Archive for December, 2008

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U.S. energy consumption is down

December 31, 2008

Michael Giberson

In the Fort Worth Star-Telegram, Jim Fuquay reports that energy consumption is down sharply:

Less gasoline. Less jet fuel. Less crude oil. Less natural gas. Less electricity.

At the end of 2008, Americans were getting downright stingy with their energy use. Between wildly volatile energy prices and a deepening recession, Americans are curtailing their renowned reputation for energy consumption in what some believe could be a long-term trend.

The economists’ term for it is “demand destruction.” This year’s poster child is driving, as the number of miles driven is showing the biggest drop since the federal government started keeping the statistic.

Between November 2007 and October 2008, Americans drove more than 100 billion fewer miles, a drop of more than 3 percent. The decline was greatest late in the year, with September falling 7 percent and October 4.5 percent.

The result? Gasoline consumption plunged 8.5 percent in September and was down 4 percent in mid-December, the latest figure available from the federal Energy Information Administration.

And jet fuel consumption is down, natural gas consumption is down, electric power consumption in ERCOT is down, and so on.  And not just in the U.S.–the International Energy Agency “expects global oil demand for all of 2008 to show a decline for the first time in 25 years,” said Fuquay.

Some analysts quoted in the story conclude that high and volatile energy prices in 2007 and 2008 may represent a turning point in attitudes and bring about a permanant shift in demand, others are reported to be not quite ready to make that call.

My general sense of it – and usually about here I should say that I am not a forecaster, nor do I play one on TV – high prices likely induced more consumers to buy more economical durable goods, and this now-more-economical stock of durable goods will shift energy demand lower.  This shift will tend to be undone over time as long as prices remain relatively low. (However, macroeconomic conditions and constraints on borrowing may be limiting the degree to which consumers are making durable goods purchases at present, leading to a smaller than otherwise expected rebound in energy demand.)

Posted in Uncategorized | Comments Off

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TuneCore and musician payment

December 30, 2008

Lynne Kiesling

In the ever-evolving (despite the efforts of RIAA) music industry, I find TuneCore very interesting. They have a fee-based music distribution system, under which an artist pays a fee and can have their single sold through iTunes, Rhapsody, etc. One of TuneCore’s most striking offerings is a flat $10 fee to distribute a song to 11 online music stores. The potentially transformative effect of this service should be obvious; not only does this service reinforce the move back toward the single and away from the album, but it also takes on some of the marketing and promotion function of the record label. If your primary market channel is live gigs and word of mouth, this distribution model may be more profitable for you than the traditional record label route.

Now they are starting up a service by which musicians can earn money by driving traffic to sponsor web sites.

Artists can promote free songs at their web sites, encouraging fans to visit the corporate sponsor to download the songs. It’s up to the band to decide how they want to promote that link and get people to those sites whether by displaying an adbox or in-blog links. Once at the site, users will interact with that web page to generate their download code, likely being polled at least for their e-mail address. The traffic fees will be split between the musicians, based on the number of downloads generated. More fans means more downloads, which means more money for the band in the end. It’s basically a way to monetize fame outside the traditional boundaries of record labels.

The whole Ars Technica article is well worth reading, because it’s full of insights about the connection between social networking and the production and distribution of creative work.

Posted in Economics, Music | Tagged , | 1 Comment »

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UPDATE: The forthcoming dramatic fall of reported oil reserves

December 30, 2008

Michael Giberson

A week ago I wrote, “The forthcoming dramatic fall of reported oil reserves is due to falling prices and reporting requirements, not ‘peak oil’ or the manipulations of greedy industry executives.” However, as this Associated Press story reports, yesterday the Securities and Exchange Commission adopted proposed changes to reporting requirements that will have the effect of reducing the effects of price volatility on reserves reported.

An SEC press release is available, but as of Tuesday morning the full text of the new regulations were not available on the SEC website.

According to the AP article the new rules will:

  • Allow companies to use new technologies to determine proven oil and gas reserves provided the technologies have been shown to lead to reliable assessments.
  • Allow companies to disclose their probable and possible reserves to investors. Until now, SEC rules limited disclosure only to proved reserves.
  • Require companies to report oil and natural gas reserves using an average price based on the prior 12-month period rather than year-end prices.
  • Require companies to certify the independence of petroleum auditors that audit their assessments of reserves.

