RealCurrents

I was reading Jessica Mah’s post on how a lot of her high-school and college-age friends are really scared about global warming. Here in the U.S., it’s often reported that folks in other countries are more concerned than the average American, but little attention has been given to how the issue is impacting younger Americans.

It occurred to me that they need a little perspective on this. I grew up in the 1970s, and for those of us Americans who went through this period when the U.S. was in a severe technophobic angst, and there were constant pronouncements about all the terrible things that were going to happen, I suppose we’re just not so quick to be convinced the world is coming to an end every time scientists start preaching doom and gloom.

This was a very long list of crises that 1960s-70s experts insisted were soon to befall us, most of which I’ve probably (thankfully) forgotten, but which included such calamities as pollution, endangered species, population, overcrowded skies, the San Andreas and yes, even a looming ice age. I guess being terrified of nuclear armageddon just wasn’t enough anymore. The funny thing was, very few of these scientists were talking about an energy crisis.

Of course, even the “energy crisis” didn’t last long, once investors started pouring hundreds of billions into oil, which was $35 when I got out of high school but less than $10 when I got out of college. Jessica titled her post “Scared of Global Warming? Bring in the entrepreneurs!” and so yes, I think she’s right that entrepreneurs and the free market are a lot of the answer to global warming.

In general, though, I think we ought to stop and notice something. It sure seems to me that scientists can get into a negative funk about stuff, and end up focussing too much on the problems rather than the solutions. In fact, I can’t help wondering if it’s sort of the same dynamic as with investment newsletters - negativity and fear apparently sell a lot more newsletters, and a crisis may, sadly, be the only thing that will finally garner a research project any funding.

Now, this is certainly not all the scientists’ fault, nor is the business world off the hook. Just look at the American car industry, one of the most pitiful examples of research budgeting in modern history. Perhaps GM, Ford and Chrysler may be excused for being caught unprepared on fuel economy in the early 70s, since they were already struggling with new emissions restrictions. On the other hand, here we are again thirty years later and, sadly, it seems that only the recent combination of high oil prices, a dropping dollar, and concerns over carbon emissions was finally enough to get them serious again about improving fuel economy.

Amidst all the prognostications, it’s still not clear how global warming is going to play out. Besides the many questions of specific effects in specific places, there’s at least three basic questions involved. First is the question of how fast temperatures will go up. Second, how much will they rise long-term (or is it a runaway increase with no end in sight)? Third, if temperatures can be stabilized, will (can?) they then head back down?

We hear virtually nothing of potentially beneficial effects, but clearly there’s going to be some winners among the many losers from effects of global warming. Interestingly, so far the Russians seem to be the only ones thinking ahead about any positive outcomes from it. As Jessica suggests, entrepreneurs ought to be also. Again, though, we must keep a proper perspective - a long-term perspective.

While there’s a lot we don’t know, we can say that at least for practical purposes, whatever we can do will take place over decades. Realistically, it’s far too late to do anything about changes that may take place within the next decade or so. In other words, whatever research and changes - technological or political - that are to be made must be done consistently over a decades-long time frame.

This is, for example, why I strongly disagree with the basic Kyoto (Treaty) framework. Already China is producing as much carbon emissions as the U.S., and will likely continue to increase. Kyoto might be effective in reducing the emissions of Western industrialized nations, but given these reductions and the continued growth of China, India and other large industrializing countries, within a few years this extremely costly plan will prove ineffective in reducing the bulk of emissions.

We’ve heard from the scientists on global warming, but have yet to hear from the engineers, who are going to be the folks who have to make reductions in carbon emissions actually happen. We need to think about cost/benefit ratios. We also need to think about sustaining research investments over decades, which as the history of NASA indicates, is awfully difficult to do when you start out with crash-program type overbudgeting.

I think it’s a good bet that a lot of these new technologies are going to come from both big American businesses (such as Boeing with its new 787) and American entrepreneurs. This realization may not play well overseas, but any approach such as Kyoto that hobbles the American economy is going to be counterproductive.

Like it or not, the U.S. is still a (if not the) major innovation engine in the world. Companies in Silicon Valley (1, 2, 3) and elsewhere in the U.S. are working on hundreds of different technologies, everything from emission controls to cheap solar to electric cars to wind power and so on. Here in Texas, it’s become common to see the giant parts of wind turbines rolling down the highway on their way west, where hundreds are being put up.

