SHAPING STRATEGY Markets and “Policy Creep” Drive Energy Risk Redmond Clark, CBL Industrial Services, Cary, Illinois
past 2.5 years. So has gasoline. Where does governmental fiscal and energy policy figure in these developments? Right at the center. Over the last several years, the U.S.
I
Federal Reserve has executed a series of efforts designed to help economic recovery, collectively called quantita- tive easing. Te Fed has been buying government bonds and other assets (including mortgages) with new mon- ey it has “created” (i.e. it has printed an extra $2 trillion or so). Tis helps to hold the value of those assets while feeding large amounts of money to banking institutions. But that policy has other effects, including a signifi- cant expansion of the money supply, a cheaper dollar, cheaper exports and more expensive imports. During the last two years, the Fed has amassed a portfolio of more than $2 trillion in securities, about the same amount it has injected into the U.S. money supply. Many metalcasting companies are seeing the immediate effects: booming sales and more ex- ports as a recovery takes hold. But this was not a free lunch, and the tab is now being presented.
Splitting the Bill Over the past two quarters, the
dollar has been devalued relative to other currencies, such as the euro. Oil prices have moved steadily higher since 2008. By creating lots of money, we are allowing the government and our economy to pay debts with a currency that is losing worth. Tis is called “monetizing” our national debt. But the costs of things—especially things mined or produced in other countries—will rise as our currency values fall. Almost 70% of our oil comes from international markets, so it is no surprise that domestic oil prices are increasing. Quantitative easing seems to be working as intended. Banks are lend-
56 | MODERN CASTING May 2011
n case you haven’t noticed, our “amber waves of grain” have almost doubled in price over the
Many metalcasting companies are seeing booming sales and more exports as a
recovery takes hold. But this was not a free lunch.
ing again, the economy is expanding at a modest (2% per annum) rate, and inflation appears to be under control for the moment. But even as our currency loses value, the global economic recovery is pushing carbon fuel demands and costs ever higher. Increasing fuel costs spill over into grain costs, and with some regional crop failures, global grain prices have trended sharply higher. Tose steadily rising prices have helped to encourage the explosion of unrest in Africa and Te Middle East. Te so-called “Arab Spring” has
already resulted in the overthrow of long-established political leaders in multiple countries, and the unrest threatens to spill over into some of the major oil-producing nations, including Saudi Arabia. Tat unrest has forced additional risk premiums into energy and food markets, further exacerbat- ing price increases and political unrest. Corn prices are currently approaching $8 per bushel (up from $4.50 in 2008), and oil prices are approaching $115 per barrel. Coal prices also have in- creased sharply. Only natural gas prices have remained relatively steady—for the moment.
On the Home Front A host of political forces are
impacting domestic carbon energy markets. Te Obama Administra- tion wishes to effectively phase out
domestic carbon fuel use by 2050. Te convergence of apparently unrelated government policies is important to note: • New offshore oil drilling approvals are moving at a glacial pace. Two lawsuits before the Fifth U.S. Circuit are trying to further slow offshore drilling activities by requiring more extensive environmental evaluations before permitting.
• Te Obama Administration is calling for slower permitting and more regu- lation of oil and gas “fracking” because of possible risks to groundwater and possible greenhouse gas releases to the atmosphere.
• Te Obama Administration is in the process of trying to significantly tighten water quality regulations around mountaintop coal mining.
• Te administration is moving to strip tax subsidies from the oil industry.
• U.S. fiscal policies are driving up the costs of imported energy resources.
• Te administration successfully de- feated recent congressional attempts to strip greenhouse gas regulatory authority from the U.S. Environmental Protection Agency, and the agency is still considering caps and new taxes.
• Te administration continues to work towards a global accord that will phase out carbon fuel use for many nations by 2050.
Tese policies are taking us towards
sharply higher carbon fuel costs. Te greatest concerns with renewable energy have been cost and reliability. Te combined actions of this adminis- tration—not to mention activities in a host of states and state compacts—will reduce or eliminate the domestic price difference between carbon fuels and renewables. For any energy-intensive manufacturing industry—especially those with potential international competition, like metalcasting—this is a real and growing threat. It is time to respond by doing more with less energy consumption. Redmond Clark is president and CEO of CBL Industrial Services, Cary, Ill.
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