Friday, February 3, 2012

Sustainable Strategies for Jackson Hole after Peak Oil

The following discussion is an attempt to bring to the fore The Most important event of our time. That event is called PEAK OIL.
Peak Oil is the term coined by a Texas geologist by the name of M. King Hubbert to describe that point in the earth’s history when mankind has consumed one half of all the petroleum that is available. After that peak, also known as Hubbert’s Peak, production of oil will go into decline. Using clever statistical methodology, Hubbert predicted at The national API meeting in San Antonio Texas in 1956 that US petroleum production would peak about 14 years hence and thereafter go into irreversible decline. He was ridiculed and persecuted for the next 14 years but in 1970, it happened. He had nailed it. US production has been in decline ever since although it has blipped upward about 10% since 2005. He also predicted dire consequences for the US Economy based on his predictions and for this and other reasons he is regarded as the father of Peak Oil. Few people then understood the consequences of Peak Oil and few today as well but finally prescient people worldwide are starting to sound the clarion call of what Peak Oil will mean to our lifestyles.
Where does oil came from? It was a result of photosynthesis in which CO2 and water combine with solar energy to form glucose and in the process release Oxygen.. Glucose fuels the growth and development of the organism which adds mass and complexity, perhaps becoming green algae.. During a period of global warming several hundred million years ago algae and other organisms proliferated, thrived and then died, falling slowly to the bottom of a warm prehistoric sea. If conditions were right, something called a nutrient trap could develop and these organisms were not broken down by oxygen and the carbon instead of being returned to the surface as CO2 became instead sequestered in an accumulating mass of carbon rich matter. I will gloss over the additional details of conversion and oil formation and skip ahead to Pennsylvania when an entrepreneur named Edwin Drake drilled the first commercial oil well in 1859. America was thus first to the petroleum banquet and it was this discovery and utilization of an unimaginably rich and concentrated energy source that fueled an explosive industrial expansion. We have consumed in a period of only 150 years what it took the world more that 100 million years to produce. And now as Richard Heinberg has stated in his book of the same name, “The Party’s Over.”. It is typical of organisms and communities that experience an unexpected energy subsidy to go through a process of overshoot and collapse. We are entering what another well known writer on peak oil, James Howard Kunstler has coined “The Long Emergency.”
The world is today producing about 74 million barrels per day (Mbd) of crude oil. This is just crude and doesn’t include other categories such as ethanol, biofuels etc. WORLD PRODUCTION has been on an undulating plateau since about 2005. The US consumes ¼ of that total. Imports peaked in 2005 at13,714,000 barrels per day and has declined to 11,755,000 per day in the last full year of statistics (2010). This represents a drop of 2 million barrels per day primarily due to the prolonged and severe recession. US production reached a low of under 5 million barrels per day in 2005 but has rebounded over 10% in the past 6 years, primarily due to the Bakken Shale fields in ND. In 2010 the figure was 5,512,000 barrels per day. Put in percentages in 2005 the US was importing 72.5% of its oil products and by 2010 that figure had dropped to 68%. I caution the reader that there are a myriad of categories of petroleum production and the figures are often manipulated to reflect the authors bias or agenda. If you look at all sources of production including lease condensates,natural gas liquids(NGLs) and so called refinery gains, bio fuels, ethanol production and compare these net imports/exports then the numbers change significantly. For example it drops our imports to about 50%. I have chosen to make my comparisons of crude oil alone. I hope that isn’t terribly confusing. My sources for these figures are the EIA. The link: Figures to remember: The US is 4 ½% of the population and consumes 25% of the world’s oil. In the early 1970's  at the peak of US production the US consumed a whopping 80% of world crude.
It is absolutely fundamental for the reader to grasp how phenomenally important oil has been to the transformation and development of modern society. It is much more than a fuel. It is the feedstock for plastics, fertilizer, pesticides, paints, fabrics, and lubricants, pharmaceuticals, and a myriad of building materials. Indeed, one author has written that oil will eventually become too valuable to use as a transportation fuel.