The third item is the key to reducing the effects of price volatility on officially reported reserves.

The effect of price volatility on reserves can be reduced, but not eliminated, because the price of oil is one factor that determines how much of the oil in the ground will likely be economically producible (cost of production being the other main factor).  A prior twelve-month average of prices is not necessarily the best estimate for a company to use in its own internal evaluation of expected reserves – the company may have reasons to believe it can do better in pulling oil from the ground (or will do worse) than the amount indicated by using the twelve-month average price. But for financial reporting purposes it is important to have a standard and not too volatile measure.

Posted in Energy markets, Regulation | Tagged , , , | 1 Comment »

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Would someone please check the price of bread in Connecticut? Another zone pricing post

December 29, 2008

Michael Giberson

Would someone please check current prices for bread in the towns of Greenwich, Port Chester, and Stamford, Connecticut? A December 23 story in the Greenwich Time notes the arrival, finally, of gasoline prices below $2/gallon in Greenwich, “after weeks of being surrounded by less-than-$2 in gas in municipalities such as Stamford and Port Chester. ” The story suggests that prices are higher in Greenwich due to zone pricing. In the words of the story, zone pricing is “a practice under which refiners sell gasoline to retailers at prices depending on what the market in a particular geographic area will bear.”

Anyway, I’m wondering whether bread prices differ much from Greenwich to Port Chester to Stamford, and if they do I further wonder whether wholesale bakeries practice “zone pricing” of bread, too. After all, late in the story a customer is quoted as saying that “Everything’s more expensive [in Greenwich],” and if everything is more expensive in Greenwich then maybe zone pricing of gasoline by refiners is not the fundamental cause.

Zone pricing has been banned in neighboring New York, but some people in the Hampton’s think the law is being ignored.

For background, see earlier my posts: Gasoline prices in New York three weeks after the zone pricing ban; Zone pricing ban coming to New York, will the results affirm policymakers’ hopes or economists’ analyses?)

Posted in Energy markets, Politics | Tagged , | 4 Comments »

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“Congress didn’t intend to create SUVs”

December 29, 2008

Michael Giberson

From Two Billion Cars by Daniel Sperling and Deborah Gordon:

Ironically, it was the fuel economy standards adopted by Congress in 1975 that set the stage for the later surge of gas-guzzling SUVs and light trucks. As Congress was designing its fuel economy, safety, and emission standards, Detroit lobbied to exempt light trucks, which at the time were used mostly by businesses and farms for hauling goods and providing services. This loophole was written into law, with light trucks subject to less stringent requirements. They also were exempt from the large tax imposed on “gas guzzlers.” The light-truck loopholes were to be the industry’s savior for almost three decades. Chrysler recovered from its 1980 near-bankruptcy in part by taking advantage of those loopholes, producing the first modern minivan, a vehicle built on a truck platform but designed for family travel. Minivans became the new version of the station wagon, only “better” because they were cheaper to make and buy, thanks to the gentler energy, emissions, and safety regulations, and their exemption from the gas-guzzler tax.

Consumers flocked to these cheaper carlike trucks. The advent of the minivan was accompanied by a slow expansion of the pickup truck market and soon followed by a surge of SUVs in the 1990s. Chrysler was again the leader, building on its 1987 acquisition of American Motors Corporation and its Jeep vehicle line to pioneer the SUV market. Ford and GM followed. SUVs flourished.

I think this brief narrative puts too much emphasis on the role of Congress, and neglects the effects of rising incomes and changing gasoline prices on automobile industry developments over the “almost three decades” discussed. Nonetheless, the episode should serve as a warning to folks with grand policy ambitions about the weaknesses of piecemeal, ad hoc interventions into people’s lives.

