Sunday, February 26, 2012

Weak Debate Performance and Romney's Money Overwhelms Santorum, Why $5 Gas is Good and Bad

Santorum Fading Fast in Arizona and Michigan
Rick Santorum missed a golden opportunity at this week's debate with probably his weakest performance to date.  No candidate hit a home run at what could be the final GOP debate of the year (there are none scheduled as of this writing), but Mitt Romney did what he came to do - dislodge the narrative that Rick Santorum is a principled conservative versus the more opportune Romney.

Santorum's defense of earmarks, No Child Left Behind and other votes in the Senate that are less than appealing to an increasingly conservative GOP primary and caucus base was strained to say the least.  I have often said that Senators in general make less appealing Presidential candidates than Governors for the simple reason that Senators cast votes for people to parse apart whereas Governors accomplish things.  Santorum's voting record clearly compromised his voice as an economic conservative and he did a poor job preparing to defend that record.

Aside from the structural differences of being a Senator, the fact is, Rick Santorum is not a purist economic conservative.  He has always voted and spoken of the need for government to intervene in things - he just wants the government to intervene in a different way than Democrats do.

And let's not forget Mitt Romney's flooding of the airwaves, the same tactic he used to wrestle the Florida primary away from Newt Gingrich.  The money matters, especially in a race where the electorate is so fluid and especially in primary states where people outside of the hardcore base of the GOP votes - people who do not follow every position and twist and turn of the race.

So, a week after he was trailing in Michigan and basically breakeven in Arizona, Mitt Romney appears reasonably comfortably poised to win both.  The latest polls have him up by 10% or more in the winner-take-all Arizona primary and up by an average of about 4% in the proportionally-awarded state of Michigan.

Neither of these losses will be utterly lethal to Santorum's campaign, as Super Tuesday, with a far more favorable map to him, is coming just a week behind.  But momentum matters.  It matters in terms of where the "Not Romney" voters go in places like Georgia and Oklahoma - do they all break for Santorum or do some go to Gingrich?  Where does the money, so crucial to compete in that many contests on the same day, flow?

Romney is, just like every other writing, the favorite to win.  A dual-win next Tuesday helps that case.  The key number to watch is the percentage of delegates that Romney has after Super Tuesday.  He will almost certainly be in the lead, but whether he crosses the 50% threshold of delegates awarded is the key to winning the nomination outright.

Of the likely delegates awarded in the 8 nominating contests to date, Mitt Romney has won 45% of the delegates - by far the most (Santorum and Gingrich each have 19% with Paul at 15% and the now-exited Perry and Huntsman carrying a combined 2%) but not an outright majority.  Arizona's winner-take-all delegates will help that.

But we will have to take stock in 9 days of where things stand.

Rising Oil Prices is a Mixed Blessing and Curse
2011 saw the highest average gas prices at the pump in history, even in inflation-adjusted terms, just edging out the 1981 gas crisis price (which, on an inflation adjusted basis averaged $3.31/gal) at $3.51/gal.   2012 is on pace thus far to break that record.

Higher gas prices are bad for the economy in many ways.  Petroleum represents 38% of all United States energy consumption and rises in gas prices permeate through costs to consumers in a number of ways including both the direct costs that they pay at the pump and in prices of all kinds of consumer goods, whose transportation is directly impacted by diesel prices.

Additionally, high gas prices (more specifically higher crude oil prices which drive gas prices) means more money going to exporters in unfriendly places like the Middle East and Venezuela which means a growing US trade imbalance and money flowing to governments that could use it to fund terrorism at worst and fund anti-American principles at best.

But high gas prices also drive economic incentives - mainly the economic incentive to reduce our dependency on oil altogether.

Virtually all of our other sources of energy are preferable to oil in most ways.  Let's examine the 5 major sources of energy in this country.

As I said above, oil leads the way with 38% of our energy consumption.  It has many problems.  60% of our oil need is sourced from foreign sources.  Proven US oil reserves would cover less than 3 years of national energy needs if foreign supply where cut off.  Oil is one of the highest carbon-producing forms of energy as well, second only to coal in greenhouse gas emissions.  In virtually every way except one, oil is an unappealing energy source.  That one reason is the reason it is still 38% of our energy consumption - it is very easy to build equipment that converts it to energy on a small scale.

70% of all oil consumption is used in transportation - primarily passenger automobiles and trucking.  There has simply been no cheaper design for portable transportation than the internal combustion engine and no cheaper engine design than one that runs on gasoline.

