Monthly Archives: August 2008

Insecure property rights may be helping to maximize current Russian oil output…

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Michael Giberson

…but not in a good way. The Streetwise Professor deploys a little Property Rights Economics 101 lesson as he contrasts the development of petroleum resources in Russia and China:

An article on the McClatchy wire states that the Russian oil industry is facing a dire future due to “the practice of reaping quick profits and ignoring long-term interests.” This is no big surprise to those who understand the effects of insecure property rights on the incentives to (a) invest in specific assets, and (b) take as much as you can grab today because it may not be yours tomorrow. There are few assets more specific than an oil well. If you invest wisely today to maximize the present value of the well’s future output, that does you no good if you’re not around to claim those future flows (because, for instance, you’re rotting in a jail in Chita.) So, to hell with the future-maximize what you can produce today, even though that impairs the well’s long run value….

The contrast with China is of some interest. Formal property rights are absent in China too, but China’s rulers act more like “stationary bandits” (in Mancur Olson’s felicitous phrase) with an “encompassing” interest in the long run health of the nation’s economy. They apparently figure they have a high probability of being around for awhile, and therefore temper their short term exactions in order to enhance their future take. Thus, property rights are informally protected and relatively secure (by comparison to the Chinese past and Russia, but not to the US.)

Russia’s rulers, by contrast, act like Olson’s “roving bandits.” Apparently insecure in their future prospects, they lean towards taking today and letting the future take care of itself. The Putinists probably have a longer view than the pirates of the 90s, but they clearly have shorter time horizons than their Chinese counterparts.

Of course when I say in the title that “insecure property rights may be helping to maximize current Russian oil output,” emphasis should be on the word current. Overall production will be lower in the long run because of the incentives to mismanage the resource.

Boone Pickens – Texas Monthly on the man behind the plan

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Michael Giberson

Texas Monthly magazine profiles Boone Pickens. Here’s a sample:

In addition to the advertising campaign, Boone is also laying out his energy manifesto in his latest memoir, The First Billion Is the Hardest, which Crown is releasing this month. (His first memoir, Boone, was published in 1987.) “The times require a George Patton, someone who can lead us to victory no matter the obstacles,” he writes, adding that the president should appoint an energy czar who “would be empowered to be decisive, to act fast, and to fix this problem.”

The profile is about much more than Pickens and his energy plans. It makes an entertaining read.

TexasMonthly_Pickens.png

Standing at a podium at the Pampa civic center, Boone fiddled for a while with his lapel microphone and then said, “Are y’all hearing a damn thing I’m saying?” Everyone roared with laughter. He then announced that he had just written a check for about $150 million as his down payment to purchase his first 667 wind turbines, each the size of a 48-story building. He openly admitted that none of the wind turbines would be placed on his nearby ranch “because I think they’re ugly as hell. But any of you who wants to put one on your ranch will get about ten to twenty thousand dollars a year in royalties from us. Pampa is on its way to becoming the wind capital of the world!” Everyone applauded until their hands were sore.

…a woman said she was worried she wouldn’t be able to irrigate her crops with a wind turbine “stuck smack-dab” in the middle of her field. Boone grabbed a sheet of paper and sketched out a diagram showing how the irrigation would work. “Okay, we’ve solved it,” Boone said to her. “Now, go sign my lease. We’re going to make you some money, and we’re going to make me some money too.”

Notice those wind turbines in the background of the cover of the Texas Monthly? That’s a little Deep Glamour, Texas-stye!

Compressed air storage is getting a fresh look

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Michael Giberson

Just as Lynne was suggesting the importance of energy storage…

If we had more efficient and distributed energy storage, then we could store wind-generated power near the source when lines are congested, and store it near demand by transmitting it when lines are not congested. Distributed energy storage gets us a one-two punch here, because it simultaneously addresses the transmission congestion problem and the wind intermittency problem.

… an established electric utility company in New Jersey, PSEG, announces a major joint venture intending to bring energy storage to the grid. A New York Times article provides a little more background.

Just speculating based on no more than a press release and a news story, but this should be very big news, eventually. PSEG has the resources to develop this project, and the intelligence to decide whether or not this will pay off, and apparently they have decided it is likely to pay off.

Wind power and transmission capacity and storage are complements (but they’re also kind of substitutes …)

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Lynne Kiesling

An article in today’s New York Times describes the difficulty of getting wind power to urban demand centers when transmission lines are congested:

The dirty secret of clean energy is that while generating it is getting easier, moving it to market is not.