We must remember that innovation, not political decrees, is the only way to solve the problems from global warming, and while we’re at it, let’s not forget to also think about taking advantage of the benefits.

Business Week has a disturbing article in the May 29th issue about how Exxon Mobil, flush with earnings larger than the GDPs of many countries, has apparently decided simply not to fund a projected $11.2 billion pension liability. This bothers me for a lot of reasons, but most of all because it’s such an outlandishly large example of a flawed mindset that is found today throughout our society, and even more so in the analytical world of finance.

It seems that setting something aside for a rainy day just isn’t “smart” enough for the highly-trained MBA types. Of course, they want someone to hold reserves, but not them. So instead of taking a small portion of Exxon Mobil’s earnings and getting the pension fund ship-shape, I guess the bean-counters would rather use that money to make money, since that would be the “smart” thing to do. Then, if down the road things don’t go so well, they can let their employees and the government - taxpayers - take the hit.

It used to be that the strong, responsible entities in society were expected to hold reserves, but since there is inevitably an opportunity cost involved, nowadays everyone wants someone else to be the one holding financial reserves, inventory, or whatever. Even many governments (e.g. the U.K.) and the International Monetary Fund seem to be souring on the notion of holding gold reserves. Amazingly, the Clinton administration’s manipulation of U.S. gold holdings in the 1990s still remains largely obscure, whether for lack of curious journalists or lack of public interest, I don’t know.

The point is that in the real world, reserves and margin, i.e. “unused” assets, serve a purpose. They provide stability and buffers that guard against damage. While it’s bad enough that in our instant gratification culture many have lost a grasp of this, it’s particularly disturbing that somewhere in their extensive education, those who ought to know best - highly-analytical financial types - also seem to lose an appreciation for the essential role of reserves.

Besides artificial lights and artificial foods, we also live in a world with a lot of artificial economics. Even folks who work in a factory are generally very removed, economically, from the actual production process. By this I mean that they have become accustomed to getting a paycheck, usually the same amount, every two weeks, which is a total fiction when it comes to how things are produced. Just as we have become used to having light, day or night, we have come to expect income streams to be uniform.

We have also become comfortable with increasingly artificial markets, such as those for complex derivatives transactions. Yet there are real dangers in these artificial markets, as the spectacular failures of Long Term Capital Management and Enron have shown.

While we may take comfort in the broad spreading of risks in the derivatives market or in the Fed’s manipulation of interest rates to bring about a “soft landing”, in the “natural economy”, everything inevitably fluctuates. There are physical cycles of day and night, winter and summer, rain and drought; business (demand) cycles of boom followed by bust; and production cycles of planting & harvest or research & development, cycles that in the latter case can be much longer, e.g. years in automobiles or decades in aerospace. Reserves are essential to manage the uncertainty inherent in these real-world cycles.

Of course, there are still some folks who contend with these natural economy effects on a daily basis. These include farmers, entrepreneurs, and long-suffering managers in the global manufacturing economy. Many of these maintain a deep disdain for the financial types, but what is really needed is for those in charge of managing the money to have one foot firmly planted in each world, i.e. to have an appreciation of the fine points of financial analysis while also maintaining a grasp of natural economy dangers.

As an example, successful entrepreneurs soon learn that Job One is managing cash, not maximizing profits. Without liquidity, a business is bled dry, no matter what the balance sheet or income statement says. Entrepreneurs also soon learn that even when you have a good year, that is no guarantee that the next year will be the same. You learn first to use the receipts from “fat years” to fill holes that were left from the lean years, before presuming to tackle other opportunities.

This is simply prudent management, something understood by millions of small business people, and it really bothers me that a huge business like Exxon Mobil could lose sight of something so basic. Besides this, I can’t help but think of all the companies that have wasted windfalls on imprudent acquisitions. Of course there’s Chrysler, for example, who after emerging from bankruptcy with the help of federal guarantees, plowed many of the profits from the success of its minivans into questionable acquisitions, and ended up back on the brink. Then there was also Mobil’s own purchase of Montgomery Wards, which one employee described to me as a “money disposal project.”

There’s no guarantee that oil prices will be at $70 a year from now, and I hope Exxon Mobil’s employees, directors and shareholders, as well as the PBGC, will put pressure on its executives to do the prudent thing and fully fund its pensions now, while they could just “write a check” to do it. Maybe the company is entitled to its “obscene profits”, as some put it, but it’s not entitled to leave us holding the bag.

