Thursday, June 26, 2008

False Hopes -- Bad Policy -- Economics Wins

When we hope for the best, we often hope for the impossible. We want to believe that we can put a glass panel on our roof and have all the free electricity we want. We want to believe that we can stick a windmill in the air and pay nothing more for electricity. We want to believe that enzymes will chew up biomass and excrete clean fuel for free. We want to believe there is no need to burn anything to produce all the power we want. We want to have our cake and we want to eat it too. We want the proverbial free lunch.

The per kilowatt cost of electricity produced by photovoltaic cells has fallen dramatically over the past 30 years. The efficiency gains are not over as high fuel prices have given numerous companies the urge to invent the "super cell". Scientist are researching everything about solar energy they can think of. Billions of dollars are being spent. Recently, the cost has fallen very rapidly and is less than half the cost of a decade ago. It still costs about 100 times as much as it costs to burn coal!

It is true that coal is a dirty fuel. If one accounts for all the external costs (according to a study done by the Paul Scherrer Institute in Switzerland), including the pollution, the cost of solar is still more than 3 times the cost of burning coal. We want cheap solar but what we have is coal and cheap oil, even when we pay the Saudis $135 per barrel.

The two cheapest ways to produce abundant electricity is by nuclear power and by oil. The problems with oil are that most of it is used as transportation fuel and that our environmentalist have made bad choices about what to protest. We should be encouraging drilling and nuclear power and discouraging the burning of dirty coal. Of course, politicians tend to avoid speaking out against coal or the environment, we all want a clean environment but at what costs.


While most every one has heard about the progress being made in solar energy, most have not heard about the progress being made in nuclear energy. New technology and the standardization of plants are dramatically lowering the cost of nuclear power. Nuclear currently cost from 4.5 to 9 cents per kilowatt hour. Coal cost from 6 to 23 cents per kilowatt hour. Include the costs of pollution and coal cost from 15 to 23 cents per hour. In America we produce half of our electricity with coal even though it cost two or three times as much as nuclear power.

Our old nuclear plants used only a small percentage of the uranium and produced a very high percentage of waste. The life of old plants has been extended 20 years beyond their original estimated life and they are producing much more power as a result of improved fuel. The volume of wast is going down while the efficiency is going up. Westinghouse recently announced another major improvement. The company estimates a 50% increase in power plant efficiency as a result of a classified technique that uses nano-technology. GE recently announced a patent on a laser technique for refining fuel that will cut the cost of fuel by as much as 70%!


So many people pine for low cost wind or solar energy that the media is full of pictures and stories. People really do not want to hear that clean wind and solar power are very expensive. A recent issue of Fortune Magazine had at least a dozen pictures of windmill farms. Dreamlike windmill "inventions" have been common in magazines like Popular Science for at least 50 years.

According to the Paul Scherrer Institute, the cost of electricity produced by windmill ranges from 20 to 50 cents per kilowatt. In the range of 4 to 12 times the cost of nuclear power, before the latest nuclear advances were developed. Once group think sets in, it is a powerful force. It was group think that has caused congress to waste money on ethanol, wind farms and solar subsides while prohibiting drilling for oil. Many ethanol plants are on the edge of bankruptcy because the cost to produce the product, even after the 46 cent government subsidy is greater than the value produced. Alcohol in car engines was tried 110 years or so ago and it was found to be problematic back then.

Once a group think mind set is established the facts are dismissed until they cannot be dismissed anymore. It took $7 per bushel corn before people were ready to hear that food based ethanol is not the answer. It was only after the price of gasoline reached $3.20 that attitudes toward drilling for oil began to change. Today, polls show that from 57 to 71% of Americans believe we should drill for oil. Congress is finally under pressure to stop spending billions on fairy tales. In the long run economics wins.


Change takes time. I was seven years old in 1957 when, theoretically, US schools were integrated. Nine years later, Roland Douthit was the one black student at my high school. Today, a black man is the democratic nominee for President. Like it or not, some votes will be cast for Obama only because he is black and some votes will be cast against him only because he is black. Change takes time.

The problems at Three Miles Island in 1979 caused a 30 year set-back in nuclear power generation. Since that time, billions of people have breathed noxious air. The Chinese will close down factories a few weeks before the Olympics in order to reduce noxious coal fumes. The good news is that China plans to build 30 nuclear power plants within the next 12 years and 6 of them are under construction now. Better still, there are 35 nuclear power plants under construction somewhere in the world right now. This does not include the reactor finally being completed in Tennessee. Will America continue to pay Venezuela $135 per barrel or will it join the rest of the world in building "clean burning nuclear power". Currently, 9 US companies have permits pending to build 31 nuclear plants. Without looking up numbers, my guess is that more than 40,000 oil wells will be drilled in America this year. Drill, Drill, Drill is a part of the solution but drilling is like the false hope of wind, solar and biomass if we think drilling will provide all the resources we need.


At last report, 71 nations have promised to help eliminate terrorism, to help eliminate nuclear bomb production and to jointly share in the safe production of nuclear fuel. India is close to joining the group. The Indian Prime Minister faces a difficult choice, he can agree to join and be forced to face elections by December or he can refuse and do significant damage to the Indian economy. Economically speaking, all nations, including Iran, should join the group. The USA and all of the major economic powers in the world are pressing hard to make it politically correct for Iran to join.

The countries that spend 4 cents per kilowatt on energy will eventually dominate those countries that spend substantially more. Deciding not to pay an extra 400% for wind power or an extra 1,700% for solar should be an easy choice. Drilling for 5 cent oil should also be an obvious choice. It is sensible to spend on clean energy research but it is not sensible to spend billions subsidizing the production by any method. Unfortunately, the process of winning congressional districts has resulted in government subsides for every energy source. It is also unfortunate that huge taxes are collected on some sources in order to subsidize the others. "Big Oil" has won a few battles but it is a heavily taxed industry. "Big Oil" has been the convenient scapegoat.


Every good is priced such that there is both a consumer and a producer surplus. This means that when Exxon sells a gallon of gas for $4 it could have easily charged more or less and the consumer could have easily paid more. As a profit making company, Exxon does not charge the maximum price it could. The maximum profit is reached though a combination of high volume and "moderated price". In other words, if Exxon unilaterally raised its price to $5 per gallon, it would not sell nearly as many gallons and its total revenues would fall, its profits would probably also fall.

From the consumer point of view, Exxon could raise the price a few pennies and still sell a lot of gas. This means there are always people who could pay more. I submit that Exxon has probably saved more people more money in the past 50 years than any other company in the world while making more profit than any other company in the world. Although Exxon is despised by many, it is a very well run company. It is a very efficiently run company. It does not wast its resources. As a result of its efficiency it can charge a small mark up and still make a nice profit.

Exxon's profit margins are quite low when compared to many businesses. Computer companies, advertising companies, drug companies and many more have much higher profit margins. In a free economy, the word profit should be a positive word. Exxon sells a lot of oil because it is good at what it does. As a result, millions of people benefit, consumers and shareholders. In the long run, economics wins.