The grid today, according to experts, is a system conceived 100 years ago to let utilities prop each other up, reducing blackouts and sharing power in small regions.

The article then expands on the argument that the necessary solution is expanding transmission capacity, which is expensive and unpopular for a lot of NIMBY and other political economy reasons. There may be some justification for this argument. But the article fails to point out the true, underlying Achilles heel, which is energy storage. If we had more efficient and distributed energy storage, then we could store wind-generated power near the source when lines are congested, and store it near demand by transmitting it when lines are not congested. Distributed energy storage gets us a one-two punch here, because it simultaneously addresses the transmission congestion problem and the wind intermittency problem.

So don’t just jump to the conclusion that distributed wind generation => more transmission capacity. A better, more resilient approach is to combine transmission capacity and distributed storage. That’s why research on energy storage is so valuable.

Evernote is my new BFF

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Lynne Kiesling

Are you looking to improve your productivity as we swing back into fall? I strongly recommend Evernote, as does the ever-helpful Lifehacker, in this useful post.

Evernote is a dynamic, networked storage application, part notepad, part inbox, part storage box. It’s an application you download for local use on your desktop, and it syncs with an online web site, so you can have access to all of your notes from anywhere. You can link together documents, pdfs, photos, music files, videos, anything. You can clip pieces of web pages to save for future reading, and this is my favorite feature; I have the habit of creeping tab clutter, because I find so many different things I want to read or leave open until I have time to think about it. Evernote allows me to clip it, tag it, store it in a notebook to help me find it again. Among other things, it’s extremely useful to me for organizing news articles and online resources that I may want to use in my classes.

Surowiecki: That uncertain feeling

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Lynne Kiesling

James Surowiecki’s Financial Page column in the new New Yorker is an interesting muse on uncertainty. Or, more precisely, on volatility, because his focus is on fluctuations in stock prices, oil prices, other commodity prices, and currency valuations over the past couple of months, and on trying to discern the underlying causes of these fluctuations.

Precipitous falls in the market have frequently been followed immediately by sharp rallies, and vice versa. And, while some of these moves have been occasioned by real news, more often it’s been impossible to tell just what made investors so damn exuberant or so gloomy.

He invokes “uncertainty” as one of the underlying causes of volatility, because traders form expectations of future valuations but do not have perfect foresight. Interestingly, their expectations are not borne out ex post, but are unusually optimistic, and in bear markets this optimism is reinforced by “chasing losses” and taking big, risky positions to try to recoup losses on other trades.

An interesting read.

Retail electric power in Texas: growing pains or just pain?

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Michael Giberson

EnergyBizInsider, Examining Texas:

Like everything else in Texas, energy prices are getting big. But is it the cause of deregulation or other factors such as the price of underlying fuels?

 

This is the question that the Governor’s Competiveness Council took up. … It acknowledges that prices have risen there the last few years but it says that this has been a function of shedding the last remnants of regulation along with high energy demand and rising natural gas prices.

“Our retail market is the most successful retail market in the world,” says Barry Smitherman, chairman of the state’s Public Utility Commission, whose comments appeared in the council’s report. “We have 25 retail electric providers fighting against each other every day for your business. Natural gas prices have increased 400 percent while electricity costs have risen just 30 percent.” …

While imperfect, the system is working. In 2006, Texas consumers in areas subject to competition could choose from 17 providers that offered as many as 36 different rate plans. Now, those customers can pick from roughly 28 suppliers that provide nearly 100 rate options. The new opportunities have meant that roughly 70 percent of commercial and industrial customers have switched providers since 2000 while about 40 percent of residential customers have shopped around.

“You can’t grab consumers by the throat and force them to shop; you also can’t allow their inertia to stifle the development of decentralized market processes that benefit so many other consumers as well as innovative producers,” says Lynne Kiesling, economics professor at Northwestern University. “So the institutional design challenge is to reduce the information costs and switching costs that create the inertia.”

I have to object to this claim by this Ms. Kiesling, whoever she is, by reminding her that you can in fact, metaphorically speaking, “grab consumers by the throat and force them to shop.” Isn’t that the normal course of business in traditionally regulated retail power and natural gas areas? Typically, the state utility commission blesses a single company in each region and woe to any consumer who wants to buy from someone else. The state will use taxpayer resources to stamp out any attempts to flee the local monopoly.

