Climate Change and Policy Direction

Yesterday, after just hanging up from a successful and stimulating conference call with Marc Morano of ClimateDepot.com during which the topic of climate change and energy policy was the theme, an e-mail popped in. It was the latest commentary from Byron King, the energy editor of the Whiskey and Gunpowder investment newsletter. CARE’s executive director Marita Noon had closed the conference call with the announcement that Byron King would be the conference call guest for May. How fortuitous that he sent this piece to CARE within minutes of the mention of his name.

This posting is a great follow up to the April conference call and a wonderful introduction for the May conference call. Byron picks up on the climate change discussion. He mentions several of the issues that CARE has been addressing—including hatred” of carbon-based fuels (see op-ed on this topic), algae to liquid fuels (as was the topic of one of the student speeches in CARE’s Student Speech Competition at New Mexico State University last week) and geothermal energy (see op-ed on this topic).

How we wish we could afford to have Byron on staff at CARE—but we are grateful he is a friend and is willing to share his insights!

The Direction of Energy Policy
The other day I had lunch with a “brain trust,” of sorts. Participants included a retired executive from an aerospace company. This guy helped design and build many of the reconnaissance satellites that the U.S. has launched. There was a senior executive from a large steel company. There was a venture capitalist who made his first $500 million in the software industry, and who now has much of that wealth spread around in biotech and nanotech startups. There was a former senior political appointee who worked in the Treasury Department. And then there was me.

“Climate Change” Driving Policy Now
According to the satellite builder, the dominant elements of the political and media culture are “completely in the tank” when it comes to believing in the dangers of “climate change.” It’s not as if climate change is demonstrably true, he pointed out. There are valid scientific data from both sides of the climate change issue, and many valid data points in between. But according to the aerospace executive — some of whose satellites were built to track climate change — “For at least ten years, if you have not been promoting the dangers of climate change then you have not been receiving government grants. So the research community is following the money.”

Thus the research literature is coming out strongly in favor of “doing something” about climate change. And policy-makers are using this research literature to justify doing what they’ve wanted all along, which is change the world as we know it. As a class, the activists want to change the world into something else.

“Pathological Hatred” of Carbon-Based Fuels
According to the steel executive, the climate change issue has spurred what amounts to “a pathological hatred” of carbon-based energy systems. “It doesn’t have to make practical sense,” says this source. “It doesn’t even have to work with economics. It just has to support a policy to utterly transform the nation’s energy system. The people making policy now have a crusader’s mentality. ‘The past is trash,’ is how many of the new policy makers view our world. So the new policy makers want to promote radical change in energy policy. They’re going to jam it down the throat of the economy.”

According to the steel executive, the steel industry expects to see inflation-adjusted, baseline energy prices triple or quadruple within ten years. “Whether the government taxes carbon-based energy at the source, or whether they pass ‘cap-and-trade’ legislation, it’s going to cost us. So we’ll pay. Of course, we’ll pass along the new costs to the steel buyers. If demand goes down, we’ll close facilities. Then the TV cameras will show up at the plant gates to watch us shut the doors and click the padlocks. And we’ll get called bad names by the people who never much liked us in the first place.”

Can the Economy Support What the Government Wants to Do?
The former Treasury official added that a new “policy paradigm” has yet to form in Washington DC. “It’s like during the Cold War, there was a bi-partisan consensus to confront and contain the Soviet Union. It was expensive, but we agreed to do it. We made the national sacrifice. Well, that foreign policy consensus ended when the Berlin Wall fell and the USSR came down.” The groupthink in the early 1990s was that another kind of broad consensus had to take the place of the confrontation with the Soviets. And by its very nature, that consensus was fragile.

“Let me back up,” said the former Treasury official. “Confronting the Soviet Union gave the U.S. an excuse to continue with Franklin Roosevelt’s Depression Era, New Deal, big government for 45 years after World War II. But after the USSR fell? Why did we still need big government? To run a modern welfare state? That was the justification.

Remember the talk about that ‘Peace Dividend?’ People were drooling over the idea of cutting the military budget and paying for more and better social welfare through more big government.”

“So what happened?” asked the Treasury guy. “Some people thought they were going to run a big government welfare state using modern monetary theory. They convinced themselves that we could do that. They didn’t understand the long term problem.”

