Energy Costs and Our Economy
In my previous post I explained my view on the direction America’s energy policy needs to go. Some of the responses to my post expressed concern as to what can be done to reduce energy prices while we develop and improve new technologies. In order to explain this we must first examine what is applying downward pressure on our economy, creating the rampant inflation we are experiencing, and elevating oil prices to unsustainable levels.
As you know all too well, it would be difficult to exaggerate the impact that escalating energy costs have on our economy and the lives of Americans. Our dependence on foreign oil has added to our trade deficit which has contributed to the declining value of our dollar and led to our highest rate of inflation in recent history. Excessive energy costs have created a downward economic cycle that is at risk of spiraling out of control. As energy costs rise businesses pass the cost on to the consumer. Consumers, who are facing increased costs and limited resources, are conserving where they can and limiting discretionary spending. This in turn is reducing business revenues in nearly all industries causing large corporations and small businesses alike to reduce their production, shrink their workforce, declare bankruptcy, and in some cases go out of business altogether. Of course this further reduces consumer spending and the downward pressure on our economy continues. We cannot simply save our way out of this cycle. While individual conservation will have some effect on our personal finances, it does nothing to substantially reduce the price of energy. Few businesses can significantly reduce their energy consumption without severely impacting production levels. Shrinking production to the extent necessary to affect energy usage will result in vast layoffs, increased unit costs to recover fixed overhead costs, and therefore compound our rate of inflation. Oil is the life blood of economic growth and the unintended consequences of elevated energy prices, such as inflation, are already proving to be disastrous.
The good news is we do not have a shortage of oil at this time. There are no reports of fuel rationing, no gas lines like we saw in the 1970’s, and no gas stations are running out of gasoline to sell. In the short term, there is little that we can do to affect the price of oil today outside of reducing restrictions and regulations on domestic oil drilling and on building additional refineries. The current price of oil is driven by the futures price of oil. Oil futures are driven by speculators and based on future supply and demand. Rather than blame the speculators, we need to pay attention to what they are basing their decisions on. Soaring oil prices fueled by speculation means that based on expected global oil production capacity and anticipated global oil consumption, demand will exceed supply in the future. What the speculators are telling us and what we need to respond to today is that there will be oil shortages in the future unless we start doing something now. It is no coincidence that since President Bush repealed the Presidential ban on offshore drilling, oil prices have receded by nearly $30 per barrel. If our government will simply allow oil companies to locate, drill, and refine oil, they will effect a change in the global oil production capacity portion of the speculation equation which will cause oil futures and thus current oil prices to be reduced now even though they may not actually be able to produce that oil for several years.
As we explore and drill, we must continue our research to discover and refine sustainable sources of energy. One source of sustainable electrical power that is readily available is nuclear. It is clean, cost effective, and safe. Western Europe produces most of its electricity from nuclear power; France generates nearly 80% of its electricity from nuclear power. Current power plant design is safer and more efficient than any of the nuclear plants we are currently operating and can be constructed and on line within 5 years, unless our government burdens the construction and approval process with excessive restrictions and regulations.
While calling on all Americans to inflate their tires may not have much of an impact on the cost of energy or our economy; there are options available to us that will result in more affordable energy, reduce our inflation, and provide much needed relief to all Americans. We must demand that government create a comprehensive energy plan that reduces crippling restrictions and regulations to allow the United States to become energy independent and to allow all Americans to go about the business of growing our economy and pursuing our goals and dreams.