Yugonomics – Why the New Auto Emission Initiatives Equals a Modern Day Smoot-Hawley Act

By John Galt

May 21, 2009

The announcement of the new CAFE and Emissions rules by the Obama administration today has a reverberation far beyond Washington, D.C. The CAFE standards though are not the story. The focus by the media is a distraction to prevent anyone from focusing on what would amount to the largest tax increase in the history of mankind, on a society completely dependent on the internal combustion engine in the midst of the worst economic conditions since the Great Depression of the 1930’s. This is a modern day mistake of the Smoot-Hawley Tariff Act just after the market cratered in 1929 and passed in 1930. I am not comparing the circumstances or the regulations but the impact will be more dramatic, more drastic and have a damaging impact that leaves a recovery greatly in doubt with little if any sustainability.

The Supply Issue

Without rehashing the peak oil debate, again, for the millionth time on the internet, let us review why “big oil” is absolutely disgusted by this administration and the current state of affairs inside the U.S. The rig count as of last Friday’s Baker-Hughes report is now down 944 from last year at this time. There is no incentive to begin further exploration efforts, TXCO, an oil and gas exploration company filed for bankruptcy this week as have many other companies either filed or reduced operations.

Based on this trend and the lack of any desire from this administration to address the issues of fossil fuel shortages looming in the future, one can only assume we will see this rig count drop below 2002 levels and then 2000 levels not far after that. The recriminations coming from the envirocommie movement and their desire to control the fate of our internal combustion engine economy is no secret and this administration hired one of the loudest voices in Carol Browner to steer policy. Even cleaner resources, such as natural gas are not expanding operations as the lack of coherent support for alternative clean energies for cars or power plants which could benefit the oil and gas industries has scared away any innovation.

With 743 fewer rigs, the global warming loons had best pray that we do not experience a “Little Ice Age” again or that the sun actually has something to do with the Earth’s temperatures. Because getting these rigs back online in a business environment with little credit and capital available for investment and a hostile regulatory regime will take a lot longer than President Spotted-Owl Lover snapping his fingers. The charts above though, do not tell the entire story I am afraid.

First the environuts have managed to insure that any search for further oil resources has come to a crawl. If you look at this chart courtesy of www.theoildrum.com you begin to realize that the nations with the most purchasing power will have the ability to purchase low cost petroleum based diminishing resources over a debtor nation wishing to move to exotic blends and taxing and penalizing older energy resources before the new sources come on line.

This will not end well for the United States because there has been no indication that Canada or Mexico will follow suit in the program and surrender their advantages with other nations willing to buy a declining resource at an ever increasing price. The supply of oil and America’s access to it is declining and instead of expanding exploration and creating capitalist based reward programs to innovate and expand alternative fuels, the Obama administration has elected to rule via the mandate. If this mandate is based on the California model, then all of us are about to pay a steep price to live in our beloved nation.

The California Model of Regulation in a Low Carbon Fuel Standards Economy

This is the end result of using scientists raised under the “Wisconsin Idea” being allowed to ‘help’ bureaucrats draft regulations to impose on a state’s economy. The damage that this was perceived to have done on its own to California without the help of the rest of the inept Legislature to the economy was never measured as this regulation was announced. In reality I can attest to the old regulations when I was involved in the transportation business as we levied surcharges on all shipments into the state due to the inane laws and reporting standards. This may have cost our medium sized enterprise some customers but the alternative was to lose upwards of 20% per shipment or more if an inspector was able to find a minuscule violation that would not infringe on the air quality of the state. This particular regulation, with everything involved would have created a bureaucracy within transportation companies, primarily rail and trucking, that would raise the expenses beyond anything imagined.

The announcement from the California Environmental Protection Agency on April 23, 2009 titled “California Adopts Low Carbon Fuel Standard” (LCFS) Release 09-37, included the entire regulatory regime and when you start to sort through all 374 pages you begin to realize that without having a staff to analyze it, determining the impact on the transportation industry is impossible. I could guess that we are talking about adding, based on a back of the napkin guesstimate, 20-25% per shipment to deal with this program based on just the reporting and penalty regime alone (see below).

That tells you right there that the cap and trade carbon credit system was designed to insure that out of state corporations that serviced the California economy were going to have to decide whether or not to service the state or increase the costs to their shippers and thus the consumers to meet the regulatory regime. It only gets better as you pour through the report and read the section on “Trucks stops” and TRU’s:

As a result, truck stops are going to be legally required to modify their facilities, or close them under this law. Not to mention the cost of servicing the agricultural industry would increase as the Transport Refrigeration Units would have to be modified to meet these new requirements. Without any sort of consulting analysis it does not take a rocket scientist to determine foodstuffs would be dramatically impacted by these new costs in addition to temperature sensitive chemical shipments. The conversion costs for carriers, manufacturers and truck stops will run into the tens of billions of dollars, something that they do not have nor the ability to raise in this economic environment.

The regulations expanded beyond trucking, truck stops and TRU’s for containers, rail cars and trucks as here is the section covering forklifts, believe it or not:

The penalties if you fail to conform? I’ll let you determine if the risk/reward ratio made it worth doing business in California first if you had a credit shortfall:

Then the penalties as referred to above:

Think of the windfall California could receive if a TRU on an aging boxcar from CSX or Burlington Northern slipped into the state and created a pollution problem that impacted 0.000000000091% of the overall air quality! Have no fear though a CEPA inspector would be sure to collect that $25,000 from the railroads and insure that the gnats would not be offended by the exhaust.

It is truly that absurd.

But now for the most terrifying part:

Why do you think Arnold was in Washington, D.C. on Tuesday to hail the announcement while the electronic birds chirped in the background while Obama spoke?

Barrack “Smoot” Obama Meet Arnold “Hawley” Schwarzenegger

Yes it is true. History does repeat itself somewhat. Obama gave Arnold all sorts of credit and proudly announced on May 19th that the new Federal emission proposals would mirror the California regulations that I have commented about above. Think about the industries that will be impacted:

All of them, except air transport.

Think of the direct costs that are now going to be added nationwide to farmers, truckers, truck stops, railroads, steamship container lines, forklift manufacturers, warehouses, etc., etc., etc…. On the good news side for California, with the standards being adopted nationwide the misery their citizens would have endured will now be shared by all of the nation.

Then think of just how much not just a gallon of gasoline will call as these new clean air initiatives are implemented; reflect on the costs of everything you eat, wear, watch, etc. and the possibility of some goods and services being beyond the ability of the lower and lower middle class to afford. As this plan is implemented, without a vote, without a public hearing, without the industry having any input, you will see impacts far beyond Government Motors building shoeboxmobiles or development of impractical electric cars. Millions of citizens will now pay a hidden tax for the creation of the devices and transport of goods to meet these new requirements. The cap and trade provisions have been hidden and buried under the carbon credit and measurement criteria. Trucking and rail companies will now have to hire LCFS officers to insure that drivers and dispatchers meet the legal letter of the law. Operations departments will bulge with unnecessary personnel that add no efficiency improvements and reduce margins as capacity and rates are already diminished by this recession.

This hidden tax will be damning and destructive for our society much like the Smoot-Hawley legislation of the 1930’s. Once the EPA publishes their regulatory regime, I will attempt to contact some old friends at the ATA and get some estimate of the added transportation costs this will create. The consumer had best realize that with the declining oil production creating higher diesel prices on top of the new regulatory regime, the days of “JIT” are over and the costs of everything we consume in this society is about to skyrocket.

Congratulations to the environmentalist commie whack jobs. You may have just succeeded in killing what is left of our capitalist society. Enjoy your clean air boys and girls; that’s about the only thing you will be able to afford to consume soon.