Over the weekend, I was disturbed by a report from AgapePress that the Bush administration had somehow, incredibly, approved a deal allowing the UAE company Dubai Ports World to acquire six eastern U.S. ports (New York, New Jersey, Philadelphia, Miami, Baltimore, and New Orleans).

My main concern was that this was going to be another one of those outrageous stories that only the conservative press picks up, but this time I needn’t have worried. Despite the federal holiday Monday, Republicans and Democrats alike were quick to condemn the deal. Thankfully, I don’t need to check that “Press Coverage Holes” category this time.

Nevertheless, as RealCurrents is all about trying to highlight what isn’t already being said somewhere else, but that needs to be part of the discussion, there are several points deserving consideration:

First and most mystifying to me (and I’m a conservative Republican, by the way), this ports deal is just one more instance of the Bush administration refusing to demand, or even suggest, some sort of wartime economic/business sacrifice. First it was the insistence that Americans go on spending like crazy in the wake of 9/11, buying more and more gas-guzzling SUVs even as we went to war in Afghanistan, and as the neo-cons in Washington maneuvered to start another war in Iraq.

The inability of the administration to formulate an effective energy conservation strategy to go along with a protracted war in the Middle East is not merely irresponsible, it is strategically stupid. While the U.S. borrows hundreds of billions of dollars to fight the war, Americans are borrowing hundreds of billions more to pay to oil-producing countries that in many cases have been documented sources of terrorists. This is worse than what we did in the Cold War, spending huge amounts on defense procurement while propping up the economies of the Eastern Bloc.

If things get bad enough, will Washington demand a draft, with a lot of hoop-la about how wartime sacrifices must be made? Though relatively small by historical comparison, the casualties already being suffered in Iraq and Afghanistan are substantial and seemingly ongoing.

The administration likes to pull out the “we’re at war” card every time it’s convenient (e.g. reauthorizing the Patriot Act), yet quickly tuck it away when other interests come into play. I think most Americans would agree that if we’re really at war, then there are going to be some strategic assets that are not to be dealt away.

This is the patently obvious second point: most every homeland security study has shown that our ports are some of our most vulnerable infrastructure. That the administration could even consider turning these over to a Mid-East country shows exactly why this must not be allowed, even if the country is our “ally” (whatever that means with Muslim countries) and, oh by the way, extravagantly wealthy.

Whoever analyzed this deal is confident that safeguards will be in place. This is the problem with any bureaucratic organization - it begins to think it’s infallible, and before long will let anything get by it as long as it’s got all the right rubber stamps on it. In other words, bureaucracies excel at straining out gnats but sometimes miss the glaringly obvious. The FBI’s failure, despite repeated requests, to investigate a suspicious student who only wanted to learn to fly 747s, straight and level, is not only now a classic in the annals of bureaucracy, but also a painful warning of what can happen if we place too much confidence in government.

Of course, the Katrina disaster in New Orleans has provided fresh evidence that bureacracies at all levels can fail to handle the obvious, even when it was expected ahead of time. The simple solution is simply not to let this deal happen in the first place, even if global trade suffers a little bit.

Third, as Republican Sen. Lindsay Graham noted, the adminstration’s stance is “unbelievably tone deaf politically at this point in our history”. As such, it provides ample evidence (as if any more was needed) that the White House is just not being well-managed. Either the administration doesn’t have a coherent message in many cases, and/or it’s failing dismally to communicate that message. Even as I write this, Don Wildmon of the conservative AFA has sent out an email alert opposing the deal, noting that “Normally we don’t ask you to participate in issues such as this, but we feel that this one justifies your involvement.”

I used to be impressed with George W. Bush’s ability to be in touch with public sentiment, but there’s a clear disconnect that seems to have worsened ever since the neo-cons gained ascendancy. Bush clearly needs help, and he should start by restoring Karen Hughes to a top White House role. Then he should demand that the neo-cons play by the same rules as everyone else, i.e. they have to actually justify their points of view rather than just use a knee-jerk accusation of the other side.

Anyone who’s been on the net for long knows there are millions of thinking Americans who are totally outraged at the lack of a real debate on the war in Iraq and other key issues, such as federal spending. Most of these are Democrats, but the number of conservative Republicans among these is growing rapidly. Maybe this ports deal will finally get the real debate about the war on terror started.