Natural Gas
Natural Gas is now 24% of our nation's energy consumption and that number is growing.  Natural gas is used in many ways - from home heating to industrial use (think big natural gas boilers and HVAC systems) to electrical generation.  It's advantages are that it is very cheap, thanks to shale extraction and rising proven reserves in the US.  It is easily burned to produce energy and natural gas power plants are far cheaper to build than any other kind.  It is more environmentally friendly than oil, giving off less carbon emissions per BTU.  And, as a net exporter of natural gas, it is an energy source that is entirely domestically sourced.  And we have enough proven reserves of natural gas to cover 100 years of energy consumption.

Natural gas has some barriers as well though.  While it is very cheap to supply and convert in stationary locations like homes, power plants and industrial uses, it is far more difficult to use as a fuel source in mobile vehicles like cars.  While the technology exists on a fairly economical scale to compress natural gas, those engines and systems are still more expensive than gasoline engines and the infrastructure to refuel is limited at this point.  In fact, natural gas only represents 2% of the energy for transportation and that is primarily where large municipalities have consciously put in the infrastructure, such as city buses or intra-airport transportation at hubs.

Finally, while the burning of natural gas is clearly less bad for the environment than gasoline, the extraction process that has enabled the natural gas boom - shale extraction - has questionable environmental consequences where it is extracted.

Coal now represents 22% of national energy use, a number that has been declining for a number of years.  Coal is abundant and cheap (with over 250 years of proven reserves), but has a number of drawbacks.  It is impractical for residential or transportation use (outside of trains) and poses environmental problems that not only including high carbon emissions per BTU but also lots of nasty particulate and sulfur emissions that lead to acid rain, lung cancer and a whole bunch of other unpleasant things.

Coal plants have been so heavily regulated since George Herbert Walker Bush signed the Clear Air Act in 1991.  Essentially, existing coal plants were "grandfathered" in and allowed to continue to operate, but new plants had to comply with emission controls so costly that no one has attempted to build a coal plant since.

Promise of "clean coal" technology has been out there for years, but no one has yet been able to figure out an economically viable way to convert coal into energy in a way that is environmentally friendly.

Nuclear power represents 8% of our national energy use.  It has many advantages - since it requires only atoms as an input, we have an essentially infinite supply of nuclear power.  But nuclear power is incredibly costly, which is one of the reasons that no new nuclear plants have been built in decades.  A new nuclear plant costs upwards of $1 billion to build and will therefore never be built without significant government subsidy.  Southern Company plans to build a new one, but only because of significant government loan guarantees.

Environmentally, nuclear produces zero carbon emissions, a welcome thing to those who dislike greenhouse gases.  The main drawback is that radioactive waste, that we have yet to establish a national strategy for disposal of, leaving nuclear power plants to continually store more and more waste on site, with no place to send it.

Renewables as a whole represent 7% of our national energy use and cover a broad range of technologies, from hydroelectric dams such as the Hoover Dam that convert water flow to electricity to wind turbines in the Northeast and rural California to solar panels across the sunny parts of the country.

Renewables possess all the advantages environmentally - zero emissions and unlimited supply.  They also possess the same key drawback as nuclear, on a capital cost basis they are not economically viable without government subsidies.  Costs, especially for wind and solar are coming down as scale builds, but at this stage, no one would invest on a large scale without tax credits or other subsidies.

So why are higher gas prices good for all of this?  As you can see, oil is the one source of energy that we cannot source our needs domestically and higher prices push the economics in favor of alternate energy technologies, which can be sourced domestically and are largely cleaner environmentally.  The free market is starting to take care of what the government has not solved.

So what could the government be doing?  There are a surprising number of things that we could do from a national energy policy standpoint that wouldn't cost much.  If you've read this space for a while, you've seen a number of these before:

(1) The Revenue-Neutral Gas Tax
An originally Republican idea, I simply can't understand why this great idea hasn't gained traction.  The concept is simple - you raise per gallon taxes on gasoline and reduce payroll taxes by an offsetting amount.  The net cost to the government is zero, but it creates an incentive that rewards consumers that reduce gas consumption and punishes ones who do not.

(2) Tax Imports, Seed Local Infrastructure
You could tax imported sources of energy and use the money to subsidize building the infrastructure to support alternatives - the building of natural gas filling stations, electrical plug-in stations for vehicles, etc.  This could be done at a net zero impact on the deficit.

(3) Set Renewable Targets for Electricity
Require an ever-increasing percentage of electrical generation come from renewable sources.  This leaves the market-place decisions about technology to the free market and forces power companies to examine the best strategy to push us to more renewable and ultimately builds scale that makes those technologies more economically viable.  California is blazing that trail, but we need to get on board nationally.

Energy policy is important both environmentally and from a national security standpoint.  You'd think that would be something that left-wing environmentalists and right-wing national security conservatives could find some common ground on.  I mean, does anybody WANT to be importing oil from Libya?

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