Monday, March 23, 2009

Out of Alaska

This is the twentieth anniversary of Exxon's 11 million gallon oil spill in Prince William Sound in Alaska. The scum got out of about $2 billion of a judgment against them last year on the argument that shipping is special and above the law. While they may be able to play fast and loose with that law, the law of just deserts might still come up and bite them.

There is a whole lot of noise about energy independence these days. And while Exxon figures it is going to be importing oil for a long time, it does not mind the possibility of getting low cost oil leases and favorable tax treatment for oil on federal land. So, they give a lot of money to the "drill booboo drill" crowd to make noise about how we could get all the oil we need if we just drilled more oil wells domestically. These people are completely wrong but they are loud because they get all that money to say these things. They are wrong because essentially no amount of effort can produce what we consume domestically. There are only three years of recoverable oil in the ground and we can't make oil wells flow fast enough to bring all that up in three years. It is very unlikely that US production will do anything but decline for the next twenty years.

So, what would it take to get energy independence? We would have to stop using oil for the most part. The promise of the Obama administration is that we will get there in ten years. That means cutting about 13 million barrels a day of imports plus whatever decline in domestic production occurs in that time. Cutting consumption at that rate should keep the price of oil fairly low during that time, perhaps around $35/barrel. But, holding the price of oil down to that level means that there is very little new domestic oil that would be worth developing since we've already developed all of the cheap oil here. Thus, in a very real way, energy independence means not drilling for oil in the US. Continuing energy independence beyond that 10 year goal implies continuing to cut consumption as domestic supplies continue to decline. but if we do that, then we extend the period over which the world price of oil remains low and there remains no incentive to develop more domestic supply. Thus, it would seem that pushing the energy independence idea yields a smaller oil business sooner than otherwise. If this means that Exxon loses a trillion dollars or so, then perhaps the punishment they avoided for their oil spill will come right back to them.

Wednesday, March 11, 2009

Hungry money

I think it might make sense to refinance our public debt to a lower interest rate. I put up a post last week about it here.

One reason we can get such a low interest rate for our public debt right now is that money is scared to take risks. It seems to me that if we can absorb this money at a low rate of return, releasing money that was earning a higher rate of return, then we may boost money's appetite for returns and thus risk. Those who were satisfied with 6% bonds may not themselves choose to invest in 2% bonds once they have received their reward for tuning in their bonds early. These investors may be a little more bold than the 2% bond customers and wish to go bargain hunting in the stock market or look to invest in banks. This hungry money may help to boost the economy by taking on a little more risk than the currently available money would do. After all, the money invested in public debt has not been burned the way the rest of the money has been so it has a right to feel more confident.

Thursday, March 5, 2009

Refinancing our debt

A portion of our government expenses is paying interest on the debt we have incurred over time. Last fiscal year it was about $450 billion or about 13% of $3 trillion in federal spending. The usual breakdown is 8% of federal spending so there is doubtless some accounting going on that apportions these numbers in some way or another.

We have also just started to spend about $800 billion is fiscal stimulus that includes some spending on renewable energy infrastructure. The last time we looked at this sort of approach, it looked like a very good investment to make. But, we are doing it now because there is a recession on and interest rates are near zero so that it would seem that only spending can help with the economy.

But, interest rates pinned near zero mean that we can free up $450 billion a year if we just refinance our debt to zero interest. If we sell treasury securities now at zero interest and use that money to buy back outstanding securities sold at a higher interest rate, we can refinance our national debt and strongly cut expenses. This makes the stimulus spending budget neutral over two years and allows further spending if needed. We really can't do anything more productive for our future prosperity than invest in renewable energy and education. Refinancing now during a window when we can borrow at zero interest would seem to be a very prudent way to assure the ability to make those investments.