While on my way to the Western Economics Association meetings this year (sitting in the airport ready to visit Vancouver for the first time in 14 years), I run across this statement from our president courtesy PowerLine:

The list goes on and on, but the point is this: this legislation will finally make clean energy the profitable kind of energy.

Note the definite article "the". It makes one type of energy at the expense of another. And how does it propose to do this? He's already told us once.

So, if somebody wants to build a coal plant, they can — it’s just that it will bankrupt them, because they are going to be charged a huge sum for all that greenhouse gas that’s being emitted.

That was January 2008. As of last week energy experts were determining the likelihood that cap-and-trade will favor natural gas over coal. This government is engaged in picking winners, an industrial policy that more and more represents the second Carter Administration. That didn't turn out so well, as I recall.

But 25 senators (soon 26) represent states that produce more than average amount of energy from coal sources. If we can't rely on the sensible economic advice that Obama supposedly is receiving -- perhaps not listening -- maybe we can appeal to those who have used government to give their states something in the past to oppose having it taken away now.

Thanks to President Ford for the title to this post.

Labels: economics, Energy, Obama

Last night Janet posted at True North about the cost of cap-and-trade legislation and her call to Colin Peterson, a Minnesota Democrat from a declining region of farms, lakes and empty nests. Heritage has posted a calculation of the costs of the Waxman-Markey bill by congressional district. Districts have roughly the same number of people of voting age, but can differ greatly in the type of economies they have and the incomes earned by the people of the district. To correct for that, I adjusted each cost applying to the district for year 2012 as Heritage estimates by my estimate of how much each district creates in personal income. The variation goes from under $18 billion in CD-7 (Peterson) to over $31 billion in CD-3 (Paulsen). Here's what I get:

Congressperson	Lost personal income % 2012	Lost jobs 2012
Walz	2.35%	3871
Kline	1.09%	3835
Paulsen	1.41%	4496
McCollum	2.31%	3984
Ellison	1.60%	3819
Bachmann	1.24%	4127
Peterson	2.41%	4174
Oberstar	1.46%	3340

This is a tax therefore that varies but bears down hard on Collin Peterson's district. It will cost CD-3 more jobs, but the impact there is less as a share of income.

Labels: Energy, global warming, politics

Because I teach until 1:45 on Thursdays, I missed the opening of the Bachmann cap-and-trade event, which ended up moved to the larger Atwood Ballroom due to high interest. I did not see the Representative speak, arriving in the middle of the presentation by Chris Horner. Those who were there were Andy, Gary, and (for the loyal opposition) Eric. A few thoughts:

1. Let me lead by complimenting our students. Those who disagreed with Rep. Bachmann, or with the presenter, Mr. Horner, at the St. Cloud event used their free speech rights with due respect for the speakers, were not disruptive, and made me rather proud of my university today. Don't agree with them, not sure they understood the points Mr. Horner was making (more on that in a second) but when he asked for his turn to speak they relented with the shouting of questions and gave Horner his due. I'd rather they didn't shout, but given Horner answered them when they shouted, he agreed to that format. I agree with Andy that they were restless, but largely because they were in a minority in the crowd.
2. Horner is entertaining. If I could suggest one thing, it'd be to s-l-o-w d-o-w-n. The points were excellent but rattled off quickly because he had lots he wanted to do. So I agree with Muse on that one, though he did have a handout that I got that helped comprehension. (I hate handouts. I use PowerPoint often, and let me say to Mr. Horner -- watch Prof. Tufte for some tips.)
3. But he did change at least one person's thinking. A couple rows ahead of where I eventually sat (finally finding Mrs. S in the crowd) was a fellow professor of another social science. An excellent professor, I am inclined to think he holds views that favor the MMGW theory. After the talk I asked him what he thought and he said that he thinks we should not do cap-and-trade. That surprised me; why? I asked. It doesn't seem to do what we want, he said, and it's not clear how it would work and not clear people can actually understand it. This has long been my point on cap-and-trade. Any estimate of "what does this cost the average citizen?" comes up against the fact that it is a hidden tax. It's so well hidden, so complex in its changing of relative costs, so shifted forward and back between producer, labor supplier, capital, and consumer, that any attempt to measure the cost has to be theoretical and contentious. Horner says this, but then throws out a number anyway. DON'T DO THAT! Your best point is that you cannot know the cost of this thing. The only solid number you can generate is what you intend to sell the initial pollution rights for. All the rest is dross. If you buy MMGW theory, you should buy it with an explicit tax, openly adopted in Congress and signed by the President. Cap and trade is bad policy because it hides costs and benefits.
   

UPDATE: "Discredited"? I thought Larry wrote news, not opinion. To support his claim all he offers is a competing number from John Reilly, who is (gasp!) an economist. One economist does not a discrediting make.

The word you want is "disputed", Larry. The point I made above is that every number can be disputed. And yes, I do work as an editor from time to time, at the right price. Call my office if you would like my services.

Labels: economics, Energy, Michele Bachmann

Remember when we bragged about First Fuel Bank and its novel approach to handling gas price risk? They're experiencing some changes.

The St. Cloud fuel bank plans to announce today a new way of selling gas. Consumers in the program can buy gas for 10 cents off the daily pump price, or as company President Jim Feneis guarantees, the cheapest legal price.

It is illegal to sell fuel below a minimum price set by the state.

The program is called a prepaid rolling account. Here’s how it works: A customer opens a First Fuel Banks account, which works much like a gift card, depositing a specific amount of money for fuel purchases.

I've thought about that decision for a few days, and read the company's newsletter. (I have an account with them.) One thing I learned there that I didn't see elsewhere is that if I deposit in this new kind of account -- the firm calls it a "prepaid rolling account" -- you always have the option of moving that money into your fixed price account when that price is acceptable. You can either lock-in at $2.379 or have a rolling account which today prices at $1.599.

Some speculate that the company might have been caught in a bad position with the decline in price. Under the old rules, the firm sold future gas at a date uncertain and should turn around and buy a contract to take delivery of gas at some future, certain date at a price that is a little lower. The margin is their profit. They could also trade future options, hedging the prices as specified here. At present futures prices increase rapidly over the time horizon, so the question for the firm is where to buy those contracts, which in turn sets the price he charges.

The difference has to be more than just the price premium for futures gas (currently running about $.25 to $.30). It also has to cover the uncertainty of the timing of withdrawal. If he buys a futures contract to deliver in June but then demand of people with the lock-in price accounts is low, he is caught with gas perhaps at a lower price than the contract he bought. Rather than accept delivery he closes the position at a loss. He could just accept delivery, but storage is not cheap. He can sell the delivered gas now at the current price and buy a future contract for those who didn't use their locked-in accounts, but the slope of that maturity curve may still be positive, meaning he is still taking a loss.

The slope of that forward curve (called 'contango' when it slopes upward and 'backwardation' when it slopes downward) is what's bugging the firm. It's the opposite of the condition of traders who don't have oil yet.

Phil Flynn, vice president at Chicago-based trading firm Alaron, said the oil contango has created a frenzy for storage space.

“You pay as much as $2 a barrel to store it but you can lock in the profit instantly today and make out like a bandit,” he said.

The scramble for oil storage, combined with reduced demand in the recession, has lifted U.S. inventory numbers to 321 million stockpiled barrels—an 8 percent increase over this time last year, according to the latest report from the Energy Information Administration.

Some companies reportedly are even storing crude in tankers, leaving them at sea instead of delivering their cargo.

This firm already has it. The rolling account is a way to deal with it.

Labels: economics, Energy

There's still a shortage going on, and might for awhile longer, in the southeast.

Atlanta’s chaotic gasoline shortage should be back to normal by Columbus Day, Oct. 13, at the latest, said Randy Bly of AAA South. That means about two more weeks of uncertainty, desperate searches for stations with gasoline and long lines at stations that do.

Bly said Nashville had fuel shortages similar to those in metro Atlanta, but now 70 to 80 percent of the city is being supplied.

...The chaos began when Hurricanes Gustav and Ike temporarily shut down Gulf Coast refineries. As shortages began to become evident, panicked motorists began topping off and filling up gas canisters. That has delayed a recovery, but the flow through major pipelines from the Gulf remains reduced. As of Friday, only three of the Gulf's 56 refineries were still off line, but several open refineries were at reduced production levels.

More thoughts on inventories at The Oil Drum. I agree with their comment, "why haven't gas prices risen more?"

Next time you hear a liberal yearn for Jimmy Carter (they do!) you can also remember these lines from 1974. Cui bono?

Labels: economics, Energy

Despite much hope that the Congress would at least get the energy question right, it appears that the Democrat leadership is up to its old tricks.  Offshore will be OK for now, but not shale, says Sen. Jim DeMint.

