The political actions of energy producing states such as Saudi Arabia, Russia, Iran, and the United States (US) impact energy prices. And no state seems to affect the nation, and it could be argued the world, more than California. California and its landmark global warming law affect how energy is consumed, produced and the impact it makes on society and the environment. Yet California is now beginning to lag behind in personal income taxes collected, which could drive more people out of the state, because of poor state services, high cost of housing, and crushing energy prices. California’s electric rates are now fifteen times higher than competing states.
California must now have a better understanding of the changes in global energy markets, such as shifts in global energy demand, reducing supply through artificial means, and the increased competition in global gas markets. Moreover, the California legislature and Governor Brown must grasp the interplay among nations – that geopolitical unrest in one part of the world – triggers responses in other regions. Foreign policy and national security decisions are now as influential in driving energy investment trends as economic action and trade agreements.
Popular opinion states that renewable energy sources will insulate markets and shield investors from the dramatic shifts in energy prices held hostage to the energy geopolitical paradox. Yet renewables only comprise 11% of worldwide energy sources, and it is estimated that by 2040 renewables will only provide 15% of global supply.
While California is attempting to lead in renewables, these estimates highlight the three major challenges presented by renewables in their present state. First and second are issues related to storage and transmission of the energy produced. The inadequate technology to harness the supply of natural sunlight and wind necessitates using fossil fuels as a substitute during periods of energy shortages and fluctuations. Further, delivering energy to the end users on a global scale would require grid modernization, the cost of which would escalate to the trillions of dollars.
With California needing hundreds of billions in infrastructure and road improvements this is a daunting figure for the US’ most populous state. Most nations are not likely to spend vast sums of money given the abundance of oil and natural gas at very low costs. Finally, these challenges underscore the heightened cost of renewables, which are more than double the cost of traditional fossil fuels.
Bad policies cause bad results. Mandates to generate an ever-increasing fraction of electrical power from renewable sources will raise the cost of electricity production, as it has done in places like California and Western Europe. This means that the cost of over six thousand every-day products will become more expensive to purchase because they are now more costly to produce. The fossil fuel industry will also suffer due to burdensome government interference. Carbon policies in Germany, Britain, and Spain, for example, have resulted in soaring electricity rates, tax-heavy subsidies, energy poverty, and industrial flight, yet they have missed their intended goal to meaningfully reduce carbon emissions.
Even the Paris climate agreement is flimsy at best. In the US, and California in particular, renewables have succeeded solely as a result of heavy government subsidization. When renewable energy production becomes cost competitive, both consumers and energy suppliers will embrace the production methods, and production will increase without forced consumption. If California wants to stop its exodus of people and jobs then rethinking its renewable mandate, and high energy costs are some of the best places for decision-makers to begin making better policy choices to foster middle-class growth.
Ironically, despite the promise of green technologies, renewables actually negatively impact the environment. While wind and solar may offer an unlimited power supply, both production methods are land-use intensive and must be backed-up by fossil fuel generators. In addition solar energy requires inordinate amounts of water to clean panels for optimal energy production, which could further burden water-impoverished nations, and drought-stricken California. Some states are even unplugging their renewable mandates.
While western nations will likely continue implementation of renewable energy technologies, it cannot be expected that these trends will become popular globally.
The International Energy Agency has said large-scale government intervention will be necessary for transitioning to a low-carbon economy, create a market for renewables, fund gaps in research and development, pay for the transition from fossil fuels, and encourage international collaboration. There still isn’t a substitute for oil and natural gas.
California energy markets are complex and factors such as production, regulations, consumption and consumer behavior have to be assumed developing modeling projections. Yet a behavioral characteristic of nation-states, and California’s economy is that large, give representations towards specific outcomes.
Projecting energy markets are subject to randomness and uncertainty, but can be foreseen through the prism of behavioral economics using geopolitical threat analysis assumptions. In today’s uncertain markets, more has to be understood than financial modeling, budgets and good accounting practices. Otherwise California could be caught in a downward spiral the way they were in this latest unforeseen oil and natural gas crash.
About the author: Todd Royal is an independent public policy consultant focusing on the geopolitical implications of energy based in Los Angeles, California.