Category Archive for: Oil [Return to Main]

Monday, April 07, 2008

Paul Krugman: Grains Gone Wild

Can anything be done to alleviate the food crisis?:

Grains Gone Wild, by Paul Krugman, Commentary, NY Times: These days you hear a lot about the world financial crisis. But there’s another world crisis under way — and it’s hurting a lot more people.

I’m talking about the food crisis. Over the past few years the prices of wheat, corn, rice and other basic foodstuffs have doubled or tripled, with much of the increase taking place just in the last few months. High food prices dismay even relatively well-off Americans — but they’re truly devastating in poor countries, where food often accounts for more than half a family’s spending. There have already been food riots around the world...

How did this happen? The answer is a combination of long-term trends, bad luck — and bad policy.

Let’s start with the things that aren’t anyone’s fault.

First, there’s the march of the meat-eating Chinese —... the growing number of people ... who are, for the first time, rich enough to start eating like Westerners. Since it takes about 700 calories’ worth of animal feed to produce a 100-calorie piece of beef, this change in diet increases the overall demand for grains.

Second... Modern farming is highly energy-intensive... With oil persistently above $100 per barrel, energy costs have become a major factor driving up agricultural costs. High oil prices ... have a lot to do with ... China and other emerging economies ... competing ... for scarce resources..., driving up prices for raw materials...

Third, there has been a run of bad weather in key growing areas. In particular, Australia, normally the world’s second-largest wheat exporter, has been suffering from an epic drought.

O.K., I said that these factors ... aren’t anyone’s fault, but that’s not quite true. The rise of China and other emerging economies is the main force driving oil prices, but the invasion of Iraq ... has ... reduced oil supplies... And bad weather, especially the Australian drought, is probably related to climate change...

Where the effects of bad policy are clearest, however, is in the rise of demon ethanol and other biofuels. ...[E]ven on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains. But ... even seemingly “good” biofuel policies, like Brazil’s use of ethanol from sugar cane, accelerate ... climate change by promoting deforestation.

And meanwhile, land used to grow biofuel feedstock is land not available to grow food, so subsidies to biofuels are a major factor in the food crisis. You might put it this way: people are starving in Africa so that American politicians can court votes in farm states.

Oh, and in case you’re wondering: all the remaining presidential contenders are terrible on this issue.

One more thing: Governments and private grain dealers used to hold large inventories..., just in case a bad harvest created a sudden shortage. Over the years, however, these precautionary inventories were allowed to shrink, mainly because everyone came to believe that countries ... could always import the food they needed.

This left the world food balance highly vulnerable to a crisis affecting many countries at once — in much the same way that the marketing of complex financial securities, which was supposed to diversify away risk, left world financial markets highly vulnerable to a systemwide shock.

What should be done? The most immediate need is more aid to people in distress: the U.N.’s World Food Program put out a desperate appeal for more funds.

We also need a pushback against biofuels, which turn out to have been a terrible mistake. But it’s not clear how much can be done. Cheap food, like cheap oil, may be a thing of the past.

Friday, January 04, 2008

Paul Krugman: Dealing With the Dragon

Paul Krugman says we’re having the wrong discussion about foreign policy:

Dealing With the Dragon, by Paul Krugman, Commentary, NY Times: ...Almost all the foreign policy talk in this presidential campaign has been motivated, one way or another, by 9/11 and the war in Iraq. Yet it’s a very good bet that the biggest foreign policy issues for the next president will involve the Far East rather than the Middle East. In particular, the crucial questions are likely to involve the consequences of China’s economic growth.

Turn to any of several major concerns now facing America, and in each case it’s startling how large a role China plays.

Start with the soaring price of oil. Unlike the oil crises that followed the Yom Kippur War and the overthrow of the shah of Iran, this crisis wasn’t caused by events in the Middle East that disrupted world oil supply. Instead, it had its roots in Asia.

It’s true that the global supply of oil has been growing sluggishly... But the reason oil supply hasn’t been able to keep up with demand is surging oil consumption in newly industrializing economies — above all, in China. ... China has been responsible for about a third of the growth in world oil consumption. As a result, oil at $100 a barrel is, in large part, a made-in-China phenomenon.

Speaking of made in China, that brings us to a second issue. There’s growing concern in this country about the effects of globalization on wages, largely because imports ... from low-wage countries have surged, doubling as a share of G.D.P. since 1993. And more than half of that rise reflects ... industrial imports from China...

Last, but most important, is the issue of climate change, which will eventually be recognized as the most crucial problem facing America and the world — maybe not today, and maybe not tomorrow, but soon, and for the rest of our lives.

China is already, by some estimates, the world’s largest emitter of greenhouse gases. And as with oil demand, China plays a disproportionate role in emissions growth. In fact, between 2000 and 2005 China accounted for more than half the increase in the world’s emissions of carbon dioxide.

What this means is that any attempt to mitigate global warming will be woefully inadequate unless it includes China. ...

So what does all this tell us about the presidential race?

On the Republican side, foreign policy talk is all bluster and braggadocio. To listen to the G.O.P. candidates, you’d think it was still February 2003, when the national discourse was dominated by people who thought that American military might was sufficient to shock and awe the rest of the world into doing our bidding.

Memo: China has 50 times the population of Iraq.

The Democrats in general make far more sense. But among at least some of Barack Obama’s supporters there seems to be a belief that if their candidate is elected, the world’s problems will melt away in the face of his multicultural charisma.

Memo: It won’t work on the Chinese.

The truth is that China is too big to be bullied, and the Chinese are too cynical to be charmed. But while they are our competitors in important respects, they’re not our enemies, and they can be dealt with.

A lot of Americans, when they think about the next president’s foreign-policy qualifications, seem to be looking for a hero — someone who will stand tall against terrorists, or transform the world with his optimism.

But what they should be looking for is something more prosaic — a good negotiator, someone who can bargain effectively with some very tough customers and get the deals we need on energy, currency policy and carbon credits.

Sunday, December 23, 2007

"Life after Peak Oil"

According to Gregory Clark, running out of fossil fuel may not reduce living standards by as much as you might think:

Life after peak oil, by Gregory Clark, Sacramento Bee: Oil prices have receded from their recent flirtation with $100 a barrel, but ... increased demand, high prices and the prospect of an eventual peak in oil production has caught Americans paralyzed between ... the fear that rampant consumption of oil and coal is irreversibly warming the Earth and the dread that without cheap oil our affluent lifestyles will evaporate. ...

Study of the long economic history of the world suggests two things, however. Cheap fossil fuels actually explain little of how we got rich since the Industrial Revolution. And after an initial period of painful adaptation, we can live happily, opulently and indeed more healthily, in a world of permanent $100-a-barrel oil or even $500-a-barrel oil. ...

Many people think mistakenly that modern prosperity was founded on this fossil energy revolution, and that when the oil and coal is gone, it is back to the Stone Age. If we had no fossil energy, then we would be forced to rely on an essentially unlimited amount of solar power, available at five times current energy costs. With energy five times as expensive ... we would take a substantial hit to incomes. Our living standard would decline by about 11 percent. But we would still be fantastically rich compared to the pre-industrial world. ... Our income would still be above the current living standards in Canada, Sweden or England. Oh, the suffering humanity! At current rates of economic growth we would gain back the income losses from having to convert to solar power in less than six years. ...

The ability to sustain such high energy prices at little economic cost depends on the assumption that we can cut back from using the equivalent of six gallons of gas per person per day to 1.5 gallons. Is that really possible? The answer is that we know already it is.

The economy would withstand enormous increases in energy costs with modest damage because energy is even now so extravagantly cheap that most of it is squandered in uses of little value. Recently, I drove my 13-year-old son 230 miles round-trip ... to play a 70-minute soccer game. Had every gallon of gas cost [considerably more], I am sure his team could have found opposition closer to home.

The median-sized U.S. home is now nearly 2,400 square feet, for an average family size of 2.6 people... Much of that heated, air-conditioned and lighted square footage rarely gets used. Cities ... that were developed in the world of cheap gas have sprawled across the landscape so that the only way to get to work or to shops is by car...

Some countries in Europe, such as Denmark, which have by public policy made energy much more expensive, already use only the equivalent of about three gallons of gas per person. I have been to Copenhagen, and believe me the Danes are not suffering a lot from those the daily three gallons of gas they gave up.

But can we get down to 1.5 gallons without huge pain? We can see even now communities where for reasons of land scarcity people have been forced to adopt a lifestyle that uses much less energy – places like Manhattan, London or Singapore. ... Housing space per person is much smaller, people walk or take public transit to work and to shop, and energy usage is correspondingly much lower, despite the inhabitants being very rich.

So the future after peak oil will involve living in such dense urban settings where destinations are walkable or bikeable, just as in pre-industrial cities (the city of London in 1801 had 100,000 inhabitants in one square mile). Homes will be much smaller... Nights will be darker. We will not have retail outlets lit up like the glare of the midday sun in Death Valley.

Such a lifestyle is not only possible it will be much healthier. We are not biologically adapted to the suburban lifestyle... – lots of cheap calories delivered right to your seat in the SUV that shuttles you from your sofa at home, to your chair at work, to the gym where you try and work on your weight problem. ...

So life after peak oil should hold no terror for us – unless, of course, you have invested in a lot of suburban real estate.

Wednesday, November 07, 2007

"Biofuels Can Match Oil Production"

Ricardo Hausmann with an optimistic view of the potential for biofuels as an alternative to oil:

Biofuels can match oil production, by Ricardo Hausmann, Commentary, Financial Times: Peering into the future seldom produces a clear picture. But this is not the case with bio-energy. Its long-term impacts on the global economy appear to be pretty clear, ... including the demise of the price-setting power of the Organisation of the Petroleum Exporting Countries and the end of agricultural protectionism.

First, technology is bound to deliver a biofuel that will be competitive with fossil energy at something like current prices. It probably already has. Brazil has been exporting ethanol to the US... in spite of a 54 cents a gallon tariff...

There is plenty of private venture capital money being poured into finding more efficient ways of extracting energy from biomass... New technologies will be able to extract energy from cellulose, allowing the use of pastures such as switch grass as well as the refuse of current food production. The cheque is in the mail.

Second, the world is full of under-utilised land that can grow ... biomass... Rodrigo Wagner and I have estimated that there are some 95 countries that have more than 700m hectares of good quality land that is not being cultivated. ... So the production potential of biofuels is in the same ball park as oil production today.

Third, even if only partially used, this large potential biofuels supply will cap the price of oil because its supply is much more elastic than the supply of oil. This will cause the price of oil to be set at the marginal cost of bio-energy, independently of the production decisions of Opec. ... Oil producers will still be rich, but they will not have incentives to form a cartel.

Fourth, ... This will imply a very large increase in the demand for agricultural land. Its price and that of the products that use it intensively – such as food and cotton – will go up. By how much? This will depend ... on the ... degree to which food crops will be complements or substitutes of bio-energy: they would be substitutes if switch grass were planted instead of soybeans; they will be complements if biofuels are made out of wheat stalk. My bet is that they will tend to be more substitutes than complements and the relative price of food will go up.

Fifth, the increase in the price of agricultural land and of food will relieve governments from the current political pressure to protect the agricultural sector. Governments that, as a consequence of the land glut, have been protecting and subsidising farmers will see them grow rich...

By contrast, consumers will be less enthusiastic and demand that something be done about the price of food. The obvious solution will be to cut back on protectionism and liberalise trade in agriculture.

Sixth, the countries that have the largest endowment of under-utilised lands are in the developing world, especially Africa and Latin America. Putting that land into production will require a type of infrastructure that ... usually crowds in other forms of investment by lowering transport costs in ample regions of the country. Bio-energy will make those infrastructure investments socially profitable, creating a possible stepping stone into other industries.

Some policy action in industrialised countries will be required to make this world possible. ... To make this scenario appealing, the impact of the expansion of the agricultural frontier on the environment and biodiversity, and the distributive effects of the rise in food prices will have to be addressed. But these problems seem solvable...

Saturday, November 03, 2007

FRB Dallas: Quarterly Energy Update

The Dallas Fed documents current conditions in energy markets, and gives forecasts of where things are headed in the future:

Soaring Oil Prices Dominate Energy Markets, Quarterly Energy Update, by Stephen P. Brown and Raghav Virmani, FRB Dallas: Oil Prices Rise Sharply Since sliding to just under $70 per barrel for West Texas Intermediate (WTI) in mid-August, oil prices have risen nearly 30 percent in two months. WTI closed at $92.91 on October 25—within $10 of the all-time inflation-adjusted high of $101.70 set in April 1980. Prices have been elevated and rising throughout 2007, climbing from $50 in mid-January to over $90 in mid-October, an astounding 86 percent gain. Oil futures prices remain in fairly sharp backwardation, which means that the market expects presently high oil prices to fall in the long term. Although this has been the case through many price spikes this year, long-term oil price expectations today have strengthened by almost 15 percent since mid-August (Chart 1).

Chart 1: Long-term oil expectations

Escalating tensions in the Middle East, slippage of the U.S. dollar (Chart 2), and an unexpected drawdown of international crude oil and product inventories account for the upward pressure on oil prices.

Continue reading "FRB Dallas: Quarterly Energy Update" »

Wednesday, September 26, 2007

Alan Greenspan versus Naomi Klein

This is part of a longer interview of Alan Greenspan and Naomi Klein:

Alan Greenspan vs. Naomi Klein on the Iraq War, Bush's Tax Cuts, Economic Populism, Crony Capitalism and More, Democracy Now [Watch 128k stream, Watch 256k stream]: AMY GOODMAN: ...We welcome you both to Democracy Now! ... You worked with six presidents, with President Reagan, with both President Bushes. You worked with President Ford, and you worked with Bill Clinton, who you have called a Republican president; why?

ALAN GREENSPAN: That was supposed to be a quasi-joke. ... I’m a libertarian Republican, which means I believe in a series of issues, such as smaller government, constraint on budget deficits, free markets, globalization, and a whole series of other things, including welfare reform. And as you may remember, Bill Clinton was ... doing much that same agenda... [H]e is a centrist Democrat. And that's not all that far from libertarian Republicanism. ...

AMY GOODMAN: Alan Greenspan, let's talk about the war in Iraq. You said what for many in your circles is the unspeakable, that the war in Iraq was for oil. Can you explain?

Continue reading "Alan Greenspan versus Naomi Klein" »

Monday, September 17, 2007

"The Iraq War is Largely about Oil"

Alan Greenspan explains his comment about oil and the Iraq war:

Greenspan Says Hussein's Removal Was 'Essential', by Bob Woodward, Washington Post: Alan Greenspan, the former Federal Reserve chairman, said in an interview that the removal of Saddam Hussein had been "essential" to secure world oil supplies, a point he emphasized to the White House in private conversations before the 2003 invasion of Iraq.

Greenspan ... made the striking comment in a new memoir out today that "the Iraq War is largely about oil." In the interview, he clarified..., saying that while securing global oil supplies was "not the administration's motive," he had presented the White House with the case for why removing Hussein was important for the global economy.

"I was not saying that that's the administration's motive," Greenspan said in an interview Saturday, "I'm just saying that if somebody asked me, 'Are we fortunate in taking out Saddam?' I would say it was essential."

He said that in his discussions with President Bush and Vice President Cheney, "I have never heard them basically say, 'We've got to protect the oil supplies of the world,' but that would have been my motive." Greenspan said that he made his economic argument to White House officials and that one lower-level official, whom he declined to identify, told him, "Well, unfortunately, we can't talk about oil." Asked if he had made his point to Cheney specifically, Greenspan said yes, then added, "I talked to everybody about that." ...

Greenspan ... added that he was not implying that the war was an oil grab. "No, no, no," he said. Getting rid of Hussein achieved the purpose of "making certain that the existing system [of oil markets] continues to work, frankly, until we find other [energy supplies], which ultimately we will."

One more person telling the administration what they wanted to hear prior to the war.

If I had questions about monetary policy, Ben Bernanke is one of the first people I would want to consult. Few, if any people are more knowledgeable about both the theory and evidence, and his recent experience enhances his understanding of how the Fed interacts with financial markets.

But if I want to know about oil markets, how removing a dictator in the Middle East will impact the region's stability, and so on, Ben Bernanke is not the first person I would think of to talk to. He might not even be in the top ten or twenty.

Greenspan was telling members of the administration what they wanted to hear, and I'm sure they used his worries about oil markets to buttress their case for going to war. But I hope Greenspan also encouraged the administration to consult with others who have more expertise on these issues than he has. I'm not sure exactly what or who Greenspan relied upon to draw his conclusions, so perhaps he consulted the experts himself, and given the cherry picking of "facts" that went on perhaps it wouldn't have mattered much in any case, but when war is involved you hope that the best and the brightest are part of the discussion.