We've just been alerted that despite House Democrats relenting on extending bans on offshore drilling and oil shale in the continuing resolution (CR) appropriations bill, Democrat Senate Leader Harry Reid has decided to sneak an extension of the oil shale ban through as Congress fights over the financial bailout. Oil shale in America's West is estimated to hold be between 800 billion and 2 trillion barrels of oil -- that is more than three times the proven oil reserves in Saudi Arabia alone.

Gary is correct: The final victory on energy is still far, far away.

Follow the DeMint link for the exact language.

Labels: Energy, politics

This just released video by Congressman John Kline of Minnesota's Second Congressional District says it all:

"Speaker Pelosi (Democratic leader of the US House of Representatives), give the American people an up or down vote on energy." Americans are still waiting for the Congress, controlled by Democrats, to provide a vote on an "all of the above," comprehensive energy plan for Americans.

Beginning in August after Speaker Pelosi shut down Congress for a summer recess, Republicans took the energy issue to the floor of the House of Representatives. Congress resumed this week. Pelosi still refuses to address our energy problems, our gas prices and the related increased costs in home heating fuel, food, and all goods produced.

Yesterday, Democrat Pelosi again refused to address energy. Republicans are continuing the fight for energy independence and jobs for Americans. There is no need for us to send $500,000,000,000-$700,000,000,000 to people who want all of us dead.

We Americans deserve a vote from our representatives or it's time to replace irresponsible energy and job Democrats with responsible energy and job Republicans.

Labels: Energy, John Kline

Last week, I was fortunate to hear Congressman John Kline of Minnesota's Second Congressional District (CD 2) speak at two venues: A CD 2 wide Chamber of Commerce meeting and the CD 2 monthly volunteer meeting. (Full disclosure - I am the Republican Chair of MN's Second Congressional District.) Congressman Kline's talks focused on earmarks and energy.

Earmarks

Washington is simply stuck. Sometimes this may be good, other times bad but when important issues that affect Americans and business are ignored, all lose. The earmark system is an example of a system gone amok. My understanding is that local governments can request that their DC representative request money for X project. In the past, the project was raised in Congress, the merits were debated and a decision to allocate or not allocate the funds was made.
Unfortunately, the system has lost its transparency. Today earmarks are slipped into bills without debate, without voting, without transparency to the taxpayer. What Congressman Kline did in 2007 was say, "No more. We've got to fix the system (ie, make it transparent)." There were 12 Congressmen who agreed with him; in 2008, there are approximately 50 who have signed on board. We, the taxpayers, foot the bills for such stupid earmarks as the researching the fruit fly in Paris, France. Excuse me, the French can do their own research.

Energy

In 2007, the USA imported 4,915,957,000 barrels of crude oil and petroleum products from all countries. The price per barrel was significantly lower than in 2008 when prices have ranged from $84/barrel in January to $125 in June, and reached $140 in July/August. Bottom line: through May of 2008, Americans spent over $193,000,000,000 for oil imports.

The Republicans have proposed the American Energy Act, an all-encompassing energy plan to free the US from the potential shackles of foreign oil producers. Counter to what much of the press is reporting, the Republican energy bill is thorough. It supports: Increased conservation; increased alternative energy sources; increased nuclear; increased oil refineries; opening the Outer Continental Shelf and North slope of AK for oil and gas drilling. However, the Democrats won't allow the bill to come to the floor of the House for a vot. Their maneuvers, described below, show that they really don't care about Americans.

The US House of Representatives has a procedure whereby any member who is on the floor is allowed to speak for 5 minutes. On August 4, 2008 when Republicans were lined up to speak on energy, as is their right by House rules, Democrat Speaker Nancy Pelosi (San Fran Nan) and her buddies forced adjournment for the next five weeks, turned off the lights and microphones. This procedure denied Republican representatives their right to speak.

Hm, what to do? Another rule says if a House member is speaking, visitors can be seated on the House floor. Republicans rounded up visitors inside the Capitol, invited them to the House floor because Republicans believe Americans should be represented- their representatives should have a vote on energy bills. These actions have been continued for the past two weeks.

Why won't the House Democrat leadership allow a vote? The bill would pass because many Democrats are in favor of it. But, there are problems. The Democrat leadership is beholden to the environmentalist lobby (as well as trial lawyers and the teachers' unions). We have been fed a bill of goods on the damage to the environment. This is ludicrous - no nation drills, processes and transports fuels as cleanly as Americans. (An aside, a Norwegian acquaintance of mine who is working in the Gulf of Mexico says the Mexican drilling sites are no where near as clean as the American platform sites and ours are 30+ years old.)

The numbers are all over the map but sending $500,000,000,000 or more a year to overseas oil suppliers, many of whom would like to see us disappear is just dumb.

The briefest summary of the root cause of our energy problem is the actions taken by environmentalists and Democrats over the past 30+ years that have literally prevented the US from building nuclear plants and refineries, drilling for its own oil, mining clean coal, etc. Already we have made significant investments in alternative energy sources and will continue to do so. However none has proven financially viable for a large marketplace, yet. In time, yes but not now.

The House did pass an excuse for an energy bill, HR 6 which will be the topic of a separate post.

Labels: Energy, Feminists, Security

I have just completed participating in Congressman John Kline's blogger conference call. He returned to Washington, DC Monday evening to join other responsible members of Congress to discuss the Republican energy policy.

Democrat Speaker of the US Congress gaveled the House to summer adjournment for five weeks and left unaddressed, the pressing need of the USA to face its energy crisis. Of course, this behavior pattern has been repeated over the last 20 or so years by either a Democrat president (President Clinton vetoed the key energy bill in 1996) or Democrat members of Congress. While they claim they're for the little guy, their behavior indicates otherwise. Then there is the national security angle, but why should Democrats be concerned about national security?

The Speaker, Democrat Nancy Pelosi, promised that when the Democrats took over Congress they would grant the minority party the right to offer alternatives to proposed bills. She and her Democrat party leaders have reneged on this promise. Not only have the Democrats refused to even address Republican suggestions, they have also ignored Speaker Pelosi's statement upon the Democrat wins in 2006 that they, the Democrats had a comprehensive energy plan. She even has blocked her own party members from addressing this issue.

We Americans can continue to elect Democrat representatives who are so out of touch with what we, the little guys of America, want and need or we can toss out the Democrat members of this Congress, one of the most lame congresses in US history. There is a reason this Congress' approval rating is in single digits - it's the Democrats ignoring real needs of Americans coupled with their inability to get anything done.

(For those of you who were short-changed on being taught American government, it's not the president who makes laws, it's Congress and this Congress has done zip.)

Labels: Energy, Feminists, John Kline

Fifteen GOP senators debuted a web ad yesterday that called for Harry Reid to bring the Senate back for deliberation and vote -- with amendments permitted -- on an energy plan. It's a pretty good ad:

Harry Reid thinks a month recess "will allow everyone to cool down," while the Gang of Ten continue to meet and try to get past the election with what seems to be a bad compromise. Intriguingly, two of the ten -- Bob Corker and John Thune -- appear in this ad. Are then in or out of the Gang?

Labels: Energy, Feminists, politics

I have tried to explain the idea of how future values of an asset drive both current price and use of an asset to a number of people. I think Robert Murphy's explanation from last week was particularly useful in application to oil and ANWR (or any other untapped fields held in the US):

Imagine that you are sitting on a huge oil deposit, which has (let us suppose) one billion barrels that can be brought to the surface for $20 each, so long as you don't pump more than one million barrels per day. (If you want to pump at a higher rate, you have to spend more money per barrel, and you might reduce the total number of barrels you can extract from the deposit.) So the question is, how fast should you pump?

You might at first think that you should pump at the maximum extraction rate, without raising your marginal costs — i.e., that you should pump at one million bbls/day. But this clearly is wrong, if you expect oil prices to keep rising. Why sell 365 million barrels in 2008 at an average of $150 each, when you could postpone production for a year and then sell those same million barrels for, say, $200 each?

In light of this consideration, maybe you think you should just hold your barrels off the market forever. By letting them sit in the ground, the market value of your asset rises over time, as the market price of oil rises.

But that isn't necessarily the right thing to do, either. What if oil prices rise an average of only 10 percent per year over the next two decades? Do you really want to put all your eggs (oil) in one basket, by leaving them sitting underground? Especially if your deposit is located in the Middle East, you might feel more comfortable selling off some of the oil now, and then using the revenue to buy stocks and bonds, not to mention a few surface-to-air missile silos. (And of course, you could be wrong in your forecasts; maybe oil prices will tank in two years.)

That story looked kind of familiar to me; it has the flavor of the Hotelling extraction story but told in a simple way. My recognition was of the story of the trees in Alchian and Allen's Exchange and Production. Let me type out a little bit of this for you. Imagine a tree that can yield only one service, producing lumber, which it can provide at only one date in the future. (Oil wells can provide service over many years, we'll get to that in a minute.) At the moment of planting the present value of the tree as lumber at some future date will be greater than the cost of planting the tree.

