Private Investors passed on Solyndra, so why didn’t the Smart People in Government pass, too?

Posted by PITHOCRATES - September 14th, 2011

The High Cost of Solar Power makes Reliable Fossil Fuel-Produced Electricity even more Attractive

Solar panels. One of the darlings of green energy. And a favorite of the Obama administration. Especially Solyndra. Where Vice President Biden made a personal appearance to showcase the government’s half billion dollar investment into the economy of the future. A future, albeit, that will not include Solyndra. Why? Sales of solar panels are down. Way down (see Opposing view: ‘Perfect storm’ sank Solyndra by Daniel Poneman, Deputy Secretary of Energy, posted 9/14/2011 on USA Today).

Unfortunately, expanding production has coincided with short-term softening demand, a product of the banking crisis in Europe and its wider economic effects. The combination has had a dramatic effect on the price of solar cells, which has plummeted 42% in the past nine months. This has taken a serious toll on solar manufacturers everywhere, including the U.S.

Actually, what made Solyndra’s solar panels unsellable was something else. They didn’t use silicon. Like everyone else. They used another material. And a different technology. This cost more. But the installation was cheaper. So the total package was competitive. Until the price of silicon fell, that is. Which priced them right out of the market.

Solyndra needed silicon to remain expensive to remain competitive. Much like E85. That really only sold well when gas peaked over $4/gallon. And people didn’t realize that they had to buy more of it to go as far as gasoline would take them. Which meant a lot of people bought E85 only once. But government still subsidizes it. To make it cheap enough to get people to buy it. Even though they don’t want it.

Which is why solar panels aren’t selling. Governments everywhere are implementing austerity measures to reduce record debts. Which means they can’t subsidize these solar panels anymore. Which makes their high prices even higher. Making that sweet reliable fossil fuel-produced electricity all the more attractive. So bye bye Solyndra.

This month, Solyndra , a California-based company, filed for bankruptcy. Solyndra had been named one of the world’s 50 most innovative companies and reported sales growth of 40% to $140 million last year. In 2006, the company applied for a federal loan guarantee. It underwent years of rigorous internal and external review before being approved — before the perfect storm of deteriorating market conditions.

This year is 2011. So they reported sales of $140 million in 2010. And if you do some math, this means they reported sales of $100 million in 2009. Sounds impressive. But numbers are relative. We have to put them into some kind of context for a true understanding.

Government Investment into Solar Energy is Politics over Substance or just Plain Cronyism

So let’s find a little context (see White House ignored red flags in loan to failed solar company by Martin Wolk posted 9/14/2011 on MSNBC).

The FBI raided the Silicon Valley headquarters of the company, Solyndra, last week, investigating whether the government was misled when it loaned the company $535 million in taxpayer funds…

Solyndra received the loan guarantees in 2009 as part of President Barack Obama’s promise to create millions of so-called “green” jobs. But last month, Solyndra declared bankruptcy, laying off all 1,100 workers.

Hmm, let’s see. That was $535 million to produce $100 million in sales. Now that’s putting things into context. In other words, $100 million in sales is not impressive. In fact, it is downright abysmal. Only about 19% of the federal loan produced sales in 2009. For the last two full years of their existence, about 45% of the federal loan produced sales.

Worse, by the time you subtract the cost of sales from these sales and calculate the return on this government investment, there is none. Even before the bankruptcy. This was a horrible investment. This is a lot like all of those dot-com startups. Companies that were flooded with investment capital. As people were anxious to find the next Microsoft. Pouring money into companies that never produced anything to sell. And when the investment capital dried up, the dot-com bubble burst.

At least with the dot-com economic destruction, private investors lost. The green energy bubble, on the other hand, it’s the taxpayer losing. Because we’re subsidizing so much of this green energy. Why? Because private investors see it for what it is. A bad investment. There isn’t a market for this stuff. So they’re not throwing good money at bad investments. Unlike Uncle Sam.

House Republican investigators have unearthed emails — reviewed by NBC — which reveal repeated warnings by government staffers about the loan. Days before final approval there was a warning that one model showed the project would run out of cash in September 2011, which it did.

