Change needed in U.S. energy policy

As usual, there are fundamental changes under way in the world, U.S. and local economies.

Businesses, in order to stay ahead of the economic game, must be thinking about and planning for these shifts in economic activity and costs. Even individuals should be planning ahead for, rather than reacting to, these economic changes. Remember that any economic change is bad for some (gas prices in California) and good for others (oil wells in Texas).

Probably the most fundamental and important world issue affecting the U.S. is the debasement of the dollar.

Our Federal Reserve is creating prodigious amounts of dollars to fund ever-larger deficits to get the U.S. and Europe out of the leveraged mess caused by cheap mortgages, unfunded wars and low taxes. Remember that as the supply of dollars goes up, the price goes down. A cheaper dollar stimulates exports, thus benefiting the American manufacturing sector and other sectors that can export their services. However, it makes our imports more expensive, thus stimulating more oil drilling and American manufacturing. Some day, the Chinese economy will be bigger than the U.S. economy and their currency more important than the dollar.

The debt overhang is going to have to be reduced, both in the U.S. and Europe.

Europe has mostly chosen to cut the size of government, thus throwing their economies into recessions that are likely to be quite lengthy, a blow to U.S. exports. The debt problem and the size of government is probably the biggest difference between the major political parties in the U.S., affecting both the amount of government spending and level of taxation. The private sector is still deleveraging from the housing bubble. This problem will take a decade or more to resolve itself.

The U.S. is undergoing a major shift in energy usage and sourcing. New oil and gas wells are being drilled very rapidly. Drilling technology has changed dramatically, creating major new environmental problems. Natural gas prices are very low and oil prices will come down. These changes will happen; environmental problems will not stop this energy conversion. It is too fundamental.

Please someone, invent a $300 water purification system that can be installed on the head of every water well!

The transportation fleet is rapidly changed to natural gas and combined natural gas/diesel engines, even without government subsidies. Automobile engines will not be far behind if electric and hybrid engines do not prevent wholesale conversion. All it will take is battery technology to advance to an affordable 400-mile range before swapping out the source of energy (five minutes).

Solar panels are rapidly getting cheaper, driven by cheap imports from China. There are technical articles now claiming a halving of the cost of energy produced from the sun within the next couple of years. Imagine solar panels on every new house and retrofits on most existing houses. Think about how this will change the demand for mass-produced electricity. And the demand for coal. And the relative cost of energy in various regions of the United States. Northern Colorado is well positioned for this change.

The agriculture sector will continue to perform well. Agricultural commodity prices will not come down as the rest of the world develops and increases their food consumption. And as the cost of energy fueling the production of food moderates. But the average age of American farmers is 58; we need more younger blood producing our agricultural commodities.

Our labor force is aging. The baby boom retirement bubble has begun and will not end until about 2035. The retirement binge has been slowed by the recession but will accelerate when the economy improves. This will be good for Northern Colorado and our developing health care and solar energy sectors. Individuals should seriously consider training for careers in the health care field. And Northern Colorado should enhance its training capacity in this sector.

Pension plans are in trouble, including Medicare. New employees are rapidly being converted to privately funded plans. This means the U.S. will need more financial advisors and more regulation to prevent abuses. A slower growing economy will make building a retirement nest egg even more difficult. New taxes will be required to make up for the historic inability of politicians to fund or change Medicare. Problems do not go away just because we ignore them.

Education, especially in Colorado, is not keeping up with the changing demands on the labor force. There are jobs available that are currently going unfilled because we are not training our work force for the new technological needs of both the manufacturing and service sectors. This factor, more than any other, will limit the competitiveness of Colorado and the U.S. in the world marketplace. It will require more tax-funded government support for education and a moderation of the cost of getting a college education. The cost of a college education, probably more than any other factor, is driving the divergence of the income gap in America.

The home and commercial construction industry may never be the economic driver that it was in the first decade of the 2000s. At a minimum, it will be fundamentally different, as energy costs and cheaper sources change the way homes and buildings are constructed. More skilled labor will be required in the construction industry and our educational processes are slow to provide it.

Government policy will soon need to put more emphasis on supply-side policies to develop the oil and gas industry and distribution corridors.

Demand-side policies were absolutely necessary during the Great Recession but now is the time to add another dimension to the expansion of our economy.

Just as the structure of energy use in the industrial sector had to change in the 1970s and 1980s, the use of energy in individual consumer demand must change in the 2010s.

The U.S. can reduce its dependence on foreign energy sources and its involvement in Middle Eastern politics but not without a concerted effort to make energy production work in the U.S., Colorado and Northern Colorado.

John W. Green is a regional economist who compiles the Northern Colorado Business Report’s Index of Leading Economic Indicators. He can be reached at jwgreen@frii.com.

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