As time passes and we apprach that future date, the present capital value rises towards that anticipated future value, and rises at the market rate of interest. Consequently, the date at which you might invest in that resource has no effect on your realized rate of return. If you invest in the first year, or any year, you will get the same annual percentage rate of growth, as long as beliefs about the future value of the lumber don't change. (p. 122)

The return on the tree, or an oil field, is equalized at the market rate of interest whether you buy a new or old tree, a new oil lease or an established field.

What ensures that equilibrium? People don't give away opportunities to get more than the rate of interest -- that is, profitable opportunities. If a young tree were priced so low that people expected to get a higher return over its life than [the market rate] per year, everyone would want to buy it; if it were priced to high, the return would be smaller, so no one would want to buy it: The price would adjust. Every durable good whether new or old will be priced on the expectation of the same interest rate of return. (ibid.)

The risk of holding that asset is that there would be additional supplies that reduce the rate at which the price of your asset increases. This intertemporal analysis would make an increase in future supply of trees -- reducing future prices -- encourage the cutting of trees now. Likewise, an increase in future production of oil would reduce the rate of return to the Saudis of their reserves, and encourage them to produce more oil now. Such a point is made explicitly by Coats* and Pecquet [2008], but the same can be found in Lee [1978 J Pol Econ; JSTOR link here if you have access.] Coats and Pecquet demonstrate that the effect of a reduction in scarcity rents -- the marginal cost of using oil now rather than later -- has an identical effect to a reduction in extraction costs. This applies to a good that grows until harvest or a durable asset that generates revenue over time. And this applies both to the monopolist or cartel as it does to a competitive oil industry.

This difference between comparative static and dynamic analysis is at the base of the argument between the drill and don't drill debaters. The don't drill side has an argument that future oil production can only affect future oil prices; good economic analysis would tell you otherwise.

*updated to get Morris Coats' last name in that post. He blogs, by the way, and wrote a nice letter. The paper was presented at the Southern Economics Association. Professor Coats reports that he was inspired on this by Dwight Lee's work.

Labels: economics, Energy

Just watched Congresswoman, Michele Bachmann, on CNN. She along with Republican Governor Haley Barbour of Mississippi represented the accross-the-board, sound Republican solution to energy demands for the USA. Governor Richardson (D - NM) and a Phd from UC Berkeley tried to paint Senator McCain as someone who opposed all their pet topics: solar, wind, etc. Richardson also attempted to justify releasing oil from the Strategic Reserve ala The Ego-bama's "plan." (The reason it's a "strategic" reserve is that it is for national security, not a stopgap solution to the Democrats' blocking energy independence for us.)

When Larry King returned to Bachmann for her comments in response to Governor Richardson, it was over. She nailed the problem clearly and succinctly. She and Barbour showed how the Democrats have been obstructionists for decades on energy. After the commercial, the topic was changed. Score one more for the Republicans.

A few minor points: the Phd. was big on blaming the US for not investing in solar (and wind power) for the past 10 years. I know for a fact that there were windmills and solar experiments in CA for at least the past 25 years. Perhaps the Phd. never traveled to southern CA to observe them. What he conveniently omits is that if solar and windmills were financially sound, we'd have more than 1% of our energy from them. It's not for lack of investment, it's because it's not economically sound.

Labels: Democrats, Energy

Until the U.S. opens its offshore waters to oil drilling, it will be seen as the world’s worst energy hypocrite.

The above is the lead sentence in an article in The American magazine. At the World Petroleum Conference in Madrid, Spain, the leaders of OPEC in essence told American reporters, (paraphrased) "Quit telling us to produce more oil - get your own from your own shores." The big three talkers included the Algerian head of OPEC, Chakib Khelil, who told the press that there are bidding wars in Algeria (not in the US, home of the free market concept) and Americans should open the OCS.

The Petrobras (Brazilian oil company) CEO, Sergio Gabrielli, told the press to drill in the Gulf of Mexico. The Saudi Arabian oil minister Ali Al Naimi said, "The limits to future petroleum supplies have more to do with politics (in the US, it's the Democrats) than with geology and resource availability. ...The most promising acreage remaining in the U.S. is located offshore, most of which is off limits to the industry."

The obstructionist attitude of Democrat politicians is just phony rhetoric. These Democrats denounce the Saudis and OPEC; they complain about the price of gasoline and claim that $10 a gallon is OK; they rant about the evils of Big Oil while The Ego-bama talks about taxing only Big Oil but no other industries (like high-tech, Democrat Warren Buffet's funds, George Soros funds, etc.). Until the US opens its offshore waters to oil drilling, the world will continue to hate us - not for protecting them or removing thugs but hate us because we will be seen as the world's worst energy hypocrite.

A final point - for all the whining by the leftist Dems, their obtuse concept to "protect the planet" in reality hurts the little guy and their union base. This vague "save the world" mindset stifles innovation, ignores the safest oil drilling system on the planet. The Democrat impediments to increasing domestic oil production along with nuclear plants and mining of clean coal ship jobs overseas, jobs that could be in the U.S. Their behavior increases the federal deficit thereby penalizes our kids and grandkids. I hope Americans wake up in time to make the change in November that will provide more energy, better food, safer drilling, warmer homes, and jobs for all of us.

Who were these speakers? Only the leaders of the world 's oil producing nation.

Labels: Democrats, Energy

Aside the controversy of using a campaign worker's spouse (see the update) to pen what might otherwise have been seen as an interested letter to the editor, I thought Susan Gaertner's letter about the claim of Michele Bachmann that the price of a gallon of gas could be $2 in the US in four years deserved some commentary. It is really a bold claim Rep. Bachmann makes and thus worth considering in more detail.

Most of the letters you read these days involve the EIA's estimate of the effect of opening drilling in ANWR. As I wrote about this last week, the report assumes that the price of a barrel of oil in 2020 would be less than $60. If $140 a barrel produces a price of $4 for gasoline, what does a price of $60 a barrel for oil produce? Those of you who answered "$2" can stop now; you've just agreed with Rep. Bachmann. (Though that's 2020 versus Bachmann's forecast date of 2012; if you'd like to argue a price that stays at $140 through 2012 -- or higher -- and then falls to $60 by 2020 so that EIA is right and Bachmann is wrong, I invite you to tell that story and wish you good luck.)

So let's suppose EIA is wrong about that forecast. This kind of cuts the legs out from Gaertner's substantive claims, but let's answer her question for her anyway. What might additional drilling produce for a price change? The key lies in understanding it's about more than just additional oil production.

James Hamilton posts this evening that demand for gasoline in the US appears to be more responsive to prices now that we're at $4 than it was when we were at $3 a gallon. I have talked about this in terms of the "second law of demand": consumer responsiveness to price changes is time dependent and expectations dependent. If the price rise is temporary, you smooth your consumption of gasoline through a combination of less spending on other goods and by saving less. If on the other hand you believe it is permanent, you make bigger changes, like dumping your SUV, riding a bike or buying a more fuel-efficient car. As that shift occurs, you move from a very inelastic demand curve to a more elastic one, and that produces a snap-back of prices towards where you were before. Jim's graphs would indicate that since the beginning of 2008 we are seeing some of that. That should give one some hope that the price decline we're experiencing right now could be the beginning of a longer period of lower gas prices.

But it's also expectations-dependent for suppliers, particularly at the refinery level. There's a very interesting post on VoxEU from Lutz Kilian of U. Michigan regarding the sources of increase in gasoline prices. Most importantly, his model distinguishes the market for gasoline and the market for oil. Domestic demand for gasoline and speculation over oil futures play almost no role in the price of gas; foreign demand and supply uncertainties explain most of the change in Kilian's model. That result makes sense to most observers (it fits, for example, that CFTC report on speculators.) The price spikes following Hurricanes Katrina and Rita reflected very tight refining capacities that were upset. Those shocks went to gas prices, with negligible impact on world oil prices.

Part of the plan pushed by Rep. Bachmann is to pass HR 6139 to cut the bureaucratic hurdles that impede the construction of new refineries. Sure, they take years to produce, but the prospect of additional capacity would reduce uncertainty about gasoline supplies and reduce inventories (which, unlike crude, have been going up versus a year ago.)

Inventory uncertainty, then, can play a substantial role in gasoline prices. Easing the regulatory chokehold on gasoline production could take much more off the price of gasoline today than anyone's projection of the impact on crude oil.

Cross-posted at Outside the Beltway.

(Afterthought: Just after posting this I realize some might think I'm predicting $2 gas myself. That's not the point; the point is the plan laid out has the capacity to create a $2 price all other things equal. To actually make that forecast would require a whole lot more analysis than offered here. I don't wish to denigrate the efforts of EIA with its annual energy outlook -- just that using it to talk about prices 12 years hence is bound to be fraught with the very difficulties I used here to dismiss Gaertner's use of it. Error bands expand the further into the future you forecast.)

