Monday, March 10, 2008

Inflation Hits Home

One does not need to be an economist to know that prices are up everywhere. It is more expensive to drive, to eat out, to buy groceries, to pay for utilities. Everything is higher, except for housing values (but they might have been over-valued anyway -- they are in Utah)

It all comes down to energy, namely oil. With oil over $107 a barrel and gasoline pump prices near an all-time high of $3.22/gallon of unleaded.

With an inability to open new drilling operations and build new refineries, supply is impacted.

The whole biofuel hype benefits a few ( a few farmers) but the masses suffer. Most biofuel production in the U.S. is marginally efficient. According to an October 2007 National Geographic article (Green Dreams), For every unit of fossil-fuel energy used to make corn ethanol (E85), the energy output is 1.3. Very inefficient...a losing proposition if it were not government subsidies.

Cane ethanol (from sugarcane, popular in Brazil) is more efficient with eight units of output for evevy one unit of input. Biodiesel (from soybeans) has a 1:2.5 energy balance. Cellulosic ethanol (prairie grass, ag residue, paper pulp, forestry waste, municipal waste) has an energy balance ranging from 1:2 to 1:36, depending on production methods.

Having a government policy that transfers food growing land to inefficient fuel producing land is reactionary at best. Biofuel is good if it is efficient and if is does more good that harm.

Algae, in plastic bags, siphon CO2 from the local power plant, can double its mass with hours. While an acre of corn produces 300 gallons of ethanol or 60 gallons of biodiesel, an acre of algae can churn out more than 5000 gallons of biofuel per year.

The free market works if government gets out of the way. There obviously needs to be some oversight, like on pollution, but if the American businessman (or woman) was given the opportunity to use his creativity, energy production and efficiency could diminish the roll OPEC (Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Indonesia, Libya, UAE, Algeria, Nigeria, Ecuador, Angola and Gabon) can play in the American economy.

Right now, the government's policy are driving us to stagflation. We see high price, decreased growth, and less buying power (wages are flat). Low unemployment is our saving factor, but that's going to change as people spend less.

The free market works if government's roll is diminished. Because that will not change, optimism is not rampant.

What will happen if all the savings and investment we have made into the equities market tank and do not come back for years. There's no bailout for that.

I prefer optimistism, but lack it today.

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