administration

The 2012 Recession: Are We There Yet? | Economic Cycle Research Institute

The Malaise of 2012 | Part IV

High Gasoline Prices and the 2012 Recession, Part I

Truth is not easily hidden.

– By: Larry Walker, Jr. –

Conventional retail gasoline averaged $3.65 a gallon in the most recent week ended October 22, 2012, yet when Barack Obama was sworn into office the price averaged $1.88. When questioned about the 94.2% increase which occurred on his watch, Mr. Obama remarked that the reason gasoline prices were so low when he entered office was because the U.S.was “in the middle of an economic depression.” However, the question wasn’t why prices were so low when he entered office, but rather why they ballooned by 94.2% on his watch. We’re still awaiting his answer.

In the second presidential debate, Barack Obama stated that, “oil imports are at the lowest levels in 16 years.” But as I pointed out in Debate 2 | Obama’s Oil & Gas Rhetoric, the gasoline I need to fill my tank only cost an average of $1.23 a gallon in 1996, the equivalent of $1.81 today. And later in the same debate, Obama proclaimed that, “oil imports are down to the lowest levels in 20 years.” Well, which is it Mr. President? I pointed out in the same post, that the 1992 price of regular unleaded averaged $1.13 per gallon, the equivalent of $1.86 today. Is the price of gasoline $1.81 to $1.86 today? No. So then what was Obama’s point?

Are we supposed to believe that it took an economic depression to bring gasoline prices down to $1.88 in the week ended January 19, 2009, when that would actually have been higher than the average inflation adjusted price of $1.73 at that time? I don’t know what that tells you, but it tells me that gas prices were in a bubble before the Great Recession, a bubble which finally burst during month 8 of the 19-month downturn. High gasoline prices were actually one of the factors leading to the Great Recession, the subsequent decline merely brought prices in-line with the historic norm.

If this is true, then hasn’t the price of gasoline been in the midst of another bubble since 2011 (see chart below)? And if a bubble currently exists, does that mean the U.S. is either in or near recession? To know the answers, we must venture back in time and analyze what actually took place prior to the Great Recession. The following analysis focuses on all grades of conventional retail gasoline.

Gasoline Prices and the 2001 Recession

Gasoline prices generally rise during the first six months of the year, and fall during the remainder. The 2001 recession began in March and ended in November, as indicated by the first shaded area in the chart above. Going back to January 1, 2001, according to the U.S. Energy Information Administration, we find that conventional grades were selling for an average of $1.42 per gallon. Once the recession commenced prices peaked at $1.70 in May, before the normal seasonal decline. But due to the recession, followed by a post-911 reduction in demand, prices continued to fall reaching a low of $1.08 by the week ending December 18, 2001. This represented a decline from the peak of roughly 36%, over 32 weeks.

Based on the 1992 price per gallon of $1.13, the 2001 equivalent price should have been $1.43 (as represented by the solid blue line). Due to the recession, gasoline prices temporarily declined below the inflation adjusted level, but would eventually regain equilibrium, reaching $1.46 towards the end of 2002. All in all, gasoline prices remained at or near equilibrium between 2001 and 2003. It was in 2004 when prices began to spin hopelessly out of control. The reason for the subsequent price hike was initially blamed on a significant number of refineries being offline, and later by rising crude oil prices.

Prior to the Great Recession, a record high of $3.25 per gallon was set in the week ended May 21, 2007. The chart above contains a green dashed-horizontal line at the breaking point, the pre-Great Recession record of $3.25 a gallon. The solid blue line represents the annual inflation adjusted price of 1992 gasoline. Although gas prices may currently be on the decline, until they dip below $3.25 a recession threat remains. At the same time, any price above $1.86 is not optimal. So where are we today?

Gasoline Prices and the Great Recession

The Great Recession commenced in December of 2007. At the time, gasoline was averaging $3.03 per gallon, but within the first eight months the price would set a new record of $4.10 per gallon in the weeks ending July 7 and July 14, 2008 (see chart above). But then something phenomenal happened. From the peak, prices declined to $3.17, or to below the $3.25 breaking point within just 14 weeks. And prices continued to fall all the way to a low of $1.64 by the week ending December 29, 2008, within another 11 weeks. So from peak to trough, gasoline prices declined by 60% in just 25 weeks, a notable difference from the 36% decline over 32 weeks at the end of the 2001 recession.