Similarly, when transitioning to competitive retail market structures, the state can help consumers overcome the costs that create inertia. For example, when Georgia moved to more competitive retail natural gas markets a decade ago, after a transition period which allowed consumers to shop, the state simply assigned the customers that hadn’t switched to one of the competitive retail suppliers. Analysis of the early results were generally favorable.

UPDATE: NewsWatch: Energy reports it gets complaints about retail deregulation in Texas every time electricity is discussed. Tom Fowler links to a 2005 story he did in the Houston Chronicle comparing deregulated and regulated rates, and provides links to another blog for another viewpoint.

Little girl, you need a license for that fruit stand

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Lynne Kiesling

Here’s my cynical, anti-authoritarian link of the day: the mayor of Clayton, California shut down a fruit stand run by two little girls because it was a commercial enterprise in an area not zoned for commerce.

Hilariously, the mayor defends the decision to shut down this tiny lesson in capitalism, preferring to make it a tiny lesson in bureaucracy instead. His defense:

“They may start out with a little card-table and selling a couple of things, but then who is to say what else they have. Is all the produce made there, do they grow it themselves? Are they going to have eggs and chickens for sale next,” said Clayton Mayor Gregg Manning.

The mayor later called the girls and their father “self-centered.”

See also the Boing Boing post on the subject as well.

This may sound like it’s not that big a deal to you, but I think it’s disgusting on many levels (and given the comment volume on the Reason and Boing Boing posts, I’m not alone). I hope this guy gets sufficiently ridiculed that he’s voted out of office at the next election.

And if you want to see the bureaucratic process at work, check out the 19-page “produce stand/veggie stand ‘information’ ” document that the city has produced to detail the nefarious lawlessness of the girls and their parents, and to attempt to justify their bureaucratic approach as “balancing” the interests of many different groups in the community. Here’s a money quote:

Staff has determined that the outside sales activity involved in a residential zoning district is contrary to Chapter 17.71 Home Occupation Permits of the City of Clayton Zoning Ordinance and, therefore, is not allowed … Chapter 17.71 focuses on allowing residents in residential districts in Clayton to conduct limited commercial activities within a dwelling unit, and not allowing outside sales or external evidence of business activity.

I’m practically speechless. Well, I’m speechless in the realm of things that I am willing to say here in print for posterity. But you can imagine the colorful rant that the KP Spouse and I will enjoy over dinner this evening … and I may even go out and buy some dinner fixins from a roadside stand “in a residential area”, to celebrate the relative liberty that those sellers and I enjoy for not being in Clayton, California.

Welcome Deep Glamour!

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Lynne Kiesling

Virginia Postrel and Kate Coe have started Deep Glamour, which “explores the magic of glamour in its many manifestations, from movies, fashion, and advertising to real estate, politics, and sports.”

Today Virginia has an energy-related post, about the visual elegance of wind turbines, and their use in advertising:

These images epitomize grace, one of the essential components of glamour. The blades appear to turn effortlessly, generating energy without waste. They look as autonomous as a bird in flight. Everyone, including me, leaves out the massive power lines required to carry the electricity some place where it will be useful. These are glamorized images.

This will be a great regular read. Welcome!

Vaclav Smil on the Pickens Plan for wind power and natural gas vehicles

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Michael Giberson

Perhaps the greatest appeal of the Pickens Plan is its cascading simplicity. First, Pickens wants to dot the Great Plains (“the Saudi Arabia of wind power”) with wind turbines to replace all the electricity currently produced by burning natural gas. Second, he wants to use the natural gas freed by wind-powered generation to run efficient and clean natural gas vehicles. Third, he believes that this substitution will create a massive, new domestic aerospace-like industry — with well-paying jobs in the production of giant turbines and auxiliary equipment — that will bring economic revival to the depopulating Great Plains. Finally, Pickens says his plan would reduce the huge outflow of wealth to oil-producing nations as the U.S. cuts its oil imports by more than one-third.

If this were an opera, shouts of “Bravissimo!” would be in order. But despite its many positives, the timely realization of the Pickens Plan faces a number of extraordinary challenges, to say the least.

The quoted material is Vaclav Smil on the Pickens Plan in Yale Environment 360. “Cascading simplicity”? I’m still trying to decide if, ultimately, that is a compliment or an insult.

Related, a story in the Washington Post about the failure of natural gas vehicles to take off despite federal government plans in the 1990s.

HT to Environmental Capital for both links.