Screw Tom Friedman and the T. Boone Pickens He Rode in on.
I had been planning on writing a similar post when I read and commented on Gob's post yesterday about alternative energy. Paul had a comment that I wanted to talk about because I think it frames the issue in a way that isn't helpful to understanding what is happening or what is going to happen. Namely, looking in political terms at energy and the new push by energy companies and their surrogates into alt.energy is just buying into their '$hell' game (so to speak).
I will concede that this post is remarkably free of linky goodness. But this is my interpretation of some commonly agreed facts, and I think my interpretation is bolstered by my experience. I'm in basically in this industry and if projections continue, we will have worked on approximately 1000 wind turbine locations by the end of this year. As perspective, we are only a very, very minor player, but I'm highly interested and motivated to learn about this topic, so bear with me.
Paul brought up the following frame:
"There are three separate issues here…
1) our need to find sources of ’cleaner’ energy
2) our need to find sources of ’affordable’ energy
3) our need to be energy independent"
Yes, these political and geopolitical thingees are very shiny and interesting, but you have to keep your eye on what's under these "$hells". I'll cut to the chase, keep your eye on #2 if you can (although I don't agree it is "our need" so much as "the energy corporations need" and therein lies the rub).
I think most here agree American imperialism and militarism is driven by our supposed 'need' for cheap commodities (Walmart nation, car culture). Although we are basically self-sufficient in most commodities, agriculutural products, steel, etc., we aren't self-supporting in everything, and the biggies are cheap labor (Japan, then Singapore, Taiwan, Mexico, now China) and oil. You can't easily fight wars for access to cheap labor or markets (anymore) but extractive commodities like minerals and oil have ALWAYS and STILL ARE being fought over militarily. Cleaner? Hah! Self-sufficiency? Double hah! You think corporations cares about the environment or what is in the country's interest? You don't think our government is primarily run for the benefit of corporations (as the most powerful "persons" in the land)? Corporations are looking out for their own best interest, if they didn't, they would actually be in violation of their responsiblity to their investors.
But just because they are supposedly looking out for their investors doesn't mean they are perfect in their actions or are long term solvent, just ask Freddie Mac and Fannie Mae. All "clean" energy means to the corporate energy producers (and all of our energy is produced by corporations) is less litigation and less regulation. All that energy 'independence' means to them is a decrease in the cost and political uncertainty of military securement of (ding, ding, ding) affordable energy. What is important to the corporate energy producers is not the shells they are moving around, it's the pea hidden underneath. That "pea" stands for "Profits".
The energy corporations (GE, Exxon, etc.) and their surrogates (Halliburton, T. Boone Pickens, pipeline companies, etc.) have built their corporate cultures, business model and physical infrastructure around securing and providing extractive commodities (oil, coal, natural gas) to a wide customer base. The equations in that business model are pretty easy to grasp: the price you can sell commodity minus the cost to buy, extract, produce said commodity equals profit. To increase profit you both increase the former (mess with demand, value-added products, increase uses of your product, i.e. plastics, road-building, building materials etc.) and decrease the later (more efficient and/or inexpensive production, political manipulation/collusion/bribery/intimidation of producing countries, pushing military interventions to secure supply at desired costs). Does this sound familiar? Wonder why alt energy sources like biofuels were the first to gain political traction? The reason is biofuels fit nicely into the extractive/commodity business structure as well as supply chain infrastructure. Biofuels are tailor-made to fit into the existing energy company model described above.
So then, why the sudden push by energy companies into alternative energy like wind/solar, etc.? Watch T. Boone Pickens ads and you can suss it out: the old extractive business model is doomed, except in the meantime, drill, drill, drill, and do it for another commodity, natural gas too while you are at it. They have milked that cash cow for all it was worth and now it is time to send it to the slaughterhouse. Even the corporations now see that they have no tools left to control the costs to extract, produce, deliver extractive energy commodities. They see the costs becoming more unpredictable, but ultimately just escalating, and escalating past the price they believe they can jigger. Go back to the simple equation above price-cost=profit. Bingo.
Alt energy sources like wind and solar are a completely different kettle of fish. They do not fit the above business model. The price can't be jiggered, the cost is predictable and stable, and it discards much of the energy producing companies installed infrastructure. A wind farm or solar panel project has fixed initial price x, it has a fixed life-span and predictable maintenance costs, you borrow the money to build it so you likely need to presell the predicted generated electricity. That means the profit is fixed. Fixed costs, fixed profits and a tangible asset (the facility or equipment itself) as collateral against the construction loan makes banks happy. But even though this isn't what sends a thrill up high-flying energy company exec legs, ya gotta do what ya gotta do. Nobody wants to be Fujifilm. So the energy companies are taking their windfall profits and investing them in wind and solar projects (and lobbying hard for tax credits, which I support because we need to promote good behavior even by bad people and for the wrong reasons). This year, the Bush admin was also kind enough to give them DOUBLE DEPRECIATION CREDITS on capital equipment purchases. Supposedly to jump-start the economy, but actually this is a great way to hide your profits by simply increasing the value of your company in tangible assets, and sequeing your profits in a dying industry (oil production) in the successor to that industry. Special double pony bonus, by gaining a dominant position in the successor to your industry, you set the terms for (and who gets screwed by) the transition.
Nice work if you can get it!
So T. Boone Pickens ads (and I'm not going to give a link to his vanity site for you to see his positions although they are easily available) are about two things. First, stirring up political sentiment for massive tax breaks for wind projects that he is investing in. I support him in this goal. And then I hope he gets run over by a tanker truck, because although that is the lead, what he really wants is transition costs to increase his profit in his other investment, natural gas production and transition of vehicles to compressed natural gas. All of the energy companies share a similar two-tiered approach depending on what their other tier is. Help us continue to keep our costs down (and profits up) on the extractive commodity end (whichever commodity we are most invested in, be it offshore, natural gas, domestic, ANWR, etc.), while we leisurely transfer our profits into fixed asset capital energy investments, with the help of tax breaks and accelerated capital depreciation (both of which I support).
Nice work if you can get it.
Beyond that, I'm not sure where things are going just yet, but I disagree with many of the Kunstler types on one point, energy costs in the future will spike, yes, but they won't be wildly unpredictable, they will plateau, that is because replacement energy costs are based on fixed capital investments with predictable construction costs, predictable operating costs and predictable asset value, and hence predictable profits.
What I would like to see is somebody with the intestinal fortitude to say "screw supporting drilling, that is not the future, we will install a 100% of windfall tax on all oil profits NOT put into wind, solar and battery technology investment". That would be a change I could believe in!
What are your thoughts?