- We all know (or should know) that energy prices are a key inflation driver, just as they were in the 70s and 80s. Hence, any attempt to cut fossil fuel supply would be counterproductive to inflation, as such would only drive energy prices higher.
- We also know that we need to reduce carbon emissions in order to mitigate climate change.
- Thus, there appears to be a dichotomy between reducing our carbon footprint and getting inflation back in the box. However, such should not be the case.
- The obvious alternative to fossil fuels is clean/renewable energy, such as solar and wind, and we’re making great progress, particularly with solar power. However, we aren’t yet ready to start throttling back fossil fuels without adverse impact.
- Once we finally make the switch (at least for the most part), the use of clean energy should help reduce both inflation and our CO2 emissions – a win-win for everyone. We just need to figure out the best way to do it.
- In order to achieve this, we need a comprehensive energy policy that entails a methodical, time-phased action plan to develop/implement clean/renewable energy, plus a methodical, event-driven plan to significantly reduce fossil fuel usage. Both of these actions are interdependent and need to be in sync with each other.
If we take the headlines on inflation and global warming at face value, it appears on the surface that there are two diametrically competing needs: 1) to bring down inflation ASAP and 2) to reduce carbon emissions ASAP. I believe there is no doubt that we need to do both. I also believe that we can satisfy both needs with the right strategy and approach. IOW, I don’t believe they should be at odds with each other. We just need coordination and cooperation in meeting them.
The reason they appear at odds is the immediate need to increase fossil fuel production/ refinement in order to shore up energy supply to meet current post-pandemic energy demand. This is a complex topic that I covered in some depth in an earlier post. In short, the pandemic created a sudden and severe drop in demand that sent oil prices plummeting. Oil companies responded by rapidly cutting production, closing refineries, and slowing efforts for new drilling. Since then, demand has picked back up to pre-pandemic levels, but production has not. Couple that with the recent sanctions on Russia due to the war in Ukraine, and the end result is a significant supply shortage. This supply shortage has driven up energy prices significantly, which has driven inflation to near 40-year highs.
I believe the key reason both camps (environmentalists and inflation-fighters) are at odd is that we currently lack a comprehensive, national energy policy that addresses both needs. The environmental side is pushing to rapidly phase out fossil fuels in order to cut carbon emissions. The inflation-fighting camp is pushing to increase drilling/production/refinement to bring the supply back up to current demand. Both have valid points, and both sets of actions are necessary.
So, how will an energy plan accomplish this? And what should such a plan look like? That is outlined it in the next section below.
Needed Energy Plan Fundamentals
I believe the outline is surprisingly simple, yet the details are quite complex. Hence it will need to be a joint effort between the oil/gas industry, renewable energy companies, state/federal government regulators, and possibly additional entities. The overarching objective being to phase in clean/renewable energy while phasing out fossil fuels in a way that doesn’t impact the ability to meet demand at any point in time. This is much easier said than done, not as much because it is technically challenging, but because of the political forces and obstacles that get in the way of achieving this.
I believe the following actions need to happen along a timeline that progresses the plan at the fastest possible rate while ensuring continuity of supply and ensuring that supply will always meet demand in real time. Following are the major needed elements that I see, along with some of their current obstacles:
- Continue development of wind and solar. Both technologies, especially solar, are progressing quite well. However, I’m concerned about the incentives. Utility companies and state governments seem to be rolling back incentives to private (mainly rooftop) solar. Some utilities are scaling back credits for customers who generate more electricity than they consume at a given time – a concept known as net metering. In such cases, customers are actually feeding the grid with the surplus power they generate at a given time. This creates a dilemma for utility companies in covering the costs of maintaining the grid. As the per-kilowatt-hour cost increases dramatically, they must pass that cost on to the consumer. Meanwhile, certain states are pushing to reduce tax credits for the up-front cost of installing solar power. Their rationale is that such incentives put the low-income at a disadvantage because they simply don’t have the needed up-front money to spend. All these things – plus more – need to be addressed in the energy plan.
- Temporarily increase drilling/production/refinement of oil, gas and, to some extent, coal. The need to do this is driven by the current situation of the energy supply not recovering from the pandemic to the extent that demand has. Hence, we still need to fill that gap, lest inflation is likely to run rampant despite the Fed increasing interest rates, and/or we could plunge into a deep recession. Both of these scenarios must be avoided. Ramping up on a temporary basis also poses a business challenge to the oil and gas industry because it requires significant investment. This challenge and some suggested ways to overcome it are addressed in my aforementioned prior post.
