Executive Summary

• Escalating energy costs (direct and indirect) create a vicious cycle in the economy that further hinders growth/recovery
• Overspending and other poor capital allocation decisions by state governments are compounding the problem
• California spends $1 on public transit vs. $10 on automobile-related investment, a gap that energy costs will soon painfully reverse
• Solutions are hard to come by and harder to fund, but without investment, alternative systems won't ever achieve scale
• California's future is increasingly easy to predict; individuals and other state governments better take notes or suffer the same fate

If you have not yet read Part I: Dawn of the Great California Energy Crash, available free to all readers, please click here to read it first.

A key feature in the post-war industrial success of countries like South Korea and Japan, given that they had virtually no domestic energy supplies, was the ability to turn a profit from manufacturing powered by imported energy. This favorable equation relied on three key factors:

• That imported energy remained a cheap input cost compared to the high margin value of exported goods
• That energy producing countries had cheap energy to export
• That purchasers of the exported goods were growing, and were running their own economies on cheap energy

These are the exact same assumptions still being made — and extrapolated into infinity — about California's economy.

Are we really to believe that California's GDP can forever deindustrialize, requiring fewer and fewer energy inputs, while growing in profitability, thus providing the capital to access/import energy — at any price? And this will all take place as the market for California goods and services globally continues to grow in sync with world economic growth?

One major problem is that the cost of running the state of California is not in decline. Most state services are deployed using energy or require energy to be maintained. State construction, policing, and road and highway maintenance all require the consumption of gasoline. The inventory of state and county buildings, primarily schools, is vast and must be run on electricity — at rates that are among the highest in the nation. And let's not forget California's enormous prison complex. (As an aside, PG&E has just asked for a new electricity rate increase).

Accordingly, a circus-like drama has played out for at least five years as the annual state budget is steered towards resolution among the legislature,