Saturday, September 08, 2007

Olivier Blanchard and Jordi Gali: The Macroeconomic Effects of Oil Shocks. Why are the 2000s So Different from the 1970s?

Why did the economy respond differently to oil price shocks in the 2000s as compared to the 1970s?:

The Macroeconomic Effects of Oil Shocks. Why are the 2000s So Different from the 1970s?, by Olivier J. Blanchard and Jordi Gali, NBER WP 13368, September 2007 [open link]: Abstract We characterize the macroeconomic performance of a set of industrialized economies in the aftermath of the oil price shocks of the 1970s and of the last decade, focusing on the differences across episodes. We examine four different hypotheses for the mild effects on inflation and economic activity of the recent increase in the price of oil: (a) good luck (i.e. lack of concurrent adverse shocks), (b) smaller share of oil in production, (c) more flexible labor markets, and (d) improvements in monetary policy. We conclude that all four have played an important role.

Continue reading "Olivier Blanchard and Jordi Gali: The Macroeconomic Effects of Oil Shocks. Why are the 2000s So Different from the 1970s?" »

Sunday, August 12, 2007

Polarized Resource Claims

One of the consequences of anticipated global warming:

The Great Arctic Oil Rush, Editorial, NY Times: For a brief moment it seemed that Adm. Robert Peary and Dr. Frederick Cook had risen from the mists to renew their race to the North Pole.

On Aug. 2, a couple of Moscow legislators in a small submersible vessel deposited a Russian flag on the seabed two miles under the polar ice cap — backing up Russia’s claim to close to half the floor of the Arctic Ocean. Canada’s foreign minister, Peter McKay, dismissed the move, sniffing that “this isn’t the 15th century.” But just in case, Canada dispatched no less a personage than Stephen Harper, its prime minister, on a three-day tour of the region and announced plans to build two new military bases to reinforce the country’s territorial claims.

At stake is control of the Northwest Passage and, with it, what could be huge deposits of oil and natural gas in the seabed below.

In a 21st-century twist unimaginable to Cook and Peary, global warming — driven, in part, by humanity’s profligate use of those same fossil fuels — has begun to melt the polar ice, exposing potentially huge deposits of hitherto unreachable natural resources. ...[W]ith oil at $70 a barrel, the rewards of discovery could be huge.

Russia and Canada are not alone in the great Arctic oil race. Denmark, Finland, Norway, Iceland and the United States also have a deep interest in the matter.

One thing is clear. To the extent that ownership can be determined, it will not be decided by photo-ops or even by planting flags.... It will be decided by geologists, lawyers and diplomats.

Under international law, nations have rights to resources that lie up to 200 miles off their shores. The rest is regarded as international waters, subject to negotiation under the Law of the Sea. A nation can claim territory beyond the 200-mile limit, but only if it can prove that the seabed is a physical extension of its continental shelf.

The Russians are claiming that the huge Lomonosov Ridge underneath the pole is in fact an extension of their continental shelf. And to show just how crazy this could get, the Danes are spending a fortune trying to prove that their end of the same ridge — though now detached — was once part of Greenland, which belongs to Denmark.

The United States does not find itself in a strong position. Misplaced fears among right-wing senators about losing “sovereignty” has kept the Senate from ratifying the Law of the Sea even though the United Nations approved it 25 years ago. This, in turn, means that the United States, with 1,000 miles of coastline in the Arctic, has no seat at the negotiating table.

President Bush and moderate Republicans like Senator Richard Lugar ... will try to remedy this blunder when Congress reconvenes. This would at least enable Washington to stake its claims to the continental shelf extending northward from Alaska. We may never need a share of that oil, but it seems foolish not to keep it in reserve.

Friday, July 27, 2007

Paul Krugman: The Sum of Some Fears

Paul Krugman discusses three fears about the economy:

The Sum of Some Fears, by Paul Krugman, Commentary, NY Times: Yesterday’s scary ride in the markets wasn’t a full-fledged panic. The interest rate on 10-year U.S. government bonds — a much better indicator than stock prices of what investors think will happen to the economy — fell sharply, but ... ended the day ... well above its levels earlier in the year. This tells us that investors still consider a recession ... fairly unlikely.

So it wasn’t the sum of all fears. But it was the sum of some fears — three, in particular.

The first is fear of bad credit. Back in March, ... I spun a fantasy about how a global financial meltdown could take place: people would suddenly remember that bad stuff sometimes happens, risk premiums ... would soar, and credit would dry up.

Well, some of that happened yesterday. “The risk premium on corporate bonds soared...,” reported Bloomberg... “And debt sales faltered...” Mark Zandi of Moody’s ... said ... another major hedge fund stumble..., “...could elicit a crisis of confidence and a global shock.”...

But what’s really striking is ... the current angst ... over two things that I thought had been obvious for a long time: the magnitude of the housing slump and the persistence of high oil prices.

I’ve written a lot about housing..., so let me just repeat the basics. Back in 2002 and 2003, low interest rates made buying a house look like a very good deal. As people piled into housing, ... prices rose ... and ... the boom fed on itself...

Eventually the bubble had to burst, and ... it did... And ... past boom-and-bust cycles in housing tells us that it should be several years ... before things return to normal.

I’ve written less about oil prices, so let me emphasize ... we’re now in our third year of very high oil prices..., even though there hasn’t been any major disruption in world oil supply.

It’s pretty clear what’s happening: ...finding new oil is getting a lot harder. Meanwhile, emerging economies, especially in Asia, are burning ever more oil... With demand soaring and supply growth sluggish at best, high prices are what you get.

So why did people seem so shocked by a few more bad housing and oil numbers? What I guess I didn’t realize was how deep the denial still runs.

Over the last couple of years a peculiar conviction emerged among some analysts — mainly, for some reason, among those with right-wing political leanings — that the housing bubble was a myth and that the real bubble was in oil prices.

Each new peak in oil prices was met with declarations that it was all speculation — like the 2005 prediction by Steve Forbes that oil was in a “huge bubble” and that its price would be down to $35 or $40 a barrel within a year. And on the other side, as recently as this January, National Review’s Buzzcharts column declared that we were having a “pop-free” housing slowdown.

I didn’t think many people believed this stuff, but the market’s sudden freakout over housing and oil suggests that I was wrong.

Anyway, now reality is settling in. And there’s one more thing worth mentioning: the economic expansion that began in 2001, while it has been great for corporate profits, has yet to produce any significant gains for ordinary working Americans. And now it looks as if it never will.

_________________________
Previous (7/23) column: Paul Krugman: The French Connections
Next (7/30) column: Paul Krugman: An Immoral Philosophy

Thursday, July 26, 2007

"I Find It Hard to Take Them Seriously"

Rudy Giuliani thinks he has a great idea - energy independence - and he's going to lead the way:

Leading America Toward Energy Independence, by Rudy Giuliani, Real Clear Politics: America needs to become energy independent. We should have started to move toward energy independence back in the 1970s... Presidents Nixon and Carter talked about energy independence, but not a lot got done. The next President of the United States is going to have to make it a major goal... Most people will say it's impossible... I'm running for president because I know how to get things done.

I will move America toward energy independence... In the long-run, energy independence can become a great industry for America. We can sell our advances to countries like China and India. They need energy independence even more than we do... The government has to approach energy independence the way we put a man on the moon. ...

I'm going to turn this over to Jim Hamilton:

Finally, it is worth pointing out that, even if the U.S. somehow were to achieve energy self-sufficiency, that would not be the same thing as energy independence. It is hard to envision an arrangement that could effectively decouple the price of oil in the U.S. from that elsewhere in the world, even if our imports were zero. As a result, even if we were importing no oil from Saudi Arabia, I would expect a disruption in Saudi production to still have a very dramatic effect on the price that consumers pay in the U.S.

For these reasons, I am open to discussion about the extent to which it might be desirable to try to reduce the amount of oil that the U.S. imports, and strategies for achieving that goal. But when someone talks about "energy independence", I find it hard to take them seriously.

It's hard to take Giuliani seriously in any case.

Update: Free Exchange at The Economist follows up with "how vacuous such ideas really are."

Wednesday, July 11, 2007

James Hamilton: IEA Becomes More Pessimistic

A recent IEA report paints a pessimistic picture of oil markets in the near future. I'm going to turn the microphone over to Jim Hamilton and let him explain what this means. Here's a condensed version of his remarks on the issue:

IEA becomes more pessimistic, by James Hamilton on energy: The International Energy Agency's latest Medium-Term Oil Market Report is significantly more pessimistic about global surplus oil capacity over the next half-decade.

The IEA Report (hat tip to Tim Iacono and The Oil Drum for the link) sees a tighter oil market ahead than it had been predicting just last February. The IEA's methodology has to make an economist wince-- they extrapolate demand trends, separately calculate supply prospects, and, when the two numbers aren't equal to each other, issue a hand-wringing report like the present one.

Source: IEA.
iea_supply_demand_jul_07.gif

The forecast now calls for demand growth to exceed supply, presumably putting upward pressure on prices... The increased strain comes from a number of different sources. The IEA is now anticipating world oil demand in 2010 ...[to be] 0.6 mb/d higher than their February forecast-- as Tim notes, a good recession could fix that problem. They also are anticipating a 0.9 mb/d smaller increase in non-OPEC crude supply and 0.8 mb/d smaller increase in OPEC crude capacity relative to their February projections. A big factor in the latter adjustments is "slippage"-- projects always seem to take longer than originally anticipated. In addition, the IEA is now subtracting 0.4 mb/d in a new category for unplanned production outages-- it's a safe bet that somewhere in the world we'll see hurricanes or other unscheduled disruptions.

The IEA report stresses that the adjustments are not coming from changes in assumptions about depletion rates... The IEA also makes clear they are not signing on to peak oil...

But conspicuous by its absence is a discussion of the production decline in Saudi Arabia. The report lists 2007 Saudi production capacity at 10.8 mb/d, but does not offer a theory as to why Saudi production is currently only 8.6 mb/d and has dropped by 2 mb/d over the last two years.

Continue reading "James Hamilton: IEA Becomes More Pessimistic" »

Tuesday, May 29, 2007

Lumps of Coal

Is liquefied coal the answer? It depends upon the question being asked. Here's Brad Plumer:

How Energy Independence Threatens the Environment, by Bradford Plumer, TNR: ...When environmentalists talk about energy policy, they usually focus ... on global warming. Many Democrats, however, prefer to frame the discussion in terms of "energy security." And who can blame them? Even people who shrug at the thought of rising temperatures agree that the country should wean itself off foreign oil. It's a hugely popular idea. And, since many of the policies that would free the United States from ... Opec would also curb carbon emissions, who would begrudge the Democrats this bit of clever framing?

But the strategy comes with a downside: ...Big Coal is teaming up with an array of Republicans and Democrats to tout liquefied coal as a substitute for gasoline... The country is sitting on vast coal reserves, they reason, so why not use those instead of tossing money at the House of Saud? There's just one catch: Liquefied coal would do little to reduce carbon emissions and, in all likelihood, would make things worse. Nevertheless, the idea continues to gain currency in Congress, in part because "energy security" is a sales pitch few politicians can resist.

The ... coal industry ... has fallen on hard times. .... Moreover, ... if Congress passes a strong emissions-reduction bill to deal with climate change, coal production could decline sharply... As a result, investors have been increasingly wary of financing new coal-related projects.

Liquefied coal could be just the life raft Big Coal needs. ... Unfortunately..., the Energy Department found that coal-to-liquid fuel could generate roughly twice the carbon emissions that regular gasoline does. Coal backers counter that, if the carbon released during liquefication could be captured and permanently stored underground, the fuel would be comparable in carbon impact to gasoline--that is, the status quo. But the technology for storing carbon underground remains unproved, and, even if it works, cost pressures may prevent it from being adopted on a large scale...

Yet, despite these problems with liquid coal, Democrats are hopping aboard. ... For their part, Republicans seem to have few qualms about coal. ...

Ironically, for all the hype, liquefied coal is hardly the cheapest or easiest way to achieve energy security. According to the National Coal Council, ... a tremendous coal-to-liquid push--involving $211 billion in investments over the next 20 years and a 40 percent increase in mining--would allow the United States to replace just 10 percent of its oil supply. By contrast, using that coal to generate electricity for plug-in hybrids would displace twice the oil and emit a fraction of the carbon.

Still, the Coal-to-Liquids Coalition insists that liquid coal is "among the most practical, promising answers to greater energy security." And, so long as official Washington continues to treat this dubious assertion as fact, Democrats who prefer to talk about energy independence first and global warming second will be playing right into Big Coal's hands.

See also Lawmakers Push for Big Subsidies for Coal Process for an example of the push to liquefy coal and more discussion of these issues.

Friday, May 11, 2007

FRB Dallas: Economic Outlook and Quarterly Energy Update

Here are two outlooks from the Dallas Fed, one for the national economy and one for energy prices.

First, the national economic outlook. The first paragraph is interesting - it says that first quarter GDP estimates probably overstate the extent of the slowing in the economy. Chart 3 showing the depth and duration of the current housing downturn compared to past housing downturns is also interesting - it shows that, as of now, the depth and duration of the current cycle is very close to the average over all cycles:

Growth Slows in First Quarter 2007, by Jim Dolmas, FRB Dallas: Real GDP growth slowed to a 1.3 percent annual rate in first quarter 2007 from a 2.5 percent rate in fourth quarter 2006, according to the Bureau of Economic Analysis’s advance estimate. While the pace of economic activity certainly cooled in the first quarter, the 1.2 percentage point drop in the GDP growth rate probably overstates the extent of the underlying slowing. Unusual declines in exports and federal government defense outlays combined to subtract about 0.4 percentage point from first-quarter growth.

Continue reading "FRB Dallas: Economic Outlook and Quarterly Energy Update" »

Saturday, February 17, 2007

Jim Hamilton: Saudi Oil Production Cuts

Jim Hamilton says there's potentially a big story concerning the reasons for Saudi Arabia's cuts in oil production that the press hasn't noticed:

Saudi oil production cuts, by Jim Hamilton: This is a potentially huge story that is not being adequately investigated by the financial press...

Update: A follow-up:

Study sees harmful hunt for extra oil, by Carola Hoyos, Financial Times: All the world’s extra oil supply is likely to come from expensive and environmentally damaging unconventional sources within 15 years, according to a detailed study.

This will mean increasing reliance on hard-to-develop sources of energy such as the Canadian oil sands and Venezuela’s Orinoco tar belt.

A report ... calculates that the world holds 3,600bn barrels of unconventional oil and gas that need a lot of energy to extract. ...

Only 15 per cent of the 3,600bn is heavy and extra-heavy oil, with the rest being even more challenging.

The study makes clear the shift could come sooner than many people in the industry had expected, even though some major conventional oil fields will still be increasing their production in 2020. Those increases will not be enough to offset the decline at other fields.

“It becomes unclear beyond 2020 that conventional oil will be able to meet any of the demand growth,” ... The report added that natural gas products such as liquids and condensate would also become important sources of growth.

The increasing reliance on unconventional oil will require a substantial reshaping of the energy industry. ...

[T]he challenge is huge, said Matthew Simmons, an industry banker who sent shock waves through the oil world when he questioned whether Saudi Arabia, the most important oil source, would be able to continue to expand production.

“The ability to extract this heavy oil in significant volumes is still non-existent,” he said in a recent speech.

“Worse, it takes vast quantities of scarce and valuable potable water and natural gas to turn unusable oil into heavy low-quality oil.” ...

Saturday, February 03, 2007

Thomas Friedman: Iran's Great Weakness May Be Its Oil

The San Diego Union-Tribune has Thomas Friedman's latest column from Times Select:

Iran's great weakness may be its oil, by Thomas Friedman, Commentary,Union-Tribune: There may be only one thing dumber than getting addicted to consuming oil as a country – and that is getting addicted to selling it. ... Economists have long studied this phenomenon, but I got focused on it here in Moscow after chatting with Vladimir Mau, the president of Russia's Academy of National Economy. ...

Here's the story: The inefficient Soviet economy survived in its early decades ... thanks to cheap agriculture, from peasants forced into collective farms, and cheap prison labor... Beginning in the 1960s, however, even these cheap inputs weren't enough, and the Kremlin had to start importing ... grain. Things could have come unstuck then. But the 1973 Arab oil embargo and the sharp upsurge in oil prices – Russia was the world's second-largest producer after Saudi Arabia – gave the Soviet Union a 15-year lease on life from a third source of cheap resources: “oil and gas,” Mau said.

