Monday, November 24, 2008

Taking the American Dream Off Carbon Fuels The presidential election of 2008 found Americans voting as if convinced that the concurrent once in a hundred years financial crisis was unrelated to political ambitions to hasten getting America off carbon fuels. The collapse of housing values underlying the global deleveraging of the financial system seemed self-evidently due to a bubble inflated by irrational exuberance and inadequate regulation. No one seemed to connect the sharp rise in gasoline prices to the economic plunge that followed it. The current crisis and deterioration of economic activity seem based on collapsing housing and transportation equipment industries. The energy crisis connection for transportation equipment seems obvious enough, but there is also a strong and hidden connection to the housing crash. Baby boomers, after all, represented a very large cohort realizing their American dream as commuters from suburbia. Joseph Cortright published a rigorous study in 2008 showing that the rise in gasoline prices is what popped the housing bubble. Analyzing statistically along several lines, he showed that commuters' fuel prices forced abandonment of purchasing houses that required distant commutes from work. Where did the energy crisis come from? Philip K. Verleger, Jr. published a 2006 paper predicting $100 oil and the recession it would cause. He explained that environmental regulations were increasingly constraining fuels supplies - including regulations restricting sulfur content in diesel fuel and legislation effectively eliminating MTBE from gasoline. Regulatory specifications prevented importation of more fuel from abroad. Poor profitability discouraged investment in refining capacity as regulation diverted large expenditures toward regulatory compliance instead of capacity augmentation....

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