Reengineering approach to energy is hard

By DAVID MOON, Moon Capital Management, LLC.
June 1, 2008

U.S. home prices fell 14.1 percent in the first quarter, the fastest annual decline since records have been kept.

How could this happen? The federal government has been working on all sorts of mortgage bailout plans ' not to mention the windfall tax prebate checks from the IRS. I hate to break it to all those well-intentioned, occasionally delusional folks in Washington, but the laws of supply and demand are more powerful than the House Ways and Means Committee.

The demand for houses has significantly declined; the supply of houses hasn't. Prices go down. Second-graders trading marbles at recess understand that concept.

The same laws that apply to marbles and houses also apply to oil. Why doesn't everyone understand that?

During a recent House Judiciary Committee hearing in Washington, Shell Oil president John Hofmeister argued that gas prices would continue to rise unless demand declined or the supply increased. He said that $5 a gallon for gas would look like a very low price unless they're allowed to find new sources of oil.

That didn't sit well with Representative Maxine Waters (D-CA), who declared her position if that were to happen: 'This liberal will be all about socializing'uh, uh, would be about basically taking over, and the government running all of your companies.'

She doesn't get it.

Even though the price of gasoline has doubled in two years, the underlying economics that precipitated this condition took decades to occur. They are only now being seen at the gas pump.

The world consumes about 86.61 million barrels of oil a day. The 680 refineries in the world are able to produce about 86.60 million barrels a day. Supply and demand trumps Rep. Waters.

Millions of people in China didn't start driving cars and SUVs last week. This energy demand increase happened over decades.

When we switched from paper to plastic grocery bags, it was supposedly the ecologically friendly thing to do; no trees are murdered in the production of plastic Kroger bags.

But the plastic bags are produced from petroleum, so they are bad for the economy ' besides, it takes 2 million years for those things to disintegrate in a landfill.

People routinely make decisions that leave them feeling good but don't change the economic realities of large-scale supply and demand.

I saw a Smart car for the first time this week. It gets 40 mpg, partly by being so small and lightweight. Maybe I'm a cynic, but I don't foresee hundreds of thousands of Smart cars taking advantage of SmartFIX40. I'm willing to bet that the average weight of an NFL offensive lineman reaches 1,800 pounds before the average automobile does.

Think globally, act locally. I like that. It sounds nice. Each of us is responsible for the impact our decisions have on the whole. But I'm not going to ease energy prices driving a golf cart to work.

Switching from paper to plastic, then back to paper is easy.

Reengineering our societal approach to energy requires some sort of massive change, and massive change is hard.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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