Wednesday, April 18, 2012

Got to Get You into My Life

Looking at any poll, you will conclude that Economic Growth, Jobs, Government Debt are at the very top of the list of issues people care about in this election cycle, and I agree these are the top issues facing our nation as a whole.  So I made my Top 5 lists of policy initiatives already proposed that I believe have enormous impact on the top issues:

Top 5 Favorite Policies: 

1) Move corporate income tax to 25%
2) Increase Soc Security and Medicare eligibility age to 70
3) Block grant Medicaid back to the states
4) Make Cap Gains / Dividend Taxes permanent at 15%
5) Tax Credit/Infrastructure Investment converting commercial trucks to Natural Gas

Top 5 Worst Policies:

1) Tax Increases - $500B in tax increases are coming in 2013 by letting Bush and other tax cuts expire
2) The Buffet Rule -  $5B collected per year vs a $1T deficit. Waste of time
3) Obama-care - Increases deficit, reduce small business hiring 
4) Dodd - Frank Financial Reform - Reduces lending by banks limiting economic growth
5) Government Renewable Energy Investment - Adds to national debt, little Return on Investment
Next 5 Favorite Policies:

1) Cut and Cap Spending to 20% of GDP
2) Reduce tax rate by 20% on all individuals
3) Reduce Unemployment Benefits to 13 weeks
4) Move from wage to price indexing for Social Security
5) Move to premium support model for Medicare

If the top 5 were the only things done by the next President, he would he revered in the history books for turning around our epic economic decline.  If the Top 5 and Next 5 could be accomplished, our grandchildren will be living in a society that would be the envy of every civilization in history. I would love to hear your thoughts on what you think are our nation's most important issues and solutions.  You should at least think about these things when picking your horses this fall.

Thursday, April 12, 2012

Chart of the Week - Progressive Tax Chart

This chart shows just how progressive the U.S. tax code already is

Fair Share?

Ticket to Ride

Energy, what is the problem and what is the solution?

The economic problem with energy consumption today is quite singular and clear: high gas prices.  These higher gas prices are akin to a tax on every American and drain from our pool of resources to spend, save and invest.  Higher gas prices are driven by higher oil prices.  

Why focus on petroleum prices and not other energy sources?

Because only petroleum is really going up in price over the long term, and is anywhere from 3 to 5x the price of Natural Gas or Coal (and this relationship is getting worse not better since 2010).  Further, U.S. Oil production peaked in 1970 and has been long in decline while the others have seen upsides in domestic supply reducing likelihood of further cost pressures.

Source: U.S. Energy Information Administration / Annual Energy Review 2010

Where is petroleum used?

Below is an excellent (and busy) chart showing how our energy is consumed in the U.S.  Instead of going blind, I will just tell you the conclusion.  26% of ALL energy consumption is petroleum used for transportation.  Three quarters of petroleum is used for transportation, and virtually all transportation activity runs on petroleum. 

Source: U.S. Energy Information Administration / Annual Energy Review 2010

Where does our Petroleum get produced?

As you can see from the chart below, we produce about half of the petroleum we consume, and we import the other half.  Of the piece we import, we get a little less than half from OPEC countries and a little more than half from non-OPEC countries like Canada and Mexico.

Source: U.S. Energy Information Administration / Annual Energy Review 2010

What drives the price of Petroleum?

The cause of higher petroleum prices can be debated, but generally part of the discussion in no particular order: weak dollar, contract speculation, Middle East relations, global demand, increased environmental constraints, and reductions in federal drilling permits.  I do not intend to argue the each of the causes, just recognize that most have at least some merit and acknowledge that reducing oil prices is the issue we most desperately need to fix.  Further, we should latch on to concepts where we have the most control and can make a significant impact.

So, how do we control Petroleum Prices?

First, we should throw out factors unrelated to direct supply and demand that play a role in the price.  The weak dollar and Middle East relationship may impact our oil prices, but since they are used to battle things like unemployment and nuclear weapons, they have to be resolved in the context of other problems so I will set them aside.

In order to increase supply we need to quite simply drill more, which is impacted by allowing more drilling on federal lands and offshore.  Further, we need to increase supply from friendly nations like Canada (cough, Keystone Pipeline, cough).  This shifts our reliance from OPEC generated oil and reduces their pricing power on the world market.  While I think these supply improvements should absolutely be pursued, we have a very heavy resistance from the environmental wing and the President to do so.  On the whole, I believe we do get a strong net benefit from pursuing these things, but the impact to overall domestic energy supply and thus price is less clear.

The more intriguing solution likely comes from reducing the demand for petroleum.  Remember, petroleum's main purpose is for transportation.  You cannot convert power plants, heating systems, industrial power, etc away from petroleum because they are already there.  YOU MUST CONVERT CARS AND TRUCKS AWAY FROM PETROLEUM TO CHANGE OIL DEMAND.  How?  Basically, we have 2 options:

1) Convert cars and trucks to electric with batteries and plug them into the wall.  I am 100% for this!!  With one major exception, we do NOT yet have an economic battery powered solution.  So should we just wait until someone develops it and continue to give our left arm at the pump? No.

2) Convert cars and more specifically commercial trucks to Natural Gas.  Thanks to the shale gas revolution brought about by "fracking" technology, we are seeing a boom in natural gas production that will increase our supply by 25% over the next 20 years (below).  By moving at least partially to natural gas powered transportation for which technology already exists, we can have very significant impact on oil demand.   


 Source: U.S. Energy Information Administration | Annual Energy Outlook 2012 Early Release Overview
Significantly reducing the demand for foreign oil great reduces the impact of the dollar and our middle east relationship on price.  Also, natural gas is has a cleaner carbon footprint than oil, so the environmentalists could actually claim a win (although they hate "fracking", and try very hard to prevent anything except cars powered by dreams and rainbows).

The issue is how we get to natural gas powered vehicles.  We have a chicken and egg problem here with the circumstance being that service stations do not want to provide natural gas if no one is driving natural gas cars and people do not want to drive natural gas cars if they cannot fill up anywhere.

I do believe that over time the incentives to convert to natural gas powered cars and truck will take hold just by market forces (oil prices will continue to climb and natural gas prices will continue to fall until it hits critical mass for people to act).  However, when you are listening to what policy incentives are being debated to improve our energy position, please listen to who is for utilizing our massive natural gas resources that can help every single American reduce their household expenses.  If the government really wants to give a tax break to middle class Americans, find ways to push the natural gas vehicle infrastructure ahead of market forces.  

From what I hear, we are waging a war of words and policy in this country over how to best meet energy needs in the face of higher energy prices and hostile energy providers (like Iran).  On one side, you will hear fighting for clean and renewable energy alternatives like solar, wind, and battery powered cars, and on the other side you hear support for increased utilization of gas and oil.  I have taken the time to explain what a massive opportunity we have to reduce our dependence on foreign oil and greatly lower pump prices.

When you hear arguments from the other side, both to fight oil and gas environmentally, and promote renewable energy solutions, please press for actual data to back up their claims.  You will find the environmental argument is much more based on spreading fear than information, and the investments in renewable energy is focused on idealism over trivial things like feasibility and return on taxpayer dollars.

All of the charts and data enclosed are from the Energy Information Administration.  I suggest you have a look at their reports, it is full of great info on the US Energy situation.