Labels: economics, Energy, Michele Bachmann

A letter in this morning's StarTribune:

Regarding "Bachmann, back from Alaska, urges more domestic drilling" (July 23): U.S. Rep. Michele Bachmann doesn't seem to understand the subtle difference between need and want (describing the untapped Alaskan energy resources as a locked pantry filled with food while children go hungry). Perhaps a better analogy would be a locked medicine cabinet filled with morphine in a room full of addicts.

Let's tend to the real needs of our children and provide a livable planet for their future that doesn't involve destroying our environment.

The difference between want and need is a source of great confusion in economics. Needs are necessary; wants are optional. In The Economic Way of Thinking, Paul Heyne, Peter Boettke and David Prychitko suggest for statements of "needs":

• The average person needs eight glasses of water per day in order to maintain optimal health.
• All citizens should be able to obtain the medical care they need regardless of their ability to pay.
• A diabetic needs insulin.
• You need to read your economics textbook.

The authors point out that all decisions are made at the margin, that all the values that matter are those at the margin. When I'm watching a baseball game at home and Mrs. S says "Who do you love more, me or baseball?" I answer "At the margin, baseball. And you're blocking the TV."

Foolish arguments like that advanced in the letter treat a marginal change as if it is an all-or-nothing choice. The choice about ANWR is not this at all. It is a decision to remove from preservation in undeveloped form a piece of land that might be 1.2 million acres (all of Area 10-02) or just 2000 acres (that part of the land designated for oil extraction) in return for an amount of oil about which we have imperfect information. The find might be small; that's the nature of oil exploration and extraction. It is a world of tradeoffs (the tragic vision I discussed earlier this week). Those tradeoffs reveal that what one might call a need is really just a want for a good with highly inelastic demand in the short run. Diabetics need insulin if they don't adjust their eating habits or use alternative health care. Those might not be great substitutes, but they are substitutes. You could list others, I'm sure.

Is a picture of an arctic scene equal to Area 10-02? Certainly not. But suppose I said you could have Area 10-02, another area of ANWR that has a very similar picture and no oil, or another area in ANWR and x billion barrels of oil. Is there no value for x that gets you to make that trade? I doubt it. I highly doubt it. If there are alternatives to oil, there are also alternatives to undeveloped land.

Scarcity is not optional; we do not live in a world where one can "tend to the real needs of our children" without sacrificing other goods for other people. People can provide for the "real needs" of pristine lands in a variety of ways, both public and private.

We call it the law of demand for a reason.

h/t: KAR, whose post is entertaining as well as educational.

Labels: economics, Energy

Stein's Law, "If something cannot go on forever, it will stop," came to mind to me today while reading a post on Angry Bear about ANWR. To get at the thought, consider this graph above, which is from a report that pgl and most of the ANWR-ain't-diddly-squat crowd quote. You know, the one from EIA that says ANWR will make barely $.02 a gallon difference for gas. See if you can find the heroic assumption in the actual passage:

With respect to the world oil price impact, projected ANWR oil production constitutes between 0.4 and 1.2 percent of total world oil consumption in 2030, based on the low and high resource cases, respectively. Consequently, ANWR oil production is not projected to have a large impact on world oil prices. Relative to the AEO2008 reference case, ANWR oil production is projected to have its largest oil price reduction impacts as follows: a reduction in low-sulfur, light (LSL) crude oil prices of $0.41 per barrel (2006 dollars) in 2026 in the low oil resource case, $0.75 per barrel in 2025 in the mean oil resource case, and $1.44 per barrel in 2027 in the high oil resource case. Assuming that world oil markets continue to work as they do today, the Organization of Petroleum Exporting Countries (OPEC) could neutralize any potential price impact of ANWR oil production by reducing its oil exports by an equal amount.

Did you catch that? It assumes OPEC's behavior in ten to twenty years will be to offset (potentially) any change in prices that occurs. It has complete control of the price. Were that true, why would people caterwaul about speculators? Can't OPEC control their behavior too?

These very same people are the ones who contend peak oil will drive the price of oil ever higher, which increases the temptation to cheat within the cartel. They never cheat, do they?

Now read that graph again. The part unshaded below the green area is production of oil in the lower 48; the green part is the current production in the leased parts of Alaska. You know, the part Pelosi says the oil companies don't use enough currently. Those other areas are the three possible projections for output from ANWR. Without additional drilling, US production in their model peaks in about ten years. (Just put your finger over all the colored areas except the green.) Drilling more of what we current lease is more a change in timing, borrowing against future oil production, unless you think the oil companies are sitting on proven reserves after a one-year 75% rise in prices.

Last point: the projections assume that in 2020 the price of a barrel of oil (without ANWR) is $59.70 and $70.45 in 2030. Were these accurate, you can see that there isn't nearly the need to increase production; prices will fall reasonably soon on their own. And they might. But people making models estimating the impact on the price of oil 20+ years from now are dealing the most imprecise of estimates. It assumes that world oil consumption is 117.6 million barrels per day. That's about thirty million more than now; if China continued to grow its consumption at its 1995-2005 rate, it would consume 21 of the 30 additional alone. And let's not forget India, perhaps for another four million. (It assumes the US would by 2020 only consumer 800,000 bpd more than it did in 2006.) Are all those assumptions realistic to you?

One of those things has to change, via Stein's Law. If prices are going to be where EIA is putting them, some economy is using a lot less energy than current trends project. Something that adds 10-20% more to our own production and reduces imports of oil by 6% (both figures for 2025, again if you beleive EIA), certainly seems a reasonable first step, lest that economy be ours.

UPDATE (7/23): pgl responds, arguing that the price in 2020 is irrelevant to the comparative statics. That's only true if you think the elasticity of demand at $60/bbl and $140/bbl are the same. I doubt this is true and would like him to write out the demand equation that does that. Given that the EIA included the price in its spreadsheet, I'm going to argue it was part of the calculations.

Labels: economics, Energy

Driving back into town Saturday night after the show, I drive first by the St. Augusta exit which has two gas stations in direct competition. One has lots of signs to attract passing vehicles, offering gas at $3.849; the one that moved in second has a much smaller sign, $3.829. I drive by both of these. They tend to attract the less-informed gas purchases. (Though it's interesting -- their prices tend to look more like Twin Cities prices than St. Cloud prices, the latter of which are often 5-10 cents more. But not this day.)

I use First Fuel (bought a big load at $2.649 about fifteen months ago), so I usually go around to Highway 15 to get to the Pantown station near the St. Cloud Times' offices. There's a station owned by some immigrant family on Third St. N., and it's sign was $3.799. I smile: I was right about those stations near St. Augusta.

Later on the phone Gary tells me that stations on the east side were selling at $3.699. The Sunday morning paper reported it; this morning prices are two cents less than that according to GasPriceWatch.

What does a forty cent decline in gas prices mean for you and me? In 2005-2006 the average vehicle consumed about 700 gallons of gas according to the Bureau of Transportation Statistics. The average household has 2.28 vehicles. So a forty cent drop in gas prices is the equivalent of a $638.40 tax cut for the average household if the price remains at this lower level for a year. As it is, for a week it would get you about $12.27 in savings.

I am hard pressed to find alternative explanations for the reduction to the president's signature of a rescission of the ban on offshore drilling. You are welcome to add other possible explanations in comments; the previous statement has a very post hoc ergo propter hoc feel. I like the graph Paul Krugman draws -- I've discussed this before as the second law of demand -- but the precipitous nature of the drop makes me skeptical that a fall in demand is the proximate cause.

FFB, by the way, pushed its price down to $3.749 to put gas away for the next time we get over $4. To the right is a chart of their prices to put fuel into your account since Jan 2007. Time to buy again?

Labels: economics, Energy

Courtesy HotAir, here's a great clip to tell you why you should never let the media engage in economic thinking:

I could have lived without the reference to CAFE standards, but Bush's tying of consumer sovereignty in energy goods to tax cuts was worth the wait.
(Your title hint here.)

Labels: economics, Energy

My friend and loyal reader jw sent along an article on the value of a life being used by EPA.

It's not just the American dollar that's losing value. A government agency has decided that an American life isn't worth what it used to be.

The "value of a statistical life" (VSL) is $6.9 million in today's dollars, the Environmental Protection Agency reckoned in May — a drop of nearly $1 million from just five years ago.

The Associated Press discovered the change after a review of cost-benefit analyses over more than a dozen years.

Now where do you get that $6.9 million from? There are two ways traditionally used in cost-benefit analysis. One is to take my estimated income over my lifetime, discount it to present value and come up with the sum. That number is likely to be relatively low, almost certainly less than $6.9 million. (If yours is not, congratulations -- you're a pretty rich fellow!)

