Changing the energy matrix

By Dave Anderson:

One of the reasons that I have not been blogging much in the past month is that my family has been traveling a lot.  The grandparents like to see their only grand-daughter (and they also like to see their own children too, but the major objective is the grandchild.)  On the drive out to central New Jersey, we take the Pennsylvania Turnpike.  Near Somerset, Pennsylvania, there has been a small six turbine wind farm for most of a decade.  That wind farm has been producing power for Pittsburgh and it is part of the green-energy cocktail.  As my wife drove and I looked out the window, I saw something amazing; every ridge line between the Somerset and Bedford exit hosted either a new wind farm with two or three dozen taller turbines, or construction was ongoing. 

Those wind farms are changing the long-term energy profile of Western Pennsylvania as they produce very low marginal cost electricity compared to fossil fuel thermal plants. 

Yesterday afternoon, the Federal Reserve stopped shrinking its balance sheet and began to monetize the US debt by buying out medium and long term US Treasury bonds.  The goal of this move is to lessen the slope of the yield curve by reducing intermediate and long term interest rates.  This morning, the 10 year Treasury has a yield of 2.79%, which is a drop of 20 basis points since the start of August.  The idea behind lower long term interest rates is to increase the number of projects that are economically viable because they can generate appropriate rates of return given their financing costs.  This should marginally promote more economic activity. 

However, as Ian notes, this move is severely limited in its impact:

After all, if the government can print money for banks, why not for
jobs?

The reason not, folks, is that if you do that, oil will go back to
levels which will crash out the economy.

The real, actual, economy, is not one spreadsheet.  It consists of
people doing things, and the vast majority of those things require
energy.  The ur-energy is still oil.  And no, there is not enough oil to
go to full capacity utilization�because doing so will kick gasoline
well over $5/gallon.

Changing the energy profile of the nation is a necessity if we are to break the oil-standard lock on the economy.  Oil production over the past few years has been flat.  It has barely moved in response to $140 a barrel prices, or $45 dollars a barrel prices.  It is the hard constraint on economic activity.  There are three ways to resolve the problem.  The first is for the nation's elite to tell everyone else to suck on it and get used to much lower standards of living.  The second is to dramatically increase the oil intensity efficiency of each gallon of oil used; this means financialization of the US economy and continued outsourcing, so it is a more dignified version of number 1.  The final option is to change the energy portfolio of the Untied States.

And that means electrification of as much infrastructure as possible, and getting that new electricity from far substitutes of oil instead of near (coal and natural gas) substitutes for oil.  When intermediate and long term interest rates are this low, and probably going lower as the Federal Reserve monetizes US government debt, making a big wind-play and a big train play is a simple and elegant solution to both mass unemployment and the current structural oil-price headlock we're in.