Pittsburgh Business Times is reporting that the Nuclear Regulatory Commission has approved Westinghouse Electric’s design for its AP1000 pressurized water reactor. This could lead to the building of new reactors in the U.S. by 2010. Westinghouse reportedly already has a contract with Duke Energy for two AP1000s.

Well, it’s about time that nuclear gets another shot in the U.S. When you consider all the health effects from hydrocarbon pollution, plus acid rain and potential greenhouse warming, nuclear can come out looking pretty good. I have long felt that if we were really serious about energy in the U.S., nuclear would be an important part of the picture.

The big problems with nuclear in the U.S. have been management of reactor construction, extensive legal interference by those opposed, and disposal of nuclear waste. Of these, the first is industry’s fault, whereas the latter two are mostly political (and with waste, somewhat technological).

Regarding management, the U.S. historically had a lot of problems because reactor designs were not sufficiently standardized. France took a different approach, developing a standard 900MW reactor. Such standardization brings both economic and safety advantages, and it’s important that the new AP1000 design, which also may be built in China, be managed in this way.

Protests and legal wrangling have been a big problem in the U.S., and I hope that the government and industry (what little is left of it) can somehow educate the public better about the relative safety of nuclear power. While natural gas is pretty clean burning, most places would probably be far better off with a nuclear plant than a coal-burning one. Of course, one of the reasons nuclear is garnering attention now is because of the rapid rises in natural gas prices. A lot of gas power plants have been built here in Texas since deregulation, and their economics are certainly not as attractive as they once were.

Disposal of nuclear waste is really the biggest sticking point. I think a lot of the protesting would really diminish if this issue was satisfactorily resolved. Compared to Western Europe, the U.S. is in a great position for handling wastes, with much dry and virtually unpopulated land, seemingly geologically stable, but politically it’s been difficult to move forward on a permanent site. Of course, the close majorities in the U.S. Senate in recent years increases the power of even a small-population western state to stall the project.

The French developed a vitrification process for containing some waste, which is an example of how technology could provide an extra margin of safety that might make a permanent site more acceptable. I haven’t looked into the French nuclear industry in a number of years, but their approach in the past seemed much more intelligent than ours, and we could probably learn a lot from them.

I guess that’s really the bottom line. An intelligent nuclear policy is what’s needed in the U.S. I just hope it’s politically feasible.

Capitalism works great until it doesn’t, and I’m wondering if in the energy sector we’re somehow reaching one of those economic eddies where things don’t just work themselves out. I’m not convinced yet that this is the case, but I’m really beginning to wonder how high oil has to go before we see some serious investment by the energy industry.

Okay, the term “serious investment” really isn’t fair, because that’s something they do as a matter of course. But here in Houston, Texas, the energy capital of the world, you’d think companies would be hiring like crazy. Oil is up about seven times (unadjusted for inflation) since the lows of the late 1980s.

Apparently I’m not the only one wondering about that. Reuters is reporting that European Union finance ministers meeting in England “issued a statement saying they … wanted oil companies to increase investment in oil exploration, production and refining capacity as well as alternative energy services.”

Back in the late 80s, when oil was really down, there was a bumper sticker in Houston that went “Dear God, Please give us $28/barrel oil again. We promise not to waste it this time.” For a long time, I assumed this more prudent mindset explained the oil industry’s rather non-aggressive stance (the economic devastation in the oil business was a lot worse than most people realize). Now I suspect oil exploration may well be restrained by the realities (?) of the global Hubbert curve, if indeed worldwide production is presently peaking.

In any event, it seems clear that worldwide energy demand is by no means peaking, mainly because of China and India, so oil companies may have to once again get aggressive about alternative energy sources (maybe it’s a good time to buy real estate in Parachute, Colorado - I wonder what happened to all those empty houses).

It may not be wise to press the oil companies too much to increase oil production through conventional drilling, but in a capitalist economy, when the price goes up steadily, consumers are sending a clear signal to producers to increase supply, and increased investment by producers is part of what justifies the premium profits they get in such situations.

I really don’t see how the energy companies can seriously be thinking we are presently in danger of seeing excessive investment in their sector. Oil would have to drop by nearly two-thirds just to get down to $28. I hope the oil companies will re-invent themselves as diversified energy companies or at least pay out the profits in dividends quickly so someone else can invest them in our energy future.