Wednesday, June 18, 2008

No one’s oil wrong and you’re welcome

Sunday I posted NY Post:“McCain’s Oil Wrong.”

It drew a number of comments. I want to respond to one here.

The commenter’s in italics; I’m in plain.

I agree with you on McCain's rant against the energy companies (and that's why he was not my first choice for Republican standard-bearer). As for oil company profits, remember that total government taxes are about five times larger, so who's calling the kettle black?

I’m not down on the oil companies. I just think they should be doing more energy conservation research and development.

I do disagree with you, though, on some of your proposals for energy conservation and alternative energy sources. I should point out that in terms of GDP, the American public has done a seemingly magnificent job at conservation. Our energy usage per dollar of real GDP is one-quarter what it was in the 1970s.

The American public hasn’t done anywhere near a “magnificent job at conservation.”

If you meant to say American industry instead of "the American public" I’m with you, and thank you for pointing out something few in MSM bother to mention, assuming they even know it: Based on energy input/product output measures, American corporations are among the world’s leaders in energy efficiency.

The absolute size of energy usage is of course larger than in the 1970s, but then the country is much larger in terms of people and GDP. (I note, though, that some of the conservation is really overstated; what we as a country have done with our environmental laws has been to push energy/labor intensive manufacturers offshore, mostly to China and India. The likelihood is that if we had not had the environmental laws, those manufacturers would have stayed here, and total oil consumption would have been lower because we are so much more efficient than the Chinese and Indians. Chalk up another "win" for the environmentalists.)

The foregoing paragraph is so fact-based, so sensible and so well stated that I suspect you’re really Charles Krauthammer.

If I’m right, I hope you’ll fess up.

If all those alternative energy sources you recommend were so profitable, they wouldn't need government hand-outs.

I’m not talking government hand-outs. I’m talking targeted government support for certain critical needs, with the support based on measurable production. Some examples: the Homestead Act, land grants for the transcontinental railroad miles complated, the GI Bill.

The important thing is to let the markets work, and in particular, to get rid of environmental laws that prevent us from drilling off-shore.

Getting rid of laws which prevent drilling off-shore should be part of a package which includes development of alternate energy. Example, the Cape Wind project.

As for the oil companies, their incentives are not to conserve oil. That research should be on the part of the oil users (not producers).

I spoke to this above.

McCain's campaign should concentrate on changing environmental laws to allow more drilling, the building of more atomic energy plants, the building of more refineries, etc.

If McCain proposes only more development of traditional energy sources I think he will be offering a needlessly limited energy policy and engaging in poor politics as well.

I thank you for your comments, including the ones critical of my positions.

Others are welcome to join the discussion on the thread.



Anonymous said...


The problem with McCain is that I have to hope he's independent vote pandering on global warming bunko, idiotic windfall tax profits, etc....

But I'm afraid he's not.


Anonymous said...

John -

Clearly, what constitutes conservation is in the eye of the beholder. Rather than disagree with you on a semantic issue, what I have done here is to gather together some figures on energy usage in the US. In doing so, I correct the egregious error I made in my original comment. In presenting the figures, I will not use any adjectives. Rather, I will let you and your readers judge for themselves the degree of conservation that has occurred over the last 28 years.

As for the egregious error, it occurred when I said that energy usage in the US is one-quarter of what it was in the 70s. The correct figure is somewhat more than one-half. (There was no excuse for my error. I was flat out wrong.) My sincerest apologies for the error.

In any event, the more exact figures would be something like this: In 1979 (when we maxed out on energy usage before the recessions) the US consumed 80,903 billion BTUs. In 2007 (the last full year before the present), total consumption was 101,603 billion BTUs. Correspondingly, real GDP in 1979 was $5,173 billion ($5.2 trillion)and $11,569 billion in 2007. If you do the arithmetic, you find that the US consumed 15.6 BTUs per real dollar of GDP in 1979 and 8.7 BTUs per real dollar of GDP in 2007. So our usage in 2007 was about 56% of what it was in 1979.

To determine usage on a per capita basis, we need the population of the US in 1979 and 2007. Those figures are respectively, 224,567 thousand and 301,621 thousand. On a per capita basis, usage was 360.3 thousand BTUs in 1979 and 336.9 thousand BTUs in 2007. Consequently, our per capita usage today is 93.5% of what it was in 1979.