Another memo from the White House Office of Management and Budget, also cited by The Washington Post, questioned the model the government was using, but said “[g]iven the time pressure we are under to sign-off on Solyndra, we don’t have time to change the model.”

Why the rush? The White House appeared to be pushing to meet political deadlines so Vice President Joe Biden could announce final approval when he spoke at the groundbreaking for the new plant.

A key question is whether Solyndra’s political connections were a factor. A big Obama donor associated with the venture, identified by the Post as Tulsa billionaire George Kaiser, repeatedly visited the White House. He has denied using his influence to win approval of the loan.

This explains a lot. Staffers warned against the loan. Some even did math. Probably recognizing that there were no sales. And with no revenue coming in it was a simple matter of dividing investment capital by their monthly costs. Which proved very accurate. The staffers were smart. The policy was just bad. But, alas, staffers don’t make policy.

This is politics over substance. Or just plain cronyism. Which means one of two things. Government is incompetent. Or corrupt. Take your pick. Whichever one makes you feel better.

If Private Investors won’t Invest it has to be a Bad Investment

Solyndra is just one example of bad government policy. The whole ‘green energy is our future’ is a pipe dream. An excuse for the government to spend money. And to pay back campaign donors.

If this was our future, private investors would be pumping investment capital into green energy like there was no tomorrow. Like they did with all of those dot-coms. Those didn’t need any government investment, did they? And you know why? Because the private sector is full of greedy bastards looking to get richer. That’s why. And they will bury someone with investment capital if that someone has a good idea.

Anything the government ‘invests’ in, then, is a bad idea. Why? Because private investors say so.

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Using the Myth of Man-Made Global Warming to Acquire Money and Power

Posted by PITHOCRATES - August 31st, 2011

A Company needs Government Help when they can’t Compete in the Market Place

The new green energy sector was going to make America energy independent.  And create jobs.  Good, high-tech jobs.  Building high-tech, expensive things.  Things we could charge lots of money for.  So we could pay high wages to all those new green energy workers.  And the Obama administration helped.  Poured federal money into green startups.  That are now failing left and right (see What went wrong at Solyndra by Barry Cinnamon posted 8/31/2011 on CNNMoney).

Chinese solar panels are 10-20% less expensive than U.S.-made panels; but by some estimates, Solyndra’s panels were 100% more…

For five years or more, the U.S. government was providing support for solar manufacturing in the U.S.  The DOE Loan Guarantee program provided critical funding for Solyndra’s manufacturing growth, supported by over $1b in private capital. Unfortunately, both these private investors and the DOE made a couple of bets on Solyndra that didn’t pan out.

A company needs government help when they can’t compete in the market place.  So they can continue to build a more costly and/or a more inferior product.  And even when they get that help they still can’t compete.  Which just means this was a bad investment from the get-go.  Only getting as far as it did because of government help.  Which was tax money poorly spent.

So why did they fail?  A couple of bad decisions by their CEO.

The first bad bet was that refined silicon, the feedstock for the solar panel industry, would stay expensive. Solyndra invented a solar panel that didn’t use expensive silicon. Unfortunately for Solyndra, and fortunately for all the silicon solar panel manufacturers and customers, silicon has gotten very cheap over the past few years…

The second bad bet was that Solyndra’s flat roof installation technology would make up for their relatively expensive panels.  Solyndra did indeed see big savings on flat roof installations, but the rest of the industry did not stand still. Other commercial flat roof products are on the market (full disclosure, Westinghouse Solar has an inexpensive and easy to install flat roof solar panel product) with similar benefits at much lower costs to Solyndra.

Of course, had they never had the government help they never would have gotten off the ground.  And anyone who would say otherwise needs to answer the logical follow-up question.  If they could have done this without government help, why didn’t they?

The Public Sector doesn’t know Squat about a Good Business Idea

But it’s just not Solyndra.  There’s green failure wherever you look in the unfolding saga that is the tragedy of green energy (see Green jobs only produce fiscal black hole posted 8/31/2011 on qcsunonline.com).

