Warren Ward Associates

The Times They Are a Changing

I recently attended a Bob Dylan concert and found myself thinking about how times have changed. Back when he first became famous, few people were talking about protecting the environment. Now "green" issues have become important to many and Socially Responsible Investing (SRI) has become a part of our investment planning at Warren Ward Associates. One of the interesting things about SRI, and "green" issues in general, is that different people have different definitions of what’s acceptable and what’s not. Today, I’m thinking about future sources of our country’s electricity and more specifically, the potential acceptability of nuclear power to environmentalists.

Coal-fired generators supply most of America’s electricity and they are our least expensive source of power. Coal is our country’s most abundant energy source, so mining more of it and building more coalfired generators might conceivably reduce our dependence on imported oil. Yet, mining and burning coal are both relatively messy operations and most advocates of environmentally-conscious energy are not interested in adding to our coal usage. We must be practical, though. Our ever-increasing use of electrical devices means that more electrical power must somehow be made available. With coal considered environmentally unacceptable and hydrogen fuel cells a long way off, people have begun to re-evaluate nuclear power’s role in our energy future.

Although no new nuclear power plants have come on line in the US since 1996, some recent changes by the US government are making it easier for utility companies to add nuclear capacity. The Nuclear Regulatory Commission has streamlined its application process and Congress passed a range of subsidies to encourage nuclear power generation. As a result of these changes, the NRC anticipates receiving about two dozen new applications for review over the next year or so, the first ones in thirty years.

In operation, nuclear power is clean and perhaps more environmentally friendly than coal. Reactors heat water into steam which then turns turbine generators. Since the day-to-day by-product is simply water vapor, most environmental concerns relate to one of two issues: potential catastrophic failure or the need to safely store the spent nuclear materials. Reactors have been extensively redesigned over the past thirty years and current versions are considered by many to be safe.

Stewart Brand, who published The Whole Earth Catalogue in 1968, is one of our country's original environmentalists, a visionary thinker whose ideas are still worth considering. In a recent issue of "The Economist", Mr. Brand shared that he has reversed his original (in his words, "knee-jerk") opposition to nuclear power, having decided that global warming is the major environmental issue facing the world today and that nuclear power offers a way to supply the world’s increasing power needs in a "low-carbon" manner. He goes on to offer what seems to be a very original thought – that we don’t need to worry about how to store spent nuclear fuel for 10,000 years or more but for just 100 years. Since it still contains a considerable amount of energy, it only has to be kept safe until a future generation comes up with a way to harvest that energy through new technology, similar to the way improved engineering now allows our cars to go farther on a gallon of gasoline.

Back in the late 60’s, Mr. Brand suggested that people attempt to live "off the grid", separating themselves from much of society, and – perhaps – its ills. That is still the goal of many environmentalists who believe that numerous small and widely distributed power plants would be the ideal solution to meet our growing need for energy. Unfortunately, not all distributed power is green (i.e. home-sized gasoline powered generators) and not all green power can be widely distributed (i.e. a windmill farm large enough to be practical). If you decide to remove yourself from the grid, then you have to plan for the highest possible peak energy need, leaving excess capacity until the hottest day next summer. This is the same issue which faces our energy companies today – operating efficiently regardless of the demand for power but being sure there is always enough available.

In many ways, storing energy is harder than generating it. Recent attempts to do so by pressurizing underground caverns and spinning flywheels at extremely high speeds are clearly beyond practical application by individuals. Storing energy in batteries seems obvious but power is lost in both the charging/discharging cycles as well as during the conversion from DC to AC. Until both generation and storage can be easily distributed, some fuel must fill our ever-growing need for electricity.

Resolving an issue this controversial may require that each side back away from extreme positions and try to negotiate a solution which is at least acceptable to the other. Along the lines of "a good plan today is better than a perfect plan tomorrow", perhaps increased use of nuclear power can help us bridge the energy gap until a large network of smaller power plants can be developed and brought on line.

All That and a Tank of Gas

As US residents, we are part of the world’s most vibrant economy. That can make it easy to forget that there is a very big world beyond our borders and not every country’s economy operates like ours. Neither, of course, do their political systems. Over the years, I have learned that politics and economics are usually intertwined and recent increases in gasoline prices have brought the politics of gas pricing back to mind. While our government taxes gasoline, other governments tax it more highly while still others choose to subsidize it instead.

It is obvious that gasoline prices fluctuate, although perhaps less obvious why. I continue to believe that the primary factor driving price changes is supply and demand but the fact that crude oil is valued in a currency which has been weakening for years (the US dollar) has certainly had an impact. I have heard it said that recent price increases have been caused by additional speculators in the markets but since those individuals deal only in paper contracts, never actually taking delivery of oil, it doesn’t seem likely that additional trading activity would be the underlying issue.

Regardless of the world price for crude oil, citizens of different countries pay different prices at the pump. Here is a chart reprinted from the May 29th 2008 issue of the British magazine The Economist(click to enlarge).It shows gasoline prices per liter in US dollars, adjusted for relative currency value. As you can see, the price we pay falls about halfway between the highly taxed German drivers and the heavily subsidized Venezuelan drivers. You can also see that Mexico falls below us, at around 60¢ per liter, compared to $1.04 per liter in the United States.

It’s always foolish to discount the ingenuity of our fellow citizens, especially when it comes to locating a good deal. While MSN compiles daily gasoline price information for the entire country, some Texas and California residents have another option available – driving across the border and getting a fill-up in Mexico. For political reasons, the Mexican government has chosen to keep gas prices low in the poorer farming areas in the northern part of the country. Since US citizens can travel back and forth without any special paperwork, filling-up south of the border has become popular. This has led to a boom in the business of installing of supplemental fuel tanks in trucks, which in-turn increases the number of gallons bought by US citizens. Mexico’s subsidies cost over $20 billion per year and I suspect various government ministries are reviewing their options very carefully right now.

As you look around, you probably see that Americans have begun to take conservation more seriously, driving more fuel efficient cars and even canceling vacation trips. Yet Chinese consumers, members of the world’s fastest growing economy, have a smaller incentive to do the same in their headlong rush to join the First World. According to The Economist, they pay less for fuel than we do.

Every component of the oil-to-gasoline "pipeline" is expensive. Increasing capacity for drilling it, transporting it over land and across the sea and refining it into useable form all require significant outlays in both time and money. In deference to the potential risk to our environment, no oil can be drilled in various portions of Alaska and the Gulf of Mexico. If Congress were to change its mind and allow drilling, for example in the ANWR, it has been estimated that it would be ten years before new fields were producing and a new pipeline available to transport that oil to refineries. In May, Congress passed legislation which halted the systematic purchases of oil for our Strategic Petroleum Reserve. Unfortunately, such politically motivated changes have little effect on the market. After having been endlessly debated and widely publicized, the impact of the halt in purchases has long been factored into the price of crude oil. Unlikely as its implementation might be, the appointment of an "oil czar", empowered to make day-by-day decisions about governmental purchases, would probably have been a more useful strategy in helping control oil prices.

An energy shortage serves no one, not even energy producers. Only a couple of countries are in a position to quickly increase the flow of oil. If they should do so, or if the Chinese build-up of fuel stocks ahead of the Olympics should abate and reduce demand, prices will probably fall again. The issue before the citizens of our vibrant economy will then be to decide if we have the political will to address our long-term energy needs systematically, rather than ignoring the issue until it once again looms large.