Archive for September 24th, 2009

h1

Price signals and free markets lead to oil exploration: who’d a thunk it?

September 24, 2009

Lynne Kiesling

From a good article in today’s New York Times: 2009 is turning out to be a bumper year for new oil discoveries; new oil discoveries always occur, but this year has been unusually fruitful. This quote from the article illustrates the important dynamic intertemporal incentives that price signals provide:

These discoveries, spanning five continents, are the result of hefty investments that began earlier in the decade when oil prices rose, and of new technologies that allow explorers to drill at greater depths and break tougher rocks.

“That’s the wonderful thing about price signals in a free market — it puts people in a better position to take more exploration risk,” said James T. Hackett, chairman and chief executive of Anadarko Petroleum.

More than 200 discoveries have been reported so far this year in dozens of countries, including northern Iraq’s Kurdish region, Australia, Israel, Iran, Brazil, Norway, Ghana and Russia. They have been made by international giants, like Exxon Mobil, but also by industry minnows, like Tullow Oil.

Note here the hetergeneity of both the location of the discoveries and the types of firms that are exploring and discovering.

See also the comments and the tie to peak oil from Tim Haab at Environmental Economics.

There’s also an interesting similarity, and contrast, with how high natural gas prices have induced further exploration and discovery in the U.S. in the form of shale gas. Extracting shale gas is more costly because it’s embedded in shale rock, but the high natural gas prices since 2003 have induced innovation and exploration. That, combined with other discoveries, has led to historically high natural gas inventories (shifting out the supply curve); this year’s recession has reduced the demand for natural gas (shifting in the demand curve). Not surprisingly, therefore, the price of natural gas is about one-fourth of what is was back in, say, 2005. This week NPR has been running a series on natural gas innovation and exploration; the first in the series is here, and there are more resources associated with the series on their web site as well.

Posted in Economics, Energy markets | Tagged , | 2 Comments »

h1

An illustration of comparative advantage from professional cycling

September 24, 2009

Lynne Kiesling

As a cyclist, it should come as no surprise that I follow professional cycling pretty closely, and have done for some time. As an economist, it’s a rich laboratory for seeing all kinds of different economic concepts and principles play out.

Today I found a good one in an interview with Dave Zabriskie of Team Garmin-Slipstream, who is currently the U.S. time trial champion and recently won the week-long Tour of Missouri stage race. One of the aspects of being a cyclist is being mechanical — some cyclists are all about knowing the ins and outs of taking their bikes apart and putting them back together, while others are just as happy to take it to the shop and let a professional mechanic handle it. Most of us  are somewhere in between, but leaning more toward letting the mechanics handle most of the bike work. The pro cyclists are not that different, as these comments from DZ illustrate:

schmalz Now are you the type of racer who doesn’t do any mechanical stuff; you don’t feel comfortable with that?

DZ [A hint of hesitation] I can do some of it.

schmalz What’s the toughest thing you can do? Can you do a bottom bracket?

DZ What’s there to do there?

schmalz Can you put one in, attach it to the cranks, and have it work?

DZ It’s got to sides to it. Well, the new ones are pretty easy. Yeah, I think I can do that.

schmalz I can’t do anything that goes through the frame. I don’t do headsets and bottom bracket stuff but I can do everything else. I can adjust cables, derailleurs.

DZ I’m at the point now where I just give it to them. I’m pretty close with some mechanics so I just hand it off to them and they dial it in real quick.

schmalz And you hve guys where you live and on the road you have team mechanics?

DZ Yeah.

schmalz So you’re not especially mechanical?

DZ Well, I keep it clean, lubed up. Air in the tires. I went through a stage where I tried to get into that stuff. I overhauled a headset and did some things but it’s just a lot easier and a more efficient use of my time to let someone else take care of it. [emphasis added]

Note how well he expresses the concept of comparative advantage — more efficient use of his time to train and ride his bike and rest than to work on his bike. It’s a really good illustration of comparative advantage. [As an aside, for teaching purposes: if the mechanic is a better mechanic and DZ is a better rider, then it's a situation of absolute advantage as well as comparative advantage, but suppose DZ is both a better rider and mechanic ... then it's a pure comparative advantage play. Good example for classroom discussion.]

Posted in Economics, Professional sports | Tagged , | 3 Comments »

h1

Can a Keynesian beauty contest improve Obama’s suggestion box for federal employees?

September 24, 2009

Michael Giberson

President Obama has created the “SAVE Award,” a process by which federal employees can submit ideas for “how their agency can save money and perform better.”  A committee of OMB officials will review the submissions and submit a short list to the President, and the President will pick the winner.  The federal employee with the winning suggestion will get to meet the President and have the idea included in the government’s next budget.

NewsFutures, a “wisdom of crowds” system vendor, suggests on the company blog that the SAVE Award approach just scratches the surface of the possible benefits of crowdsourcing innovation.  Here is their diagnosis and recommendation:

What’s wrong with this process?

There is no aggregation of the collective wisdom. The crowd is called on only to submit ideas, not to help evaluate them, which is the critical step in the delicate wisdom of crowd recipe. Instead, a bunch of political appointees in the OMB will decide which ideas get on the short list that the President will see. Needless to say, we would not dare propose such a simplistic process to our enterprise clients looking to harvest and select innovative ideas from their employees.

Here’s how it should be done: After everyone has proposed their ideas, ask everyone to bet (not vote) on which idea the President will ultimately select – or alternatively, on which ideas will be short-listed by the OMB officials. The crowd’s betting will quickly and efficiently produce a ranking of the best-to-worst ideas, and the result will be less arbitrary than what you can expect form a close-knit group of bureaucrats. Now, it doesn’t mean that the OMB officials cannot have the ultimate say on what ends up on the short list that goes to the Oval Office, but their choice is at least informed by the crowd’s aggregate choice.

Let’s ask NewsFutures’s question again: “What’s wrong with this process?”

Since the crowd is being asked to bet on which item(s) will be chosen, not which one would actually produce the best productivity improvement, the betting will not “quickly and efficiently produce a ranking of the best-to-worst ideas.”  Instead, it will produce a ranking of what the bettors believe is most likely to be selected by the OMB and President.

If the short list was actually determined by the betting rather than independently selected by the OMB, the process takes on elements of a Keynesian beauty contest.  No longer would bettors be betting on which ideas would be best, nor which idea among all submissions is most likely to be chosen by the President.  Instead, the winning bettors would be those that best predicted which idea would be chosen from among those ideas most heavily favored by other bettors.

Rather than aggregating collective intelligence to identify the best idea, the process instead becomes one in which, in Keynes’ words, “we devote our intelligences to anticipating what average opinion expects the average opinion to be.”

UPDATE: Jed Christiansen’s post, Starting from the wrong metaphor – Prediction Markets and Ideas, was written a few weeks ago in response to another ideas market operation. His comments seem relevant to the issues here.

(HT to Chris Masse at Midas Oracle)

Posted in Economics, Politics | Tagged | 3 Comments »

Follow

Get every new post delivered to your Inbox.

Join 41 other followers