Lowlights of the saga include the recent bankruptcy of Evergreen Solar Inc. of Massachusetts, recipient of $58 million in direct subsidies and tax breaks, including federal “stimulus” funding, but which cut 800 jobs and is now $485 million in debt, with more job losses to come with the closure of a Michigan plant. Green Vehicles of Salinas, Calif., received $500,000 in city subsidies, but closed last month without having produced anything of significance, Human Events magazine reported. The company had promised to create 70 jobs and pay back local taxpayers $700,000 a year in taxes.

Seattle got a $20 million federal grant to weatherize 2,000 homes and create 2,000 jobs. After a year, three homes had been retrofitted and 14 new jobs created, many of them administrative. That’s a return on investment of about one job per $1.4 million. In Michigan, Fisher Coachworks is out of business two years after being touted as part of the state’s green future, and despite millions in state subsidies to sell buses bought with federal tax money.

The U.S. Forest Service awarded $490,000 in stimulus funding to Urban Forestry Revitalization Project in Clark County, Nev., to plant trees and other greenery in urban neighborhoods. It created 1.7 jobs, one of them a full-time temporary job, and 11 short-term and temporary.

Overall, estimates the Competitive Enterprise Institute’s Chris Horner, $30 billion in green handouts in the stimulus bill cost taxpayers about $475,000 per job.

These are good examples of why there is a private sector and there is a public sector.  The private sector aren’t experts on providing for the common defense or promoting the general welfare.  And the public sector doesn’t know squat about a good business idea.

Lobbyists’ Money influences Government Misdirection into Economic Affairs

The government is backing a lot of electric cars and hybrids.  They believe this is our future.  And, of course, ethanol.  So while they are interfering with natural market forces, good ideas may not get a chance.  Like, say, this one (see Old newspapers could make gas substitute by Colin Bird posted 8/31/2011 on USA Today).

The researchers have discovered a bacterial microbe that likes the taste of old newspapers — the cellulosic wood pulp that makes the paper, to be more exact. In the process of eating the paper, the microbes excrete a biofuel that can act as a substitute for gasoline, the Detroit News reports.

Such microbes aren’t new; we outlined their potential to make ethanol a few years ago. The difference here is the type of fuel that comes out of the microbes: butanol.

Butanol is better than ethanol because it doesn’t require any modifications to today’s gasoline-powered engines. (Many older cars can’t accept E15, let alone E85.) Also, butanol would generate similar gas mileage performance as gasoline. Ethanol has 27% less energy per gallon compared with gas.

It’s not yet known if this discovery is marketable or scalable, especially since alternative fuels are a bit out of vogue, with more attention focused on electrics, plug-ins and hybrids.

Anyone who has ever tried E85 that actually had a real commute to work saw what a bust E85 was.  There was no cost savings because you had to pump 27% more of it into your tank than gasoline.  Worse, the first time you found out about this you may have been driving home from work.  Late at night.  Going through an area not known for its bright lights and safety.  And have to stop.  To buy gas.  Not a lot of fun.  Especially if you’re a woman.

But the government is committed to E85.  Because, of course, of the powerful corn lobby.  Who is chopping in high cotton these days.  The price of corn has never been higher.  What with it being both a staple food and now a fuel.  So while the money will influence more government misdirection into economic affairs, butanol may die a quiet death.  For it has no lobby.

Global Warming may not be Man-Made, but the Myth of Man-Made Global Warming Is

All of this government malinvestment in products is one thing.  And a complete waste of taxpayer’s money.  But it’s ‘the why’ that they are doing this that really rubs the salt into the open wound.  To save the planet.  From man-made global warming.  Which, as it continues to be shown, is a myth (see Watching A Green Fiction Unravel posted 8/30/2011 on IBD’s Investors).

Experiments performed by a European nuclear research group indicate that the sun, not man, determines Earth’s temperature…

The results from an experiment to mimic Earth’s atmosphere by CERN, the European Organization for Nuclear Research, tell researchers that the sun has a significant effect on our planet’s temperature. Its magnetic field acts as a gateway for cosmic rays, which play a large role in cloud formation.

Consequently, when the sun’s magnetic field allows cosmic rays to seed cloud cover, temperatures are cooler. When it restricts cloud formation by deflecting cosmic rays away from Earth, temperatures go up.

Or, as the London Telegraph’s James Delingpole delicately put it:

“It’s the sun, stupid.”