The oil windfall gave the Brezhnev government “money to buy the support of different interest groups ..., import some goods and buy off the military-industrial complex,” he said. “The share of oil in total exports went from 10-to-15 percent to 40 percent.” ...

By the early 1980s, though, oil prices had started to sink... “One alternative for the Soviets was to decrease consumption, but the Kremlin couldn't do that – it had been buying off all these constituencies,” Mau explained. ... Oil prices and production kept falling as Gorbachev tried reforming communism, but by then it was too late.

The parallel with Iran, Mau said, is that the shah used Iran's oil windfall after 1973 to push major modernization onto a still traditional Iranian society. The social backlash produced the ayatollahs of 1979. The ayatollahs used Iran's oil windfall to lock themselves into power.

In 2005, ... Iran's government earned $44.6 billion from oil and spent $25 billion on subsidies – for housing, jobs, food and 34-cents-a-gallon gasoline – to buy off interest groups. Iran's current populist president has further increased the goods and services being subsidized.

So if oil prices fall sharply again, Iran's regime would have to take away many benefits from many Iranians... For a regime already unpopular with many of its people, that could cause all kinds of problems and give rise to an Ayatollah Gorbachev. We know how that ends...

In short, the best tool we have for curbing Iran's influence is not containment or engagement, but getting the price of oil down in the long term with conservation and an alternative-energy strategy. Let's exploit Iran's oil addiction by ending ours.

Monday, January 29, 2007

The Price of Gas and Fuel Consumption

Paul Krugman saw the "Five Myths?" about gas consumption and conservation and sends along this graph. It's from his favorite textbook. He says:

Mark

Saw your "five myths" post. The thing is that the big issue isn't how much you drive, but mileage. And there's a strong effect of prices on consumption, mainly through that channel.

Oh, you do have to be careful, though: Europe uses a lot more diesel, so you don't want to just look at gasoline.

Here's the figure for use in the 2nd edition of the Krugman/Wells text showing that higher fuel prices are associated with lower fuel consumption:

Krugwellsgas12907_1

Wednesday, January 24, 2007

Robert Samuelson: Biofuels

Robert Samuelson is wary of the strong push toward biofuels because it might divert us from taking other, more effective paths to reducing our dependence on foreign energy sources:

Blindness on Biofuels, by Robert J. Samuelson, Commentary, Washington Post: President Bush joined the biofuels enthusiasm in his State of the Union address, and no one can doubt the powerful allure. Farmers, scientists and venture capitalists will liberate us from insecure foreign oil by converting corn, prairie grass and much more into gasoline substitutes. Biofuels will even curb greenhouse gases. Already, production of ethanol from corn has surged from 1.6 billion gallons in 2000 to 5 billion in 2006. Bush set an interim target of 35 billion gallons in 2017 on the way to the administration's ultimate goal of 60 billion in 2030. Sounds great, but be wary. ...

The great danger of the biofuels craze is that it will divert us from stronger steps to limit dependence on foreign oil: higher fuel taxes ... and tougher federal fuel economy standards to force auto companies to produce them. ...

Until now, most ethanol has been made from corn. ... Ethanol receives heavy federal subsidies. ... Naturally, corn farmers love this. They've been the program's main beneficiaries. Although ethanol displaces only tiny amounts of oil (slightly more than 1 percent), it's had a big effect on corn prices. ... They could go higher. ... Higher prices for corn (which is fed to poultry, hogs and cattle) raise retail meat prices. Ironically, fuel subsidies may boost food costs.

But corn harvests won't be large enough to meet either the 35 billion- or 60 billion-gallon targets. Large amounts of "cellulosic" ethanol would also be needed... Prime candidates are farm wastes, including wheat straw and cornstalks. Unfortunately, the chemistry for doing this is far more costly than it is for corn kernels. Without technological advances, cellulosic ethanol won't be economically viable. It could be supported only with massive federal subsidies or direct requirements forcing refiners to use the fuel, regardless of cost. Then the high costs would be passed on to consumers. ...

Biofuels are certainly worth pursuing. Up to some point, they're even worth subsidizing. Government can nurture new technologies, and breakthroughs for cellulosic ethanol -- hardly inconceivable -- would make a meaningful difference in the U.S. fuel balance. But there's also a real threat that the infatuation with biofuels is a political expediency that will turn into a classic government boondoggle, benefiting selected constituencies and providing few genuine public benefits. That has already happened with corn.

Our primary need is to curb reliance on foreign oil. If imports were dependable, they would not be dangerous, but they come from unstable or hostile suppliers. Although our dependence can't be eliminated, it can be reduced. The most obvious way is to improve the efficiency of vehicles by 30 to 50 percent over the next few decades. Americans need more hybrids and more small vehicles. Biofuels might be a complement, but if they blind us to this larger reality, they will be a step backward.

Thursday, January 04, 2007

The Sensitivity of the Economy to Rising Oil Prices

In this Economic Scene, Austan Goolsbee looks at how the sensitivity of the economy to increases in the price of oil has changed since the 1970s:

A Country Less Dependent on Oil Is Free to Make Other New Year’s Resolutions, by Austan Goolsbee, Economic Scene, NY Times: Well, another New Year’s Day has ..., no doubt, started another wave of resolutions to ... go on a diet. But after seeing gas prices pass $3 a gallon last year, hearing all the talk about global warming and having a bad feeling about all the bluster coming from the Iranian president, Mahmoud Ahmadinejad, a great many folks wish the economy would go on a diet, too, and stop using so much energy.

Some of the fear over energy and the economy ... resides in people old enough to remember some grimmer New Year’s Days. In 1973, OPEC imposed an oil embargo against the United States and Western Europe... New Year’s Day 1974 came in the middle of the first great energy crisis. Oil prices shot up with the embargo and the American economy collapsed into recession ..., our first stagflation.

New Year’s 1980 was even worse: the Iranian revolution, American hostages and oil prices pushing $40 a barrel. The second great energy crisis once again plunged the American economy into a recession coupled with high inflation.

Our past seems to show that when oil prices rise too much, our economy cannot grow. These lessons have been taken to heart by Mr. Ahmadinejad and Osama bin Laden as each has contemplated ways to cripple the American economy.

But ... much has changed since the wrenching days of the 1970s... The energy used for each dollar of gross domestic product in 1980 was almost 70 percent greater than it is today. While we have collectively wrung our hands over the decline of manufacturing in the country, it has also reduced the relationship between energy prices and growth.

Manufacturing industries consume about 25,000 B.T.U.’s of energy for each dollar of gross domestic product they generate. The most energy-intensive sectors, like the steel, iron ore and aluminum industries, consume about 70,000 B.T.U.’s. Outside of manufacturing, the economy uses less than 6,000. ...

So now when the price of oil goes up, ... it does not automatically mean recession. Indeed, it caused only a ripple this last year. Unemployment and inflation both stayed quite low. ... OPEC’s ability to impose an oil embargo on the West ... and bring the economy into recession is highly limited today.

Paradoxically, although the economy seems somewhat less prone to disruption from energy crises, there remains one enormous group that suffers from high prices: us, the car drivers. Industry has become less and less dependent on energy over time, but the average American commuter is now more dependent.

From 1980 to 1990, rising Corporate Average Fuel Efficiency standards forced automakers to improve car mileage significantly. .... That ended in 1990... Our regulations are now much less stringent than those in Europe, Japan and even China. We also shifted to driving trucks and sport utility vehicles. We moved farther from our places of work and drove a lot more. Since 1990, the number of gallons we use, even on a per vehicle basis, rose substantially.

So as the price of oil neared $80 a barrel last year and gasoline exceeded $3 a gallon, it did not bring the economy to its knees, the way previous oil crises did. It just hit all of us driving our cars. Mr. Ahmadinejad may not have the ability to terrorize the economy, but he can certainly aggravate soccer moms in their minivans or commuters stuck in traffic by making them pay more...

It is New Year’s so ...[f]orget about New Year’s resolutions for the economy and stick to your own. Next time you need to get somewhere, toss the keys and walk.

Wednesday, December 20, 2006

What About Iraq's Oil?

Christopher Hayes wants to know why "the word oil never crossed the lips of any of the reporters at today’s press conference" with president Bush, and why reporters don't ask about the establishment of permanent bases once the war has ended:

Oil Law, by Christopher Hayes: Listening to the President’s press conference..., something caught my ear. ... Bush mentioned that a key to unifying the country would be getting Iraq’s new oil law passed. The idea is, I imagine, that once Iraq’s new government has figured out how to equitably share oil revenues among various factions, everyone’s going to get along just fine. Of course, along with bringing Iraqis together, the new law might just also provide a boon to American energy companies A win-win!

As Antonia Juhasz shows in a new cover story for In These Times (not yet on line), and argued in the LA Times earlier this month, access to oil continues to drive US policy in Iraq:

The Bush administration hired the consultancy firm BearingPoint more than a year ago to advise the Iraqi Oil Ministry on drafting and passing a new national oil law. Plans for this new law were first made public at a news conference in late 2004 in Washington. Flanked by State Department officials, Iraqi Finance Minister Adel Abdul Mahdi (who is now vice president) explained how this law would open Iraq’s oil industry to private foreign investment. This, in turn, would be “very promising to the American investors and to American enterprise, certainly to oil companies.” The law would implement production-sharing agreements. ...

In July, U.S. Energy Secretary Samuel Bodman announced in Baghdad that oil executives told him that their companies would not enter Iraq without passage of the new oil law. Petroleum Economist magazine later reported that U.S. oil companies considered passage of the new oil law more important than increased security when deciding whether to go into business in Iraq.

There are two elephants in the room when it comes to Iraq, and for some reason the establishment press can never quite bring itself to broach the subjects: permanent bases and access to oil. It’s fairly clear that Bush is not going to withdraw from Iraq no matter what happens. Part of this is due to the fact that he has decided that as long as we stay in Iraq we can’t lose the war, and he doesn’t want to lose. But there’s also the not-so-minor fact that if we withdraw from Iraq we’ll have a hard time establishing permanent bases and may not have any secure access to the country’s oil.

So why is it the word oil never crossed the lips of any of the reporters at today’s press conference?

Update: In response to comments, let me add that I think the form of the contracts/law matters. Access is different from control/property rights and that's where people may be talking past each other.

If, for example, the law gives U.S. companies the right to some of the oil in return for developing the infrastructure destroyed in the war, preferential treatment about who gets the development contracts, etc. - the kind of cronyism we've seen again and again - that's one issue, and one that merits raising. It's this phrase:

The law would implement production-sharing agreements.

that caught my eye in that regard.

If it's just access, the so long as the oil hits world markets, then that's another issue, and I agree that it won't affect price, etc.

Update: Angy Bears follow up - see PGL, then Steven Kyle.

Thursday, November 30, 2006

The Advantages of Pay-As-You-Drive Insurance

In a recent Economic Scene article for The New York Times posted here, Hal Varian explains the benefits of per-mile auto insurance. He also *patiently* answers many of the questions that come up in comments to the post (his answers are here and there are more rounds of questions and answers in the comments to that post complete with supporting models).

In the article, Hal Varian discusses work by Aaron S. Edlin and Pinar Karaca-Mandic from their paper, “The Accident Cost From Driving.” In this article from Economist's Voice, Aaron Edlin summarizes work in this area with a focus on the political advantages of using per-mile auto insurance to reduce gasoline consumption:

If Voters Won’t Go for Taxing Oil to Conserve Energy, How Do We Do It?, by Aaron S. Edlin, Economist's Voice, November, 2006: ...Lowering our dependence on oil would give the United States considerably more flexibility in Middle East policy. It would also help us to fight global climate change. Yet precious little has been done. The obvious solution of European-size taxes on gasoline and other uses of oil is just too unpopular in the United States to become law. ...

What can be done to decrease America’s energy dependence, given the public’s apparently well entrenched fear of increases in the cost of driving? One way forward may be a simple reform to auto insurance: Pay as You Drive.

Pay-as-you drive-insurance: how it would work

Currently, auto insurance is largely, but not entirely, independent of the amount of driving a person does. If an individual drives 5,000 miles per year, instead of 25,000, then her insurance rate is reduced only slightly: often, by 15% or less. ...

Suppose that, instead, ... that auto insurers were required to quote premiums on a per-mile driven basis instead of a per-year basis.

Consider a given class of drivers ... whom insurance companies currently charge $1000 per year, and who currently drive 10,000 miles per year on average. Instead of charging these drivers $1000 per year, insurers might charge 10 cents per mile driven.

The average driver ... would continue to pay the same amount—$1000 per year— assuming no change in driving behavior. However, suppose this driver chooses to cut her driving in half, to 5,000 miles per year... Then she would save $500/year, much more than under the current pricing system. Moreover, if the same driver were to double her driving, she would double her insurance cost... Such a pricing system would give her a significant incentive to reduce her driving. Elsewhere, I have estimated that such pay-as-you-drive insurance could reduce driving and gasoline consumption by 10–15%.

The political advantage of pay-as-you-drive insurance over a gas tax is that it doesn’t increase the total cost of driving, at least on average. ... Prices at the pump, of course, stay the same—making the measure much more palatable... And rather than voters simply fearing negative consequences, they can enjoy some positive ones: lowered insurance prices as a reward for changes in behavior. ...

The change won’t be painless for everyone, of course. Those who drive twice the average will pay twice as much. But that’s only fair: They also cause more accidents, and burden the environment, and worsen our dependence issue, twice as much. And charging high mileage drivers more is exactly what will give people an incentive to drive less.

The peculiar all-you-can-drive way that auto insurance is currently priced

The late Nobel Laureate William Vickrey wrote almost forty years ago that “the manner in which [auto insurance] premiums are computed and paid fails miserably to bring home to the automobile user the costs he imposes in a manner that will appropriately influence his decisions.”

The costs to which Vickrey referred were accident costs, not terrorism, climate, and national security costs. The great thing, though, is that by switching our insurance system to pay-as-you-drive insurance, we can reduce accident costs with more efficient accident pricing, and reduce these other costs as a bonus. ...

Vickrey’s point is that with each mile we drive, there is a cost in the form of accident risk. When we don’t pay the costs we impose, the incentives are obvious: we drive more than is economically efficient, causing accidents as we go. If we paid as we drove, and were charged a per-mile premium we would choose to drive less and there would be fewer accidents. And that would be fair: we would simply be forced to pay for the externalities of our conduct. ...

If Americans are successfully incentivized to drive less by pay-as-you-drive insurance, [accident] costs will fall appreciably... Several insurance carriers have begun to experiment with pay as you drive insurance, but they have not rushed to charge per-mile premiums on their own. Too many of the gains would not be captured by the company changing the policies. They need some encouragement.

The political salability of mandating pay-as-you-drive

...Per-mile premiums ... could lower the cost of driving for most people because most people drive less than the average. (Because driving quantities follow a skewed distribution, the median is considerably lower than the mean). Moreover, such premiums give drivers additional control over their costs, so they can choose to lower them still further.

There would, of course, be opposition. Although more than 50% of people drive less than the arithmetic average, many obviously drive more ... and would tend to oppose the change, at least if they vote their pocket books. Moreover, oil companies, the highway lobby and gas stations can be expected to oppose any change that leads to less driving. ...

[A] full-scale national shift to pay-as-you-drive insurance is too much to hope for. Still, a shift could be made in stages: if each insurance carrier had to issue 5% of its policies at per-mile rates, no carrier would be at a competitive disadvantage. ...

There are many pieces to a sound national energy policy, but per-mile premiums should be high on the list. What is needed is a jump start.

Tuesday, November 28, 2006

Political Price Cycles in Gasoline Markets?

Are oil prices manipulated prior to elections? This paper provides evidence that they are based upon a sample of legislative elections for 32 countries over 27 years:

Do Politicians Manipulate Gasoline Prices?, by David Wessel WSJ Washington Wire: Before the recent U.S. congressional election, there were widespread, unsubstantiated assertions that the Bush administration somehow had manipulated gasoline prices so they’d fall before the November congressional elections. Economists pooh-poohed them. Now a couple of International Monetary Fund economists, looking through data on gas prices and legislative elections from 1978 to 2004 in 32 countries from Australia to the U.S., say there may be something to this conspiracy theory.

“Focusing on real” – inflation-adjusted – “gasoline prices alone, we observed that they declined 0.3%, on average, during ‘normal’ quarters and about 0.7% during quarters of electoral campaign. Moreover, in 15 countries of the sample, this difference exceeded 2 percentage points, whereas it exceeded 6 percentage points in seven countries,” economists Claudio Paiva and Rodriga Moita write in new IMF working paper. ...

