Michael Giberson
As a follow up to Lynne’s post, David Warsh at Economic Principals provided an overview of Acemoglu’s research that does a good job of situating Acemoglu’s work in the broader world of development economics. Well worth reading. See The Man Who Succeeded Gerschenkron.
Anyone interested in economists, both in and out of the academy, should be reading Warsh’s work.
Lynne Kiesling
MIT economist Daron Acemoglu has won this year’s John Bates Clark award for the best economist under 40. Acemoglu’s research is fascinating and well-done. As the Chronicle of Higher Education (subscription required) notes:
In a written statement, the [American Economic] association praised Mr. Acemoglu, 37, as a “broad and productive economist” who has made “valuable contributions” in the fields of labor economics, macroeconomics, institutional economics, and political economy. “Especially innovative,” the statement says, is his recent work on the role of institutions in development and in political economy.
Mr. Acemoglu was one of the authors of a paper, “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution,” that appeared in the Quarterly Journal of Economics in 2002. The authors argue that among countries colonized by European powers, those that were relatively rich in 1500 are now relatively poor because of colonial policies — an argument against the notion that geography is destiny.
Lynne Kiesling
After flying home from Paris on Monday, I am convinced that the worthless labyrinth that is Charles de Gaulle airport is part of a deliberate French strategy to remove any separation anxiety in those tourists who are unhappy to be leaving France. By the time we got through security, I was downright thrilled to be going home; and this from a person who loves visiting France!
My father has a better, and less cynical, theory: he thinks that CDG was designed by a person who had never set foot in an airport.
It is certainly true that the nature and volume of air travel has changed in the 30+ years since the construction of CDG. But I must observe that good architecture, like good markets, is organic, robust and flexible. CDG always strikes me as an exercise in Cartesian hubris, in which the designers were so enamored with their vision that they ignored the forward-looking question of how useful and beautiful the design is likely to be in 20, 30, 40 years. It’s so rigid and maladaptive that the subsequent attempts to renovate it have only created incremental improvement.
Lynne Kiesling
The Valero purchase of Premcor announced Monday is another interesting, if not surprising, step in the industry consolidation that started in the mid-1990s. The press on the Valero/Premcor deal seems to hit all of the right notes; I would add to this article on demand continuing to outstrip refining capacity that one of the stated drivers of the acquisition is the less-than-efficient utilization of Premcor’s major refineries. Premcor’s two largest refineries, in Delaware and in Port Arthur, Texas, could deliver more throughput with some reworking (according to some of the sources I’ve read). In fact, the Delaware facility has had some safety and process problems in the past. Thus part of the value proposition in the merger is Valero’s expectation that they can re-optimize the processes at the Premcor refineries. So it may create some additional capacity by increasing the load factor within the existing capacity. But, the last refinery in the US was built in 1976, and it doesn’t look like another one will be built any time soon.
Another angle that enters here is that this acquisition creates a better portfolio from which to produce the variety of fuels that are used to meet myriad federal and state enviromental regulations. The Premcor refineries, in addition to having the ability to process (cheaper and more plentiful) sour crude, may enable the merged firm to specialize more at each refinery in the production of particular types of fuels. Refining is an incredibly technically difficult process, and there are lots of ways to get different combinations of products out of a given stream of crude oil; when you combine that complexity with the complexity of fuel oxygenate requirements etc., the production process gets even more challenging and expensive. Bringing additional refineries into a merged firm may enable the merged firm to eke out some efficiencies by loosening one dimension of that complexity. [NOTE: a former student and I wrote a paper a couple of years ago with the hypothesis that the complexity of the federal fuel oxygenate requirements contributed to the consolidation of the industry through horizontal mergers. Unfortunately the data we would need to test the hypothesis are private, although the publicly-available financial data did not falsify the hypothesis.]
One of the things I find most interesting about this transaction is that it is a horizontal merger of two refining-only firms. The mergers of the mid-1990s were horizontal mergers of vertically-integrated firms. In this high-demand market firms are not using vertical integration to reduce costs, but are instead are consolidating within the specific part of the supply chain that they already inhabit. I continue to think that this merger pattern is consistent with the fact that environmental regulation has broken apart the economies of scale in petroleum refining, making it more costly, and that the mergers are a way to recapture those economies of scale.