The other way to find that out is to look at different jobs with different levels of safety or risk. Figure out the probability of a job fatality for the different occupations, and then compute how much additional pay the average worker receives in the riskier job. For example, one of the job opportunities I might have is to work as an adviser to, say, the central bank of Afghanistan. How much more would you have to pay me to go there versus, for sake of comparison, the central bank in Mongolia? Afghanistan is riskier, and if we can figure out how much riskier it is and compare it to the wage differential required to hire economists into both positions we have some measure of the value of a life. Indeed, this is what EPA is using:

...economists calculate the value based on what people are willing to pay to avoid certain risks, and on how much extra employers pay their workers to take on additional risks. Most of the data is drawn from payroll statistics; some comes from opinion surveys. According to the EPA, people shouldn't think of the number as a price tag on a life.

The EPA made the changes in two steps. First, in 2004, the agency cut the estimated value of a life by 8 percent. Then, in a rule governing train and boat air pollution this May, the agency took away the normal adjustment for one year's inflation. Between the two changes, the value of a life fell 11 percent, based on today's dollar.

EPA officials say the adjustment was not significant and was based on better economic studies. The reduction reflects consumer preferences, said Al McGartland, director of EPA's office of policy, economics and innovation.

"It's our best estimate of what consumers are willing to pay to reduce similar risks to their own lives," McGartland said.

But the EPA's cut "doesn't make sense," said Vanderbilt University economist Kip Viscusi. The EPA partly based its reduction on his work. "As people become more affluent, the value of statistical lives go up as well. It has to." Viscusi also said no study has shown that Americans are less willing to pay to reduce risks.

At the same time that the EPA was trimming the value of life, the Department of Transportation twice raised its life value figure. But its number is still lower than the EPA's.

There's no good reason for them to use different numbers, so that there has been convergence between DoT and EPA should be considered a good thing, caterwauling by liberal blogs notwithstanding. Here's a white paper from 2004 that EPA has posted that describes their study of VSL. Part of the problem is that people sort themselves into jobs in part depending on the attitudes towards risk. The report takes, for example, the observation that night clerks at convenience stores tend to be older and male. Older individuals tend to make more because of experience; males have been noted to earn more than females. Should all of the difference between the pay the night clerk and the morning clerk receive be attributed to the greater chance of armed robbery at night?

Interestingly, that paper includes a study done by Viscusi, which puts VSL at $6.9 million in one estimate. You would need to adjust that for inflation from 2003.

The implications of this for the drilling debate should be obvious. We have on one side a desire to reduce the price of gasoline and other energy products, which clearly increases the welfare of our citizens. Against that we have to weight the cost to the environment, which might include the loss of wildlife. What is the demand for wildlife? If you look at it in market terms, the location of ANWR matters as it provides less value to tourism than a similar-sized area on the California coast. We can compute the value of ANWR or any other place by looking at how much people will pay to travel there, and how many people do so. Take for example this 2001 piece that says 2500 people travel there and pay $4000 each to go. That's $10 million a year; discounted at 5% in perpetuity says the value of tourism in ANWR is $200 million. Now that number is almost assuredly too low -- there must be other tours. But as well, tourism would not fall to zero if rigs were put there. If we assume the tourists are there to see caribou, and if caribou will remain after the rigs are put in, some fraction of the 2500 will still go. A survey might tell you how many.

The benefits are likely to be large; sure, it might take years to get production (though Larry Kudlow (h/t: Dave) points out that in California, one estimate says you get drilling within one year), but that is an easy correction to the spreadsheet on which you do the cost benefit analysis.

Democrats have ignored tradeoffs on energy for years, and a few Republicans have joined them at least until now. A format exists to make sound calcuations about the tradeoffs. It is good to see liberals considering the meaning of VSL. Now to get consistent application of the method...

Labels: cost-benefit analysis, economics, Energy

Chad alerts us to a new site being promoted inter alia by Northwest Airlines, the folks who are making tipping the skycap mandatory. The site: Stop Oil Speculation Now.

Every time you buy products such as food or gas, you are impacted by unregulated, secretive and often foreign commodities futures markets. Speculators in these markets are increasingly buying and selling commodities such as oil to sell again, rather than to use. As largely unregulated speculators pocket billions of dollars at your expense, the price of commodities has increased out of proportion to marketplace demands.

As speculators continue to dominate the market, the volume of oil traded “on paper” has been as high as 22 times greater than the volume of oil consumed. As prices rise, institutional investors have become active traders, turning commodities into just another asset class. This has caused severe market imbalance and upset the natural relationship between supply and demand. As a result, legitimate customers such as trucking companies, airlines, and consumers have been forced to purchase oil at unnecessarily higher prices. This has dramatically raised costs, resulting in needlessly high prices for American consumers and businesses.

Lovely. Foreign speculators. It takes a special kind of chutzpah for someone to practice xenophobia while selling you a plane ticket to Asia. (Now with an extra $100 processing fee for using your frequent flyer miles, too!) Foreign speculation has been done for a long time, even going back to Biblical times. Does it matter? Do we think the price would be less if speculation was restricted to Wall Street firms? (Such firms, by the way, often use foreign futures markets for their trading, just a small quibble.)

The site provides a definition for a speculator:

In commodity futures, an individual who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements.

That begs the question, what do they mean by hedge?

Hedging: Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; or a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans on buying the cash commodity in the future).

So someone who is minimizing risk is hedging. But risk doesn't disappear when a futures contract is purchased or sold. It can only be transferred from the seller of the contract to the buyer. The speculator, in buying futures contracts, is accepting the risk that the price will be lower in the future; he loses money if the spot price for oil in the future is below the contracted price in the futures contract. The airlines are of course trying to reduce their exposure to oil price fluctuations, so they pay speculators to transfer that risk. Who did they think they were doing business with before, just oil companies?

Northwest and others are seeking relief from Congress, to which Chad writes:

One obvious question is how the UNITED STATES CONGRESS plans to "act" to do something about these "foreign" commodities futures markets. The arrogance and ignorance that leads these bozos to believe that global oil markets will bow to the whims of Congress is rather astounding.

Labels: economics, Energy, Northwest Airline sucks

In posting on the "crisis of choice" made by Democrats and Bill Clinton's veto of ANWR drilling, Gary Gross links to a letter in the local paper praising renewable energy. Why not drill offshore?

Offshore drilling is extremely expensive and jeopardizes important sources of seafood.

This despite there being not one drop of oil spilled from Katrina or Rita off of the Louisiana Coast. And Humberto Fontova points out, the fish and coral life seem to like being around oil rigs. He's written a book on a group of people who go fishing off of abandoned oil rigs, most of which are off the Louisiana coast. The group has a video that shows spearfishing off those waters.

The high prices of gas and oil are exactly the thing that induces offshore drilling. Yes it's expensive, but firms in Florida who got a few leases squeezed out of Congress in 2006 are willing to risk $100 million or more to see if they can find new reserves. When Congress passed the Deep Ocean Energy Resources Act of 2006 , Democrats like Florida Senator Bill Nelson threatened a filibuster. DOER never passed the Senate. It kept drilling (in a rider on another bill) to 125 miles offshore the FL panhandle, an area of 8.3 million acres. That's when gas was $3 and oil $60. Now we're north of $4 and $140, and they're drilling and wanting more leases. Any chance we could get Congress to agree?

Let's say that again: in 2006, the Republican House passed DOER Act; the Democrats in the Senate threatened a filibuster and gutted it. Anyone wanting to blame Republicans for not drilling OCS when they were in charge is ignorant of DOER's history.

Labels: economics, Energy

After a week of debate where it appeared the saner members of Congress would keep their colleagues from looking like fools, the House passed HR 6377 just before leaving on Fourth of July recess last night, instructing the Commodity Futures Trading Commission to "curb immediately the role of excessive speculation" in energy futures or swaps and

(2) eliminate excessive speculation, price distortion, sudden or unreasonable fluctuations or unwarranted changes in prices, or other unlawful activity that is causing major market disturbances that prevent the market from accurately reflecting the forces of supply and demand for energy commodities.

The bill, introduced by Minnesota Congressman Collin Peterson, passed overwhelmingly, with only 19 nays. I've already written this week about speculation, but some further comments seem justified.

Congress has heard lots of testimony from 'experts' contending that the price of gas would fall to $2 if we could just get those nasty speculators out of the market. The testimony most have focused on is that at the top of the article, by Michael Masters. Here that is. The focus is on index speculators, who are now buying futures contracts almost equal to the entire increase in demand for oil from China. This however does not reduce the supply of oil unless someone takes delivery of the contract. Krugman hints at this very same point; see also Craig Jones. Most futures contracts are going to be closed out by writing the opposite contract as one reaches expiration. (Futures basics.) You might keep your long position by buying another future, but that does not remove oil from supply.