Why, this seems to disprove much of what the global warming alarmist have been alarming us about for lo these many years.  And being scientists, of course you know what they will do.  Do everything within their power to hush things up.

This new finding of 63 scientists from 17 European and U.S. institutes from an experiment that’s been ongoing since 2009 is, if we may paraphrase Vice President Joe Biden, a big deal. Which is exactly why the mainstream media, with so much invested in global warming hysteria, is letting last week’s announcement from CERN pass like a brief summer shower, ignoring it.

Even CERN’s own director general, Rolf-Dieter Heuer, is trying to avoid the meaning of the findings.

He told Germany’s Die Welt Online that he’s “asked the colleagues to present the results clearly, but not to interpret them. That would go immediately into the highly political arena of the climate change debate.”

But, as British science writer Nigel Calder points out, Heuer would have no reservations about entering “‘the highly political arena of the climate change debate’ provided” his results endorsed man-made warming.

Of course, without global warming, the globe isn’t warming.  Even at the poles.  Where the icebergs are.  Which can mean only one thing.  Those icebergs aren’t melting.  And the sea levels aren’t rising.

And it’s not just the CERN research creating a problem for them. They also need to explain why sea levels, like presidential approval numbers and consumer confidence, have fallen. According to NASA, the oceans are down a quarter of an inch this year compared to 2010.

Under the rules of climate change, sea levels, due to melting ice and water that expands as it warms, should be increasing in a way that we’re all supposed to believe is a threat. But NASA scientists say that El Nino and La Nina, weather cycles in the Pacific Ocean, have caused sea levels to fall.

So, yes, global warming is man-made.  The myth of global warming, that is.  Just like the billions of dollars the government has been throwing at these bad green investments.  The idea that these ‘investments’ will create jobs is another man-made myth.

Money and Power – the Driving Force of all Mankind and Governments

The green energy sector is based on man-made global warming.  Which real science continually disproves.  Man isn’t warming the planet.  The sun is.  As it always has.  And always will. 

And the scientists know this.  The real ones.  And the fake ones that have been pushing global warming.  Why do they do this?  Just look at what they have accomplished.  Costly new regulations.  And all that government spending on green energy.  Paid with our taxes.  Stifling real economic output.  And transferring a lot of wealth from the private sector to the public sector. 

And there it is.  Like it always is.  Money and power.  The driving force of all mankind.  And governments.

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LESSONS LEARNED #57: “Environmental policy is a zero-sum policy; save the planet, kill man.” -Old Pithy

Posted by PITHOCRATES - March 17th, 2011

DDT gets rid of Mosquitoes and Malaria

No one thinks much about malaria in big American cities.  Because they’re modern, paved cities.  So there aren’t a lot of mosquitoes.  At least, not like there used to be.  In colonial times, summers were bad.  Anywhere there was standing water.  Thomas Jefferson hated to be anywhere near tidewater areas during the summer months.  Because people got malaria.  He thought it was the air.  It wasn’t.  It was the mosquitoes.  Unpaved areas in tidewater streams just bred mosquitoes wholesale. 

As our concrete cities grew these wetlands went away.  As did malaria.  In the United States.  Other nations, though, were not so fortunate.  Especially sub-Saharan Africa.  Where malaria kills hundreds of thousands of children each year.  Why?  Because much of sub-Saharan Africa is impoverished.  With no modern, paved cities.  And it’s a mosquito paradise.  For awhile, that is.  Because man stepped in and used chemistry.  Created a miracle synthetic pesticide.  DDT.  And went to war against mosquitoes.  Campaigned especially fiercely in the tropical countries that really favored mosquito breeding.  Armed with DDT, it was a lopsided war.  Areas that saw millions of people infected by malaria each year had less than a hundred people infected after the DDT campaign.  It was a huge success.  Chemistry saved the children.  It was so successful they also used it in agriculture.  Food yields improved with the resulting pest elimination.  The mosquito and other pests were on the run.  But then an unlikely ally saved them.  Rachel Carson.