Though the paper appears to be carefully done, I'm skeptical. In particular, though there is a theoretical model in the paper, how the price manipulation is carried out isn't completely clear. The paper says:

[A]nother assumption we make in using the gasoline market in the empirical part of our paper [is] that governments either determine gasoline prices directly through price regulation or exert strong influence on them through regulatory stocks, importation, taxes, subsidies, and when setting environment and safety standards.

Thus, the connection between government action prior to elections and gas price changes is assumed, not established empirically. I'm not saying the connection is or isn't there for the countries in the sample, just that it hasn't been shown to exist for the U.S.

Update: Here are the countries:

Australia, Austria, Belgium, Brazil, Canada, Switzerland, Denmark, Finland, France, Germany, Greece, India, Indonesia, Ireland, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovak Republic, South Africa, Spain, Sweden, Thailand, Turkey, United Kingdom, United States

Sunday, October 15, 2006

Who Should Reduce Their Energy Consumption?

As a follow-up to the post below this one on the politics of promoting increased energy independence, this is from the CEO of Eni:

To extend the age of oil, we must save fuel now, by Paolo Scaroni, Commentary, Financial Times: One of the most common explanations advanced in the west for the current squeeze on energy supplies – and for why prices are still so high ... is ... China...

But... In spite of China’s rapid expansion, it still accounts for only 8 per cent of global oil demand. Meanwhile, the US and Europe account for 25 per cent and 18 per cent of global oil demand respectively. Each Chinese individual uses fewer than two barrels of oil a year. This compares with the 12 barrels used by their European counterparts and with the massive 26 barrels used by each US citizen every year.

It is the west’s consumption, along with sustained under-investment in energy infrastructure during the 1990s, that has really pushed prices up. The paradox is that, while on the one hand we complain about high oil prices, on the other we pursue energy policies that are wholly irrational. ... Look at the US, where oil demand keeps rising. Indeed, one out of every two cars sold there in the past five years was an SUV or a light truck...

Continue reading "Who Should Reduce Their Energy Consumption?" »

Is It Energy Independence, Stupid?

Thomas Friedman thinks energy policy, energy independence in particular, is the key to winning the election:

The Energy Mandate, by Thomas Friedman, Commentary, NY Times: James Carville, the legendary Clinton campaign adviser who coined the slogan, “It’s the economy, stupid,” knows a gut issue when he sees one. So when Mr. Carville contacted me the other day to tell me about the newest gut issue his polling was turning up for candidates in the 2006 elections, I was all ears.

“Energy independence,” he said. “It’s now the No. 1 national security issue. ... It’s become kind of a joke with us, because no matter how we ask the question, that’s what comes up.” ...

Clinton pollster Stan Greenberg, ...[said] “When we lay out different plans for how to deal with Iraq, any plan that also includes energy independence tops any other plan that doesn’t”... Mr. Greenberg ... added that people are not expressing this view because they are worried about price, but because they are starting to understand that our oil dependence is fueling a host of really bad national security problems. “There is frustration that leaders have not taken it up,” he added...

What this means for Democratic Party candidates, argues Mr. Carville, is that it’s no longer enough to have “energy security” as part of a 12-step plan for American renewal. No, it needs to become a defining issue of what Democrats are all about.

It should “not be part of an expanding litany, but rather a contracting narrative,” explained Mr. Carville. “It can’t just be that we are for a woman’s right to choose, and education and energy independence. This is the thing we need to get done above and beyond everything else.” People should associate “energy security” with Democrats the way they associate “tax cuts” with Republicans, he argued. “This is not something to add to the stew — this is the stock.”

The best way for a party that is often viewed as weak on national security to overcome that deficit is to be for energy independence, he noted. ...

So does this mean the public would accept a gasoline or B.T.U. tax? No, said Mr. Greenberg. The public wants government to impose much higher auto mileage standards on Detroit and much more stringent energy codes on buildings and appliances. People want a tough regulatory response, à la California.

Remember, Mr. Carville and Mr. Greenberg are professional campaign advisers. They get paid to get people elected — not to offer feel-good nostrums. So when they tell you that their polling and focus groups around the country show that “reducing dependence on foreign oil” is voters’ top national security priority, you know that this issue has finally arrived. The party that captures it most credibly will be rewarded.

Hello? Anybody listening?

I've been listening since this column came out a few days ago. I hear Bush and other Republicans making this point repeatedly, they even have plans on how to get there (ethanol production, Alaskan and offshore drilling, etc.), but I didn't hear much from Democrats. I'm not as sure as Carville is that this should be the signature issue, but Democrats could surely be more aggressive on this point.

Monday, October 02, 2006

The Saudi Pledge?

Via email, something for the conspiracy theorists from the Financial Times:

White House ‘ignored’ Iraq warning, by Caroline Daniel, Financial Times (free): The Bush administration was shaken on Friday by revelations from a new book by Bob Woodward, the veteran investigative reporter... In a claim that could fuel conspiracy theories about the recent oil price decline ... Mr Woodward described a conversation between Prince Bandar bin Sultan and Mr Bush in which the former Saudi ambassador said he could ease oil prices ahead of the elections. “They could go down very quickly. That’s the Saudi pledge. Certainly over the summer, or as we get closer to the election, they could increase production several million barrels a day,”

Jim Hamilton discusses, and dismisses, another conspiracy theory here. I'm not much of a conspiracy theory type, and I haven't heard anything indicating the Saudis are increasing supplies, only that they aren't cutting production like Nigeria and Venezuela plan to do, e.g. see "Oil falls 3 percent, healthy inventories weigh" from Reuters:

Some traders said the planned cutbacks by Nigeria and Venezuela would have little impact on prices unless larger producers in the Organization of the Petroleum Exporting Countries also said they would join the move. "The only significant thing would be if Saudi Arabia announced they were going to cut output, which they haven't," said Christopher Bellew...

I'm not quite sure what, if anything, to make of Woodward's report so I'll turn it over to you.

Sunday, October 01, 2006

Vintage Varian: Raise Gasoline Taxes

Hal Varian from October, 2000 on the need for higher gasoline taxes:

Tax cutting may be in fashion, but it's a good time to raise gasoline taxes, by Hal R, Varian, New York Times, Oct 19, 2000: With all the talk of tax cuts, this may be an inopportune time to propose a tax increase. But it is easier to put tax reforms in place when times are good than when they are bad, and United States policy on gasoline taxation could be much improved.

Gasoline taxes are an emotional issue... But there are several good reasons that increasing the gasoline tax in the United States makes economic sense.

First, it is a good idea to tax the consumption of goods that impose costs on other people. One person's consumption of gasoline increases emissions of carbon dioxide and other pollutants, and this imposes environmental costs on everyone. And even those who do not care much about the environment have to acknowledge that driving contributes to traffic congestion. Increased taxes on gasoline would reduce consumption, cutting both pollution and congestion.

But, you might argue, we already have taxes on gasoline: federal, state and local taxes average about 41 cents a gallon, or 28 percent of the price of gasoline. Isn't this enough? The problem is that the tax is used mostly to pay for road construction and maintenance. True, the gasoline tax decreases the use of gasoline, but the road subsidy increases its use.

If we subtract the subsidy from the tax, we end up with a net tax rate on gasoline in the United States of about 2 percent, which is much, much lower than net gasoline taxes in the rest of the world.

There is another, quite different reason to tax oil products.

Economists like to tax things that are in fixed supply because the same amount is available whether or not the tax is imposed. ...[I]n the long run, there is only so much oil. Taxing petroleum products will not reduce the total amount of oil in the ground, it will just slow the rate at which it is discovered and extracted.

Taxes on gasoline reduce the demand for oil, thereby reducing the price received by the suppliers of oil. And most of those suppliers are foreign: the United States now imports 56 percent of its oil... Taxing foreigners is popular both economically and politically -- they do not vote. Of course, domestic oil producers not only vote, they contribute to campaigns, and a tax on gasoline would be unpopular with them. But deals can be made -- taxes can be traded for depletion allowances and other accounting goodies to make such a plan politically viable.

A gasoline tax in a small country falls mostly on the residents of that country. The world price of oil is essentially independent of the taxing policies of most countries, since most countries consume only a small fraction of the amount of oil sold.

But the United States consumes a lot of oil -- almost a quarter of the world's production. That means it has considerable market power: its tax policies have a major impact on the world price of oil, and economic analysis suggests that in the long run, a significant part of a gasoline tax increase would end up being paid by the producers of oil, not the consumers.

Nearly 20 years ago, Theodore Bergstrom, an economist who is now at the University of California at Santa Barbara, compared the actual petroleum tax policies of various countries with policies those countries would adopt if they wanted to transfer more OPEC profits to themselves.

He found that if ... the United States, Europe and Japan all coordinated their oil-tax policies, they would collectively want to impose net tax rates of roughly 100 to 200 percent. This is not as scary as it sounds since such a coordinated tax increase would mostly affect oil producers; the price at the pump would increase much less.

Mr. Bergstrom's analysis was focused entirely on transferring profits from oil-producing to oil-consuming nations. If we factor in the pollution and congestion effects mentioned earlier, the optimal petroleum taxes would be even higher.

In the past, Al Gore has advocated increasing gasoline taxes for environmental reasons, though he has been pretty quiet about this proposal lately. George W. Bush does not think much of oil taxes, but he likes the idea of a tax cut.

Let me propose a bipartisan plan: raise the tax on gasoline, but give the revenue back to taxpayers in the form of an income tax credit.

Average consumers would be about as well off as they are now, but the higher price of gasoline would tend to discourage consumption -- giving us environmental, congestion and tax-the-foreigner benefits. It would make sense to phase the tax in over several years, so that the next time drivers trade in their sport utility vehicles, they would have an incentive to buy those fuel-efficient cars that Detroit has promised to produce.

Increasing the net tax on gasoline by, say, 2 percent a year for the next 10 years would be pretty painless for most people. Oil prices would almost certainly drop back down in the next few years, tending to reduce the price of gasoline back toward historical levels. A higher gasoline tax would just mean prices would not drop quite as far as they would otherwise.

If something must be taxed, it makes a lot of sense to tax something that is costly to the environment, costly to the users and mostly controlled by foreigners. The United States is passing up a big opportunity by not taxing gasoline at a higher rate.

I haven't strongly supported these proposals, perhaps because I hate the idea of paying more for gas. But that's the point of raising the tax, I'm supposed to dislike it and reduce my consumption, and I can't deny that an increase in gas taxes is needed. Robert Frank has a similar proposal (analyzed graphically here), while Martin Feldstein has called for tradeable gas rights.

Friday, September 29, 2006

Bush on Energy Policy

The Wall Street Journal interviews George Bush on energy issues:

Interview With President Bush, Wall Street Journal:

THE WHITE HOUSE
Office of the Press Secretary
(Birmingham, Alabama)

Internal Transcript
September 28, 2006

INTERVIEW OF THE PRESIDENT BY THE WALL STREET JOURNAL

Q: I think I would like to just start on the topic that you were on just now -- energy. Obviously, it's a huge priority for you and I wonder if you can just talk about where it goes from here.

THE PRESIDENT: I think energy diversification is a priority for the nation. And by energy diversification, I mean that a policy that promotes technological change so that we become less dependent on crude oil from overseas.

The best way to become less dependent on crude oil from overseas is to change the driving habits of the country. My vision is that, ultimately, we'll be using hydrogen-powered automobiles; in the meantime, we'll be diversifying our fuel mix from gasoline to more ethanol. Conservation will be achieved by new technologies, such as batteries that enable a car to go for the first 40 miles on electricity and your car doesn't have to look like a golf cart.

It's interesting, this diversification has required federal involvement -- federal involvement through tax credits for ethanol, as well as research dollars. But those research dollars are being complemented by research dollars in the private sector. And one reason why the research dollars in the private sector are coming is because the price of crude oil, the rise in the price of crude oil has made it clear that there is profitability for private dollars when they invest...

Q: Do you envision more policy down the road?

THE PRESIDENT: I envision more money being spent to accelerate that which is possible. You heard a full discussion today about the possibility of switch grass and two types -- using switch grass as a raw material and two types of manufacturing processes.

The market for ethanol will evolve differently than the market for gasoline, because transportation is part of the bottleneck of finished product, and therefore in order to get ethanol penetration throughout the country, there are going to have to be locally-built plants so as to reduce transportation costs. And, therefore, there's going to be the need for locally-grown raw materials for those plants. And some places just aren't that good for growing corn or sugar, therefore, we're going to have to develop alternatives to be able to use to make ethanol. ...

Q: And do you envision the money being spent in that area, in particular?

THE PRESIDENT: Well, we're spending, since I've been President, about $29 billion on dealing with alternative forms of energy, which it affects the warming issue. In other words, as you diversify away and/or improve the capacity to burn certain fuels, you're developing environmentally friendly technologies.

And so our effort is multifaceted. You know, for example, you heard me mention the need to deal with nuclear waste. And I believe we ought to reprocess, as well as have fast burner reactors that can deal with that fuel, which reduces the amount of waste substantially, which then makes it easier to store, which then makes it easier to convince people that nuclear power is the way to go. Nuclear power is renewable. Nuclear power is going to be necessary for the production of hydrogen, which is the new kind of -- which will be the new source of powering automobiles, plus it's clean. It deals with the warming issue.

Q: So that's another area, is it fair to say, where you envision some new policy?

Continue reading "Bush on Energy Policy" »

Friday, September 22, 2006

Oil Prices and the U.S. Trade Deficit

This Economic Letter from the San Francisco Fed looks at the relationship between oil prices and the trade deficit:

Oil Prices and the U.S. Trade Deficit, by Michele Cavallo, Economic Letter, FRBSF: With the price of oil ... having nearly quadrupled over the last four years, it is little surprise that U.S. import prices have soared. One concern about these higher import prices relates to their implications for the U.S. trade balance... This Economic Letter explores the relation between the surge in oil prices and the trade deficit...

Continue reading "Oil Prices and the U.S. Trade Deficit" »

Thursday, August 10, 2006

Econoblog: Will Oil History Repeat Itself?

James Hamilton and Stephen Brown on how oil prices impact the economy:

Will Oil History Repeat Itself?, Econoblog, WSJ Online (free): ...Economic forecasters keep a close eye on gushing fuel prices, which preceded recessions in 1974, 1979 and 1990. But so far, the global economy has seemed to shrug off recent spikes in the price of a barrel of oil, which has more than doubled over the past three years.

The Online Journal asked energy economists James Hamilton, of the University of California, San Diego, and Stephen Brown, of the Federal Reserve Bank of Dallas, to discuss why high oil prices haven't choked off economic growth.

Here's some of the discussion, but there's a lot more if you click through to the (free) original:

James Hamilton writes: The price of oil has more than doubled in the last three years, going from $30 a barrel to now above $75. On previous occasions when we saw oil price moves of this magnitude, such as 1974, 1979 and 1990, the world economy went into a recession. What's different this time?

In my view, part of the answer has to do with the cause and timing of the oil shocks. In each of the previous episodes, oil prices made their move within the space of a few months and were caused by war-related cuts in oil production. By contrast, the current run-up has been a more gradual process...

The answer seems to be that, in those previous episodes, consumers and businesses didn't go about things as before but instead made some pretty abrupt changes in their spending patterns. ... A rapid drop in consumer confidence ... led to significant drops in spending for key sectors. Because workers and capital cannot immediately relocate, the result was unemployment and idle capacity, which greatly magnified the economic losses associated with the energy bill itself.

For the most part, those sudden shifts in spending haven't been seen this time around. ...

Stephen writes: I think James and I are mostly on the same page. Three things have me concerned about the economy's ability to continue to out distance the oil price increases.

1) Until recently, consumers continued to spend even as energy prices and energy bill rose. Much of that seems to have been financed by borrowing against home equity... With housing prices no longer as strong and interest rates rising, we are seeing anecdotal reports that overall consumer spending has become sensitive to rising fuel costs. ...

2) We are also beginning to see reallocation effects in the economy that are the result of higher energy prices -- not just globalization. For instance, sales of big vehicles are down while Toyota's profitability is at a record high. Shippers are shifting away from trucking to more fuel-efficient rail.

3) And as James notes, rising productivity pushing oil prices upward explains the situation very well for 2003-2004. The price increases in 2005 and 2006 seem to be better described as supply shocks, or at least, developments outside the U.S.

Some of these increases seem to be driven by fears of disruptions in a very tight market, as well as by actual disruptions, such as have resulted from civil strife in Nigeria, continuing production issues in Venezuela, conflict in Iraq, and pipeline problems in Alaska....