Oil is the basis of our economic system, a point largely missed by contemporary economists who maintain that it is the allocation of capital and labor that forms this basis. Our growth economy exists because of oil. It is also the basis of our credit and debt based financing of the economy. Oil promotes growth by its very efficiency as a low cost energy source. The low cost energy of oil fuels almost all of our industrial machines and it is in effect itself a kind of machine that converts energy into wealth. It is analogous to having thousands of slaves at our beck and call every day. My 200 hp pickup truck thundering down the highway does the work of 4000 people! Many of the empires of ancient times became empires on the basis of the energy harvested from slaves. At one point it is said that ancient Rome had a ratio of slave to free of 9:1, which was an unsustainable ratio. The contemporary American has the equivalent of 50 slaves working for him 24 hrs a day. This will also prove to be unsustainable. Petroleum has been a primary or contributory cause of many recent wars with the Iraq fiasco only the most recent example. The inevitable depletion of this, the most important energy source ever discovered, will alter our lives going forward like no other event in national or world history.
It is time for us residing in this beautiful isolated valley to recognize the reality of Peak Oil and how it will shape the future of Jackson Hole. We can either shape our future adapting in the context of petroleum depletion or fall prey to its effects. I believe that local governments are the best qualified to evaluate our local dependency on oil and what strategies we might employ to try to attenuate and mitigate the impacts of scarce and expensive oil upon our community. I have little expectation of help at least initially from our state or national government. Fortunately we in Jackson have had some farsighted local leaders who love this valley and who have tried to provide a culture of sustainability, community organization and responsible energy consumption. I believe it is now time for the people of this area to come together and devise a master strategy for the future life of our town. I hope Jackson will survive as a healthy place to live and work and raise families but if it does, it will certainly be in a much different form than it is today. If it does, it will become intensely local. Angus Thuermer, one of the editors of the Jackson Hole News and Guide newspaper, remarked to me that Jackson lies at the” end of the food chain.” We are indeed a long way from any metropolitan area. Without petroleum no one and nothing arrives in Jackson. And that means virtually all our food, our fuel, our building materials, our medical supplies, even our elk feed. What do we make in Jackson? Nothing. How would we cope if that pipeline went dry, or if the electrical grid failed? Some of you who were here in the winter of 1978 remember what it was like when the mercury plummeted to 60 below zero. Power lines contracted and snapped, the ceiling in the courthouse collapsed and travel came to a standstill with no electricity, no gas, and no lights. Eventually temperatures moderated but that event gave me a foretaste of what cataclysmic energy deprivation felt like. Our future energy shortages will probably involve shortages of individual energy components, perhaps like what China is experiencing at the moment. In Chendu, the capital of Sichuan province, a city of 10 million, trucks have been lining up at the three stations who have diesel, waiting hours to receive their paltry ration of 40 litres..Gasoline is $4.54/gal in some towns in the eastern Sierra and almost $10 in the Hebrides when they can get it. Maine-iacs in the state of Maine are being asked to conserve electricity because of short supplies. These are places at the end of the food chain too.
My point is that it is time that we develop a plan for coping with energy resource depletion before it is upon us. An event of this magnitude will almost certainly involve a task force approach to assess our vulnerabilities and strengths and local resources to devise our survival plan. This may involve formulating a risk management approach of scenario creation looking at every important component of the community such as communications, policing, delivery of essential services, access to food and water, care of our vulnerable members and all of this to be done in a context of scarce or expensive petroleum or electricity. This town has done a lot of this work already, for example powering all of its municipal operations with renewable energy, but equally important besides crisis management is to look at what changes we might undertake to make this valley and its towns more livable. For most of the 20th century we built our towns to service the automobile and our expanding sprawling suburbs. The existence of sprawl was only possible because of virtually free seemingly inexhaustible energy. In retrospect, it was a terrible expensive mistake. The outlying suburbs are ultimately doomed. We are fortunate we live in a small place and haven’t had the room to expand like our neighboring states to the south and west. But we should take action now. At the very least, we should mandate energy efficiency in all aspects of our lives. This is not something we can leave to market forces. Increasing efficiency is easy. It is the low hanging fruit. This must involve all aspects of county and regional planning. We will need to look at our civic structures and building codes. We should use carrots as well as sticks to ensure compliance. We need first to educate and convince our citizens of the necessity of our task but we will need their cooperation. Increasingly as we localize, we will need to rely more and more upon each other personally. For example, we may need to think of abandoning plats for new suburbs composed of single-family homes and mobile homes. In a cold mountain valley, they are energy hogs. We should look at contiguous structures of higher density with super insulated building envelopes, fuel stingy appliances and perhaps earth