Posted in Environmental policy, Liberty, Politics | Tagged , , , , , , | 1 Comment »

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Couple of “food miles” items

December 29, 2008

Lynne Kiesling

One topic that has gotten some attention in 2008 is “food miles”, or the estimate of the environmental impact of the total resource use and transportation required to get food from grower to consumer. One argument for eating more locally-produced food is that it reduces the transportation impact; however, in making that argument we also have to take into account differentials in total factor productivity. In other words, if your local farmers are less productive than distant farmers, producing and consuming a given amount of food produced locally could increase resource use because the local farmers have less of a comparative advantage and achieve lower yields. That increased resource use mitigates the transportation benefits of local production, and if large enough can outweigh them entirely.

At Aguanomics David Zetland had a post recently with some links to work on the “carbon footprint of food”; interestingly, one report finds that transportation constitutes a small share of food’s environmental impact, and that most of food’s climate impact is a result of non-carbon dioxide greenhouse gases (such as methane). Very interesting.

Back in November Ron Bailey wrote about food miles at Reason, and I’ve been wanting to post about it since then. He mentions the studies that David noted in his recent post, and Ron also commented on a Mercatus Center study of the food miles argument (pdf).

In their recent policy primer for the Mercatus Center at George University, however, economic geographer Pierre Desrochers and economic consultant Hiroko Shimizu challenge the notion that food miles are a good sustainability indicator. As Desrochers and Shimizu point out, the food trade has been historically driven by urbanization. As agriculture became more efficient, people were liberated from farms and able to develop other skills that helped raise general living standards. People freed from having to scrabble for food, for instance, could work in factories, write software, or become physicians. Modernization is a process in which people get further and further away from the farm. …

Food miles advocates fail to grasp the simple idea that food should be grown where it is most economically advantageous to do so. Relevant advantages consist of various combinations of soil, climate, labor, capital, and other factors. It is possible to grow bananas in Iceland, but Costa Rica really has the better climate for that activity. Transporting food is just one relatively small cost of providing modern consumers with their daily bread, meat, cheese, and veggies. Desrochers and Shimizu argue that concentrating agricultural production in the most favorable regions is the best way to minimize human impacts on the environment.

In other words, the productivity effects on resource use swamp the resources used and emissions generated in the transportation portion of the supply chain. Incorporating this aspect of productivity into the food miles argument illustrates the point I raised above — much of what determines resource use and emissions in the food supply chain is factor productivity and comparative advantage.

Posted in Economics, Environmental policy, Food and wine | Tagged , , | 1 Comment »

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The Blagojevich saga: the psychology of power, and rent-seeking

December 29, 2008

Lynne Kiesling

Two items have kept my attention over the holidays with respect to the Blagojevich fiasco. First, back when the story first broke, our local NPR station interviewed my colleague Adam Galinsky on the psychology of power. Adam’s research is fascinating, and in this interview he communicates very effectively how positions of power affect individual incentives and decision-making: “putting people into positions of power basically alters their psychological processes.” People in power start to feel more invulnerable and focus on their rewards and ignore potential pitfalls; this change leads them to make more risky decisions. I heartily encourage you to listen to this interview; it’s superb.

And it ties in to the second item, which relates to the endemic corrupting incentives that arise from political power. Don Boudreaux’s Christian Science Monitor column last week does a really good job of turning the whole Blagojevich fiasco into a “teachable moment” on rent seeking, as Josh Wright calls it.

Tullock’s insight is that the very ability of government to create lucrative special privileges diverts resources from socially productive pursuits into wasteful ones.

Knowing that government is willing and able to impose tariffs that will protect them from foreign competition – and knowing that such protection will raise their incomes – sugar farmers understandably spend some of their resources farming government rather than farming their land. …

… And the larger the potential gain from being granted such a privilege – that is, the larger the rents – the more intense will be rent-seekers’ incentives to chase after them. That puts tremendous pressure on – and gives tremendous leverage to – politicians.

It’s easy to look at the Blagojevich case and see a failure of personal ethics. It is about character. But it’s also about how government itself creates the very conditions for corruption. Think of all the special privileges governors can bestow: subsidies for stadiums, public-works contracts, special taxes and fees, not to mention myriad regulations with myriad loopholes. Chief executives – mayors, governors, and presidents – are supposed to be the chief enforcers of the law. Today, though, they are also chief bestowers of privileges. As such, the trading of favors is intense, leaving little bandwidth for actual public service. Society loses.