James writes: ... Stephen's point about home-equity borrowing raises another very important issue, which is the interaction between oil prices and other strains that may be hitting the economy. The oil price spike of the first Persian Gulf War in 1990 came at the same time that construction employment was already falling due to a weak housing market. Given that backdrop, crashing auto sales proved enough to tip the economy into a recession.

By contrast, the price spike associated with Katrina last fall came at a time when the housing market and construction employment were still booming. That strikes me as a very important reason why all we saw that time was slower but still positive GDP growth.

The situation at the moment is clearly quite different from where we were last fall. ... It wouldn't take much of a shock from any source to become a lot more pessimistic about that forecast.

And then there's the critical role of consumer psychology. ...

Stephen writes: ...Back-of-the-envelope calculations based on previous research suggests that the gains in oil prices that have occurred likely only shaved 0.5-0.8% off of annual GDP growth in 2005 and will have similar effects in 2006 and 2007. So, higher energy prices probably aren't the only factor driving the current slowdown. ...

Wednesday, July 05, 2006

Stiglitz: Nationalization of Bolivia's Energy Resources Driven by Commendable Democratic Progress

Joseph Stiglitz defends nationalization of oil and gas fields in Bolivia as a way to renegotiate unfair and perhaps illegal contracts put into place under previous administrations:

Who Owns Bolivia?, by Joseph E. Stiglitz, Project Syndicate: A few months ago, Evo Morales became Bolivia‘s first democratically elected indigenous head of state. Indigenous groups constitute 62% of Bolivia’s population, and those with mixed blood another 30%, but for 500 years Bolivians had been ruled by colonial powers and their descendants. Well into the twentieth century, indigenous groups were effectively deprived of a vote and a voice. ... So Morales’ election was historic, and the excitement in Bolivia is palpable.

But Morales’ nationalization of Bolivia’s oil and gas fields sent shock waves through the international community.  ... Genuinely concerned about raising the incomes of his desperately poor people, he recognized that Bolivia needs foreigners’ expertise to achieve growth, and that this entails paying fairly for their services. But are foreign owners getting more than a fair rate of return?

Morales’ actions are widely supported by Bolivians, who see the so-called privatizations (or “capitalizations”) under former President Gonzalo “Goni” Sanchez de Lozada as a rip-off: Bolivia received only 18% of the proceeds! Bolivians wonder why investments of some $3 billion should entitle foreign investors to 82% of the country’s vast gas reserves, now estimated to be worth $250 billion. ...

No wonder that Bolivians thought they were being cheated and demanded a new deal. On May 2, Morales simply reversed the percentages, pending renegotiation of the contracts: the companies operating in the two largest fields would get 18% of the production for themselves. As part of this new deal, Bolivia should also get a larger share when prices increase. (Bolivia may, of course, not want to bear the risk of a fall in the price, so it may strike a deal to transfer some of the downside risk to foreign companies, giving them in exchange more of the upside potential.)

To most Bolivians, what is at stake is a matter of fairness: Should foreign oil and gas companies get a fair return on their capital, or a supernormal return? Should Bolivia be paid a fair value for its resources? And should Bolivia, or foreign companies, reap most of the windfall gains from increases in energy prices?

Moreover, many deals were apparently done in secret by previous governments – and apparently without the approval of Congress. Indeed, because Bolivia’s Constitution requires the approval of Congress for such sales, it isn’t clear that Morales is nationalizing anything: the assets were never properly sold. ...

As with many privatizations elsewhere, there are questions as to whether the foreign investors have kept their side of the bargain. ... The foreign companies’ contribution was supposed to be further investment. But did they fully live up to their commitments? Are accounting gimmicks being used...? Bolivia’s government has, so far, simply raised questions, and set in motion a process for ascertaining the answer.

The problem in Bolivia is a lack of transparency, both when contracts are signed and afterwards. Without transparency, it is easy for citizens to feel that they are being cheated – and they often are. ... Around the world, oil and gas companies have themselves to blame: too often, they have resisted calls for greater transparency. In the future, companies and countries should agree on a simple principle: there should be, to paraphrase President Woodrow Wilson’s memorable words, “open contracts, openly and transparently arrived at.”

If the Bolivians do not get fair value for their country’s natural wealth, their prospects are bleak. Even if they do, they will need assistance, not only to extract their resources, but also to improve the health and education of all Bolivians – to ensure long-term economic growth and social welfare. For now, the world should celebrate the fact that Bolivia has a democratically elected leader attempting to represent the interests of the poor people of his country. It is a historic moment.

Tuesday, July 04, 2006

Old King Coal

Martin Wolf on energy security:

The best hope for energy security, by Martin Wolf, Financial Times: ...Thomas Malthus, the early 19th century forefather of environmental doomsayers, ... remark[ed] that: “The power of population is so superior to the power of the earth to produce subsistence for man, that premature death must in some shape or other visit the human race.” Malthus was wrong: the world’s population has risen six-fold since his day, while life expectancy has doubled. So will contemporary Malthusians prove right about energy?

The answer is: no. Moreover, ... the future lies with oil, gas and, above all, “old king coal”, the fuel with which the industrial revolution began. This must concern another group of Malthusians – those concerned with global warming. That, however, is a subject for next week. The theme of today is how humanity might meet its demand for commercial energy. A recent survey from the Organisation for Economic Co-operation and Development suggests that demand for commercial energy might double by 2050. If anything, this is a conservative assumption...

Now consider whence – and at what prices – this additional energy might come. ... Taken together, fossil fuels now provide 86 per cent of the world’s commercial energy. Is the world about to run out of these fuels? “No” is the answer or at least not in the next half century and almost certainly far longer.

Published oil reserves do, it is true, cover only about 40 years of current consumption. If consumption rises, as seems inevitable, that does not seem to provide much of a cushion. Moreover, believers in the theory of “peak oil” argue that the world has already reached peak production. ... Their analysis is based on ... the pattern of discovery. Peakists argue that the world has used up about half the available supply and global production is in irreversible decline.

Against this, most analysts argue that reserves tell one little about available supplies, that higher prices and innovation generate greater extraction from existing fields, that discovery of new (if smaller) fields is continuing and, most important, that unconventional oil resources are still to be exploited ... So even if production of conventional oil were to peak, the oil era would not be over. The question is rather one of price. The potential at a price of $70 a barrel seems huge. Many argue that the price needed to bring forward additional supply is much lower.

Nor does the end of oil mean the end of fossil fuels. Gas and, above all, coal are even more plentiful. Some would counter that petroleum is a unique source of high quality energy for transportation... But it is possible to convert coal and natural gas into “syngas” (synthesis gas) and then into liquid fuels. The question is one of cost. The answer is that this would be more expensive than conventional oil, but not prohibitively so.

What role then might be played by nuclear and renewables in such a “business as usual” scenario? “Marginal” seems to be the answer. The big points are that renewable energy is expensive, nuclear energy is controversial...

Renewables have problems of usability, scalability or cost. To generate half of all current energy consumption we would need 100m windmills.... Use of large proportions of the earth’s surface for bio-mass runs into the constraints imposed by alternative uses (food production and natural habitat). In principle, solar energy should be more than adequate: the quantity falling on the earth’s surface is more than 6,000 times current commercial energy consumption. The hurdle is the difficulty and cost of collecting solar energy...

Does this scenario – of a world in which fossil fuels generate the bulk of commercial energy over the next half century – generate worrying security problems? If one focuses on oil or gas alone, the answer might be yes. In both these cases, the reserves are not located where most of the consumption takes place. The gap is particularly large for conventional oil... But coal is widely distributed, with much of it in the large consuming regions. The best solutions then for governments concerned with security are diversity of sources and open and flexible world markets. Attempts by any power to seize valuable resources for exclusive use would create serious global insecurity and even war...

Remember that this argument ignores the question of climate change. It asks whether the Malthusians who argue that the world will soon run out of fossil fuels allow the Malthusians who worry about the damage to the atmosphere to cheer up. The answer is an unambiguous no. It will be perfectly possible to run a fossil fuel economy for many decades at prices that are likely to be substantially lower than those of recent times. Even if they remain at current levels, the world economy will almost certainly cope, as its recent performance suggests. The world can afford quite expensive energy. The big question is, instead, whether the environment on which our lives depend can cope with the results.

Update: This is from The New York Times, It examines the coversion of coal to either diesel or natural gas:

Search for New Oil Sources Leads to Processed Coal, by Matthew L. Wald, NY Times: The coal in the ground in Illinois alone has more energy than all the oil in Saudi Arabia. The technology to turn that coal into fuel for cars, homes and factories is proven. And at current prices, that process could be at the vanguard of a big, new industry. ...

But there is a big catch. Producing fuels from coal generates far more carbon dioxide, which contributes to global warming, than producing vehicle fuel from oil or using ordinary natural gas. And the projects now moving forward have no incentive to capture carbon dioxide beyond the limited amount that they can sell for industrial use.

Here in East Dubuque, Rentech Inc., a research-and-development company ... recently bought a plant that has been turning natural gas into fertilizer for forty years. ... In an important test case for those in the industry, it will take a plunge and revive a technology that exploits America's cheap, abundant coal and converts it to expensive truck fuel. ...

There are drawbacks; the technology requires a large capital investment, and a plant could be rendered useless by a collapse in oil prices. ... Lately ... the price of diesel fuel, which determines the value of this coal-based fuel, also called synfuel, has soared, as has the price of natural gas, which made plants like the one at East Dubuque ripe for change.

Most of the interest is in making diesel using a technology known as Fischer-Tropsch, for the German chemists who demonstrated it in the 1920's. ... The technology was used during World War II in Germany and then during the 1980's by South Africa when the world shunned the apartheid regime there. Now Rentech is preparing to use an updated version. ...

Other projects are in various stages of planning in this country... But people who think this technology will find wide use presume some kind of environmental controls, which the Rentech plant, thus far, does not have. Some environment and energy experts doubt that the method is compatible with a world worried about global warming. Unless the factory captures the carbon dioxide created during the process of turning coal into diesel fuel, the global warming impact of driving a mile would double. ...

But the Energy Department sees potential. In March, the Energy Secretary, Samuel K. Bodman, said ... that making diesel fuel or jet fuel from coal was "one of the most exciting areas" of research and could be crucial to the President's goal of cutting oil imports. He said that loan guarantees enacted in last summer's energy bill might be used for Fischer-Tropsch diesel fuel.

In Des Plaines, Ill., near Chicago, a new company called GreatPoint Energy has developed, on a laboratory scale, a vastly improved process for turning coal into natural gas.

The promise and the pitfalls are similar for both GreatPoint and Rentech. ... [T]urning coal into natural gas or diesel fuel means ... carbon emissions, which causes concern to environmentalists. Carbon is released in converting coal into an energy-rich gas made up of carbon monoxide and hydrogen, and then converting the gas into something more useful. Rentech wants to turn it into liquid fuel. GreatPoint wants to rearrange the molecules into natural gas. ...

Robert Williams, a senior research scientist at Princeton, said "it's a step backward" to operate a plant like Rentech's without capturing the carbon. "It almost doubles the emission rate," he said.

Mr. Ramsbottom also sees the carbon dioxide problem. "The worldwide production of Fischer-Tropsch fuels is going to ramp up dramatically, and carbon sequestration is on everybody's mind," he said. But the geology of this part of Illinois is not suitable for sequestering the carbon dioxide from these plants. Building a pipeline would be expensive and difficult to justify while carbon emissions are not taxed, experts say.

GreatPoint has a different plan: move the plant where it can sell the carbon.

Andrew Perlman, the company's chief executive, thinks it has value. "Not only is it capturable, one of biggest advantages of the system is, we can locate our plant near a natural gas pipeline, in places where we can sell that carbon dioxide for a profit, using existing technology," he said. Oil producers inject carbon dioxide into old oil fields, to force oil to the surface.

Backers also hope that methanization, the process GreatPoint uses, will succeed in part because it fits in with existing energy infrastructures, like gas pipelines and coal mines. If it did, it could have a profound impact on the balance of natural gas imports... Like Fischer-Tropsch diesel, methanization is not a new idea; one plant in North Dakota does it now... But GreatPoint is going about it in a new way, in which far less energy is lost in the transition. ...

Robert Williams, a senior research scientist at Princeton University, points out that crop wastes and wood chips can also be gasified, producing carbon monoxide and hydrogen. Normally, biomass is thought of as carbon-neutral, because for each plant cut down for gasification, another grows and absorbs carbon from the atmosphere. But if biomass is gasified and the carbon dioxide sequestered by being pumped into the ground in the expectation that it will stay there, then atmospheric carbon actually declines for every gallon produced.

From a greenhouse perspective, that is more attractive than what Rentech does now with the carbon dioxide from its plant here. It is sold to soft-drink bottlers. That keeps the gas sequestered until someone burps.

Wednesday, June 28, 2006

Wheels for Mini-Me

Here's the story: Daimler Hopes Americans Are Finally Ready for the Minicar:

Minime62806

The article says it will fit on a regulation pool table and that "Fortwo is the only car in the world less than 3 meters (roughly 10 feet) long."

This and a Hummer side by side at a stop light would make an interesting contrast.

Monday, June 26, 2006

Ahmadinejad is a Destabilizing Influence; Bernanke is Not

What is the explanation for the recent large stock market losses in the U.S. and around the world generally? Was it U.S. monetary policy as many claim, or something else?

What News Is Moving the Markets?, by Robert J. Shiller, Commentary, Project Syndicate:  Stock markets in much of the world have shown sharp cumulative declines since around May 10, with most of the drop occurring in the two-week period to around May 23, but with prices continuing to fall on average since then. Does trouble in the world’s stock markets mean trouble for the world economy? ...

Continue reading "Ahmadinejad is a Destabilizing Influence; Bernanke is Not" »

Saturday, June 17, 2006

Trapping Carbon from Coal-Fire Plants

News on the technology front:

Trapping Carbon, Freeing Coal, SciAm blog:  There is a lot of carbon in the ground. For eons, life forms ranging from microbes to Homo sapiens have trapped the element as part of their fundamental molecular makeup... Some of that carbon has been recycled into descendant organisms and soil, and some has been transformed by temperature, pressure and time into coal, natural gas and oil--the fuels of our modern economy. Keeping that carbon safely underground to fend off climate change is one of the current goals of modern industry and has given rise to a seeming oxymoron: clean coal. The idea is to burn the coal but capture the carbon that the burning produces and pump it back underground.

It sounds simple. But millions of dollars have been spent--with the promise of billions more--in the thus far vain pursuit of a technology that can capture a diffuse gas (carbon dioxide), concentrate it and render it suitable for transport. Now the R.E. Burger Plant in Shadyside, Ohio, stands on the threshold of becoming the first coal-fired power plant to test both the capture and storage of the leading greenhouse gas...

[T]his would be the first time the CO2 was pumped underground simply to store it--as much as 7,000 feet beneath the surface and safely away from the atmosphere and oceans. Powerspan plans to have its capture and compression technology in place by next year; Batelle will drill a test well shortly thereafter if all goes well. Then, if the geology and technology work, pumping could begin by the end of the decade. Because there is no cheap, reliable and easy to build alternative to coal-fired power plants--particularly in the U.S., China and India, where it is most needed--such carbon capture and storage represents a critical technology fix for the pollution that is warming our world. ...

Sunday, June 11, 2006

A Gas Tax with a Rebate

Recently, there have been several proposals to encourage conservation of oil. One proposal from Robert Frank increases the tax on gasoline, then rebates the tax revenue to consumers through a payroll tax reduction or some other means. As he states:

In my Feb. 16 column, I suggested an additional gasoline tax of $2 a gallon. All revenue would ... be returned on an approximately equal per capita basis

To look at the economics of this proposal, I decided to examine a fairly standard textbook treatment of the topic where a tax on each gallon of gas consumed is imposed along with a lump-sum tax rebate to consumers on an equal per capita basis. (I hope the microeconomists won't mind a macro guy stumbling around in their territory. This proposal is discussed in Pindyck and Rubinfeld 5th ed., pgs. 114-115.)

Here's a graph of what happens before and after the tax, and after both the tax and the rebate.

Gastax61106
Click on figure to enlarge

The consumer starts out at point A consuming QA gallons of gasoline and has a utility level of U2. After the tax, which rotates the budget line downward as shown by the dashed budget constraint, the consumer moves to point B which is on a lower indifference curve U1, and consumption falls to QB. Finally, after the rebate which shifts the budget line outward, the consumer moves to point C and consumption increases to QC (the tangent indifference curve at point C is omitted for clarity).

Overall, the consumption of gasoline has fallen, as intended, and the consumer is worse off because the level of utility attainable at point C is below the level U2 at point A. Even though the money comes back to consumers in the form of a rebate, the reason consumption falls from A to C is because the income elasticity of demand for gasoline is relatively low (around .3 by some estimates) so that the substitution effect dominates the income effect.

