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 favourite amongst 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 we 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.
In the interview James talks about:
- The political implications of America's oil & gas boom
- How the shale boom will impact climate change
- Why China may be forced to change its political system
- An easy way to solve the debt crisis
- Why we should expect a comeback from coal in the future
- Why we must invest in renewable energy
- Why cheap energy isn't vital to economic growth
- How Obama's second term will alter the energy landscape
- Why we need to focus on conservation
- Why we shouldn't take note of the doom and gloom predictions
Interview by James Stafford of Oilprice.com
James Stafford: 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.
James Stafford: What are your thoughts on America's oil and gas boom?
James Kwak: 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 Exxon Mobil Corporation (NYSE:XOM) 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.
James Stafford: What do you see happening to the US and global economies in 2013?
James Kwak: I'm modestly positive about the U.S., but that's not because of any particular insight. It's because I read Calculated Risk, and because the housing market is turning around.
James Stafford: 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?
James Kwak: 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 Exxon Mobil Corporation (NYSE:XOM), 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.
James Stafford: What is the relationship between energy and the economy? Is cheap energy vital for economic growth?
James Kwak: 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.
James Stafford: 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?
James Kwak: I think it's always too soon to make this kind of prediction. People thought