See also Brian Doherty’s comments at Reason Hit & Run. These commentaries are all consistent with my observations when this first broke: lobbying/rent seeking and political corruption are different in degree, but not in kind.

Posted in Economics, Politics | Tagged , | 2 Comments »

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Hints about the value of smart grid technologies

December 26, 2008

Michael Giberson

Via the New York Time‘s Green, Inc. blog, a story from a community newspaper in Massachusetts describing adaptations to the loss of power during the recent snow and ice storms that covered the area. In one case a man pressed his Prius into service as an emergency generator, a feature likely to become standard if hybrid gasoline-electric vehicles become widely adopted.

Around the corner at Madigan Lane, John Sweeney, a member of the town’s conservation-minded Heat Advisory Committee, took a characteristically green approach to powering his home during the storm. He reported his achievement in an e-mail, saying it was no big deal, but that his wife thought it an impressive tale worth sharing: Sweeney ran his refrigerator, freezer, TV, woodstove fan, and several lights through his Prius, for three days, on roughly five gallons of gas.

“When it looked like we were going to be without power for awhile, I dug out an inverter (which takes 12v DC and creates 120v AC from it) and wired it into our Prius…These inverters are available for about $100 many places online,” he wrote.

The device allowed the engine to run every half hour, automatically charging the car battery and indirectly supplying the required power.

Green, Inc. notes that the New York Times itself had reported a similar story a year earlier:

This form of vehicle-to-grid technology, often called V2G, has attracted hobbyists, university researchers and companies like Pacific Gas & Electric and Google. Although there is some skepticism among experts about the feasibility of V2G, the big players see a future in which fleets of hybrid cars, recharged at night when demand is lower, can relieve the grid and help avert serious blackouts….

No automaker is selling a plug-in hybrid vehicle, but some ambitious people are making their own. Converting a stock Prius to back up the grid is much easier, and the guru for such conversions is Richard Factor, 61, an inventor from Kinnelon, N.J….

During a recent six-hour power failure, Mr. Factor estimated that his 2005 Prius used less than one gallon of gasoline.

The V2G potential of Honda’s full hybrid vehicles is unexplored, but the company is doubtful of using them to power homes. “We would not like to see stresses on the battery pack caused by putting it through cycles it wasn’t designed for,” said Chris Naughton, a Honda spokesman. “Instead, they should buy a Honda generator that was made for that purpose.”

I can gather that Honda would rather sell a car and a generator, and that some consumers are wealthy enough to afford having a generator sit around unused for, perhaps 364 days a year on average in order to have power that 365th day. But seems like it would be wasteful to have a large stock of PHEV and a bunch of very infrequently used diesel or gasoline-fueled home generators laying about.

Clearly, too, electric utilities are wary of consumers hooking generators up in their homes. But these barriers will be overcome, and likely soon.

Posted in Electricity, Technology | 3 Comments »

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Merry Christmas, in OLEDs!

December 25, 2008

Lynne Kiesling

GE has been making lots of research progress on OLEDs, and they are celebrating the holiday season with a green OLED roll Christmas tree! Sure, it’s a little dorky, but imagine how these low-energy-per-lumen lights can transform our lighting, and our energy use to provide valuable lighting functions and services.

Merry happy to all!

Posted in Electricity | 1 Comment »

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Easy to rig BLS auction

December 24, 2008

Michael Giberson

The emerging field of economic systems design (or “market design”) has spawned a lot of fancy mathematics in the effort to better understand auctions and other economic systems and to apply that knowledge to make those systems better. Paul Klemperer, among others, has pointed out that “what really matters in auction design” is often just a matter of getting simple things right: encourage entry, discourage collusion and predatory practices.

Al Roth at Market Design provides current reminder of the importance of getting simple things right in the form of a news story on an economics student who disrupted a recent BLS auction of development rights to public land in a very simple way: he bid, but had no intention of paying.

Posted in Economics, Energy markets | 1 Comment »

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