After the 2001 recession prices remained relatively stable for two years, but that wasn’t the case with the Great Recession. This time, when prices hit bottom the recession wasn’t over. It probably should have been over at that point, and perhaps it would, had it not been for artificial demand, induced by an unprecedented amount of deficit-financed government intervention. By the time the Great Recession ended, the price of conventional gasoline had risen from a bottom of $1.64 to $2.64. So from an early Great Recession surge to $4.10, prices finally flushed out at $2.64.

To summarize, during the Great Recession, gasoline prices rose by 35% before declining by 36%. By comparison, during the 2001 recession, prices rose by 20% before declining by 36%. That seems fairly harmless on its own, but what’s missing is the fact that gasoline prices doubled, from $1.50 to $3.08, during the previous recovery, between January 2004 and December 2007. That’s the key. There’s the bubble. So what was the cause?

According to information from the U.S. Energy Information Administration, there was a notable rise in U.S. petroleum demand, and a corresponding decline in U.S. supply from 2004 to 2007, as indicated by the shaded area in the chart below. In fact, the phenomenon of rising demand and declining supply actually commenced in 1986.

A quick study of the chart leads to two questions. Is the U.S. currently producing more oil than it did in 1985? The answer is no. Is the U.S. consuming more petroleum than it did in 1985? The answer is yes. Yet in 2009 there was a noticeable decline in demand and a corresponding uptick in supply, the combination of which contributed to lower prices at the pump. And, it appears that U.S. oil supply is continuing to trend upward, while demand has leveled off. So since demand is stable and supply is increasing, gasoline prices should be dropping like a rock, but instead we have witnessed a 94.2% price increase since January 20, 2009.

So was Obama right to blame the 94.2% price hike, on what he refers to as the extraordinarily low prices he inherited as a result of an economic depression? No, because by inauguration day the price of gasoline had settled right about where it should have, on an inflation adjusted basis. Recall that in 1992 the price of regular unleaded gasoline was $1.13 per gallon, which would have been equivalent to $1.73 in 2009; and the national average was $1.64 on December 29, 2008, and $1.88 on January 19, 2009. Thus, at that time, the price of gasoline was barely above its inflation adjusted value (see the first chart).

Going back to the original question, the reason prices have risen on Obama’s watch has nothing to do with supply and demand. The root cause is unprecedented government intervention vis-à-vis his $832 billion stimulus plan (see Part II). The stimulus program merely re-inflated a price bubble that existed prior to the recession, the first caused by lack of supply, and the second by devaluation of the dollar. It was this artificial deficit-financed demand that caused gasoline prices to rise from the $1.88 he inherited to $2.64 by the end of the recession, so that by June of 2009, gasoline was only 19% below its pre-recession record of $3.25.

Gasoline would remain below $3.00 from June 2009, until the week ending December 27, 2010. It was during this period that the economy showed its most promising signs of recovery. But ever since then, the price of gasoline has never fallen below $3.00. Instead, in the week ended February 28, 2011 the price once again accelerated past the $3.25 breaking point, where it has remained for the last 86 consecutive weeks.

With regard to 2010 being the end of the Obama recovery, the proof is that Real Gross Domestic Product (GDP) contracted by -3.1% in the year 2009, as gasoline prices surged from $1.64 to $2.62. Then in 2010, GDP grew by 2.4% as prices stabilized and remained below $3.00. But economic growth again slowed to a rate of 1.8% in 2011, as prices climbed above $3.25. GDP further slowed to a growth rate of just 1.3% through the second-quarter 2012, as gas prices remained above $3.25.

Note: The third-quarter 2012 advance estimate that GDP grew by 2.0% is just that, an estimate. In fact, according to the Bureau of Economic Analysis, “the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency. The “second” estimate for the third quarter, based on more complete data, will be released on November 29, 2012.”