Our energy usage includes fossil fuels, nuclear, renewable (hydroelectric and other) and bio-fuels. If we restrict our attention to fossil fuels, we find that they comprised 91.3% of fuel usage in 1979 and 84.9% in 2007. If you go through the arithmetic, you will find that we have cut fossil usage almost in half (actually 52.9%) per real dollar of GPD and by about 1/8 on a per capita basis (88.1%) in 1979. If we focus on petroleum alone, we find that BTUs of petroleum comprised 45.7% of energy usage in 1979 and 39.2% in 2007. (The number of petroleum BTUs used in 2007 is only 7% higher than in 1979.) So on a per real dollar of GDP, US usage of petroleum in 2007 was 48.2% of what it was in 1979 and on a per capita basis, 80.1% of what it was in 1979.

When we turn to household usage (for the point you were making about where the conservation was coming from) we find that as a percentage of consumption, total energy usage of households was 57.7% of what it was in 1979; on the other hand household energy usage as a percentage of GDP was 62.7% of what it was in 1979. The reason for the disparity when comparing usage to consumption as opposed to GDP is that consumption increased as a percentage of GDP from 1979 until now. In any event, that means energy usage by the business sector had to fall that much more, and that happened in two ways. One was a very large shift in GDP output towards non-energy using services (in effect that meant we were exporting some of our manufacturing) and the other was conservation. I do not know how much each accounted for the reduction in energy usage by business.

The interesting question those figures pose is why there was any conservation at all until recently. Remember that oil prices were low or declining since about the middle of the 1980s until 1999 or so, while incomes were rising relatively rapidly. Those would all lead us to expect increasing usage, not conservation. One possible reason I would suggest is simply uncertainty of supply. For many countries with oil, their possession of it seems to be a curse. (Think of the countries that are the major producers of oil - Nigeria, Venezuela, Iran, Saudi Arabia, etc.)

As for how the US should proceed in the energy sector, I am still going to differ with you on what is the best way. My very strong preference is to allow the markets to work without interference. Markets usually provide the best outcome in terms of providing existing goods and producing new goods. Remember, leaning on government to do the right thing in terms of where to invest is to expect unaccountable humans, for whom the future is just as much the undiscovered country as for the rest of us, to do more than humanly possible. Just look at the roads on which we drive. The potholes in those roads stare government employees in the face daily, yet they can't seem to have them fixed. If government can't do something simple like potholes, why then would you expect it to be able to do more complicated things like determining where to invest for the future?

Again, my apologies for my error.

Jack in Silver Spring

Anonymous said...

Jack in Silver Spring:

A truly outstanding post! If you could add any links to the data sources, that would be great.

I can shed some light on the shift in manufacturing to other countries. I make my living selling semiconductors to large OEM manufacturers. Its a technical sell that requires a EE degree. Since 1995, almost every large firm in my area has shifted their board level assembly operations out of the country (mainly China). I am now seeing the mid level firms do the same. in addition, I am seeing the design centers also starting to move (there are less expensive EE designers in Asia). This has led to a signficant drop in commission revenue to the sales industry in the US.

I see the low skilled jobs in my area being taken by illegal immigrants and the higher skilled jobs being outsourced. I don't understand how the GDP continues to increase under these circumstances but the downward pressure on my paycheck is very real.


Anonymous said...

John and others -

Ken asked for the sources I used.

The energy data are from:

Click on 1.3 (Annual data through 2006 from AER columns; data for 2007 from MER columns.)

The GDP data are from:

For GDP, click on Table 1.1.6 and then select the annual button.

For consumption, click on Table 1.5.6 and select the annual button; for the energy components, add together lines 10 & 15 (respectively, gasoline, fuel oils, etc., and household use of electricity and gas).

The population estimates can be found at the following site:

That last source is a little cumbersome, so you might want to hunt around the internet for an historical file.

Note also - The GDP and demographic data I used come from a vendor that has collected pertinent economic data in one place. Consequently, my figures may differ slightly from what you will find on the sites I listed.

Jack in Silver Spring