In this example, a low-income household would be made worse off by the tax and rebate proposal (because indifference curve U2 is no longer attainable), but it's still possible for some low-income individuals, those who consume less gas than the value of the lump-sum rebate, to benefit. However, the substitution effect induced by the tax makes the average household worse off. To aid low income individuals, other proposals such as linking the size of the rebate to income could be examined as well.

Finally, this highlights the costs to households, but there are also potential benefits. To assess the proposal, the costs must be compared to the benefits from reduced dependence on foreign oil and the additional security that brings about, and the environmental and other benefits from lower consumption of gasoline.

Thursday, June 08, 2006

Discouraging Energy Use

Once again, Robert Frank calls for a $2 a gallon tax on gasoline with the revenue from the tax used to offset payroll taxes, but this time there are refinements designed to overcome objections to the initial proposal:

Energy Policy Is Far Too Complicated to Be Left to the Politicians, by Robert H. Frank, Economic Scene, NY Times: ...[T]he recent spike in gasoline prices has prompted a wave of proposals that if enacted would do far more harm than good. Senator John Thune, Republican of South Dakota, among others, has advocated suspension of the federal gasoline tax of 18.4 cents a gallon. Similar proposals to suspend state taxes have been advanced in New York and at least 12 other states. These proposals make no economic sense...

An immediate problem is that a tax cut would be offset in part by OPEC's response to it. ... Dealing with OPEC is ... like dealing with a rational kidnapper... A visible transfer of money to the victim's family (like an inheritance) would serve only to increase the kidnapper's ransom demand. Similarly, since OPEC now realizes that motorists are able to pay $3 a gallon, its best response to a gasoline tax cut would be to raise the price of oil by enough to keep gasoline prices at $3. ...

Gasoline prices are rising because the world's appetite for oil has been outstripping dwindling supplies. Legislatures cannot repeal the law of supply and demand. To escape the burden of widespread energy shortages, we must consume less energy. And to achieve that goal, gasoline prices need to be higher, not lower...

In my Feb. 16 column, I suggested an additional gasoline tax of $2 a gallon. All revenue would ... be returned on an approximately equal per capita basis by reducing payroll taxes. Because rebates for individual consumers would be independent of the amount of gasoline tax they paid, the higher post-tax gasoline prices would strongly encourage conservation. ... And just as a gasoline tax cut would encourage future OPEC price increases, a tax increase would discourage them.

As with all such proposals, the devil is in the details. Because the losers from any policy change cry more loudly than the winners sing, a tax increase would be palatable only if the resulting economic gains were distributed equitably. Readers were quick to identify deficiencies in my proposed payroll tax rebate. It would not help retirees, for example, because they no longer pay this tax. The rebate for retirees could instead take the form of an augmented Social Security payment...

Businesses could also receive rebates... To promote efficiency, the critical design feature is that the rebate for each business be independent of its current gasoline consumption.

Would a steep gasoline tax jeopardize automakers like Ford and General Motors, whose current product lines emphasize light trucks and sport utility vehicles? ... The transition could be smoothed by announcing a start date well in the future — say, Jan. 1, 2009 — and then phasing in the tax gradually, say, by 10-cent monthly increments.

What about low-income motorists who could not afford to buy new fuel-efficient cars? A gradual phase-in would also provide valuable transition time for these drivers. They could retire their current vehicles within a few years in favor of more recent used models with better fuel economy. Rebates could also be made progressive...

An academic economist clearly runs less risk than a politician in proposing higher gasoline taxes. But how much political risk would such a proposal really entail? According to a recent New York Times/CBS News poll, 55 percent of Americans would be willing to support a higher gasoline tax if it reduced dependence on foreign oil... It may be naïve to expect our current crop of leaders to take affirmative steps to alleviate the energy crisis. But ... surely we can demand that politicians do no further harm.

Robert Frank: Impose a tax per gallon, the revenue is given back as a rebate of some type, one option is a payroll tax reduction. The tax can be adjusted to reach conservation goals.

Martin Feldstein: Issue tradeable gas rights with the cap on the number of available credits set by the government. The revenue from the tax can be used to reduce the budget deficit or to finance equally large cuts in personal taxes. The cap can be set according to conservation goals.

CAFE standards: These standards specify the miles per gallon a particular class of cars or trucks must achieve. Evidence for the effectiveness of CAFE standards is not very strong, and the standards are not as efficient as taxes or tradeable gas rights. This is because when fuel economy standards are raised it lowers the cost per mile driven, and people have an incentive to drive more.

If these are my only three choices, I choose the tax. But I would prefer a broader array of options for using the revenue from the tax beyond just reducing payroll taxes, including spending on transportation infrastructure that helps to achieve conservation goals and improves economic efficiency.

GreenSpeak

Alan Greenspan testifies before the Senate Foreign Relations Committee about U.S. oil dependence:

Greenspan sounds alarm on oil supply,  Reuters/IHT: Alan Greenspan ... offered a grim view on Wednesday of the world's rising vulnerability to high crude oil prices, saying he was skeptical that oil producers could pump enough crude to meet future demand... "The United States ... has been able to absorb the huge implicit tax of rising oil prices so far," Greenspan told the Senate Foreign Relations Committee... "However, recent data indicate we may finally be experiencing some impact." ... Greenspan warned that a big oil price increase could spur "a significant contraction in the economy."

Greenspan said that few of the world's dominant producers, aside from Saudi Arabia, see the danger that rising crude oil prices pose to the economy, and to their sustained ability to sell oil. ... Greenspan said while U.S. businesses had so far been able to improve productivity to compensate for costly energy, households were suffering from higher gasoline prices.

"Current oil prices over time should lower to some extent our worrisome dependence on petroleum," said Greenspan... "Still higher oil prices will inevitably move vehicle transportation to hybrids, and despite the inconvenience, plug-in hybrids." Greenspan warned that... "The balance of world oil supply and demand has become so precarious that even small acts of sabotage or local insurrection have a significant impact on oil prices," he said, adding that global refining capacity was still too limited.

A few months ago, a Greenspan warning that a large increase in oil prices could cause "a significant contraction in the economy" and his worry that high oil prices are beginning to place a drag on output would have had a much larger impact. I wonder if he misses the power to move markets.

Tuesday, June 06, 2006

Refining Monopoly Power

As the demand for gasoline has grown, why hasn't refining capacity expanded at a faster rate, and how can the rate be increased in the future?:

Pumped Up, by James Surowiecki, The New Yorker: At first glance, there’s nothing unusual about the refinery that Marathon Oil owns in Garyville, Louisiana. ... Indeed, the only thing that’s special about the Garyville facility is that it was opened in 1976. That makes it the last refinery ever built in the United States.

Until recently, this didn’t seem like a problem. Gasoline was cheap, and no one was clamoring to live next to a highly combustible chemical plant. So, over the past twenty-five years, the number of refineries in the U.S. has been cut in half, and although the remaining ones have expanded, they haven’t kept up with the growing demand for gasoline. But now, with voters furious about three-dollar-a-gallon gas, Washington has decided that this trend must change. Samuel Bodman, the Energy Secretary, has exhorted oil companies to use some of their hefty profits to expand refining capacity, and Congress is considering streamlining the environmental regulations that add to the expense of building new refineries...

There are so few refineries in the U.S. now that they are run tight to the bone, typically using about ninety per cent of their total capacity. The result is that refining—which, until recently, was a tough, low-margin business—has become tremendously lucrative. Last year, refiners’ profits jumped thirty-nine per cent, to twenty-four billion dollars, and this year should be even better...

In a normal marketplace, of course, high prices and profits would drive companies to expand, in an attempt to capture more of the market, or else new players would emerge, hoping to outmaneuver a risk-averse establishment. But the refining industry isn’t a normal marketplace. For one thing, refineries are huge investments—a new one costs at least two billion dollars—and they take a long time to open. This means that although refiners might make more money by opening new facilities and thus serving more customers, they’d rather take the sure money than gamble. It also means it’s hard for new competitors to raise enough capital to enter the market at all.

What’s more, over the past fifteen years refiners have been buying each other up, creating an industry that’s highly consolidated. In 1993, the five biggest refiners in the U.S. controlled thirty-five per cent of the market. By 2004, they controlled fifty-six per cent. And refining is primarily a regional business. The government allows different states to use different formulations of gasoline—some formulations burn cleaner than others—and in some urban areas a federal requirement determines what formula can be used, depending on the quality of their air. That makes it hard to ship gas across state lines, and shrinks the number of refiners that provide a particular blend of gas, giving each refiner more power. As a result, in many areas the refinery business is more like an oligopoly than like a competitive market. In 2002, a Senate report identified “tight oligopolies” operating in twenty-eight states; in California in 2003, ninety-five per cent of the refining market was in the hands of just seven companies. ...

Some have suggested that the lack of new refineries points to collusion on the part of refiners—an agreement to reduce capacity... But in refining today there’s no need for a cartel; the investment decisions that the companies make have such a direct impact on prices that it’s rational for each of them individually to limit capacity.

And if Washington wants a scapegoat it might take a look at itself. By not vetting mergers more carefully, government regulators allowed many refiners to achieve “market power”..., and other regulators enhanced that power by mandating gasoline standards without considering competition...

In general, monopoly power is associated with prices that are too high and a level of production that is too low relative to the competitive or socially optimal outcome. In competitive markets, when price is above the cost of production, the resulting profit attracts new capacity to the industry, but when monopoly power exists this mechanism breaks down.

Policymakers should take steps to make these "tight oligopolies" more competitive as a means of encouraging additional investment and lower prices before considering tax cuts, the easing of environmental restrictions, and other government incentives that increase profit with no guarantee of subsequent increases in refining capacity.

In addition, reductions in the demand for gasoline through conservation and other programs can also reduce the need for additional capacity and this is an area that has not received enough attention from policymakers (see Feldstein's proposal for tradeable gas credits for one idea).

Sorry for the outburst of supposedly conservative values, advocating competitive markets and all that, but somebody has to do it and besides, as I've argued before conservatives do not have a monopoly on this idea. Democrats are also strong advocates of well-functioning markets.

Monday, June 05, 2006

Tradeable Gas Rights

Martin Feldstein has a way to reduce gasoline consumption, tradeable gas rights:

Tradeable Gasoline Rights, by Martin Feldstein, Commentary, WSJ: The rapid rise in the price of gasoline has produced calls for tougher fuel economy standards on new cars and trucks. Although reduced gasoline consumption would be good for the environment and for national security, such a regulatory change would be a mistake. A far better approach would be a system of tradeable gasoline rights, or TGRs. These could be distributed in a way that actually raises the income of a majority of households while giving everyone an incentive to reduce gasoline consumption.

In a system of tradeable gasoline rights, the government would give each adult a TGR debit card. The gasoline pumps at service stations ... would be modified to read these new TGR debit cards... Buying a gallon of gasoline would require using up one tradeable gasoline right as well as paying money.

The government would decide how many gallons of gasoline should be consumed per year and would give out that total number of TGRs. In 2006, Americans will buy about 110 billion gallons of gasoline. To keep that total unchanged in 2007, the government would distribute 110 billion TGRs. To reduce total gasoline consumption by 5%, it would cut the number of TGRs to 104.5 billion.

The government could distribute TGRs to reflect geographic differences in driving patterns. ... Businesses that use trucks would also get TGRs.

A key feature of these gasoline rights is that they are tradeable. Individuals with more TGRs than they need could sell the excess, while those who want to use more gallons than their allocation would have to buy extra TGRs. The gasoline companies could act as clearing houses for these trades, using their gasoline pumps to sell TGRs in the same way that they sell gasoline or to buy TGRs in exchange for the cash needed to purchase gasoline. Other institutions like banks could also trade TGRs for cash. And individuals could of course buy and sell TGRs among themselves by letting others use their card.

The market price of a TGR would depend on the number of TGRs that the government distributed relative to the number of gallons that households would buy if there were no TGR system. The smaller the number of TGRs, the greater would be the price per TGR... The money price of gasoline would continue to reflect the world price of oil and the local cost of refining and distribution.

If the price of a TGR turned out to be 50 cents, an individual who buys an extra 20 gallons of gasoline would use up $10 worth of TGRs. If he avoids the purchase -- by driving less, driving at speeds that use less gas, or driving a more fuel-efficient car -- he could sell the 20 TGRs for $10.

The 50 cent price of the TGR would have the same incentive effect as a 50 cent gasoline tax. But while a gasoline tax lowers everyone's real income, the TGR system creates winners as well as losers. Someone who receives 800 TGRs for a year but only needs 500 would pocket $150 by selling his unwanted TGRs. But even such individuals would still face the right incentive: Every extra gallon consumed would reduce their net cash by 50 cents.

Advocates of a gasoline tax argue that it would produce extra revenue that could be used to reduce the budget deficit or to finance equally large cuts in personal taxes. ... [But] it is hard to believe that Congress would now respond to the public's unhappiness over high gasoline prices by enacting a gasoline tax that would raise the price even more.

That aversion to a higher gasoline tax is why tougher mileage standards for new cars is back on the legislative table. They would, however, do virtually nothing to lower the price of gasoline. And if individuals want to economize on gasoline by driving smaller or more fuel-efficient cars, they can do so now without government action. ...

Higher gas mileage standards would reduce gasoline demand in a very inefficient way by focusing exclusively on the rated mileage of new cars. Separate fuel efficiency standards for each type of vehicle -- one of the options now being considered -- would be even worse because it would provide no incentive to switch to more fuel-efficient cars.

Requiring higher mileage standards on new cars would do very little to reduce total gasoline consumption in the near term because each year's new cars are only about 10% of the total cars on the road. Unlike the system of TGRs that raises the effective cost per gallon, the new car standard would do nothing to change the behavior of owners of existing cars. But the TGR system would cause owners to economize on gasoline by driving fewer miles, driving at speeds that use less gasoline, using tires that improve miles per gallon, and servicing their engines to maintain fuel efficiency. And of course the higher effective cost of gasoline would also cause new car buyers to prefer more fuel-efficient vehicles.

In short, a system of tradeable gasoline rights would be better than either higher taxes or tougher new car regulations. That a majority of households could benefit from the TGR system while all households would have an increased incentive to economize on gasoline is both an economic and a political advantage. It would be an efficient way to reduce gasoline that Congress could actually pass.

Getting over my surprise at the Feldstein's call for government intervention in the marketplace, particularly for the government to set a national cap, I'm not fully convinced. Would the cap on gasoline usage be as easy to lift as the debt limit?

In addition, while this proposal does provide the correct incentive at the margin, I can envision an endless political fight over the allocation of credits. Should LA residents get more credits than NY or SF in the zero-sum allocation? Will cities or regions with more credits per person relative to average distance traveled see people moving in to take advantage of the chance to earn extra income? If I don't own a car, am I out of luck? Is it per person as in Feldstein's proposal, or will it be changed to per household? Do households with more kids get more coupons? Will rural residents get more credits? If so, how much more? Over time, will the credits per person be decided based upon political considerations rather than economics? This may well be better than other proposals in a lot of dimensions and I am not opposed to it, but unless I missed something on the allocation part, it doesn't seem so obvious that it would sail through congress. [Update: More at Brad Delong and Angry Bear]

Sunday, June 04, 2006

Oil Prices and the Canadian Dollar

Stephen Gordon reports on a 'plausible' reason for the apparent structural break in the relationship between the US dollar-Canadian dollar exchange rate and oil prices around 1993:

Worthwhile Canadian Initiative: Oil prices and the Canadian dollar: A mystery solved: In an earlier post, I noted that the relationship between the CAD-USD exchange rate and oil prices hasn't always strong as it has apparently been over the past few years. Since I hadn't been able to sort this problem out on my own, I went into last weekend's session on this topic organised by the Bank of Canada at the meetings of the Canadian Economics Association with a certain amount of the hope. Happily, I wasn't disappointed.

The story starts with Bob Amano and Simon van Norden's paper written in the early 1990's, in which they found that an increases in the price of oil prices were generally associated with depreciations in the value Canadian dollar. Unsurprisingly, the Bank of Canada has found this to be a less-than-spectacularly-successful forecasting model over the past few years, so they've been taking a second look.

Robert Lafrance's (et al) paper suggests a structural break in the relationship between oil prices and the exchange rate sometime around 1993. Sure enough, when you go to the data, the correlation coefficient between the WTI oil price (divided by the US GDP deflator) and the CAD is -0.69 before 1993, and 0.71 afterwards. Why?