sheltered or solar thermal augmented design features. Germany is doing this today. Offer our builders options to reduce administrative and permit costs if they can find ways to build green. For example I would waive all permits if a builder could increase the energy efficiency of a building say, 50 or 100 % over a conventional building. Building material costs can only increase in the future and we must build for extended building lifespan. We should abandon single use zoning and move immediately to mixed use where people could live and work and shop in the same place. Some current absurd codes that require so many parking spots per unit need to be abolished. I recently returned from northern Italy and in Bolzano people can walk to obtain all the necessary and enjoyable niceties of life. The streets are crowded with folks on foot and on bicycles that are easily rented in the town square near the train station. Cars are discouraged but not prohibited. And striking to an American’s eyes, very few people are FAT. Small trucks supply the stores, offices and habitations with their necessary supplies. Many of the workers live on site. The first floors seemed to be shops and restaurants, the next floor was often office space and above the offices were apartments and homes. Alleys allowed the offices and retail shops to function without disturbing pedestrian traffic. We could do this in Jackson. As another local example, we have a sprawling largely single floor hospital that is energy profligate and inefficient as are most hospitals. We have staff and nurses who cannot find affordable housing often coming from great distances over perilous roads from Star Valley and Idaho. Why don’t we have a 4 or 5 story hospital with housing and necessary shops for our staff? I was in just such a hospital in France 30 years ago after a skiing mishap. The nurses lived on site in the hospital in their convent. Why don’t we adopt a livable sustainable sister city instead of cities overseas with which we have little in common. Certainly there are state and federal regulations that will have to be changed to accommodate a healthy new dynamic but it just those existing regulations that have let us to our current predicament.
This discussion must begin with life’s basic necessities starting with food and water. How can we procure our food locally? How many people could this valley support if we had to feed ourselves? Maybe we should think about permitting sustainable farming practices around our periphery if the soil is suitable for agriculture. That flat fertile land in the National Elk Refuge looks very suitable for agricultural production for the town of Jackson. Kelley Warm springs could be a good place for a geothermally heated greenhouse. We may want to look at a drilling plan to try to prospect for other hot rock geothermal areas to heat our greenhouses .Why not produce electricity domestically? Our consumer owned utility allows net metering but why cannot Lower Valley or our state government help offices and homes become individual mini power plants delivering power to our local grid with wind or PV solar or local hydro? A lot of electricity available on the regional grids is lost to transmission losses. We have a recently rebuilt dam on Jackson Lake, which probably could supply the entire valley with cheap hydroelectric power. I believe it could be done without disrupting wildlife, our recreational businesses or visually impairing the beauty of that great lake. Of course all of these ideas involve difficult trade offs and compromise but obtaining a source of renewable clean energy is a potentially huge payoff.
This is a valley dependent on tourism. Will the tourists continue to arrive from the far-flung corners of the empire if gas or JP4 jet fuel goes to $10, $20 or $50 a gallon or if it becomes rationed? There is one way that they could arrive. That is by rail, the way visitors to Yellowstone used to arrive. Trains are unique in that their engines can run on almost any fuel from electricity to coal to corncobs. The same cannot be said about planes or buses or heavy trucks. Our valley electricity could supply those trains and streetcars and trolleys to move our guests who will always want to see this, the most beautiful valley in America. We should move to electrify our entire national transportation infrastructure immediately. It will take time to lay track and build a rail network but Wyoming is one of the richest states in the country per capita and we need to start this immense project while we still have surpluses. Where will the money come from for this massive project that will rival the interstate highway network in scope and cost? Our country has subsidized automobiles and highway based transportation and aviation for almost a century. The gas tax is $0.18 a gallon and the tax on jet fuel can be as little as 4.4 cents!! We need to drastically raise the tax on petroleum while there is still petroleum to tax. Alan Greenspan recently suggested $3.00/gallon, which is about what Europe charges. In fact it may need to be more because they already have a rail infrastructure. There is no way we can repair and maintain all our roads and bridges nor should we. We need to prioritize our key travel corridors and gradually abandon non-essential maintenance on hard surfaced highways. Get used to gravel roads. They are in your future. Asphalt comes from what? And concrete is extremely energy costly to produce. The 8-lane concrete and steel highway bridge across the Mississippi to Minneapolis  cost a small fortune and will have a limited lifespan. A steel rail bridge is far cheaper and faster to build, inspect and maintain. Forget airport expansion projects anywhere. Perhaps they can morph into transportation hubs for a variety of transportation options but air travel will likely become what it was in the dawn of aviation, a conveyance of the wealthy. If you have traveled on France’s bullet trains or Italy’s sleek Eurostar streamliners that silently blow past Ferraris on the autostradas, you’ll soon forget the pleasures of removing your shoes under the grim faces of the TSA.
