CHAPTER 3 : ENERGY AND THE GLOBAL ECONOMY

Great Decisions

Adam Smith•The invisible hand pursuit of self interest•Free market economyDavid Ricardo•Comparative Advantage •Produce efficiently and trade

John Maynard Keynes•Demand economics•Government intervention

History

The Great Depression – 1930’sNew Deal – a sequence of programs from

1933 -1938 that provided government intervention to resolve the economic crisis

Institutions like : Social security system; Security and Exchange Commission, Federal Housing Administration etc came out of the NEW DEAL

GLOBAL ECONOMY

Helped build EUHelped build Asia Pacific Countries To counter soviets post world war II

Free Trade

Following Ricardo’s Comparative advantage model

FTANAFTA

Era of Interdependence

China produces 85% of the shoes that American wear

Americans buy Chinese cheap shoesMNC’s Financial interdependence – Treasury bonds

Wood fuel

1885 Coal

1890 hydroelectric power

1951 Oil

1957 Nuclear Power

Foreign Oil

The Five biggest private oil companies only hold 12% of global oil production

The rest is produced by sovereign countriesWhile other sectors are becoming more

globalized - the oil sector is more controlled by governments

OPEC – Organization of Petroleum Exporting Countries Algeria, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya,

Nigeria, Qatar, KSA, UAE, Venezuela

Historical Price Shocks

1973 - Yom kippur war in the ME1979 – Revolution in IranNixon – Project Independence

Energy self-sufficiency in the US by 1980 Free the US from dependence on Foreign oil

Oil and Foreign Policy

Oil Consumers

USChinaJapan

High Oil Prices

On Oct. 15, 2004 – limited supply due to many factors – prices rose to 55$ per barrel

More demand ( China )– Limited supplyA weakened dollar

As a result of 2004:

Prez Bush signed the Energy Policy Act of 2005 Encourage energy efficiency Promot alternative energy sources Reduce dependence on foreign oil Increase domestic production

2006 – Advanced Energy Initiative Stated that “US had become addicted to oil “ Need to replace 75% of oil imports from the ME by 2025 by

producing Clean energyEnergy Independence and Security Act of 2007

Increasing the supply of alternative fuel sources by making it mandatory that fuel producers use 36 billion gallons of biofuel in 2022

Setting a national fuel economy standard

Research and Development

Critics believe that no money is being funded in research for alternative energy

8 billion $ = 9 days of fighting in Iraq

Independence

Diversifying sources

Proposals

Diversify EnergyProviding more incentives for green friendly

energy alternativesSolar powerWind power – can the US be the KSA of wind

powerThomas Friedman –book HOT FLAT AND

CROWDED – Green Revolution ( US) US should stop buying oil and gas from

Petrodictatorships (KSA)

US State Governments

California governor – Arnold Schwarzenegger – “California Global Warming Solutions Act – 2006

Western Climate Initiative - by 7 governors – cut regional CO2 emissions by 15%