Lynne Kiesling
Stephen at Disinterested Party has a post in which he argues that oil prices will fall. In short, he thinks it’s a combination of slowing demand and fleeing speculators once that demand slowdown hits the market. His take on speculation:
Then there’s speculation. The oil market’s behavior this past year has been perplexing. Sure, there’s been a supply/demand imbalance, but not enough of one to account for current prices. However, factor in the huge bets on higher oil prices being made by hedge and pension funds—largely via indexed products developed by companies such as, surprise, Goldman Sachs—and things look a lot clearer. Particularly with so few investors willing to short oil.
How big is that speculative premium? Last summer, when oil was around $45, the industry consensus was $7-8 a barrel. Which means—other things being equal—it’s probably now at least $10.
I do not know how much of the price increase is driven by speculation, so I have little reason to doubt this estimate. I do know, though, that the effect large pension funds and hedge funds may have on prices in energy markets is a very live issue with many people with whom I converse.
Michael Giberson
Tom Toles in the Washington Post offered the following last week:
Lynne Kiesling
Today the KP Spouse, the KP Dad and I are flying home from Paris, so this the the content du jour … a fitting glimpse of our weekend activities. I know that the flowers will not yet be out in Chicago, so I will be sad to leave behind scenes like this one from the Palais Royal:
We walked through the Palais Royal on our way to one of my must-go places in Paris: Galerie Vivienne, and more precisely, the tea salon A Priori The and the wine merchant Legrand.
This weekend we also went to Epernay to visit a couple of champagne houses. We started at Castellane, where friends told us to expect a friendly and thorough tour. We were not disappointed. Furthermore, the building is a late-19th century style with glazed insets etc., so the architecture weenie in me was happy too. Then we went to Moet & Chandon, where the atmosphere was glitzier and the marketing budget is huge! But they’ve also been around for 250 years. This is the Orangerie of the Moet grounds:
I prefer the style of the Castellane tour and the product; Moet is too yeasty for my taste, and you don’t get any true sense of the grape flavor like you do in the Castellane brut. But the grounds were lovely.
Lynne Kiesling
From Chocolate & Zucchini, asparagus and strawberry tart. Yum. Different.
Have to try that when I get home.
Lynne Kiesling
See this Business Week summary of the energy bill version that passed the House yesterday. The Washington Post opined that the bill is “new and unimproved”:
More to the point, it will fail to give this country the truly revolutionary energy policy it desperately needs. Instead of pointing the way toward an eventual transition from fossil fuels to other energy sources — a transition that would have environmental as well as national security benefits — the bill will simply make Americans even more dependent on oil and gas than they are now.
As before, the bill contains sizable subsidies for the oil and gas industries (and all kinds of other groups as well) although Mr. Bush himself has pointed out that in a time of high prices, this is hardly the economic sector that needs the most help.
Indeed. Then there’s the Orwellian protection of MTBE producers from liability for groundwater contamination, a distortion in response to the mandatory, federal oxygenate requirement that was implemented over a decade ago.
Although the Post editorial then goes steeply wrong by advocating more stringent CAFE standards on vehicles. This energy bill proposal is almost unchanged from last year’s, and it has all of last year’s warts. If you support a forward-looking, dynamic, creative, innovative approach to energy, this is not the legislation for you. If you are a fan of corporate subsidies to oil companies, and you are happy with the reality that “what gets subsidized gets done” (that is, increased oil production and consumption), then belly up to the bar.
Lynne Kiesling
Tim Worstall had a post yesterday on the “peak oil” calculation, inspired by a long article in the Guardian. Tim makes the important point in this post and in an earlier one to which he links that the economic assumptions on which the calculation rests are too static to be realistic. They don’t recognize the phenomenon of substitutability and don’t make any allowance for/do any sensitivity analyses on cross-price elasticities of demand.
The comments on the post are also worth a read; note in particular the references to production capacity from oil sands in western Canada.
For more useful and insightful analysis, see Rob at Peak Oil Optimist.
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