Monthly Archives: March 2012

Refiners are getting squeezed by high crude oil prices and faltering U.S. demand, so let’s increase their costs!

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Michael Giberson

The Houston Chronicle reports on the difficult financial position of many U.S. refineries. Crude oil prices are up for refineries relying on international markets, but U.S. consumers are moderating their gasoline consumption at higher prices and so refiners find their margins to be getting squeezed.

A good article, but right at the end we get this oddball proposal:

Still, refineries could do more to curb skyrocketing gasoline prices, said Amy Myers Jaffe, fellow at Rice University’s Baker Institute. A government mandate for refineries to maintain a certain level of gasoline in storage would help to curb market fears of a shortage, fears that fuel rapid price spikes, she said.

“We should be requiring inventories of gasoline,” Jaffe said, to reassure the market that supplies won’t run short.

Seems to me a non sequitur wrapped in a riddle: refineries should be doing more to curb skyrocketing gasoline costs? Why refineries? Every indication is that gasoline prices are being driven by world oil crude oil prices (expect for the bottlenecked supplies of the northern Rocky Mountain states). There is no indication that “the market” is fearing a shortage of gasoline, is there? By the way, gasoline inventories are pretty high for this time of year AND consumption has been trending down, so who thinks consumer fears of a gasoline shortage are a problem?

And, I guess this is my real question, what makes Jaffe think that the solution to the refineries’ current woes is to impose regulations that would significantly add to their costs? Exactly how is this going to “do more to curb skyrocketing gasoline prices”?

Jaffe is usually smarter than this, so I’m a bit confused by the idea.

Hamilton on the main reason oil prices are high

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Michael Giberson

Saudi oil minister Ali al-Naimi said  there was “no rational reason” for current high oil prices, since there were enough supplies and all consumers were getting oil.

James Hamilton rises to object, “if oil prices were lower, the world would want to consume more than is currently being produced.” Hamilton examines what the quantity demanded might be at lower prices and concludes we’d need about an additional 15 million barrels a day in supply to meet consumer demand at oil prices of a decade ago.

So the higher price is encouraging some consumers to reduce their consumption while urging suppliers to increase, if they can, the amount of oil they bring to the market.

Hamilton: Why do gasoline prices differ across U.S. states?

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Michael Giberson

James Hamilton, at Econbrowser, examines the question,”Why do gasoline prices differ across U.S. states?“

The short answer is: state gasoline taxes (clearly), regional fuel requirements (probably), and access to relatively inexpensive crude oil supplies. Any remaining price differences are probably just general state differences in the cost of doing business.

But go read Hamilton’s explanation which includes some colorful maps (and draws on a similar assessment at Political Calculations).

 

Left, right, and climate change

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Michael Giberson

In principle, there is nothing in the science of climate change that imposes a partisan political commitment. It isn’t as if, for example, you have to believe in steeply progressive tax rates in order to understand climate science. Yet there seems to be a partisan divide on the science. Three recent posts at Grist have ventured into this ground.

David Roberts wrote, “What ‘left’ and ‘right’ really mean on climate change (hint: nothing)“:

The left-right alignment on climate is completely scrambled, in part because the real battle, as we shall see, is not ideological. …

I’m not sure I would call carbon-pricing solutions right-wing, but I do think it’s fair to characterize them as conservative. Conservative economic thinking prefers a minimum of government intervention in the economy. Sending a carbon-pricing signal via a tax or cap is a minimalist intervention, as technology and industry agnostic as policy can be….

The odd thing that’s happened in climate circles in the last few decades is not just that the (generally liberal) environmental community has fervently championed “market-based” solutions like carbon pricing, but that the activist left in particular has adopted a carbon tax as its cri de coeur. … That doesn’t make any sense at all … both are basically conservative in their approach.

Nonetheless, that’s the odd situation we are in today: an intra-left battle between two conservative policy solutions. … It’s a mess. There really is no coherent left vs. right on climate, at least not in terms of economic ideology.

Roberts concludes:

In actual fact, there is no struggle between philosophies happening in U.S. climate politics, only a struggle among economic interests.

A few weeks after the Roberts piece, Grist ran an interview with author/activist Naomi Klein, and she had a directly opposing view:

(Klein:) [B]elief in climate change in the United States has plummeted. If you really drill into the polling data, what you see is that the drop in belief in climate change is really concentrated on the right of the political spectrum. It’s been an extraordinary and unusual shift in belief in a short time. … So I started researching the denial movement and going to conferences and reading the books, and what’s clear is that, on the right, climate change is seen as a threat to the right’s worldview, and to the neoliberal economic worldview. It’s seen as a Marxist plot. They accuse climate scientists of being watermelons — green on the outside and red on the inside.

Q. It seems exaggerated, but your piece was about how the right is in fact correct.

A. I don’t think climate change necessitates a social revolution. This idea is coming from the right-wing think tanks and not scientific organizations. They’re ideological organizations. Their core reason for being is to defend what they call free-market ideology….

You can set up carbon markets, consumer markets, and just pretend, but if you want to get serious about climate change, really serious, in line with the science, and you want to meet targets like 80 percent emissions cuts by midcentury in the developed world, then you need to be intervening strongly in the economy, and you can’t do it all with carbon markets and offsetting… The market is not going to step up to this challenge. We must do more… These climate deniers aren’t crazy — their worldview is under threat. If you take climate change seriously, you do have to throw out the free-market playbook.