Continued: High Gasoline Prices and the 2012 Recession, Part II

Reference:

Weekly U.S. All Grades Conventional Retail Gasoline Prices | U.S. Energy Information Administration

The 2012 Recession: Are We There Yet? | Economic Cycle Research Institute

The Malaise of 2012 | Part IV

Photo Via: Midwest Energy News

Debate 2 | Obama’s Oil & Gas Rhetoric

Forget Fact Checking: Where’s the Logic?
– By: Larry Walker, Jr. –
In a real town hall meeting, the person asking a question gets to follow up. What we saw Tuesday night wasn’t a town hall meeting at all. The readers appeared to be simply mouthing someone else’s prearranged questions. There wasn’t any passion. But what if the public was allowed to retort? Following are my thoughts on the lecture Barack Obama provided in response to the second question, a rather simple one which he has yet to answer.
QUESTION: Your energy secretary, Steven Chu, has now been on record three times stating it’s not policy of his department to help lower gas prices. Do you agree with Secretary Chu that this is not the job of the Energy Department?

OBAMA: The most important thing we can do is to make sure we control our own energy. So here’s what I’ve done since I’ve been president. We have increased oil production to the highest levels in 16 years.
Natural gas production is the highest it’s been in decades. We have seen increases in coal production and coal employment. But what I’ve also said is we can’t just produce traditional source of energy. We’ve also got to look to the future. That’s why we doubled fuel efficiency standards on cars. That means that in the middle of the next decade, any car you buy, you’re going to end up going twice as far on a gallon of gas. That’s why we doubled clean — clean energy production like wind and solar and biofuels.
So by the middle of the next decade, or around the year 2025, if I’m in the new car buying market at the time, I’ll be able to go twice as far on a gallon of gas. But, since a gallon of gas today costs more than twice what it did four years ago, we’re already at net zero. Mr. President, I was talking about today, right now, not 13 years from now or sometime after I’m dead and gone. And what exactly do coal, wind and solar have to do with the price of gasoline? Retail gasoline prices are sitting at a national average of $3.77 a gallon, just $0.33 off the all time high of $4.10 set in July 2008 (see chart above).
And all these things have contributed to us lowering our oil imports to the lowest levels in 16 years. Now, I want to build on that. And that means, yes, we still continue to open up new areas for drilling. We continue to make it a priority for us to go after natural gas. We’ve got potentially 600,000 jobs and 100 years worth of energy right beneath our feet with natural gas.
Oil imports may be at the lowest levels in 16 years, but the gasoline I need to fill up my tank only cost an average of $1.23 a gallon in 1996, which would be equivalent to around $1.81 today, yet I’m paying around $4.00. Is the reason gasoline cost so much today perhaps the result of fewer imports? And as far as natural gas goes, can I fill up my tank with that tomorrow morning?
And we can do it in an environmentally sound way. But we’ve also got to continue to figure out how we have efficiency energy, because ultimately that’s how we’re going to reduce demand and that’s what’s going to keep gas prices lower.

We can drill for oil in an environmentally sound way? What does that mean? And what do you mean by ultimately reducing demand? How far away is that, longer than four years? Although it’s true that less demand can result in lower prices, it only works if supply remains constant or increases. But if both supply and demand are cut at the same time, then consumers won’t realize any price change at all. And if demand declines too rapidly, then many suppliers may be forced out of business. And then what will we do?
[The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.]
Now, Governor Romney will say he’s got an all-of-the-above plan, but basically his plan is to let the oil companies write the energy policies. So he’s got the oil and gas part, but he doesn’t have the clean energy part. And if we are only thinking about tomorrow or the next day and not thinking about 10 years from now, we’re not going to control our own economic future. Because China, Germany, they’re making these investments. And I’m not going to cede those jobs of the future to those countries. I expect those new energy sources to be built right here in the United States.
Mr. President, I don’t need you to tell me what Governor Romney’s plan is, he can do that himself. The question was: Do you agree with Secretary Chu that it’s not the job of the Energy Department to help lower gas prices? So it seems your answer is that I need to be thinking about 10 years from now, and forget about how I’m going to get to and from work today, tomorrow, next week, or even four years from now. I see. And you’re willing to cede the jobs of the present in hopes that jobs of the future will be based on your present day policies, which for all we know might be considered archaic a month from now.
That’s going to help Jeremy get a job. It’s also going to make sure that you’re not paying as much for gas.
What’s going to help Jeremy get a job, a policy geared to kick in by the middle of the next decade? In the meantime I guess poor Jeremy will have to get by on two or three McJobs, and hope he makes enough to cover the cost of getting to and from work. So is that it? Are you finished?
CROWLEY: Mr. President, let me just see if I can move you to the gist of this question, which is, are we looking at the new normal? I can tell you that tomorrow morning, a lot of people in Hempstead will wake up and fill up and they will find that the price of gas is over $4 a gallon. Is it within the purview of the government to bring those prices down, or are we looking at the new normal?