What was the long-term problem? “The welfare state was never going to last. Especially because the nation collectively wanted it to support a rank, consumerist culture that could not earn its keep within the world economy. We imported, imported, imported. And we paid for it with cheap dollars. After the U.S. left the gold standard in 1971, the fundamentals of the American productive economy could never support what the nation was trying to do. We’ll look back eventually and realize it was delusional policy-making. All we did was run down the economy for a couple of generations. It finally collapsed in 2008.”

Whatever “post-USSR consensus” existed in the U.S. in the 1990s shattered during the 2000s. “People went nuts because of the Bush Administration,” said the Treasury official. “The white-bread explanation — call it ‘Decline and Fall for Dummies’ — was that it was all about the evil George Bush and his wars in Afghanistan and Iraq. Well, Bush and the wars were visible, so that’s what people blamed. The real problem for the U.S. was that the whole foundation for post-war American society, economy and governance was caving in under our feet. The timbers were rotten.”

The Barn Burned Down — Did Anyone Notice?
According to the Treasury man, the U.S. economy is now confronted by “block obsolescence” of many of the economic and political assumptions with which we’ve lived for decades, since World War II. “Chrysler isn’t the only big institution that’s bankrupt. We ought to burn down a few universities, while we’re at it,” he added.

And he noted that Republicans and Democrats both fed at the trough while the going was good. “But while the politicians had their heads buried in the trough for all those years,” he said, “they didn’t notice that the barn was burning down around them.”

The Treasury-man continued: “Look at the destruction of former industrial titans like General Motors, and with GM the annihilation of much of the rest of the automobile industry. Who’s going to invent whatever will take its place? We used to say that 40% of the U.S. economy was based on the auto industry, directly or indirectly. Are we ever going to see 40% of the U.S. economy based on putting solar panels on roofs, or tuning the gearboxes of windmills?”

“Free-Traded” to the Poorhouse — We’re at the Edge of the End
The former Treasury official looked at the ongoing economic crash. He placed it within the context of the long-term decline in U.S. manufacturing. “As a society,” he said, “we’ve made a lot of very bad choices of both moral philosophy and economic policy. Those bad choices have brought us to the edge of the end. We’ve spent, borrowed and ‘free-traded’ ourselves to the poorhouse. Now the Chinese own us.”

Helping Embryonic Industry — Creating a Success Story
The venture capitalist chimed in with some thoughts. “If the feds are going to spend billions on stimulus, then they ought to direct some of that money to help fund promising research. How about some money to pay for every fossil-fuel power plant in the country to siphon off some of its CO2? Then run the CO2 through a facility to grow algae to make biofuels.”

“We’d be killing about four birds with one stone,” explained the venture capitalist. “We’d be taking down CO2 emissions. Not much, maybe, but some. We’d be helping an embryonic industry that can be competitive in coming years. Heck, turning algae into fuel is easy. The basic part is just high school chemistry. So we’d be creating a new supply source for the liquid fuels industry. And we’d be able to point to at least one success story where people can agree that we all did something right.”

Then the venture capitalist added that one of his startups is “working on coal-eating bugs.” He explained that “There’s a lot of coal buried so deep, or under other conditions that we can’t mine it. That coal will never get out. So why not put bugs down in the deep seams, and let them eat the coal? Then we can harvest the gases that come out the back end of the bugs, and use that as feedstock for other things.”

“Well, What Do YOU Think?”
At one point, one of the lunch participants turned to the silent person at the table, who was busy taking it all in and making a few discrete notes. Then came the dreaded question, “Well Byron, what do YOU think?”

I focused my comments on geothermal development. I pointed out that for all the anti-carbon sentiment out there, the most under-appreciated, “clean and green” energy source is geothermal. There appears to be strong support for geothermal development via tax incentives and other, policy-based standards. Combine this with the growing social focus on clean, renewable energy sources.

Right now, 24 states have renewable portfolio standards (RPS) for electricity production. And Congress is leaning towards setting a national standard of 20% to 25% RPS power production by 2025. We’re at the point where a utility like California’s Pacific Gas and Electric is so desperate for “clean” energy that they’re contracting with a privately-owned company to build a satellite to harvest solar energy from space, and “beam” it back to earth.

The companies that are out there now are in relatively advanced stages of developments. The big problem is that the follow-on pipeline is almost empty. The problem has been lack of access to capital for the past year or so. In other words, lack of capital is the strongest headwind to progress. If the funding delays can break down, then we’ll see decreased complexity for funding, and project schedules moving ahead.

Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor.