Energy is one of those subjects on which economists have a lot to say, yet nothing to say. Applied economics can be very useful, even indispensable, in the microeconomics questions of cost comparisons, product pricing and, especially, long range planning of production facilities. Where economics has come up short, though, is in the macroeconomics theory that might help us forecast accurately.
There was a time when energy forecasts were a statistician’s paradise. I once worked on a project team with a statistician who was an energy expert. The project had a lot of uncertainties embedded in it, and as we were going over the numbers, he laughed and said, “In my business, a one percent deviation in a forecast is considered the upper limit of allowable error.”
Today’s energy forecasts are another matter entirely. They depend not only on demographics and technology adoption but also on such things as the popularity and politics of electric cars and trucks, the prices of gasoline, diesel, and crude oil, the price of natural gas, the price and legality of coal, and the government subsidies for solar, wind, and other sources of power. Many of these variables affect both the supply and the demand for energy, as do imponderables such as the regulatory and political environments.
In today’s environment uncertainty is the forecaster’s constant companion. It is also a major factor in investor decisions as well as corporate capital allocation and planning decisions.
Nothing illustrates this uncertainty as clearly as the diversity in those decisions. In the space of less than two weeks, for example, we saw General Motors double down on its bet that electric cars were the future … and legendary investor Warren Buffet placing his bet on traditional energy sources and on traditional trucker-driven trucks.
The Buffet decision to buy a controlling interest in the Pilot Flying J company is particularly interesting because it involves dueling forecasts for the trucking industry. In one forecast, truckers will remain a mainstay of shipping as home delivery expands its influence on retailing. In the other forecast, truck drivers are replaced by driverless trucks controlled by robots and artificial intelligence.
Pilot Flying J operates a chain of truck stops that sell diesel fuel and food to truckers playing the nation’s highways day and night. And unless the techie sector invents a tough, cigar-chomping android that strides in wanting black coffee, chili and homemade pecan pie, the trucking industry would change. There would be no place for Pilot Flying J in a driverless truck environment.
The General Motors decision to expand its production of electric cars illustrates management’s faith not only in the growth of the market for these cars but also in the technology which will expand the cars’ range to allow more flexibility and cost reductions through home recharging.
There is a lot of uncertainty in the energy market and more has been added now that the Environmental Protection Agency has announced that it is acting to repeal the Clean Power Plan, which set limits for the carbon emissions from power plants. The procedure for EPA to do this is complicated enough in its own right but it is bound to become even more so. The strong political sentiment on both sides and the multitude of legal cases already filed regarding the plan will ensure that. Because of all these factors, it will probably take awhile for EPA’s efforts to have any real effect.
One factor that will be changing the mix of energy production and forecasts is the replacement of gasoline-powered cars with electric vehicles. The average privately owned car in the U.S. consumes nearly 500 gallons of gasoline per year. If that vehicle is replaced by an electric car, somebody has to produce and deliver the equivalent amount of electrical energy to run it. Electric cars may reduce the need somewhat if they turn out to be more efficient overall but it is still going to be a big number.
Producing power for the small number of electric cars on the road today is not an issue. But the U.S. for all uses consumes over 140 billion gallons of gasoline a year. When we consider producing the electric power equivalent of that amount of energy we start to see a problem — especially if we are shutting down existing generating plants because of tightened emission standards.
The real obstacle for us will be stabilizing the regulatory environment enough to allow producers a decent chance at forecasting demand. Power plants do not spring up overnight like Jack’s beanstalk, and power producers need forecasts for economically efficient results. We can solve the problems that economics and technology create for us. It’s more difficult to solve the problems we create for ourselves.
James McCusker is a Bothell economist, educator and consultant.