January 01, 2012

The Constant Dependence On Fossil Fuel And The Hidden Cost To Public Health

And The Insurance Industry As Well As Society That Will Eventually Pay

It’s not easy being green

By Melvin J. Howard

Let’s discuss the relationship between fossil fuels, the future of the world's most powerful cartel, the changing climate and the powerful industry that loses big bucks on changing weather patterns. Many of the environmental problems we face today result from our fossil fuel dependence. These impacts include global warming, air quality deterioration, oil spills, and acid rain. Can we touch on that ever important "oil price range" that target price range per barrel of oil within which both producers and consumers are happy to continue "business as usual". But we can't discuss that without also talking about that thing at the heart of the oil markets so despised in all our free market teachings the cartel in this case, the OPEC cartel, of course. Given what's happened in Iraq with Iran not too far behind and continuing US policy towards OPEC countries, we might see where OPEC might be headed in the future. Indications are predicting that the OPEC cartel may face tough times ahead and the outlook for the fossil fuel industry in general.

Despite skepticism, the huge global insurers and reinsurers accept climate change as fact. Furthermore, they accept that climate change is induced by human activity. And, climate change is costing them big bucks. As powerful advocates of the Kyoto Protocol and with Trillions of dollars to vote with in the capital markets, the insurance industry has both the motive and the power to do something about climate change for the first time in history. Let's define what a cartel is a cartel is formed when a dominant group of suppliers or producers of a product conspire to keep prices artificially high. Basically, they conspire to hold back supply so that prices are held above where they would fall if you allowed full competition between these producers. The most powerful cartel in the world is, of course, OPEC the Organization of Petroleum Exporting Countries. It consists of 11 countries altogether and they are Saudi Arabia, Iran, Iraq, Qatar, UAE, Kuwait, Nigeria, Algeria, Lybia, Indonesia and Venezuela. For various reasons, OPEC does not want the price of oil to get too high, either. And so the price of oil ends up being managed within a certain magical price range.  What will happen to it now that America the world’s largest oil consumer is at the table?" Isn't it bizarre that, for the first time ever in the history of big cartels, the biggest customer of the cartel, the United States, actually has a seat at the table of the cartel?

These days, it's not just the environmental movement and the health care industry and some concerned shareholders that are going into battle against the oil giants. Another set of equally formidable industry giants the global reinsurance companies are starting to flex their muscles in this global battle for green fuels over fossil fuels. Reinsurance companies basically provide insurance to the direct insurance companies that we are more familiar with, who insure our houses, cars and businesses. The two biggest of these the European based Swiss Re and Munich Re - provide insurance to insurance companies all over the world, to limit the losses of those insurance companies, just like we limit out losses by buying insurance on our house.  Just like you have to go to Texas to talk oil, you have to go to Switzerland and Germany to talk about important worldly insurance issues. Apparently, not all insurers are quite so active in this mission to stem climate change, and it seems that some of the US insurance companies are not so serious about slaying the fossil fuel dragon.

The Future

Quite undeterred by the finding of the UN Panel on Climate Change and the 30 years of study at the big reinsurers, some consultants and researchers in the oil industry are determined to believe that fossil fuels do not cause climate change. Many oil industry analysts see the demand for, and use of, oil continuing to increase for decades to come and can't see how transportation can get away from the fossil fuels. But, then again, so people with wood chip cars and buses early in the twentieth century might have once thought about their dependence on chopping down trees for transport. Where is the status of renewable energy to some people's amazement, the environmental community is starting to work more with the investment community in the battle against global warming.

The method of allowing the market to cut emissions quickly where it is cheapest and easiest to do will presumably have the least detrimental effect on the health of the economy and people. I am very mindful of the our environment but I am also an advocate of using the market and science to solve society most complex issues. I am an advocate for Clean Development Mechanisms which means funding "clean energy" projects in developing nations. Many people fear that credit accumulation or emissions offsets gained under some market methods may be the most wide open for abuse and therefore may not bring about real change in the battle to stem the release of greenhouse gases into the atmosphere.

Back in 2000 working with the State of New South Wales Forestry Department and also closely with the forest investment divisions of global financial institutions such as US-based John Hancock Insurance Company, the stage was set for the first international market in carbon futures, backed by the trees in new and growing forests in Australia. These carbon-based instruments were to be based on the quite controversial provision in the Kyoto Protocol whereby "Carbon Sinks" such as certain forests and forest management practices, can be used to accumulate credits in carbon emissions trading programs. However, this world-first futures market collapsed, mainly due to the controversial nature and uncertainties surrounding the definition of Kyoto Forests and Carbon Sinks. A senior research scientist at the National Oceanic and Atmospheric Administration (NOAA) Geophysical Fluid Dynamics Laboratory, and more marked effects are likely to come, according to models developed by climate scientists around the world. Projected effects of global warming on precipitation throughout the world can be summarized in a single sentence, areas that already get a lot of rainfall such as the equatorial and subpolar rain belts will get more, and areas that get little such as the subtropical dry zones will get less.

The Hidden Cost

Fossil fuels, coal, oil, and natural gas are America's primary source of energy, accounting for 85 percent of current US fuel use. Some of the costs of using these fuels are obvious, such as the cost of labor to mine for coal or drill for oil, of labor and materials to build energy-generating plants, and of transportation of coal and oil to the plants. These costs are included in electricity bills or in the purchase price of gasoline for cars. But some energy costs are not included in consumer utility or gas bills, nor are they paid for by the companies that produce or sell the energy. These include human health problems caused by air pollution from the burning of coal and oil; damage to land from coal mining and to miners from black lung disease; environmental degradation caused by global warming, acid rain, and water pollution; and national security costs, such as protecting foreign sources of oil. Since such costs are indirect and difficult to determine, they have traditionally remained external to the energy pricing system, and are thus often referred to as externalities. And since the producers and the users of energy do not pay for these costs, society as a whole must pay for them. But this pricing system masks the true costs of fossil fuels and results in damage to human health, the environment, and the economy.