Knowledge Problem

OK, this is interesting: Chicago may soon be home to the first haggis factory in the US:

“There are lots of Scots living in the States, and Scottish food is becoming increasingly popular, so I think the market is definitely big enough to make haggis a success in the U.S.,” Ken Stahly, owner of Stahly Quality Foods told the Evening Telegraph and Post in Scotland. “Chicago is an ideal base, because its geographical location is an ideal gateway to the U.S. and Canadian marketplace.”

Not to mention our extensive set of folkways that involve eating various and sundry pieces of meat and offal ground into bit and stuffed into organs, yum. Actually, I love bratwurst, don’t get me wrong, but … even on Burns Day and even in Scotland I can’t bring myself to eat haggis. I’ll stick with Lagavulin, thank you very much.

Interestingly, the company says that they will market a vegetarian haggis in the US market (!).

There are some disturbing implications of the Supreme Court ruling today regarding EPA enforcement of the Clean Air Act:

The 5-4 decision, a victory for environmentalists, found the EPA did not go too far when it overruled a decision by Alaska regulators, who wanted to let the operators of a zinc and lead mine use cheaper anti-pollution technology for power generation.

In short, the deal is this: the mine built a new electric generator and the Alaska state government authorized them to install emission reduction technology that reduced emissions by 30 percent. The US EPA did not agree with that authorization, and ordered the mine to install technology to reduce emissions from the new generator by 90 percent. The mine found this order prohibitively costly, and Alaska found this to be a violation of state’s rights. A federal court disagreed with Alaska, saying that the EPA has the final jurisdiction over enforcement of the Clean Air Act, and the Supreme Court agreed.

This decision flies in the face of the knowledge problem, the issue at the heart of this very website. Local regulators are going to be in a better position to know the costs, benefits, and tradeoffs in the specific local conditions (although even a local regulator will never, never, be able to capture or replicate the information of individual economic actors). The counterargument to this is that the EPA may do a better job of aggregating preferences across multiple jurisdictions (I am skeptical about their ability or incentive to do this impartially), but in the case of an isolated mine in Alaska, the issue of transboundary pollution is specious as a justification for federal regulation. Another counterargument may be that the local regulators are captured by the local regulated firms. Possible.

I have other concerns about this ruling, but will leave them for later.

In case you didn’t notice (but I know those of you in the Northeast did), last week was some of the coldest winter weather in the Northeast since 1875. Not surprisingly, such a cold wave puts a strain on heating energy supplies, including natural gas. This Catallarchy post by Doug Allen, and its attached comments, address the market response: natural gas prices rose, and those prices will be passed through to at least some extent to retail customers. In responding to someone whose understanding of economics seems tinged by politics, Doug makes a very important point:

Why arificially keep heating costs low? Why encourage some people to blast the heat at 75 degrees and walk around their house in t-shirts, gobbling up what little supply there was already? By raising natural gas costs, people will learn to conserve and do more with less. For example, cut the thermostat down a few degrees, make sure closet and attic doors are shut, throw another blanket on the bed, etc. High prices force consumer conservation, leaving a little more “heat” for everyone.

Indeed.

Some other important facts and interpretations on this topic, most of which come from insights of industry experts I met with today at a Center for the Advancement of Energy Markets meeting:

-Natural gas markets are healthy, robust, and liquid, and have been for quite a while since deregulation in the 1980s. That means that buyers and sellers use forward contracts, financial hedges, and other instruments to manage price risk.

-One feature of healthy competitive markets is the optimization of inventories in storage. If there is a cold spell of unanticipated depth and/or duration, then the binding constraint is not supply, it’s storage. The natural gas price volatility seen in the markets in the past week reflects the unexpected demand relative to the hedges in place and relative to inventories.

-Price spikes last week did not persist, because both wholesale and retail natural gas consumers (certainly large consumers, even if not residential consumers) responded by cutting demands for natural gas that were of lower priority than heating. Electricity plants that are dual-fired found it economical to switch from natural gas to oil, for example. But it looks like all of the demand reduction was voluntary, and led to suppliers who have interruptible pipeline contracts choosing not to import natural gas, thus making the pipeline capacity constraint not bind.

Conveniently enough, the Federal Energy Regulatory Commission recently released a study of New England’s natural gas transportation and storage infrastructure.

Winter is the peak natural gas use period in New England. From December through February, much of the region’s pipeline system is fully loaded. While this situation is not unique to this region, it reduces the opportunity for New England to access natural gas from underground storage in New York and Pennsylvania. The absence of underground storage in New England, in combination with the inability to access storage in New York and Pennsylvania, makes New England dependent on its limited above ground storage, pipeline imports, and liquefied natural gas (LNG) to meet peak winter demands.

But the robustness and liquidity of markets, as well as the combination of supply response and active demand response to prices, mean that enough natural gas was available to satisfy the high heating demands on it last week. The prices at which these demands were satisfied may look high to those looking for a political angle, but simply put the fact is this: given unexpected conditions and the hedges in place to smooth out price effects from expected conditions, these high prices are the most competitive prices that can be had in this situation.

It may be little comfort to Doug’s “Jane” that if these high natural gas prices persist, then those who can make money off of delivering natural gas to New England consumers will make investments that enable them to do so, both in increasing supply and in increasing delivery and transportation infrastructure. Those investments will increase supply relative to demand (ceteris paribus, of course), and thus reduce prices. Thus, as Doug notes, high prices induce conservation on the demand side, but they also serve the very important role of inducing investment on the supply side.