Our community may need fewer hotels and restaurants in the post Peak Oil Era as our population and businesses strive to live within the carrying capacity of this valley. A lot more of us will probably be engaged in farming and ranching and gardening and few of us will have careers in marketing and human resources. Eventually Wyoming may come to resemble what it looked like at the turn of the last century. It seems to me that that would not be such a bad thing.

Tuesday, January 24, 2012

How I would Fund Wyoming Government

The Corpus Callosum column by Jonathan Schlechter is always worth a look in the Jackson Hole News and Guide .  His columns in the Jan 11 issue inspired me to make a few comments. To refresh your memory, Jonathan discussed how economic activity and taxable sales related to that activity have changed in the past 5 decades and particularly in the past 10 years. This mirrors changes in the state and national economy in the same period.  In the 1950’s and “60’s the US was a balanced dynamic economy producing goods and services not only for its own citizens but worldwide. The industrial expansion following WW 2 fueled a growing middle class who produced “things” from our resources generating real wealth and rising incomes to a growing middle class. Government’s funding model was to tax companies and individuals involved in this post war boom .By making things, companies and individuals could buy things and people went from being citizens to becoming consumers. This was a time of real economic growth fed by very low energy costs and a huge economic advantage enjoyed by the United States who did not have her industrial base bombed to rubble as did Europe and Japan.  It was a time of low debt, rising productivity and rising incomes across all strata of society. This economic model started to change in the 1970’s and ‘80s and the broken economy of today bears little resemblance to the economy of 50 years ago. But what has changed? How has it changed?
      I think the most useful model of economic activity is to divide the economy into three segments: the Primary Economy, the Secondary Economy and the Tertiary Economy. I first read about this construct in The Wealth of Nature, by John M Greer. The Primary Economy is that segment involved in bringing resources to the wellhead, to the mouth of the mine, to the railhead at the edge of the forest for example. The Secondary Economy takes those resources ( eg.,oil, timber, oil and coal, and minerals) and delivers them to factories and workshops where people make things and sell them. This industrial production fueled a huge increase in services to those productive members. The sons and daughters of miners and farmers and factory workers became lawyers, doctors, economists, teachers, insurance salesmen, financiers and………bankers. This brings us to the Tertiary Economy. This Tertiary economy is the part of our economy which makes money off of money. A sound banking  and finance sector is crucial to the health and growth of the Primary and Secondary economies, taking in deposits and making loans, providing liquidity to the productive members working in the primary and secondary economies.  The members of the Tertiary Economy formerly made money by  loans to the Primary and Secondary economy, by putting them in Debt and charging interest on the debt. Keep in mind the Tertiary Economy while valuable to the other two, does not create wealth. Ideally, the Tertiary Economy facilitates real wealth creation by the Primary and Secondary members. Government  taxed the real wealth creators in  the Primary and Secondary Economies. This was the government funding model that Jonathan describes in his article.  In Wyoming  and Teton County it was working, that is until the last few years. But the secondary economy has been losing out to the Tertiary Economy for the past 30 or 40 years. The Tertiary economy has become the dominant segment of the economy. Fifty years ago the manufacturing economy was three times the size of the financial sector. Today that ratio is reversed.  The government doesn’t tax the Tertiary economy at the same rate as it taxes the Secondary economy. Members of the Tertiary economy have manipulated the political system and the tax code to their advantage so as to pay low or even no taxes. Their income is shifted away from earned income to the capital gains rate of a maximum of 15%. It is no accident that most of the 1% club lives within the Tertiary Economy.