Carson wrote Silent Spring.  Published in 1962, she saved malaria.  And started the environmental movement with her attack against chemistry.  It was hurting the environment.  DDT was thinning egg shells.  And some other nasty stuff.  And perhaps it was.  But there were two uses of DDT.  Heavy agricultural uses.  And the lighter anti-malaria uses.  Some of the things she cited may have been more on the agricultural side.  In any event, environmentalism was born.  DDT fell out of favor and nations banned it or discouraged its use.  And malaria returned in force, killing hundreds of thousands of kids each year.

Firebreaks stop the Spread of Wildfires

Smokey the Bear says only we can prevent forest fires.  Well, that’s not exactly true.  We can’t change the weather.  Oh, sure, we can change the climate by warming the earth with manmade greenhouse gases, but we can’t make it rain.  Or stop the lightning.  Put the two together (a long time without rain then a lightning storm) and it will start a forest fire/wildfire.  And there’s nothing we can do about it.  Well, there’s nothing we can do to prevent it from starting.  But we can limit the severity of the wildfire.  By cutting firebreaks in the forest.

Dried trees burn very well.  And dried brush makes excellent tinder.  As a forest burns, the trees burn and flick off embers.  The wind blows the embers downwind.  Where they land on dried brush (i.e., tinder).  A fire smolders.  Then takes hold.  Flames grow.  And jump to the trees.  Which flick off embers.  That blow downwind.  And so on.  This is how fires travel.  And sometimes you can’t stop them.  They get too big to try and douse with water.  So they burn.  And the only thing that will stop them is the lack of fuel.  And this is where a firebreak comes in handy.  If you cut firebreaks into the forest at strategic locations the fire will spread until it comes to one of these fire breaks.  The embers flicking off of trees will then fall harmlessly on the firebreak.  Where there is no fuel.  And the embers will burn out.  Without starting a new fire.  Depending on the strength of the winds and the width of the firebreak, you can stop a lot of fires.  As long as there isn’t a rat living in the area.

Fire struck Riverside County outside Los Angeles in 1993.  It was huge.  And hungry.  That fire advanced and ate everything in its path.  Trees.  Brush.  And houses.  Homeowners in Riverside Country wanted to plow in some fire breaks to protect their homes.  Unfortunately for them, they shared their habitat with the kangaroo rat.  Which was on the Endangered Species List.  And plowing in those firebreaks may have harmed those rats burrowed shallowly in the sandy soil where all that tinder was growing.  So they were forbidden to cut in those firebreaks.  To save the rat.  And the fire burned through their houses.  And kept on burning.

The Food Chain Turned Upside Down

The San Joaquin Valley in central California is one of the most fertile farmlands in the world.  The Westlands.  Some call it the food basket of the world because they grow so much stuff there.  The San Joaquin River is fed from the snow in the Sierra Nevada Mountains and drains into the Sacramento-San Joaquin River Delta.  And it’s from this delta the government has helped the farmers pump water to irrigate their farmlands.  That is, until drought hit the area.  And a little fish.  A tiny smelt.

In the Delta there lived a fish.  This fish was on the Endangered Species List.  And this fish liked to hang around with man.  And the things man built.  Like water pumps.  With the prolonged drought, those irrigation pumps were pumping a lot of water.  And apparently killing a lot of smelt.  That were hanging around the pump inlets.  So a federal judge ruled in 2008 to shut off the irrigation pumps.  To save the fish.  And they did.

Without water farmers can’t farm.  So land went unused.  Farmers planted fewer tomatoes.  And fewer of their other crops.  Worse, some farmers had to destroy some of their healthy crops.  Such as almond trees that took 30 years to grow.  Without water they’d died.  And dead trees attract pests.  That can spread to healthy trees.  So it was either cut down some of their trees.  Or face pest infestation and lose all of their trees.  So food production in the fertile San Joaquin Valley dropped.  There was less food.  Which, of course, raised food prices.  All to save a small fish.

Diverting Corn from Dinner Tables to Gas Tanks 

Some say that we have to find an alternative to oil.  Because oil will run out one day.  Soon.  They’ve been saying this for decades.  And we haven’t run out yet.  But that’s beside the point.  The point is that they say it will run out because of our increasing demand for gasoline to drive our cars.  And that rising demand one day will exceed the oil supply.  One of their solutions?  BiofuelsEthanolFlex FuelE85.  Made from corn.  Our food.  And others.  For we feed a large part of the impoverished world with our surplus corn.