Now that doesn't mean that the price isn't influenced by what is going on in futures markets. Prices have been rising in part by expectations of the future, but it was ever thus since the beginning of asset trading. The key question is, at what point does speculation become excessive? And the reaction of politicians and everyday people, in my view, is emotional rather than economic. Excessive speculation occurs, in the mind of the non-economist or Congressperson, when the price of X is driven beyond the point where he or she can afford to own it. To take just one example: A St. Cloud resident is a Green Bay Packers fan. He owns season tickets to Packer home games. He does not use these often, instead selling them for above face value. Is he a speculator? When I ask him why he still gets the tickets, he hopes some day to return to the Land of the Cheese and attend all the games when he retires. He thinks the price will be higher for him to go to games when he returns than it is now, so he is hoarding his spot in the season ticket queue.

He is preventing others from holding that ticket, and therefore is helping drive up prices now. Unlike the index speculators, he actually HAS THE TICKET. But is his speculation excessive, or is it rational? You don't know, I don't know, and the government regulators don't know.

This does not prevent, unfortunately, government from acting as if they did. Sometimes arrogance is a disguise for ignorance, and as a good example this week consider Tim Walz' antipathy to markets, as Andy Aplikowski documents. He quotes a Rochester Post-Bulletin article in which Walz denies the market.

This idea — this red herring — that all of a sudden you’re going to drill and everything is going to be better, as if the market fundamentals are at work here — that’s not happening... These are the same people that are (getting) $40 billion in profit.

"As if" Walz believes profits do NOT motivate drilling. What do you think they do it for, to drop the rocks they drill in the ocean to watch the ripples? There is, in the Walz mentality, a suspicion that people who earned a profit got this from someone, that it's undeserved. For many years we've understood profits as the return to risk born by the residual claimant, the entrepreneur. But instead we get people who believe corporations are reprobates less worthy of our trust than a government that has a monopoly on force.

But that's not the point either. There's no need to believe the government is more immoral than corporations. There's little argument from either side of this debate that corporations are quite willing to co-opt or corrupt government to do their bidding, or that it's easier for them to do so than the hordes of consumers. It is that Walz and the others in Congress do not comprehend how the wealth we live in today came from. In the book with the title that I made this post, Ludwig von Mises stated this well:

Economics is so different from the natural sciences and technology on the one hand, and history and jurisprudence on the other hand, that it seems strange and repulsive to the beginner. Its heuristic singularity is viewed with suspicion by those whose research work is performed in laboratories or in archives and libraries. Its epistemological singularity appears nonsensical to the narrow-minded fanatics of posi­tivism. People would like to find in an economics book knowledge that perfectly fits into their preconceived image of what economics ought to be, viz., a discipline shaped according to the logical structure of physics or of biology. They are bewildered and desist from seriously grappling with problems the analysis of which requires an unwonted mental exertion.

The result of this ignorance is that people ascribe all improvements in economic conditions to the progress of the natural sciences and technology. As they see it, there prevails in the course of human history a self-acting tendency toward progressing advancement of the experimental natural sciences and their application to the solution of technological problems. This tendency is irresistible, it is inherent in the destiny of mankind, and its operation takes effect whatever the political and economic organization of society may be. As they see it, the unprecedented technological improvements of the last two hundred years were not caused or furthered by the economic policies of the age. They were not an achievement of classical liberalism, free trade, laissez faire and capitalism. They will therefore go on under any other system of society’s economic organization.

And thus there is no check on the ability of people to vilify speculators, because of course the oil can be brought to market in any number of ways! It occurs to me that people do not know what the world was like before the Industrial Revolution (or perhaps they want to go back to those halcyon days?) and how recent our gains against disease and starvation and the Malthusian world. Anthony de Jasay writes about how the modern progressive glorifies envy by its ignorance of these gains on the subsistence level:

Most of us react to the decency or otherwise of large incomes and quickly made fortunes by moral reflexes that evolved under the capitalism of a generation or two ago. They have not yet been adjusted to the changes capitalism has since undergone. One such change is the flood tide of pension funds in the Anglo-American type of capitalism which, after all, sets the mode of operation the rest of the world is beginning to imitate. The needs of pension funds and the competition between their managers sets the maximisation of asset values as the primary goal, and the more classic goal of profit maximisation by corporate enterprise tends to become a mere instrument of the primary goal. Socialists whose rejection of the "system" is visceral rather than intellectual, call this "Casino capitalism," run by and for "speculators".

It is that same visceral reaction that lead 402 Congresspersons yesterday to cast aside the gains that result from finding more ways to spread risk in the world to those willing to bear them, gains that allow pensions, homeownership, life insurance, and the development of new technologies -- the very ones the modern progressive says we should trust instead to give us energy rather than tapping the oil deposits we already know exist. Ignorance of that history is a peril to us all.

Labels: economics, Energy, libertarianism, socialism

A reader asks whether a law proposed by some in Congress and Obama to limit oil speculation is a good idea? I was asked at a presentation yesterday how much of current oil prices I thought were speculation. Jim Hamilton has been trying to estimate that for about a month now, and my answer is the same as Jim's and Paul Krugman's -- if you are speculating and forcing price up above equilibrium, there ought to be a surplus that has to be stored somewhere (and storage isn't cheap.) Krugman's graph is instructive.

The story from foreign exchange markets, that we first learned from Milton Friedman, is that speculators stabilize rather than destabilize markets because they are providing new information to the price. If they were providing bad information and destabilizing prices, they would be buying high and selling low, not a good way to make money. Instead speculators are seen as buying when prices are lower than their best guess for equilibrium and selling when prices are higher than equilibrium. Both forces push the price towards the market-clearing level. Mark Perry has another graph that illustrates this.

Stopping speculators either stops the stupid ones from losing money or prevents stabilizing the price of oil. Why would government want to do either? If you're going to blame the speculators for anything, says Arnold Kling, blame them for keeping oil prices too low in 2006-07.

I am reminded in this of a story I always tell in principles classes (again, based on a chapter in Heyne's intro book): We are all speculators. Those who want to expand drilling now think the price is going to go up in the future without increased supply (and look at the flat supply from the last two years as evidence in favor of their view.) Those who don't want to expand drilling are speculating either on finding a warp drive or a willingness of Americans to drive in very dangerous cars. (I listened to a friend the other day happily discuss building an electric car with an old Karmann Ghia chassis with a fiberglass body. All smiles until I asked, "wouldn't that be dangerous?" "Well, I'd only drive it to the nearest town." "What share of accidents happen within two miles of home?")

Labels: economics, Energy

The mantra of conservatives and other reasonable Americans is now: "Drill here, drill now, pay less." To address our energy snafu, our Republican Senator, Norm Coleman has introduced a bill that makes very good sense.

SB 3126 includes the following, energy independent points:

1 - Drill off the continental shelf for oil.
2 - Tax credits for nuclear energy.
3 - Funding and credits for alternative sources.

We've seen the results of the 40-year partnership of the Democrats and environmentalists:

1 - Dependency for oil on enemies of freedom in general, the US in particular
2 - Sky-high gas prices because the economics of the market place finally reflect the absurdity of playing ostrich with energy demands: increased cost of building materials; increased food prices; (stock up on meat now - ranchers are dumping b/c they cannot afford feed - meat prices will jump in the fall);
3 - A refusal to build more refineries or nuclear plants yet France, the darling nation of the left, gets 75-80% of its power from nuclear plants but we Americans, with some of the most strict construction laws on the planet cannot build a nuclear power plant?

Benefits of energy independence include but are not limited to:

1 - Lower prices for energy - affects housing, driving, food production, etc.
2 - More private sector jobs (regardless of the Obama mantra, government solves very little but officials are very eager to tell us they do)
3 - Cheaper food
4 - Investment funds to continue to develop cleaner and more efficient products.

In other words, couple energy independence with American ingenuity, the entire planet wins!

Updates to come but this is terrific news! Thank you, Senator Coleman!

Labels: Coleman, Energy

I suppose we should expect politicians to make appeals to businesses to keep plants in their state. So this story about Sen. Norm Coleman talking to Ford about the St. Paul plant makes sense in an election year. But the timing of this, after Ford just announced May sales down 16% from a year ago would make me think he's barking up the wrong tree. They're not likely to want to retool plants just now, not when they're shedding workers elsewhere.

Want to help Ford? Make gasoline cheaper.

Labels: economics, Energy

The CEO of Exxon Mobil, Rex Tillerson, isn't going to roll over for the global warming religionists.

"My view is that this is so extraordinarily important to people the world over, that to not have a debate on it is irresponsible," he said. "To suggest that we know everything we need to know about these issues is irresponsible.