The third paper of the session, given by the IMF's Tamim Bayoumi, suggests a plausible explanation. Instead of using oil prices as an independent variable, they use the value of net oil exports, and their model tracks the last few years quite well. Here's a graph of the real value of net oil exports and oil prices:

Can60406
Click on figure to enlarge

Ordinarily, we'd expect that a rise in oil prices would increase the value of net oil exports, thus leading to an appreciation of of the CAD. And if you look at the data since 1993, that story seems to be consistent with what we observed.

But the story from the 1970s and 1980s is very different. The rise in oil prices during the 1970s was associated with a reduction in the value of net oil exports, so it's not surprising that an econometric model that used data from this period would pick up that negative relationship.

After this was pointed out, the general consensus of those who were at the  session seemed to be that the experience of the 1970s and 80s was explained by the dirigiste oil policies of the era; the reaction of the governments of the day to the increase in oil prices was to reduce exports in order the ensure 'secure' oil supplies for the domestic market. So even though oil prices were increasing, net exports of oil went negative, thus putting downward pressure on the CAD.

Once oil production and trade had been liberalised (and especially after NAFTA), the correlation between the CAD and oil prices went back to being positive.

Saturday, June 03, 2006

Friedman: A Quick Fix for the Gas Addicts

Thomas Friedman comes out from behind New York Times paywall:

GM keeps the gas flowing and U.S. soldiers in danger, By Thomas L. Friedman, deseretnews.com [FREE link] [NY Times link]: Is there a company more dangerous to America's future than General Motors? Surely, the sooner this company gets taken over by Toyota, the better off our country will be.

Why? Like a crack dealer looking to keep his addicts on a tight leash, GM announced its "fuel price protection program" on May 23. If you live in Florida or California and buy certain GM vehicles by July 5, the company will guarantee you gasoline at a cap price of $1.99 a gallon for one year — with no limit on mileage. Guzzle away.  ...

"This program gives consumers an opportunity to experience the highly fuel-efficient vehicles GM has to offer in the midsize segment," Dave Borchelt, GM's southeast general manager, said in the company's official statement. Oh, really?

Eligible vehicles in California include the 2006 and 2007 Chevrolet Tahoe and Suburban (half-ton models only), ... GMC Yukon and Yukon XL SUVs (half-ton models only), Hummer H2 and H3 SUVs, ...

Let's see, the 6,400-pound Hummer H2 averages around nine miles per gallon. It really is great that GM is giving more Americans the opportunity to experience nine-miles-per-gallon driving. And the hulking Chevy Suburban gets around 15 miles per gallon. It will be wonderful if more Americans can experience that, too...

Our military is in a war on terrorism in Iraq and Afghanistan with an enemy who is fueled by our gasoline purchases. So we are financing both sides in the war on terror. And what are we doing about that? Not only is GM subsidizing its gas-guzzlers, but not a single member of Congress, liberal or conservative, will stand up and demand what most of them know: that we must have some kind of gasoline tax to compel Americans to buy more fuel-efficient vehicles and to compel Detroit to make them.

Where are the presidential aspirants on this issue? ... [I]f you go to GM's Web site, you will see an ad with a young African-American boy saluting an American flag, above the following offer for U.S. military personnel: "In appreciation of your commitment to our country, GM extends a $500 exclusive offer to active duty military and reserves when you purchase or lease select 2005, 2006 or 2007 GM cars, trucks and SUVs — just show your military ID!"

That's really touching. First GM offers a gasoline subsidy so more Americans can get hooked on nine-mile-per-gallon Hummers, and then it offers a discount to the soldiers who have to protect the oil lines to keep GM's gas guzzlers guzzling. Here's a rule of thumb: The more Hummers we have on the road in America, the more military Humvees we will need in the Middle East.

You want to do something patriotic, GM, Ford and Daimler-Chrysler? Why don't you stop using your diminishing pools of cash to buy votes so Congress will never impose improved mileage standards? That kind of strategy is why Toyota today is worth $198.9 billion and GM $15.8 billion. GM is worth just slightly more than Harley-Davidson, the motorcycle company ($13.6 billion).

President Bush remarked the other day how agonizingly tough it is for a president to send young Americans to war. Yet, he's ready to do that, but he's not ready to look Detroit or Congress in the eye and demand that we put in place the fuel-efficiency legislation that will weaken the forces of theocracy and autocracy that are killing our soldiers in Iraq and Afghanistan — because it might cost Republicans votes or campaign contributions...

Friday, May 26, 2006

Krugman: Nuclear Energy Should Not Be the Main Answer to Our Energy Problems

Paul Krugman responds to comments on his latest column and gives sources for his estimates of the cost of policies to offset global warming:

Krugman's Money Talks: Al Gore and the Future of Energy, Commentary, NY Times: Readers respond to Paul Krugman's May 26 column, "A Test of Our Character "

...William R. Mosby, Salt Lake City: Does nuclear energy have a part to play in mitigating global warming in the long term? ... [T]hose who see an urgent need to do something about global warming generally don't talk about nuclear energy as a prominent part of the solution. Do they think that nuclear energy would be a bigger problem than global warming?

Paul Krugman: I was at a reception for Al Gore after a screening of his movie, and he was asked that very question. I thought his answer was very good. He said that yes, nuclear should be part of the mix, but it can't be the main answer. And there are problems with nuclear we need to resolve: not just disposal of radioactive waste, but vulnerability to terrorist attack. In fact, as nuclear power becomes more common around the world, the possible misuse for weapons, terrorist or otherwise, will be a big problem. So unless there are some breakthroughs, nuclear power is only a piece, and maybe not a big one, of the solution.

Mark Neely, Santa Monica, Calif.: ...Is there a way to calculate the profit oil companies make relative to the price of a barrel of crude? ... I ask because it seems to me that all administration energy policies seem to encourage diminishing the availability of crude outside the Arctic Circle and U.S. coastlines at any rate. This only makes sense to me if profitability increases for the oil companies when the price of crude goes up and if, as seems obvious, the administration is facilitating the profitability of oil companies at the expense of the public good.

Paul Krugman: It's not that simple. It depends on what the oil company does. To some extent, oil companies own crude production, and in that case they make more money when the price of crude rises. But a lot of what they do is refining, and the profits on refining depend on the "crack spread" — the difference between the price of a barrel of crude and the price of the gasoline, fuel oil, and other stuff you make from that barrel. Right now both the price of crude and the crack spread are very high, so oil companies are making huge profits.

Michael Papenfus, Milwaukee, Wisc.: ...If you have them available, can you recommend a few citations of serious economic studies exploring the costs of reducing CO2 emissions?

Paul Krugman: Some correspondents have asked for sources on the costs of policies against global warming. It's all pretty technical stuff, but here are two things I looked at. (An awful lot of work goes into things that never make it into the column!) First, in 1998, the Energy Information Agency (a part of the Energy Department) did a survey on the costs of complying with the Kyoto treaty, back before Bush rejected the whole thing. The executive summary is at http://www.eia.doe.gov/oiaf/kyoto/execsum.html. Basically, EIA found that trying to meet the Kyoto target on emissions by 2010 might be fairly expensive, but that meeting the target by 2020 wasn't. The report also compared a number of other estimates: http://www.eia.doe.gov/oiaf/kyoto/cost.html.

Second, William Cline of the Institute for International Economics did a study of climate change policy, which can be found here (pdf), and gives very long-run analyses. I'd focus on Figure 7, on page 21: the costs of an aggressive anti-warming policy eventually reduce Gross World Product by about two percent, compared with what it would otherwise be, but only over a very long period.

Monday, May 22, 2006

Oil, Religion, and Debt

An email (thank you) says to take a look at this review of Kevin Phillip's book outlining three perils facing the U.S., oil, religion, and debt:

The US in Peril?, by Jeff Madrick, The New York Review of Books, June 8, 2006: Review of  American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century, by Kevin Phillips:

1. ...In Kevin Phillips's view, the Bush energy policy is a prime example of America's failure to confront its most difficult challenges. Phillips, once a member of the Nixon administration, ... argues that America is very different from the independent and omnipotent nation portrayed by President Bush and his administration. Dependency on oil is one of three major tendencies that will seriously undermine America's future, he writes, the other two being the influence of radical religion and the growing reliance on debt to support the economy. For Phillips, these constitute "the three major perils to the United States of the twenty-first century," and he offers little hope that the US will avoid the consequences...

Continue reading "Oil, Religion, and Debt" »

Friday, May 12, 2006

Paul Krugman: Gas Tax Follies

Staying with the topic of the previous post, oil policy, when George Bush was a candidate for president in 2000, he proposed a reduction in gasoline taxes as a solution to high gasoline prices, and similar calls have been heard at the federal level. Many states are currently entertaining serious proposals to reduce gasoline taxes as well, at least temporarily. Here's a rerun of Paul Krugman's March 15, 2000 column evaluating Bush's proposal to lower gasoline taxes, an analysis that is equally applicable today:

Gasoline Tax Follies, by Paul Krugman, Commentary, New York Times, March 15, 2000: Teachers of economics cherish bad policies. For example, if New York ever ends rent control, we will lose a prime example of what happens when you try to defy the law of supply and demand. And so we should always be thankful when an important politician makes a really bad policy proposal.

Last week George W. Bush graciously obliged, by advocating a reduction in gasoline taxes to offset the current spike in prices. This proposal is a perfect illustration of why we need economic analysis to figure out the true "incidence" of taxes: the people who really pay for a tax increase, or benefit from a tax cut, are often not those who literally fork over the cash. In this case, cutting gasoline taxes would do little if anything to reduce the price motorists pay at the pump. It would, however, provide a windfall both to U.S. oil refiners and to the Organization of Petroleum Exporting Countries.

Let's start with why the oil cartel should love this proposal. Put yourself in the position of an OPEC minister: What sets the limits to how high you want to push oil prices? The answer is that you are afraid that too high a price will lead people to use less gasoline, heating oil and so on, cutting into your exports. Suppose, however, that you can count on the U.S. government to reduce gasoline taxes whenever the price of crude oil rises. Then Americans are less likely to reduce their oil consumption if you conspire to drive prices up -- which makes such a conspiracy a considerably more attractive proposition.

Anyway, in the short run -- and what we have right now is a short-run gasoline shortage -- cutting gas taxes probably won't even temporarily reduce prices at the pump. The quantity of oil available for U.S. consumption over the near future is pretty much a fixed number: the inventories on hand plus the supplies already en route from the Middle East. Even if OPEC increases its output next month, supplies are likely to be limited for a couple more months. The rising price of gasoline to consumers is in effect the market's way of rationing that limited supply of oil.

Now suppose that we were to cut gasoline taxes. If the price of gas at the pump were to fall, motorists would buy more gas. But there isn't any more gas, so the price at the pump, inclusive of the lowered tax, would quickly be bid right back up to the pre-tax-cut level. And that means that any cut in taxes would show up not in a lower price at the pump, but in a higher price paid to distributors. In other words, the benefits of the tax cut would flow not to consumers but to other parties, mainly the domestic oil refining industry. (As the textbooks will tell you, reducing the tax rate on an inelastically supplied good benefits the sellers, not the buyers.)

A cynic might suggest that that is the point. But I'd rather think that Mr. Bush isn't deliberately trying to throw his friends in the oil industry a few extra billions; I prefer to believe that the candidate, or whichever adviser decided to make gasoline taxes an issue, was playing a political rather than a financial game.

There still remains the argument that the only good tax is a dead tax. This leads us into the whole question of whether those huge federal surplus projections are realistic (they aren't), whether the budget is loaded with fat (it isn't), and so on. But anyway, the gasoline tax is dedicated revenue, used for maintaining and improving the nation's highways. This is one case in which a tax cut would lead directly to cutbacks in a necessary and popular government service.

You could say that I am making too much of a mere political gambit. Gasoline prices have increased more than 50 cents per gallon over the past year; Mr. Bush only proposes rolling back 1993's 4.3-cent tax increase.

But the gas tax proposal is nonetheless revealing. Mr. Bush numbers some of the world's leading experts on tax incidence among his advisers. I cannot believe that they think cutting gasoline taxes is a good economic policy in the face of an OPEC power play. So this suggests a certain degree of cynical political opportunism. (I'm shocked, shocked!) And it also illustrates the candidate's attachment to a sort of knee-jerk conservatism, according to which tax cuts are the answer to every problem.

As a citizen, then, I deplore this proposal. As a college lecturer, however, I am delighted.

Wednesday, May 10, 2006

Biomass as an Energy Source

John Deutch, "director of energy research and undersecretary of Energy in the Carter administration, ... director of the CIA and deputy secretary of Defense in the first Clinton administration, [and] professor of chemistry at MIT" is enthusiastic about cellulosic biomass as an energy source:

Biomass Movement, by John Deutch, Commentary, NY Times: President Bush has made the welcome point that the U.S. needs "to move beyond a petroleum-based economy," and has lent his support to the need to develop energy from biomass... This is popular with the public and also enjoys significant support in Congress. Unfortunately, congressional subsidies for biomass are driven by farm-state politics rather than by a technology-development effort that might offer a practical liquid fuel alternative to oil. ...

Biomass can be divided into two classes: food-crop and cellulosic. Natural enzymes can easily break down food-crop biomass such as corn to simple sugars, and ferment these sugars to ethanol. Cellulosic biomass -- which includes agricultural residues from food crops, wood and crops such as switch grass -- cannot easily be "digested" by natural enzymes.

Today, we use corn to produce ethanol in an automobile fuel known as "gasohol" -- 10% ethanol and 90% gasoline. Generous federal and state subsidies, largely in the form of exemption from gasoline taxes for gasohol, explain the growth of its use... Politicians from corn-states and other proponents of renewable energy support this federal subsidy, but most energy experts believe using corn to make ethanol is not effective in the long run because the net amount of oil saved by gasohol use is minimal.

In the U.S., ... a significant amount of oil and natural gas is used in growing, fertilizing and harvesting [corn]. Moreover, there is a substantial energy requirement -- much of it supplied by diesel or natural gas -- for the fermentation and distillation process that converts corn to ethanol. ... While there is some quarreling among experts, it is clear that it takes two-thirds of a gallon of oil to make a gallon equivalent of ethanol from corn. Thus one gallon of ethanol used in gasohol displaces perhaps one-third of a gallon of oil or less. A federal tax credit of 10 cents per gallon on gasohol, therefore, costs the taxpayer a hefty $120 per barrel of oil displaced cost. Surely it is worthwhile to look for cheaper ways to eliminate oil.

The economics are not the same in other countries. Brazil is a well-known example, where sugarcane grows in the tropical climate and conventional fermentation and distillation readily yields ethanol. Ethanol is said to provide 40% of automobile fuel in Brazil and compete with gasoline without government subsidy. Depending on the future world price of sugar and the lessening of trade restrictions on both sugar and sugar-derived ethanol, Brazil could become a net exporter of this biofuel.

The situation in the U.S. is quite different for cellulosic biomass, because much less petroleum is used in its cultivation. There are two paths to convert this material to liquid fuel. In the chemical approach the cellulosic feedstock is gasified with oxygen to produce synthesis gas... This "syngas" can be converted by conventional chemical techniques into liquid fuel suitable for transportation use. The cost, although uncertain and dependent upon local production conditions, is in the range of $50 to $70 per barrel of oil, which explains why, until now, it has not attracted a great deal of attention.

The biotech approach, by contrast, seeks to produce new enzymes that will break down the difficult-to-digest cellulosic feedstock into simple sugars... This approach merits genuine enthusiasm... Realizing this exciting prospect will not be easy... Success will require a sustained research effort; it is too early to estimate the production costs of this method, because process conditions are unknown. However, the expected fossil energy inputs for cellulosic biomass will be much less than that of gasohol, because the energy cost for cultivation is less, and because the portion of the cellulosic material not converted to ethanol can be burned to provide process heat -- thus substantially lowering the implied cost of federal tax subsidies per barrel of oil displaced.

I will be astonished, but delighted, if the cost of ethanol or other biomass-derived chemicals proves to be less than $40 per barrel of its oil equivalent, and if large-scale production can be accomplished in six years.

Critics of biomass argue that the conversion of sunlight into plant material is "inefficient," and that impractically large amounts of land would be required to produce significant amounts of transportation fuel. Both arguments are overstated. We should be humble about calling natural photosynthesis "inefficient" -- especially since we clever chemists cannot accomplish any artificial photosynthesis in the lab. At present, artificial photosynthesis is not an option, but it is an important basic research goal.

