Abundance and affordability, overlooked characteristics

Although energy is just one input in the wealth production process, it is generally recognized as a critical one. Labor, capital equipment, technology, investment are combined with energy to produce goods and services, with energy being the catalyst.

The growth of economic activity, as reflected by growth in GDP, can be directly linked to the combination of productive inputs that make goods and services competitive. Maintaining economic growth in the face of rising costs or reductions in one input—eg energy—requires increasing the use of other inputs or offsetting technological improvements. Professor David Stern of Rensselaer Polytechnic Institute in a comprehensive literature review made a clear and unambiguous statement about the relationship: “When (the) shift in the composition of final energy use is accounted for, energy use and level of economic activity are found to be tightly coupled.” His review also makes the clear case for rising energy use and economic growth, in spite of improvements in efficiency.

The Obama Administration and its EPA have been pursuing policies like the Climate Action Plan and Clean Power Plan that clearly will raise the cost of fossil fuels, namely coal, gasoline, and diesel, making them both more expensive and less abundant. The supposition appears to be that these policies will have limited or no economic impacts. Pursuing environmental objectives without regard to a cost-benefit metric risks causing additional damage to a weak and struggling economy.

In its report, Hard Energy Facts, the Institute for Energy Research concluded, “Affordable energy allows the economy to become more efficient, lowers the cost of goods, and saves us money. … Moreover, by making transportation less costly, affordable energy gives us greater freedom to live, work, and play how and where we want. In this way, energy enables more freedom.

Affordable and abundant energy is a crucial component of a strong economy. Low domestic energy prices help keep jobs at home by lowering the cost of producing goods and services in the United States. This increases our competitive advantage”. But, that is not the objective being pursued by the Obama Administration.

In a recently released report, the Energy Information Administration, (EIA) forecasts a 90 GW loss of coal generation because of the Clean Power Plan. The former chair of the National Association of Utility commissioners estimates that this is the amount of power used by about 63 million homes. Even more troubling, the EIA projects that most of these coal plant closings will occur by 2020 to meet the Clean Power Plan’s interim goals.  The EIA says that the coal plant closings required to meet the Clean Power Plant regulation would require “significant investment” in alternative forms of electricity generation that would this raise electricity prices by about 6%. Even more troubling, EIA concludes that the required infrastructure cannot be planned, constructed, and placed into operation in the less than 5 years. Hence, scarcity and higher costs.

The National Economic Research Associates consulting firm, in Congressional testimony, indicated that the cost to the economy would be about $29 billion a year in reduced disposable income or $3000 per household. Add to that EPA’s proposed new ozone standard and its proposal for reduced sulfur in gasoline and diesel and the obvious conclusion is that there will be slower economic growth and more job losses because alternatives to coal and liquid transportation fuels are more costly and except for natural gas less abundant.

Restoring strong robust economic growth is one of our nation’s highest priorities. It won’t be achieved until regulators and policy makers better understand the importance of energy abundance and affordability.

 

This article appeared on the FuelFix website at http://fuelfix.com/blog/2015/06/07/abundance-and-affordability-overlooked-characteristics/

 

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