"And I will take all the criticism that comes with it. Anybody that tells you that they got this figured out is not being truthful. There are too many complexities around climate science for anybody to fully understand all of the causes and effects and consequences of what you may chose to do to attempt to affect that. We have to let scientists to continue their investigative work, unencumbered by political influences. This is too important to be cute with it."

Some shareholders were not happy with Tillerson's lack of leadership on greener energy technologies, but he answered that even 25-30 years from now, even with the development of all the other technologies currently being explored, oil and natural gas would represent 2/3 of the energy market.

Your product is growing so rapidly in price that your revenues from a 25% price increase rise by more than 20%. Why would you want to make less? And of course if Tillerson were allowed to explore new fields and increase supply, what would happen to price?

(Note also from the Economist story (second link) the second law of demand -- prices always rise more in the short run than the long run, as quantity adjustments take time. Another reason why this price spike might be near the end. David Leonhart is experiencing this too.)

(h/t: Mises email list.)

Labels: economics, Energy

The Christian Science Monitor reports that the Congress has passed a bill that does something I consider good: Stop buying oil for the Strategic Petroleum Reserve. The economics is quite simple, as Thomas Sowell explains: Gas prices are high because demand is up.

Is there anything complex about the fact that with two countries-- India and China-- having rapid economic growth, and with combined populations 8 times that of the United States, they are creating an increased demand for the world's oil supply?

The problem is not that supply and demand is such a complex explanation. The problem is that supply and demand is not an emotionally satisfying explanation. For that, you need melodrama, heroes and villains.

It is clear that many people prefer to blame President Bush. Others prefer to blame the oil companies, who have long been the favorite villains of the left.

Local blogger Political Muse does us the favor of posting the summary of the bill that includes the one good thing. In one fell swoop, it takes $17 billion in tax breaks back from oil companies, imposes a windfall profits tax, and allows the executive branch to impose price controls. It's the audacity of dopes who want to create villains rather than deal with the real issue of short supplies. Betsy Newmark provides more evidence of how Democrats have prevented the release of pressure on that supply.

Frankly, I have no idea why we have an SPR, though, and if this is the first step in eliminating it, it would be a good thing. SPR is a Cold War holdover that's outlived its usefulness.

Labels: economics, Energy

Hunger Stalks Millions of Poor Americans blares the headline in the Financial Times of London. The article itself, however, turns out to be a combination of rank speculation and advocacy journalism for more welfare spending, triggered by pending congressional consideration of the farm bill.

The real story behind the farm bill, of course, is this astonishing observation by Ronald Bailey:

The amount of food being burned because of government mandates and subsidies for biofuels would feed nearly 450 million people. [My paraphrase]

That’s right, folks. We could feed every person on the entire North American continent with the food we burn because of well-intentioned but foolish government intervention in agricultural markets.

Over at National Review Online, Deroy Murdock notes the resulting Global Food Riots: Made in Washington, DC occurring in such places as Haiti, Mexico, Egypt, Pakistan and the Ivory Coast. His excellent article pulls together a wide range of relevant factual information on the biofuels mess, linked to the sources.

Contrast the opening sentences of the FT story:

An escalating global food crisis could bring the problem of hunger home to the US and other developed countries. Millions of poor Americans risk going hungry if food prices continue to rise and food agencies struggle to cope with rising costs, dwindling resources and a huge increase in demand. Already more and more poor people in the US are turning to charity and government assistance as they struggle with rising food costs and soaring fuel bills.

The only factual information here is that the US has a social safety net, consisting of a variety of government programs and private charities that help poor people with food, fuel bills and similar problems. Food prices are up, and the social safety net appears to be doing what it is supposed to do. The rest is speculation.

All of the remainder of the FT article consists of quotes from “campaigners” who seek “to broaden eligibility for food stamps and increase emergency food provision”: the California Women Infants and Children Program Association, the Food Research and Action Center, the Cleveland Food Bank, the Greater Chicago Food Depository, America’s Second Harvest, and Martha’s Table.

It is neither news nor interesting analyis that such organizations want more of our tax dollars devoted to their government rent-seeking activities.

We used to subscribe to the Financial Times, the Economist, Scientific American and National Geographic, all of which once consistently published excellent material with analysis based on well-sourced facts. We watched with dismay as each began to devote more and more of their limited resources to shallow advocacy pieces like this. We canceled our subscriptions, one by one, with regret.

Labels: economics, Energy, food, Media

Tyler Cowen notes that Italy's largest electric utility is converting a power plant from oil to coal, in spite of Europe's stated intentions on reducing greenhouse gases. I forwarded that post to a student of mine in the energy industry, who notes:

I believe it was last year the German government passed a law decommissioning all nuclear facilities by 2020. As of today, roughly 30% of the German grid is supplied by nuclear generation. The other alternative to coal is natural gas but the problem there is the Germans, and virtually all of Europe, doesn’t feel comfortable becoming more dependable to the only supplier of gas in the region. That being Mother Russia herself. With the EU ETS getting over its honeymoon phase with serious haircutting to carbon allocations, this should cause some volatility in the carbon and power markets. Exciting times…

He's right about Germany. And decommissioning is expensive.

Labels: economics, Energy

The European Union's greenhouse-gas emissions from key industries rose 1.1% last year, despite its antipollution policies, demonstrating the difficulty in meeting international commitments to fight climate change.

Carbon-dioxide emissions reached 1.914 billion metric tons last year in the sectors covered by Europe's Emission Trading Scheme, according to an analysis of data by Oslo-based Point Carbon, a carbon market-research and consulting firm. The data released Wednesday aren't complete, because some companies' results are still trickling in, but it represents about 93% of the total, according to the EU Web site.

For the past three years, Europe has been trying to reduce emissions by imposing a market-based cap-and-trade system. Industries such as power generators, steel, cement and aluminum are supposed to cap the amount of carbon dioxide they spew. If they can't make their targets, they must buy permits to emit carbon on the open market.

By forcing companies to buy and sell the right to pollute, Europe's system is supposed to give them a financial incentive to clean up their acts. It is also supposed to provide European countries with a way to meet their commitments to the Kyoto Protocol, the United Nations accord that set emissions-cutting targets for the 175 nations that ratified it for the period between this year and 2012.

Some 11,500 factories, oil refineries, steel mills and other installations are covered by the EU scheme, accounting for about half of Europe's total emissions. There is still no limit on the other half, produced by everything from cars and planes to buildings and retail outlets.

But the caps that the EU set for different industries turned out to be too high. As a result, instead of shrinking, as was originally envisioned, emissions in these industries have crept up by about 1% each year since the program began.

Source. Like you couldn't have seen this one coming. The fight over how much now to reduce caps will be political, not scientific.

Labels: economics, Energy, global warming

Increasingly politicians are using new media to communicate with their constituents and other supporters. Rep. Michele Bachmann has put up a blog on the Republican Study Committee's site to explain her position on CF lights. It's interesting because it turns the precautionary principle on its head. Rather than prevent a new product coming onto the market until one could absolutely prove its safety, it requires the GAO to show that a ban on the incandescent light bulb would

1.) Lead to lower costs for consumers

2.) Lead to a reduced carbon footprint

3.) Not lead to a health risk for consumers, particularly those in vulnerable populations, like those in nursing homes, day care centers, hospitals, and schools.

We've written about the issue here before, in terms of its warping of peak demand, and the Minnesota Free Market Institute re-released an editorial from May 2007 about health effects of the mercury inside them.

But, I would argue the Bachmann bill does not go far enough. As Mike Moffatt noted a year ago, prohibitions have a lousy history. If somehow the price of electricity is wrong such that the incandescent light isn't paying the true cost of energy it consumes, the answer is to change the price. Rather than allow a ban to go forward if GAO gives the right answers to her questions, Bachmann should have it construct the right Pigovian tax. Mike has an idea for that, too.

Meanwhile, Congress could save some energy use by just getting rid of daylight savings time. And make farmers happier at the same time.

Labels: economics, Energy

I was thinking about Captain Ed's post about the new policy toward nuclear policy in the UK. The intention is to reduce emission of greenhouse gases from power plants. Yet that seems quite unlikely on a global scale. The Financial Times reports recently (h/t: PSD blog) that Africa's consumption of oil is such that the price increases in oil since 2004 have cost these countries roughly 3% of their GDP. When the British stopping using oil (or coal, or gas, or ...) to use nuclear, do we think those resources just stay in the ground, and their gases not escape, or do they go instead to Africa, China and India?

Labels: economics, Energy

Via Greg Mankiw, an article on what cars Harvard professors drive. I am reminded of this conversation on EconTalk where Mike Munger tells of a meeting of Duke department chairs. Everyone has a Prius or other hybrid. Next to last comes up the chair of chemistry, who argues that hybrid cars may use more energy (though less fuel) than gas vehicles. (Here's one report explaining why that might be so.) The chemist is then asked what he drives. "Oh, I drive a Prius, but that's just because you have to if you're gonna be a faculty member."