As for the land required to support significant biofuel production from a dedicated energy crop, switch grass offers a basis for estimation. ... [T]he land ... needed to displace one million barrels of oil per day (about 10% of U.S. oil imports projected by 2025), is 25 million acres (or 39,000 square miles). This is roughly 3% of the crop, range and pasture land that the Department of Agriculture classifies as available in the U.S. I conclude that we can produce ethanol from cellulosic biomass sufficient to displace one to two million barrels of oil per day in the next couple of decades, but not much more. This is a significant contribution, but not a long-term solution to our oil problem. ...

Saturday, May 06, 2006

Daniel Gross: Why Gas Prices Don't Matter to Consumers

Daniel Gross argues that "rising gas prices may not be as economically damaging as has been assumed":

Why Prices at the Pump May Have Little Bite, by Daniel Gross, Economic View , NY Times: As the summer driving season approaches, gas prices have been soaring ... But the steep prices don't seem to be curbing the enthusiasm of American consumers. Same-store sales at Wal-Mart, those for stores open at least a year, rose a solid 6.8 percent in April. Last week, the Conference Board reported that the consumer confidence index for April hit its highest level since May 2002...

These data point to the enormous resilience of the consumer. But they also bring into focus a truism lost in the miasma of media coverage and political rhetoric...: while the price of gasoline may be highly visible and symbolic, filling up the tank simply doesn't eat up that much of most families' budgets.

How much will Americans spend this year to satisfy their gasoline habit? It's hard to know precisely. But there are clues in government data. In the Consumer Price Index, the inflation gauge, gasoline has a weighting of 4.15 percent... In other words, about four pennies of every American's consumer dollar wind up in the gas tank...

Based on data collected in the bureau's consumer expenditure surveys in 2004, consumer expenditures per household ... on gasoline and motor oil, with gasoline accounting for virtually the entire sum, were 3.7 percent... [of income on average].

Since then, this amount has certainly risen with the price of gasoline, but so has average income. John Felmy, chief economist at the American Petroleum Institute in Washington, estimates that in 2006 the average household will devote ... expenditures to gasoline  ...[of] 4.6 percent.

"This proportion is certainly up from recent years, but it is something that most households can cope with," said Carl Steidtmann, chief economist at Deloitte Research. The difference in spending on gasoline from 2004 to 2006, then, is an extra $10.62 a week...

Drill down a little further, and it becomes apparent why rising gas prices may not be as economically damaging as has been assumed. ... [C]onsumers with a greater ability to absorb the pain of higher gasoline prices buy a disproportionately large amount of the stuff. In 2004, ... the ... 41.4 percent of households that earned more than $50,000 accounted for 58.4 percent of total expenditures. Even at the higher prices, these comparatively better-off households — which account for 64 percent of overall consumer spending — are still devoting only a small fraction of their total spending to gas.

Maybe that is why prices near $3 a gallon haven't put a significant dent in Americans' overall gasoline use... Compared with switching from a car to a commute by bus or train, or undertaking the expense of buying a new, more fuel-efficient car, paying more for gas is a minor inconvenience for many consumers.

That doesn't mean Americans should be complacent. Expensive gas is a burden for those at the lower end of the income scale, whose wages have generally stagnated during this expansion. ... consumer confidence fell in April among households making less than $35,000.

Ken Goldstein, a Conference Board economist, says that people who worry about the impact of expensive oil shouldn't look just at the prices at the local Mobil station. When a spike in a crucial commodity evolves into a long-lasting plateau, the higher costs can spill over into a wide range of other products and services.

"We haven't seen the high price of oil show up in the prices of chemicals, plastics, paint and rubber yet," Mr. Goldstein said. "But when it happens, it is going to drive up the cost of a lot of goods."

I wonder what the percentage would be if the definition was widened, as suggested at the end, to include home heating costs, the feed through to other goods, and so on. It would also be interesting to know what percent the four cents or so spent on gas is of monthly discretionary spending rather than total spending. But inflation has been mild and there is something else that may make the effects more consequential.

Consumers may not be paying higher prices for the goods they purchase, but they may not have as much income available to purchase goods. Many argue that the reason oil price increases have not passed through to output prices is that oil price increases are being offset by holding down wage growth and letting productivity increases compensate for higher energy costs. If so, then these estimates won't capture the lower income share that consumers would have as a result.

Friday, May 05, 2006

The Elasticity of Oil Supply

An email says to take a look at this article from The Economist discussing how Exxon's investment plans have responded to recent developments in the oil industry:

Texan sangfroid, The Economist: ...Rex Tillerson, ... took over as the head of Exxon Mobil at the beginning of the year. Over the past five months, the price of oil has hit $75 a barrel, Exxon has announced the biggest profits in corporate history... Yet Mr Tillerson claims that none of this upheaval has much bearing on how Exxon is run. The firm will stick to the same strategy, he insists, making the same investment decisions based on the same assumptions about the future of the industry as it did last year. In fact, he goes even further: Exxon's strategy has not changed since 1998, when oil sold for as little as $10 a barrel.

That is quite an assertion at a time when many are arguing that the oil industry is on the verge of a cataclysm. ... But as far as Mr Tillerson is concerned, this is just the typical hyperbole that always accompanies upswings in oil's boom-and-bust cycle. As a lifelong oilman, Mr Tillerson should know. He grew up in a former oil boomtown, Wichita Falls, Texas (“the city that faith built”). ... During the course of his career, he has managed oilfields everywhere from Arkansas to Yemen.

What is more, Mr Tillerson is the chosen successor of Lee Raymond, Exxon's previous boss. Mr Raymond's 12-year tenure was a period of unparalleled success for the company. ... Ruthless financial discipline underpins that rise: last year, for example, Exxon earned 31 cents on every dollar it spent, half as much again as its nearest rival, BP. That helps to explain those record profits, of more than $36 billion last year.

Exxon pursues only projects that will turn a profit even in the leanest years, Mr Tillerson explains; so in the fattest ones, the returns are eye-catching. True to that policy, he will not be seduced into making expensive investments on the assumption that the oil price will remain high. ... Traders, he argues, are pushing the price up on speculation about possible future supply shocks, rather than any actual shortfall. Exxon, after all, refines even more oil than it pumps, yet has never had any trouble buying supplies to feed its refineries.

Anyway, oilfields take so long to develop, and are in production for such a long time, he says, that the oil price of the day, whether high or low, “is almost entirely irrelevant” to investment decisions. ... Mr Tillerson claims that the threshold at which Exxon considers a project commercially viable has not budged at all. The firm revisits a scheme that it has previously discarded only if improvements in technology change its economics—not simply because the oil price has spiked.

Despite this choosiness, however, Mr Tillerson maintains that Exxon is not short of opportunities. ... it is helping to tap the world's biggest gas field in Qatar, and has just signed a deal to develop an oilfield in the United Arab Emirates. Unlike most other Western firms, it recently sold its stake in a Venezuelan field rather than submit to higher taxes—suggesting that it is not desperate for oil to pump. Exxon estimates its total “resource base” of possible, probable and proven reserves at 73 billion barrels, which would last 49 years at the rate it is pumping.

There is a self-serving political element to this line, of course. If Exxon's record profits are the result of years of shrewd and disciplined investment, rather than an unexpected and undeserved windfall, it is harder to argue ... that they should be taxed away. It is also harder to complain about Messrs Raymond's and Tillerson's record pay. ...

Mr Tillerson is making a genuine—and risky—choice. Some rivals, such as BP, are piling into renewables such as solar power. Others, including Chevron, have bought rival oil firms despite the cost. Still others, such as Royal Dutch Shell, have rapidly increased their spending on exploration and development. But Mr Tillerson says that he plans to run the company without making any bets on the oil price. That, in itself, is a gamble: if it remains high, and he sticks to his guns, then Exxon will lose ground to its competitors.

A couple of thoughts from someone with no claim as "a lifelong oilman," and who grew up in a town built by economics rather than "faith."

I would have increased my assessment of future world economic growth, and hence oil demand, with the new information that has arrived since 1998. Revisiting plans "only if improvements in technology change its economics," a supply factor, ignores permanent changes in demand from higher world economic growth. These changes in demand differ from the transitory changes in demand over the boom-and-bust cycle highlighted in the discussion. Also, the requirement that an investment project return a profit in all possible states of the world in order for it to be viable seems overly conservative, but maybe I don't understand the principle of "choosiness."

Friday, April 28, 2006

Economic Freedom and Oil Prices

I'll be curious to hear what you think about this Economic Letter from the Dallas Fed, particularly this statement:

Oil prices are rising—not because the world is running out of oil but because the bulk of reserves are in countries where market incentives cannot work fully or in the hands of monopolists who may be exercising their power by restraining investment.

The claim is that a large factor in expaining high oil prices is lack of economic freedom which limits the ability of major oil producing countries to bring supplies to the marketplace. Here's the paper:

Running on Empty? How Economic Freedom Affects Oil Supplies, by Stephen P. A. Brown and Richard Alm Economic Letter, Federal Reserve Bank of Dallas, Vol. 1, No. 4, April 2006: Oil prices have marched upward in recent years, ending nearly two decades of relatively cheap energy. ... (Chart 1). In April 2006, oil reached an all-time high of more than $75 a barrel, measured in current dollars.[1]

In explaining today's high oil prices, many analysts point to surging demand from China, India and other rapidly industrializing countries and cyclical growth in U.S. consumption. When added to existing demand from Europe, Asia and elsewhere, these increases have outstripped any gains in global production and reduced excess capacity to near zero. The analysts expect economic development to continue apace in China and India, with their appetites for oil growing as fast as or faster than their economies.[2]

Are we running out of oil? The question always arises when oil prices spike. Some experts—including Matthew Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy—argue that world oil production is at or near its peak and prices will just continue to rise, perhaps toward $200 a barrel or more...

Continue reading "Economic Freedom and Oil Prices" »

Wednesday, April 26, 2006

Clinton Did It!

Dean Baker evaluates Bush's inference that Clinton is responsible, in part, for higher oil prices:

Beat the Press: Arctic Oil Nonsense, by Dean Baker:  ... President Bush claimed today that the country would be producing another million barrels of oil a day, if President Clinton had allowed drilling in the refuge. ... implying President Clinton’s opposition to drilling in the refuge is a major factor behind today’s high oil prices.

A few simple facts indicate otherwise. First, there is a world market for oil. What matters in determining the price of oil is how much oil is supplied in the world, not how much is supplied in the United States. ... One million barrels is less than 1.2 percent of world oil supply. That is not trivial, but it will not hugely affect the world price of oil.

The second point follows directly from the first. Iraq’s average oil output is approximately 1 million barrels a day less than it was before the war. ... the same amount that drilling in the refuge might have increased it.

The third point is that the oil in the Refuge is a temporary fix. According to the Energy Information Agency, it would take approximately 10 years to reach the peak production of 1 million barrels a day. This peak production would continue for approximately 10 years, and then it would trail back down to zero over roughly 10 years. This means that if we had begun drilling in the Refuge the day Clinton took office in 1993, then we would have hit peak production just over three years ago, and we would begin to see a decline in output beginning in 2013. This is not exactly long-term energy security.

Of course, there is plenty that Clinton can be blamed for regarding energy policy. For example, if he had introduced mileage standards that increased average mileage by just 10 percent, this would save the country 1 million barrels a day of oil consumption ...

The NY Times also comments on the president's remarks:

How Not to Cure an Addiction, Editorial, NY Times: During his State of the Union speech last January, President Bush correctly diagnosed America's oil consumption as an addiction. Unfortunately, Mr. Bush is balking at taking the steps to cure the abuse.

Yesterday, the president told an audience ... that he would try to lower gasoline prices by increasing the supply of oil ... His plan is to refrain from topping off the nation's Strategic Petroleum Reserve, but it ... is nearly full already, so skipping a few deposits won't appreciably affect supply or prices. ...

Mr. Bush's other recommendations were similarly off point. For instance, he acknowledged that higher prices reflected global demand. But he offered no strategy to combat demand-driven price rises. The obvious solution, to increase fuel efficiency standards for ordinary cars, was not mentioned. ...

The president made no mention of the Iraq war, which pushes up prices by reinforcing the market's anxiety over political upheaval in oil-producing areas. But he did make another pitch for drilling in protected Alaskan wilderness.

The alternative energy technologies Mr. Bush emphasized — biofuels, hybrids, hydrogen power — are important and promising. What's missing is a plan to get us from here to there...

Finally, The Wall Street Journal adds:

Despite critics' dismissal of the White House moves, the actions -- particularly relaxing clean-fuel standards -- could affect prices, oil analysts said...

Update: Maybe Dean Baker had an impact:

TPM: TPM Reader: TPM Reader PON finds this exchange from White House National Economic Council Director Al Hubbard's briefing yesterday on the president's 'Four Point Energy Plan' ...

Q Just to follow up, though, on one element of that point. The President made the point that had ANWR been approved ten years ago, you'd get about a million barrels a day. Had the Iraq production resumed to the level that had been projected before the war, how much would that contribute today?
DIRECTOR HUBBARD: I actually don't know the precise answer to that. What's really most important, though, is that we've become less reliable on overseas sources of crude oil and other sources of energy, and more reliant on energy from within our 50 states [sic].

Q You have no estimate, though, about what Iraqi production could be?
DIRECTOR HUBBARD: I do not have it.
MR. HENNESSEY: We can get back to you. DIRECTOR HUBBARD: Yes, we can get back to you with that, or --

Q That would be useful. I mean, just -- obviously, since the President has chosen one interesting example in ANWR, the Iraq one would be an interesting one to compare it to, whether that would be more or less than a billion -- a million a day.
DIRECTOR HUBBARD: Yes, we will have to get back to you on that.

Can I get back to you on that? Can I leave now?

Monday, April 17, 2006

Paul Krugman: Enemy of the Planet

Paul Krugman tackles the trashing of science by oil companies, Exxon in particular, to cloud research pointing to global warming. He also notes how the press, in its quest to be balanced, aids and abets this effort:

Enemy of the Planet, by Paul Krugman, Commentary, NY Times: Lee Raymond, the former chief executive of Exxon Mobil, was paid $686 million over 13 years. But that's not a reason to single him out for special excoriation. Executive compensation is out of control in corporate America as a whole, and unlike other grossly overpaid business leaders, Mr. Raymond can at least claim to have made money for his stockholders.

There's a better reason to excoriate Mr. Raymond ... he turned Exxon Mobil into an enemy of the planet. To understand why Exxon Mobil is a worse environmental villain than other big oil companies, you need to know a bit about how the science and politics of climate change have shifted over the years.

Global warming emerged as a major public issue in the late 1980's. But at first there was considerable scientific uncertainty.

Over time, the accumulation of evidence removed much of that uncertainty. ... there's now an overwhelming scientific consensus that the world is getting warmer, and that human activity is the cause. ... To dismiss this consensus, you have to believe in a vast conspiracy to misinform the public that somehow embraces thousands of scientists around the world. That sort of thing is the stuff of bad novels. ...

So how have corporate interests responded? In the early years, ... many companies from the oil industry, the auto industry and other sectors were members of a group called the Global Climate Coalition, whose de facto purpose was to oppose curbs on greenhouse gases. But as the scientific evidence became clearer, many members — including oil companies like BP and Shell — left the organization and conceded the need to do something about global warming.

Exxon, headed by Mr. Raymond, chose a different course of action: it decided to fight the science.

A leaked memo from a 1998 meeting ... describes a strategy of providing "logistical and moral support" to climate change dissenters, "thereby raising questions about and undercutting the 'prevailing scientific wisdom.' " And that's just what Exxon Mobil has done: lavish grants have supported a sort of alternative intellectual universe of global warming skeptics.

The people and institutions Exxon Mobil supports aren't actually engaged in climate research. They're the real-world equivalents of the Academy of Tobacco Studies in the movie "Thank You for Smoking," whose purpose is to fail to find evidence of harmful effects.

But the fake research works for its sponsors, partly because it gets picked up by right-wing pundits, but mainly because it plays perfectly into the he-said-she-said conventions of "balanced" journalism. A 2003 study ... of reporting on global warming in major newspapers found that a majority of reports gave the skeptics — a few dozen people, many if not most receiving ... financial support from Exxon Mobil — roughly the same amount of attention as the scientific consensus, supported by thousands of independent researchers.

Has Exxon Mobil's war on climate science actually changed policy for the worse? Maybe not ... the Bush administration has done nothing, it's not clear that policies would have been any better even if Exxon Mobil had acted more responsibly.

But the fact is that whatever small chance there was of action to limit global warming became even smaller because Exxon Mobil chose to protect its profits by trashing good science. And that, not the paycheck, is the real scandal of Mr. Raymond's reign as Exxon Mobil's chief executive.

Previous (4/14) column: Paul Krugman: Weapons of Math Destruction
Next (4/21) column: Paul Krugman: The Great Revulsion