Macro Mondays: An Economic Opine on the Paris Accord


For this special edition of Macro Mondays, I wanted to touch on a topic that's very recent and at the forefront of quite a few minds. On June 1st, President Trump formally announced that the United States would withdraw its support for the Paris Agreement: an agreement within the United Nations Framework Convention on Climate Change (UNFCCC) designed to deal with greenhouse gas emissions mitigation, adaptation and finance starting in the year 2020. All aspects and participation in the agreement are voluntary by the member nations, at least for the time being, and the United States was one of three out of the 195 countries with representation that chose to dissent from the agreement. The other two nations were Syria (which is obviously dealing with a ton of shit at the moment, and has no funding left after attempts to quell civil war) and Nicaragua (which said that the agreement was not 'green' enough).

Trump had five primary reasons for disassociating from the agreement: 1) it will cost Americans jobs, 2) the science is bogus, 3) it was designed to have a negative economic impact on the United States, 4) the United States will be at risk of more blackouts and brownouts, 5) it will cost "billions and billions" of dollars. If you CLICK HERE you'll see how all points are being debunked by those in their respective industries.

Today, I will discuss points 1, 3 and 5...

First disclosure: I'm not a scientist. And if you're not a scientist either, you're no more qualified than I am to argue the effects of climate change. So this is why I'm not touching that topic, nor will I in any comments. I've been agnostic on the concept of climate change for years, and I think this approach has enabled me to keep an open mind on things. I've traveled all over the world, and I've witnessed the effects that man-made pollution has had on nature and the health of city dwellers. I remain open-minded on the issue, and quite frankly you should be too.

Second disclosure: although I have a degree in Political Science, the arguments associated with political discourse are enclosed in a can of worms that I simply will not open. The rhetoric of the Political Right is that the Paris Agreement was unilaterally made by President Obama, and NOT a valid treaty in the eyes of the US government because only Congress has the power to ratify treaties with foreign countries. To which I say, 'so what'? This is a treaty which potentially had the support of more than 70% of the United States population and Trump could have appeased the population by formally bring it to Congress for a vote. Instead, he pulled the same card as Obama and abused Executive power instead of attempting to re-establish order. If this had gone to vote in Congress, things would be different right now on both sides.

Third disclosure: I am an economist. Albeit, a young one, but my brain is designed to first gravitate towards the economic component, and I have yet to hear a realistic fact-based argument related to the economic implications of withdrawing from this agreement from anyone on the right. The most important issue of American voters is the economy...every. freaking. time. If that is truly the motivator of politicians, than this should be a HUGE issue worth discussing.

I'm making today is not scientific or political: it's an economic argument. Here are the lies that have been told about withdrawing from this agreement as it relates to the ECONOMY:Argument

Withdrawal Will Bring Jobs Back to America - President Trump was elected thanks largely to a marginalized voter base in 'Rust Belt' states like Ohio, Michigan and Pennsylvania. There's a reason why this region is called the 'Rust Belt' - is in a former industrial mecca that has slowly died out since the beginning of the 20th Century thanks to the development of cleaner, better and more efficient methods of industry thanks to the free market. Not to mention, it was cheaper to move these pollution-ridden factories to developing countries (like China and India) which have little-to-no human rights oversight, so the exploitation of workers would be easier.

As a way to keep his campaign promise of bringing jobs back to this industry and "Making America Great Again," Trump believed that eliminating the restrictions on coal mining and oil drilling, will increase demand and therefore increase the need for jobs in these industries.

Basic economics 101 tells you that in a free-market system (capitalism) you cannot instantaneously create demand for something that the free market has permanently rejected. Back in 2010, I was responsible for researching the financials of domestic railroads, even back then, the ever-declining prices of coal resulted in fewer railroads transporting them when they could make much more money designing their fleets for more expensive commodities. Coal usage has been on the decline for decades now. Same thing with oil - you have only to look at the price per barrel to see that there has been little to no recovery and economists don't believe the price will rise again for another decade or so. Cheap gas is good though, right? Not if you work in a state like Texas who relies heavily on markups in the oil industry to support its local economy.