Back in the summer of 2008, gas hit $4/gallon.  That hurt.  The pain was so bad that it made people change behavior.  They bought smaller cars.  Hybrids.  And cars that ran on the ‘cheaper’ E85 (ethanol).  Which sold for something like fifty cents less than unleaded gas.  It seemed like quite the bargain.  Until you used it.  As those who had a significant commute to work soon learned.  One tank of gas let you commute to work for a whole week.  A tank of ethanol?  It didn’t take you quite as far.  People often learned this the hard way.  After having to stop in an unseemly part of town to refuel late night on the way home from work after hearing that ‘low fuel’ chime unexpectedly.  Those of us who did soon switched back to gasoline.  Why?  To prevent late night surprises like that again.  And because we just don’t like pumping gas.  Or, should I say, ‘fuel’.

You see, ethanol has less energy than gasoline.  So it takes more of it to go as far as gasoline takes you.  When you crunched the number you were actually paying more using the ethanol.  Because you were buying more of it.  Which brings us back to the interesting argument of why we have to replace oil.  Because our growing demand will eventually use it all up.  Now, let’s apply that logic to ethanol.  And the fact that it takes more ethanol to drive as far as with gasoline.  What does that tell you?  They will divert an enormous amount of our corn crop from dinner tables to gas tanks.  Making less food available for us.  And for export.  Which will do what?  That’s right.  Make some people go hungry.  And increase food prices.

Trading Humans for non-Humans

Advancements in environmental policy come at the expense of man.  Every time they protect an endangered species man has to yield ground.  When we fight global warming it is man who makes the ultimate sacrifice.  We have to lose some liberty.  Pay more for food.  Or eat less.  When they ban life-saving chemicals people die.  Hundreds of thousands of them.  Especially children in sub-Saharan Africa.  All in the name of saving the planet.

Environmentalists are okay with this.  For they must know about it.  And yet they pursue their agenda.  So they don’t mind the zero-sum game they play.  Trading humans for non-humans.  Because they favor the non-humans over the humans.  So when it comes to saving the planet or saving man, their choice is an easy one.  They save the planet.  And kill man.  For the human dead are acceptable collateral damage in their war to save the planet.

www.PITHOCRATES.com

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The Rules of Supply and Demand Apply to Gasoline, Too

Posted by PITHOCRATES - October 18th, 2010

What’s the Difference Between Underwear and Gasoline?

Go through your wife’s or girlfriend’s underwear drawer.  What do you see?  What kind of underwear does she have?  Silk?  Nylon?  Satin?  Cotton?  Chances are you’re not going to see only one type.  There’ll be a little variety.  If you don’t see her get dressed, can you tell what she’s wearing?  Probably not.  The underwear she’s wearing will have no impact on her life.  Whatever she does on any given day will probably be the same regardless of her choice of underwear on that day.

All right, now think about what kind of fuel she puts into her car.  What are her choices?  At best, maybe two.  Far fewer than her underwear choices.  Chances are that she’ll be running her car on gasoline.  If it’s a late model car and she’s a hardcore environmentalist she may be using E85 (an alcohol-based fuel made from food).  However, if she finds herself having to refuel in a bad part of town late at night she’ll probably be switching back to gasoline pretty darn quick.  You see, you just can’t drive as far on a tank of E85 as you can on gasoline.  For when it comes to fuel, gasoline is king.  It packs a lot of energy per gallon.  It’ll let most people refuel on the weekend at that safe gas station close to home.

So what’s the difference between underwear and gasoline?  Choice.  If the price of gasoline goes up, we have but two choices.  Pay more.  Or drive less.  If the price of cotton goes up, we can pay more or wear less cotton.  And when there’s other fabric available (silk, nylon, satin, etc.), wearing less cotton is a whole lot easier.  And that choice will never put anyone in danger.  Like stopping to refuel in a bad part of town late at night.

Market Forces Driving Market Prices

Well, cotton prices are going up (see Flashback to 1870 as Cotton Hits Peak in the Wall Street Journal on line by Adam Cancryn and Carolyn Cui).  Floods in Pakistan and heavy rains in China have significantly reduced the supply of cotton.  And when supply goes down, what happens to prices?  They go up.  How much?