- Start/continue to scale up implementation of affordable wind, solar and other clean/renewable energy to the point that will be available to most people.
- Start throttling back fossil fuels as #3 above continues to make progress. This will require us to define and implement a Concept of Operations (CONOPS) that will synchronize Actions #1-3 above. For the most part, I believe it will entail implementing #1 and #2 ASAP while having #3 be event-driven and executed in a way that isn’t punitive to the companies that will have made the necessary investments to support #2.
- Concurrent with #1-4 above, ensure the aforementioned CONOPS addresses the implementation of #1-4 above and the ongoing implementation of the energy policy going forward from there. This should include retaining certain fossil fuel capability as a back-up to renewable energy and for any occasional surge support needs.
I am 100% convinced that this is all achievable if we can/will only bring the necessary parties together to develop, adjudicate and implement such a plan while containing certain external (mainly political) entities that are overzealous in one or more aspects of this plan. I believe this is the primary overarching challenge. However, by having people like US Senator Joe Manchin (D-WV) working together, we can overcome these challenges and develop a balanced solution that will satisfy and help everyone.
How Would Such an Energy Policy Help Climate Change?
I believe the long-term benefit is self-evident – significant reduction of fossil fuel use/consequent carbon emissions. During the transition, it might mean slowing down the rate of fossil fuel reduction. This might seem like a compromise to some extent, and maybe this is true. If so, it is a necessary compromise that would avoid creating energy shortages that would exacerbate inflation and increase recession risk. It would also go a long way toward avoiding unintended interim consequences. For instance, some utilities in Europe are turning to coal due to an insufficient supply of oil and natural gas. As we know, coal is dirtier and presents a greater greenhouse risk than natural gas or petroleum.
How Would Such an Energy Policy Help Lower Inflation?
First off, it would ensure we step up the fossil fuel energy supply to meet current demand and ensure that future demand will continue to be met. Such could only stabilize – or more likely enhance – current efforts to rein in inflation. Second, I see definite long-term deflationary benefits in clean/renewable energy, once such sources predominate.
In fact, I’m already seeing this now in a very few, limited cases. For instance, a friend of mine has solar power that is producing more electricity than he and his family of four use. SoCal Edison writes him a check every month, even in the summertime when their A/C unit hard at work. He and his wife also have EVs that they charge at home. They are incrementally replacing their natural gas appliances with electric (already done with HVAC and hot water heater). Their power bills are still zero.
Lowering the cost of energy would help everyone – the consumer, the manufacturer, the logistics and transportation entities, warehouses, retail stores, etc. This all translates to lower costs of all goods and services. Note this also includes software and services, as their utilities will be much lower and their computing/IT costs will be lower too, for both hardware and software.
What Needs to Happen Next?
I see several things:
- Identify and convene the team of industry/government experts/officials and task the team to define and adjudicate the aforementioned energy plan.
- Obtain the necessary support and legislation (if any) that’s needed to implement the plan. Then, start implementing!
- Start tackling some of the near term challenges including:
- The governments’ (Federal and some states) premature push to immediately cut fossil fuel usage. That needs to be reversed in order to enable oil/gas companies to make the necessary investments to meet demand. It also avoids forcing utilities to resort to coal, which is already happening in certain places.
- We need to accelerate the development, production, and use of clean/ affordable/ renewable energy TO SCALE (i.e., make it available to the masses). Tax incentives for producers and users would be a great start.
- We need to overcome some hurdles in implementing solar and wind. For instance, SoCal Edison is scaling back their net metering incentives for solar. I don’t blame them because they profit more by selling electricity versus buying it. Also, the state of California is considering reducing tax credits for the up-front cost of installing solar. Their concern is that the current incentives put low-income families at a disadvantage in that most cannot afford the NRE of installing solar. So, we somehow need to solve both of these problems.
Although currently somewhat controversial, I do believe the energy provisions outlined in the “Inflation Reduction Act of 2022” proposed by Senator Joe Manchin (D-WV) and Senate Majority Leader Chuck Schumer (D-NY) might be a good starting point for a comprehensive national energy plan.
As for us customers/end users, we need to simply do our homework and vote in individuals who would support such a cooperative and balanced approach to a comprehensive national energy plan and vote out those getting in the way.