OBAMA: Candy, there’s no doubt that world demand’s gone up, but our production is going up, and we’re using oil more efficiently. And very little of what Governor Romney just said is true. We’ve opened up public lands. We’re actually drilling more on public lands than in the previous administration and my — the previous president was an oil man.
Wait, so world oil demand and our production are going up? But you just said that our ultimate goal is to reduce demand in order to keep gas prices lower. So if the supply and demand of oil is going up, and you’re drilling more than the last administration, then how is this achieving your goal? And actually very little of what you just said is true. According to the U.S. Energy Information Administration production of finished motor gasoline is trending downward, not up (see chart above). Maybe this is why gasoline prices are hovering near historic highs? After all, we’re not talking about jet fuel and diesel, are we?
And natural gas isn’t just appearing magically. We’re encouraging it and working with the industry.
Can I fill up my car with natural gas tomorrow morning? Because if I could, that would truly be magical.
And when I hear Governor Romney say he’s a big coal guy, I mean, keep in mind, when — Governor, when you were governor of Massachusetts, you stood in front of a coal plant and pointed at it and said, “This plant kills,” and took great pride in shutting it down. And now suddenly you’re a big champion of coal.
Maybe Romney’s a big champion of jobs, unlike you Mr. President. At least he’s got a plan to create 12 million jobs in four years to eliminate the current jobs deficit. Where’s yours?

So what I’ve tried to do is be consistent. With respect to something like coal, we made the largest investment in clean coal technology, to make sure that even as we’re producing more coal, we’re producing it cleaner and smarter. Same thing with oil, same thing with natural gas.
Yeah, consistently wrong. The question wasn’t about coal, clean coal or natural gas, you we’re specifically asked to comment on the Energy Departments role in keeping gasoline prices affordable.
And the proof is our oil imports are down to the lowest levels in 20 years. Oil production is up, natural gas production is up, and, most importantly, we’re also starting to build cars that are more efficient.
So now you’re saying that oil imports are down to the lowest levels in 20 years. A minute ago you said 16 years. Let’s see, so that would be 1992, right? In 1992 the price of regular unleaded gasoline averaged $1.13 per gallon, which would be equivalent to $1.86 today. So if oil production is up, oil imports are down, and they’re building more efficient cars, then why am I still paying close to $4.00 a gallon at the pump?
And that’s creating jobs. That means those cars can be exported, ’cause that’s the demand around the world, and it also means that it’ll save money in your pocketbook.
So by producing more efficient cars, America will someday be able to export them to Libya, Egypt, Iraq, Iran, Greece, Spain and such, and this will create jobs and save money in my pocketbook. Well, that’s interesting, albeit illogical.
First of all, switching over from the production of less efficient to more efficient cars doesn’t add any net jobs, because as new jobs are created, old ones are destroyed. It’s at best a zero sum game, and perhaps even worse looking at the latest green energy failure. The electric-car battery producer, A123 Systems, Inc. filed for bankruptcy just hours ahead of your wishful thought. How many is that? Looks like around 16 so far, see

Obama’s List Of Failed Green Energy Jobs & Companies.

Secondly, as far as saving money in my pocketbook, what’s a pocketbook? It seems that you’re either talking about something way off in the distant future, or the archaic past, but the question pertains to right now, today, within my lifetime.
OBAMA: That’s the strategy you need, an all-of-the-above strategy, and that’s what we’re going to do in the next four years.
No Mr. President, that’s not the strategy I need. What I need is for gasoline prices to drop by at least half of where they are today. So do you agree with Secretary Chu that it’s not the job of the Energy Department to help lower gasoline prices or not? Will gasoline prices be half what they are today if you get reelected, or twice as high? Oh never mind, I’m leaning heavily towards the other guy anyway. I can make sense out of Romney’s policies, but as for yours, the record speaks for itself.
References: