Steering out of the energy crisis by Michael Shashoua theDeal.com Posted 03:28 EST, 1, Feb 2001

It will take nothing less than a Marshall Plan for energy to end the crisis that has put California electric companies PG&E Corp. and Southern California Edison Co. near bankruptcy, says Matthew Simmons, president of Houston-based Simmons & Co., an investment bank specializing in the energy industry.

"There's only two solutions. We can limit the demand for energy to create capacity again. But that's a terrible way to save energy," Simmons told the New York Capital Roundtable on Feb. 1. "The right way is to begin an energy expansion the likes of which the world has never seen."

It will take years to get out of what has become a "perfect energy storm," predicted Simmons, who also served as an energy adviser on President Bush's transition team.

"We have to expand all forms of energy around the globe by 30%," he said. "If we did 10%, it would take as long as 30%, and we'd only get three years of growth. While doing this, we must rebuild the current energy infrastructure. Energy prices will have to stay high, otherwise we can't pay for this.

"We must re-do our business plans and count on the real cost of energy, rather than assume that energy was free."

By keeping prices high, Simmons asserted, oil producing countries could see a ripple effect.

"In the '70s, the OPEC countries basically wasted the petrodollars (they earned) on palaces, tanks and bad loans," he said. "But if they use the petrodollars to create a lower-middle class instead of poverty, it will create a spending wave the likes of which we've never seen. We need to start to appreciate their poverty."

The current crisis could become more acute than those of the '70s because it has been caused by bad data and bad analyses, according to Simmons. Past crises due to shocks in oil prices were alleviated by supplies of electricity and natural gas, but in this crisis there is no spare capacity of petroleum, natural gas or electricity, Simmons testified at a U.S. Senate Budget Committee hearing Jan. 30.

"I began my testimony by saying this is real, it's serious and it will hurt the economy. It's not around the corner. It's here," he said. "And I found myself agreeing 1,000 percent with what a junior member of the committee said – Senator Clinton – which I never would have imagined happening. Senator Clinton said 'It seems like energy is not like other commodities – it touches too many other things.'

"She is right. Energy is like industrial oxygen," Simmons said. "Without oxygen for three minutes, you don't need food."

This truth may have eluded Californians, Simmons said.

"As the California economy grew, it started embracing the concept that the new economy doesn't use energy," he said, eliciting laughter at the Capital Roundtable. "In Mississippi, Alabama and Texas, they would say 'Those people are stupid!' "

"I'm worried," Simmons said, "that we'll destroy California's economy by sucking energy out of neighboring states." He stressed that this would strain the electricity gates states put on their power, making it tough for California to get what it needs from other states.

-- Swissrose (cellier@azstarnet.com), February 02, 2001

Answers

So where will we take that 30% increase from? Duh!

-- Swissrose (cellier@azstarnet.com), February 02, 2001.