(Warning: this is a rant) OK … the antidote to my hopefulness. I just walked home from the el, which I took to work today because the rain threatened this morning and put me off of bicycling. Greenpeace has a bunch of their summer student employees out and about spreading the word about Mother Earth, their mission, etc. One of them approached me (very politely, may I add) and asked if I wanted to hear about environmental issues. I told him that I teach environmental economics and was in the middle of finals week, so he might want to talk to someone else. He was intrigued and asked me what I thought about environmental issues like global warming. I told him that I think property rights matter, that private enterprise and ingenuity are crucial to a clean environment, that a healthy economy is an important foundation of a healthy environment, and that CO2 is not a human toxin. In response, he said, “oh, you mean acid rain?” I said, “No, that’s SO2, CO2 is the global warming that you are worried about. That’s one reason why you should take an environmental economics course.” Bless his soul, at that point he realized that talking to me was not going to get him where he wanted to go. I am not mocking or faulting this earnest, well-intentioned, polite young gentleman, but if Greenpeace is going to send out folks to canvass, they should teach them some SCIENCE first!
This week is finals week at Northwestern, and that means that I get to read 11 research papers from my Environmental Economics class. Very good brain candy — I always learn something from their presentations, their evidence, and their arguments. If these students are representative of the future of environmental policymakers, I am hopeful.
I’m not going to get into the California market manipulation fray any further for now, beyond providing links to stories summarizing the issues and commenting on the continuing vituperative rhetoric of politicians in California, without any willingness to acknowledge that the rules of their dysfunctional “market” did not forbid any of these trades. At the big picture level, I truly think this is part of the learning process. We’ve only been trading natural gas as a commodity since 1989 and electricity since 1992 (and not in any serious volumes until 1996, really), so our experience of dealing with the financial transactions of electricity and gas is pretty short. We’ve been trading all sorts of other commodities using financial instruments for over 400 years, from tulips in Dutch markets in the 1600s to shares in insurance annuities of young French girls in the 1700s to modern trading of wheat and pork bellies. The SEC is now going to have to think more carefully about how it should treat energy commodity trades to ensure market transparency, and to make the rules for trading energy consistent with the rules for trading other commodities. One complicating factor, though, will be some of the physical characteristics of electricity that could keep it from being a really good tradeable commodity, such as the fact that it cannot be stored given current technology. Anyway … some good stories on what’s going on are here and here. This is a commentary I wrote a month ago about the trading strategies detailed in the Enron memos that FERC released.
Furthermore, the International Energy Agency announced today that it is revising its oil demand estimates downward for the second half of 2002. They cite the slow economic recovery as the primary reason for the revision. Slower oil demand growth increases the likelihood that prices will remain stable (all other things equal, of course). This pattern is not surprising, though — in the same sense that the beginnings of economic recoveries are often “jobless,” companies do more with less of all of their inputs, energy included. It’s one of the hallmarks of increasing productivity.
Lots of good oil market news today for consumers; a bit less good if energy stocks comprise a substantial share of your investments! A Platts survey of OPEC production shows a huge increase in May, according to a press release on Yahoo Financial News. Iraq coming back online and Venezuela increasing production after the oil strike and the failed Chavez coup attempt accounted for much of the increase. Interestingly, though, all countries with a stated production quota overproduced. It’s a beautiful illustration of why cartels are unstable and usually fail to sustain price increases; if you scroll down to the table showing production and quota by country, each country is exceeding its quota by a pretty small amount. But when you add up these little violations it’s enough additional production to stem price increases in the world oil market. We can especially expect Venezuela to continue producing beyond its quota, notwithstanding its strident rhetoric of the past two years, because of the government’s revenue requirements. Their incentive to make money in the short run by taking market share from other producers outweighs their long-run incentive to stabilize the cartel at a higher price.