       I would like to summarize how I would fund government in the current recessionary environment. In general I believe you tax what you want to discourage or where you want to find income. You might tax smoking or alcohol to reduce consumption for example, or tax imported oil to reduce the trade deficit. The tertiary economy should be taxed at the very least at the same rate as the working economy. Even a famous conservative, Ronald Reagan in the Tax Reform Act of 1986 raised the capital gains rate to the same as ordinary income. Warren Buffet, one of the nation’s richest billionaires also has come out in support of this concept. If you want to encourage jobs and earned income, the tax rate should be low.  But instead the tax rate is low or non existent for members of the Tertiary Economy. Goldman Sachs, the world’s most powerful Investment bank in some years has paid No taxes. IN 2008 they were at the 1% bracket despite receiving Billions in taxpayer largesse. It is time for local state and federal taxing authorities to tax the Tertiary economy which creates no real wealth but amasses fortunes and stop taxing economic activity, people and companies who create things and who actually work for a living.
I offer the following concrete suggestions to fund government. Some of the ideas are my own and some have been suggested before. Some would not be possible without changes to current tax law.
1. Capital gains rate at the same rate as ordinary income. FICA, Medicare and state income taxes to be assessed the same as in ordinary income.
2.Tax all financial transactions which would include real estate both commercial and residential, equity, bond and mutual funds trades, derivative trades, bank loans, hedges, insurance premiums etc.  For example, the amount of derivatives in the world economy is estimated in the $ Hundreds of Trillions ! Just a 1% tax on dervatives would yield trillions of dollars. That would raise a stock trade for me at Charles Schwab from $8.95 to $9.04!  Over 70% of US equity trades are said to be high frequency trades(HFTs), computer generated trades which add to the volatility of US markets benefitting only the tertiary folks in the investment banks and hedge funds.
3. Tax LBO and hedge fund activity at the same rate as ordinary income.  Many hedge fund managers have made in the hundreds of millions to billions in a single year and yet pay no more than 15% capital gains rate. This would only reinstate the policy of Ronald Reagan.
4. End subsidies to companies in the tertiary economy. Under current tax law, the overseas income of corpations is often shielded and deferred, sometimes forever. The  aircraft leasing arm of  Gerneral Electric has used this dodge for decades and it’s corporate taxes are often way below 10%.
5. Lower earned income and corporate taxes from a top rate of 35% to say 20-25% in the non financial sectors but make it a flat tax that will be paid regardless of deductions.
6. Wyoming is a state where the 1% club flock to, to avoid punishing regional and state taxes. There are many ways to tax the  unearned or inherited wealth of  these newcomers arriving from elsewhere. Many Chinese and Asian newcomers are moving money out of their countries to avoid taxes. The uberwealthy newcomers to Teton County have driven up the cost of housing to levels unaffordable to what’s left of our middle class.
7. Regardless of the incorporation structure, taxes to support  necessary government expenditures should be paid by anyone who straps on shoes and walks our soil and that would include non profit corporations, churches,and state and local buildings.   
8. Tax all unproductive wealth. Under current Wyoming law billionaires can shield hundreds of millions by for example setting up a ranch corporation of thousands of acres and pay little or nothing in property taxes because they are taxed at an agricultural rate. The nuts and bolts of a law going after this time honored dodge of the wealthy  and money launderers while not punishing productive farmers and ranchers would of course have to be worked out. Taxing raw land and raw lots at a rate to discourage buy and hold socially unproductive investment would free up the land for productive use. The way it is done now is to tax the land with a structure on it at far higher rate  than raw land. Use it or lose it.
9. Institute a carbon tax on the transportation sector. Road and port construction and maintenance should be 100% supported by users.. An easy first step is toll booths on the Interstates. Many states do this now. Commercial aviation pays little in the way of fuel taxes while using vast amounts of fuel burned in inefficient turbine engines spewing an enormous carbon load. Even private aircraft pay a trivial tax of only about  20 cents a gallon while the average automobile taxes are $.51/gallon, which itself is only about 6%.
Of Course I am aware that these suggestions are anathema to the  upper caste financial elites of the world who have purchased our political leaders and molded our tax laws at great personal expense. I have tried to explain how our economy has changed in the past several decades and continuing the current tax system of taxing earned income and ignoring unearned income needs to change.  In an upcoming blog I will attempt to lay out our economic future if we fail to enact some or all of these ideas. Sadly, I think the most likely scenario of state and local economies will be default. As James Schlessinger has said, we seem to have only two modes, complacency or panic.