At Harvard, one environmental studies professor drives a '96 Suburban, arguing that he reduced his carbon footprint at home. But eight of 18 economists who answered the survey said they owned luxury cars. Most popular across the campus? The Subaru Forester.

(h/t: Greg Mankiw, proud owner of a BMW 330xi)

Labels: Energy, higher education

The cover story of this week's Business Week is titled Little Green Lies, about the on-the-job education of one Auden Schendler. After a few years of trying to get his company to make investments directly in reducing energy consumption, he was finally able to get them to make a commitment to purchase renewable wind energy credits. (They tout this on their environment page.) This gave the company a leadership position but Schendler a queasy feeling, because it wasn't really changing energy consumption, just buying a green plaque.

Any student of economics could have told you this would be true once they read the economics of these credits as described in the article.

Credits purchased at $2 a megawatt hour, the price Aspen Skiing and many other corporations pay, logically can't have much effect. Wind developers receive about $51 per megawatt hour for the electricity they sell to utilities. They get another $20 in federal tax breaks, and the equivalent of up to $20 more in accelerated depreciation of their capital equipment. Even many wind-power developers that stand to profit from RECs concede that producers making $91 a megawatt hour aren't going to expand production for another $2. "At this price, they're not very meaningful for the developer," says John Calaway, chief development officer for U.S. wind power at Babcock & Brown, an investment bank that funds new wind projects. "It doesn't support building something that wouldn't otherwise be built."

So the change in the price of electricity caused by the increase in demand for green energy generated by wind is less than 2.2%; what would be the elasticity of supply? In the short run you would expect it to be very, very small. What about in the longer run? Could it be greater than one? What would this due to the production of wind power generators?

Labels: economics, Energy

To reinforce yesterday's point, we read Lisa Lerer's dispatch from Iowa.

There are four views of Iowa, at least according to a local joke: corn on the left and soybeans to the right; soybeans left and corn right; corn on both sides; soybeans on both sides.

The old joke needs an update, says Bill Sells, production manager at the Hawkeye Renewables ethanol plant in Iowa Falls. Twenty-eight ethanol plants now dot the Iowa landscape, sticking out like spaceships amid the cornfields.

...Three Republican presidential candidates, former Massachusetts Gov. Mitt Romney, former New York Mayor Rudy Giuliani and former Arkansas Gov. Mike Huckabee, all visited the Iowa Falls refinery, where they pledged further investment in alternative energy.

Over the past year, two other candidates, Sen. Hillary Rodham Clinton (D-N.Y.) and Sen. John McCain (R-Ariz.), went from strongly opposing the expansion of ethanol to endorsing it.

Backing ethanol is a political necessity in the state that is the traditionally the first to choose its presidential candidates. Iowa boasts the greatest number of ethanol plants in the country, producing about 30 percent of the U.S. supply. Ethanol is Iowa’s golden, corn-fed goose.

“It would be a mistake for a candidate to come to Iowa and not address renewable energy,” says Carrie Giddins, communications director for the Iowa Democratic Party.

With a presidential contest in Iowa and an energy bill in Congress, ethanol has become the panacea of all political problems. Pro-ethanol politicians offer the fuel as a cure for everything from dependence on foreign oil to global warming to outsourcing.

All of the major candidates bow at the ethanol altar in Iowa, supporting some form of increased subsidies or development.

If we did not have a caucus so early in Iowa, would we have this boondoggle? One suspects voters in, say, Maryland take a different view.

Labels: economics, Energy, politics

Local DFL leaders are still drinking the ethanol.

Calling today’s investment in ethanol production “feedstock,” U.S. Rep. Collin Peterson believes the nation can reach energy independence in 10 to 15 years.

“The bottom-line goal is for us to get off foreign oil,” Peterson, DFL-7th District, said Friday at an energy conference at Bemidji State University.

He was joined by U.S. Rep. Jim Oberstar, DFL-8th District, who said in his remarks that moving more Americans to public transit — or bicycling — can negate the need to import millions of barrels of foreign oil.

(Yes, I know, I laughed at the bicycle reference too!)

The biggest issue is that it won't. It turns out first of all that in terms of emissions, growing more for biofuels causes a greater net harm than burning more fossil fuels and planting trees with the land you didn't put into biofuel production. Prairie grass might be better, but that wouldn't be bragged about by Rep. Peterson.

Second, it might be nice for Minnesota agriculture to push up prices, but it really makes Hugo Chavez and the poor around the world unhappy. One of those is a good thing. The other is not. Think there's a connection between tortilla prices in Mexico and immigration? Of course, it also turns out increasing developing country wealth has also raised food prices ... but isn't that all the more reason to not divert crops to biofuels, to allow those countries to enjoy their newfound gains?

Corn-based ethanol is only a stepping stone to making ethanol from other sources, such as wood wastes or switch grass, Peterson said, adding that negative press has been “ginned up” by special interests who claim Third World countries are starving because they can’t get American corn, which is now used to make ethanol, a blend of gasoline and bio-fuel.

“There’s a lot of stuff being ginned up out there by some of these people saying that we’re going to starve people in Africa because we’re making all this corn into fuel, which I think is a bunch of baloney,” he said.

“This ethanol, and some extent biodiesel, opportunity has repriced agriculture,” he said. “And it was about time, because we have been selling corn for the last 10, 15 years below the cost of production. We were using the government to finance that benefit, going to the big grain traders to feed and livestock producers, big dairy producers.”

Now with higher corn prices due to ethanol, the government can step out, he said. “One of the positive things is that we’re now seeing a price in the marketplace for corn and soybeans where you can make money without government help, and that’s good.”

Do you think that will come back to us in tax cuts? I wouldn't bet on this. Politics relies on being able to favor one's special interests. Witness two local legislators:

While federal lawmakers talked about pending legislation, Minnesota state legislators talked about three bills they passed and Gov. Tim Pawlenty signed earlier this year.

“We have passed the most forward-looking renewable energy legislation in the country,” Assistant Senate Majority Leader Tarryl Clark, DFL-St. Cloud, told the 200 people attending the energy summit.

Rep. Bill Hilty, DFL-Finlayson, said the three new laws require an increase in renewable energy sources such as wind, while providing loans and grants to meet the goal of producing 25 percent of electric energy from renewable sources by 2025.

They produce cheaper energy, they say, and use the savings to fund loans and grants to produce more renewable energy. We will not see the savings.

They are not interested in energy independence; politicians of both stripes only want to divert dollars spent on a key good to their favored interests. If you want people to be energy independent, just let prices rise and have people learn to conserve as best they can. But then, that doesn't allow the rent-seeking.

FMI: WSJ, Energy Independence, A Dry Hole?

Labels: economics, Energy, Minnesota, politics

The basic problem facing engineers was that there was no technology yet devised that could deal with permafrost, bitterly cold temperatures and the extreme terrain that comprises AK. In addition, environmental and Native groups all lined up to add their concerns to the known environmental concerns.

Eventually all were addressed. The Arab oil embargo of 1973-74 drove home the fact that the United States’ dependence on foreign oil was an exposure we did not need. Alaskan native claims were resolved with the 1971 Alaska Native Claims Settlement Act. The Trans Alaska Pipeline Authority At was passed in November of 1973. It cleared the way for construction to begin.

Alaska’s permafrost underlays nearly 600 miles of the pipeline route. Oil comes out of the ground between 156-178 degrees F. Known methods of burying pipeline would have resulted in thawed permafrost which in turn would surround the buried pipe with a soupy silt/water mess. The solution: Move the pipeline above ground with H-shaped vertical supports (see photo at top of this post). On top of these H structures, you will notice aluminum fins. The fins act as a cooling system that pulls excess heat from the permafrost layer and radiates it into the air. This complex yet complete solution represented the first time a pipeline had been built above ground.

The H supports went in slowly, in fact so slowly the pipeline completion date was expected to last until 2010. However, again ingenuity raised its head. By changing the type of materials and processes used, the construction and installation of the supports rapidly increased. Eventually 78,000 supports were placed into service and the 2010 completion date was no longer an issue. These supports hold 420 miles of pipe above ground.

Photos often show the zigzag configuration of the pipeline. This unique design accommodates seismic activity (earthquakes) and the extreme temperature changes along the pipeline route. In addition, in the middle of the H supports, just above the cross-section of the H, is an approximately 4' bar that can move from one side of the H to the other. This horixontal flexibility also lets the pipe flex during an earthquake. Hence, damage is minimized.

A total of 380 miles of pipeline was buried underground. The depth ranged from 3-12 feet, depending on soil conditions. For pipeline buried in avalanche-prone areas, the underground components were refrigerated to protect the permafrost.

Labels: Energy