The sudden surge in prices—cotton has risen as much as 56% in three months—has alarmed manufacturers and retailers, who worry they may be forced to pass on higher costs to recession-weary consumers.

Ouch.  56%.  Even gasoline doesn’t go up that much in three months.  But will we, the consumers, absorb that increase? 

For the apparel industry, rising prices have upended roughly two decades of cheap cotton. Consumers have become used to relatively low prices, making it hard for garment producers to pass on the rising costs, especially as the economy struggles to recover.

Probably not.  Why?  Because we have fabric choices.  Wearing something other than cotton is no big deal.  It’s easy to do.  And life will go on just as it did when we were wearing cotton.  We won’t notice the difference.  Which is why it’s hard to pass these price increases on to us.  It’s not the same with gasoline.  With gasoline, we don’t have other choices.  Maybe E85.  But we’ll have to buy more of that to drive just as far so we might as well pay the higher gasoline prices.  At least our wife/girlfriend won’t have to stop to refuel in questionable parts of town.  But cotton isn’t gasoline.  People will buy other fabrics if cotton prices go up.  So manufacturers will look at ways to keep from passing on these costs

The most at risk are discount retailers that compete on price and sell large quantities of cotton-based basic items, such as T-shirts. But clothing manufacturers of all price levels may be forced to decide between absorbing the costs or passing them on. Some say they also are exploring different materials, including synthetic blends.

Because consumers have clothing choices, clothing manufacturers will switch to less expensive fabrics to offer what the consumer will choose.  Gasoline producers can’t do this.  There’s only gasoline.  Sure, there’s E85.  But E85 is not gasoline.  When you choose E85, you get less.  It’s not the same with fabric.  There may be a difference in the feel of cotton and a synthetic blend, but you’re not going to incur additional costs with a synthetic blend (i.e., you won’t have to buy more of the synthetic blend clothing for the same amount of ‘wear-time’ of the cotton).  So the consumer won’t just whistle a happy tune and pay these higher prices.   

Compounding this problem of supply pressure on prices is the demand pressure.

Meanwhile, demand from Chinese cotton mills has shown no signs of slowing. The U.S. Department of Agriculture said China bought 267,700 running bales of U.S. upland cotton last week, more than half of the total bales exported and more than the country usually takes.

The clothing manufacturers may be suffering, but, surely, the cotton farmers must be loving this.  Just like Big Oil must love those high oil prices, right?  Sure.  As long as someone is buying at these prices. 

However, the lofty prices are making some cotton farmers worry.

“I hope it won’t go too high. If you can’t put it into clothes and clothes become too expensive, prices will come down,” Mr. Wilkins said.

And that’s the problem.  As prices go up, we buy less.  When we have choices, we just won’t pay high prices.  And in free-market capitalism, there are always choices.

Drill Baby Drill – If You Want Affordable Gasoline

There are no other fuels to compete with gasoline like there is with fabrics.  But we still have a choice.  We just drive less.  That’s a choice.  Before the great recession resulting from the subprime mortgage crisis of 2008, gasoline had peaked around $4/gallon.  It doesn’t cost that much now.  Prices came down because a lot of people bought less $4/gallon gasoline than they did $2.75/gallon gasoline.  But that price will go up again.  Not because of Big Oil’s price fixing (if they could fix prices gasoline would not have come down from those $4/gallon prices).  But for the same reason cotton prices are going up.  Exploding demand in China. 

Until there is a viable alternative to gasoline, gasoline prices will always be more volatile than clothing prices.  But the laws of supply and demand will have similar affects on each.  A reduction in supply (a poor cotton harvest or a lack of new oil drilling) will raise prices.  An increase in demand (hungry Chinese cotton mills or a growing Chinese middle class buying and driving cars) will increase prices.  Both of these together will really increase prices.  It’s not Big Oil.  It’s not Big Cotton.  It’s simple economics.

How do you make these prices go down?  Well, with little control over the Chinese economy, our only choice is to increase supply.  And when it comes to gasoline, that means we need to drill more.  The more oil we pull from the ground the more we can refine.  It’s just simple economics.

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