I'll break it down for you:

  • We live in a country (and world) with a high supply of coal and oil

  • While there is high supply, there is also low demand

  • The combination means that the price is low

  • When you create greater supply (as withdrawing from this agreement is intended to do) with even lower demand (no one in the world wants to buy our coal or oil now), the price goes down even more

  • Lower prices means lower revenues for coal and oil companies, resulting no money left to hire workers or even pay existing ones

  • End result = a loss of jobs

It Will Make Oil Cheaper for Americans - The logic here is that if we drill for more of our own oil, this will increase the supply and make the price cheaper for consumers. What these individuals fail to realize is that the reason oil is so cheap here (between $2-$3 per gallon) versus countries in Europe (between $6-$8 per gallon), is because we dilute the costs associated with our domestically produced oil by importing cheaper oil from the Middle East and other countries.

Obviously, oil is oil no matter where you are in the world, so it isn't about quality, but rather about effective cost management.

Oil needs to be sourced, drilling equipment needs to be bought and maintained, it needs to be extracted, refined, transported, distributed, marked up to a retail price and ALL along this chain, thousands of workers' salaries and benefits need to be paid. American workers, as GM has demonstrated for years, are expensive, and cost far more than the endless stream of expendable labor in Middle Eastern 'kingdoms'.

Let's take Saudi Arabia for instance, just one of many Middle Eastern countries that drill for oil. The Saudis possess the second largest amount of proven oil reserves in the world at 268 billion barrels. By contrast, the United States has proven oil reserves of about 727 million barrels and only 4.4 million of those barrels are capable of ever being extracted. Saudi Arabian oil is also the cheapest oil in the world to produce: in 2016, the costs associated with 1 barrel of oil for Saudi Arabia was $8.98. US non-shale oil costs about $20.99 to produce and shale oil costs $23.35 per barrel to produce.

A few years ago, when the price per barrel was over $100, profits were HUGE, but as of today, the price of oil is less than $50 per barrel. The Saudis have a huge oil supply with limited costs, making their oil cheap, and we import this oil to offset the high prices of American oil which is in limited supply and costs almost 4 times a much to produce.

Withdrawing from this agreement will have harsh consequences regarding oil prices. Even Exxon-Mobil urged President Trump to not withdraw support because doing so will make negotiating oil prices more difficult with other oil-exporting nations. Now that we've basically pissed everyone off, (you ought to care about this), these oil-exporters are now at a luxury to charge Americans whatever price they want for their oil, and as a result those nice diluted prices that you see at the pump will be on-par with those in Europe if something is not done.

Higher Energy Prices Mean a Better Economy - It would if the entire US population worked in the energy sector...but they don't. Cheaper energy prices mean consumers have more money to allocate to other things because gas takes a big chunk out of their paychecks. Anyone notice how cheap it is to fly on airlines nowadays? Airlines save millions on cheaper oil and can therefore expand fleets and increase revenues per passenger. But as I mentioned above, withdrawing support for this treaty will result in higher energy prices, and subsequently, consumers will be forced to give up discretionary spending in order to fill up their gas tank to drive to work and earn a living.

The Agreement Would Cost the US Economy "$3 trillion in lost GDP, 6.5 million industrial jobs and the average household would have $7,000 less in income" - This was Trump's main economic argument. Not only did he cite no sources for these numbers, the statistics make absolutely no sense. The reference is to the proposed carbon tax, which according to Trump, will cripple the economy. The non-partisan website, Factcheck.org, looked into that claim and found that if the carbon tax, at $36 was not staggered out and increased by 3% per year between 2015 to 2035, this would result in an average of 0.55% negative annual impact on GDP. The current US GDP is $17.95 trillion per year. This would result in a cost of about $98 billion per year. It seems like a lot, but not when you consider that the US GDP increases by more than 2.5% each year anyway.

But that's just worst case scenario, according to calculations by Resources of the Future, the US could actually reach its Paris goals with a much lower carbon tax rate in far less time: either with a constant tax rate of $21.22 per year until 2025 or a rate that starts at $16.87 and then increases by 3% each year over the same time frame. In which case, the impact on the US GDP would be negatively effected somewhere between 0.10% and 0.35% per year between now and 2025.

$3 trillion lost versus $98 billion lost per year (worst case). HUGE difference. HUGE lie.

The loss of industrial jobs will happen no matter what because the free market has deemed it so. How the heck the average household would have a $7,000 loss in income makes no sense. As I just showed, the carbon tax in the worst case would result in about 3.0% of that $3 trillion in lost revenue number. Meaning, worst case, consumers might lose $200 per year to carbon taxes. Right now it costs about $695 as a tax penalty if you don't have health insurance. Think about it.

(Getting down off my soapbox now...)

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