As we begin a new year we wanted to take a look at the current energy landscape and see what the future holds for the global economy, America's oil and gas boom, whether renewables will continue to be a favorite among investors and whether we should be focusing more attention on conservation and energy efficiency rather than our continuous effort to increase supply.
To help us look at these issues and more Oiprice.com managed to speak with the well known economist James Kwak. James is an associate professor at the University of Connecticut School of Law. He blogs at The Baseline Scenario, which he co-founded with Simon Johnson. Simon and James have also written two books: 13 Bankers and, more recently, White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You. In a previous career, James worked as a management consultant and co-founded a successful software company. You can follow him at @JamesYKwak.
Oilprice.com: What changes do you see happening to the domestic energy landscape in Obama's second term?
James Kwak: The biggest trend is obviously the domestic boom in shale gas and oil, and hence the biggest question is what will happen to it. Frankly, I don't see anything happening to change the current trend. Plentiful fossil fuels do have obvious short-term economic benefits that the Obama administration is not blind to. Insofar as the administration wants to reduce fossil fuel consumption – and it's not clear that they do want to – there is enough opposition, both in Congress and in the courts, to justify a policy of doing nothing.
OP: What are your thoughts on America's oil and gas boom?
JK: There are some obvious benefits. Lower dependence on politically unstable parts of the world is clearly good. Shifting electricity production from coal to natural gas is also good. One can also come up with a plausible scenario in which plentiful natural gas buys us the time necessary to shift toward greater usage of renewable energy sources.
On the downside, I worry about the political implications of the boom. Increased domestic production will encourage politicians to declare victory on the energy front without doing anything about the big, long-term problem: climate change. Before, fears of rising energy prices and dependence on the Middle East were encouraging political investment in renewables and conservation. Now the message from ExxonMobil and its allies will be that we don't need to do anything because we are a (net) energy exporter and energy is cheap. That will further reduce the chances that we do anything meaningful about climate change.
OP: What do you see happening to the US and global economies in 2013?
JK: I'm modestly positive about the US, but that's not because of any particular insight. It's because I read calculated risk, and because the housing market is turning around.
OP: Obama has made clear his desires to cut the $4 billion a year tax breaks given to oil companies. What affect do you believe this would have on the US economy and the US oil industry?
JK: I find it hard to imagine this would have a big impact on anything. $4 billion is simply not a lot of money for the energy industry (something like a few weeks' operating profit for ExxonMobil), and even assuming they pass it on to businesses and consumers, that's not a lot of money for the U.S. economy. At the same time, it won't do much to cut the deficit. But it's still a good idea simply to get rid of economic distortions.
OP: What is the relationship between energy and the economy? Is cheap energy vital for economic growth?
JK: I don't see why, as a logical matter, you need cheap energy to have economic growth. My background is in software, for example, and energy inputs were just not an important part of our cost structure. We sold software to insurance companies, and their ability to pay for our software was not constrained by higher energy prices, since they weren't a big part of their cost structure, either. Cheap energy can certainly change the type of economic growth you have, and maybe it can increase growth, all other things being equal, but I don't think it's a prerequisite.
OP: At this moment in time natural gas extraction is cheap – which is leading people to say coal is finished. Is it too soon to predict this – as natural gas prices can't stay depressed forever?
JK: I think it's always too soon to make this kind of prediction. People thought wood was finished in England sometime in the eighteenth century, and now other people are talking about biomass (which hopefully won't make a comeback, but does have its supporters). Coal may not be economically viable now, but as energy prices rise in the future it could become viable again, and maybe someone will figure out a way to use it "cleanly."
OP: Advances in renewable energy technology are slow and expensive. Do you see renewables making a meaningful contribution to global energy production? And if so over what time period?
JK: Renewables can and must make a meaningful contribution to global energy production, or else much of our coastline will be underwater in a century. But I think we're talking about a few decades here, not a few years. The problem is that behaviorally we find it very difficult to make choices that seem painful today and whose benefits are both uncertain in magnitude and far off in the future. Having a dysfunctional political system in the United States and not much better ones in Europe doesn't help. (I'm not saying that China has a good political system, but as an autocracy it is more able to dictate a national energy strategy, whether or not it's the right one.)
OP: With cheap oil running out do you see Americans changing their driving and energy consumption habits?
JK: Unfortunately, I think Americans' energy consumption habits will shift relatively slowly in response to increases in the price of oil. There are many factors that lock us into our current driving patterns, most notably the physical layout of our cities, suburbs, and exurbs. The stickiness of people's living and working arrangements means that we will always be slow to respond to changes in prices. In addition, there are cultural factors at work here. I imagine many people will continue driving long distances either because they take pleasure in it or because they refuse to change their habits as a matter of pride, despite the economic disincentives.