Q. What is the political philosophy that underscores those who accept climate change versus those who deny it?

A. The Yale Cultural Cognition Project has looked at cultural worldview and climate change, and what’s clear is that ideology is the main factor in whether we believe in climate change. If you have an egalitarian and communitarian worldview, and you tend toward a belief system of pooling resources and helping the less advantaged, then you believe in climate change. And the stronger your belief system tends toward a hierarchical or individual worldview, the greater the chances are that you deny climate change and the stronger your denial will be.

Environmental economist Gernot Wagner responded with a piece saying Klein was only half right:

Naomi Klein’s interview in Grist this week is smart, insightful, and half right. Her assessment of the obstacles to solving climate change — from ideology to misplaced faith in green consumerism — are exactly right.  And she’s right that fixing this problem means changing how the world does business.

But Klein is wrong in her more serious assertion, first articulated in her “Capitalism vs. the Climate” article in The Nation, that we can save the planet only if we abandon capitalism:

Responding to climate change requires that we break every rule in the free-market playbook and that we do so with great urgency.

The deeper problem is not that our markets are too free; it’s that they are woefully rigged in favor of pollution. Which is also the main reason the Earth finds itself in peril.

The “rigging” in favor of pollution Wagner refers to is the economists’ familiar negative externalities, and the too-common absence of rules that require polluters to pay.

Wagner concludes, “My real argument with Klein is that in trying to escape capitalism, she is trying to evade human nature. [The debate is] not about a full-scale assault on human desires, capitalism, and free markets. … It’s about freeing markets, and in the process freeing all of us to do the right thing.”

I think Klein has a good point concerning the ideological divide over climate change. Crudely speaking, leftists are all to willing to accept scientific claims implying a bigger role for government in the economy, while rightists are all too willing to reject scientific claims implying a bigger role for government in the economy. (And note that the Yale study she cited isn’t about bashing conservatives – they find that leftists are too willing to dismiss scientific findings challenging their views on nuclear waste disposal.)

But I’d like to insert my plea here: climate change science ought not to be a political issue. And, as a complement to that position, climate scientists ought also to recognize the limits of their expertise. The science can and should inform the public policy making process, obviously, but nothing in temperature data, computer modeling and the study of climate/cloud-cover interactions, etc., implies any particular policy conclusion.

It might be true, as Klein says, that we must “throw out the free market playbook” in order to achieve an emission cut “in line with the science.” And if it is true, it may also be quite reasonable for an analyst to weigh the costs and benefits of such a shift, and choose markets. Fortunately, I think Wagner is more right. In my view, we don’t need a government-led assault on markets to address environmental issues, we need rules that support markets.

Nutrition experience, research, and orthodoxy, with some economics parallels

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Lynne Kiesling

Last week was our spring break, and I finally took some time to read Gary Taubes’ 2008 book Good Calories, Bad Calories. Taubes is an investigative science journalist who has been writing for years about the science of nutrition and epidemiology, and the book focuses on a long, careful, detailed narrative about how such science has evolved since the mid-19th century. One of the themes that emerges is that some of the most prominent researchers, particularly those advancing the dual hypotheses that fat causes heart disease/overeating causes obesity, did not test their hypotheses for falsification using controlled trials in designing their research, and are also personally invested in doing research that “proves them right”. Thus, Taubes argues, an orthodoxy has formed around these hypotheses when he finds the scientific support for them lacking, and similarly finds support for an alternate hypothesis — refined carbohydrates cause heart disease and obesity. But the orthodoxy resists testing that alternate hypothesis.

I have personal interest in this topic based on my own experience. As a high metabolism athlete for all of my life, I grew up being able to eat almost anything in unrestricted quantities. But when I got my first faculty job out of grad school (at WIlliam & Mary, yay!) in 1992, the combination of teaching and research duties with moving to a swampy climate against which my body rebelled meant a reduction in my activity, bloating because of the humidity, and weight gain. Without really thinking about it (because I hadn’t had to before), I reduced my meat consumption and substituted into (refined and unrefined) carbs. The next two years were right out of Taubes’ book — reduction in calories to manage weight while increasing exercise, but not having enough energy to actually make it meaningful, culminating in what is now known as metabolic syndrome complete with insulin resistance, hormone imbalance, and symptoms of polycystic ovarian syndrome. I then spent two years revamping my diet to reduce refined carbs, include more animal and vegetable protein at every meal, and monitor my hormone and energy levels, and succeeded in reversing all negative symptoms. I returned to the energy levels that have enabled me to do longer and longer distance cycling and triathlon endurance events and the demanding training for them. Even though I don’t eat low-fat, my triglycerides are so low that my doctor marvels at it. Taubes’ argument is consistent with my experience.

Economist Russ Roberts has been experimenting with his diet and exercise for the past six months, following broadly the same principles that I do (including the refined carbs on the weekend), and he reported in on Friday: 20 pounds lost, more energy, feeling of satiation, low triglycerides. Again, consistent with my experience.

You may know Russ for his outstanding EconTalk podcast series, and in November 2011 he interviewed Gary Taubes. The conversation was interesting and informative, and the podcast page lists lots of resources for further reading. One theme that Russ developed in the discussion was that in both nutrition research and economics research, the issues come up of orthodoxy and structuring research questions in ways that generate falsifiable hypotheses when you are studying such a complex, dynamic system as either the human diet/cardio/endocrine system or the human economy. The human traits that incline us toward orthodoxy, whether it’s wanting to prove ourselves right or appeal to authority or some other trait, have led to models and hypotheses that are not supportable or not even meaningfully testable/falsifiable. So for me reading Taubes’ book was a good cautionary tale of the value of humility beyond the analysis of low-carb/low-fat nutrition.

Another insight that comes up in the book that I would add to Russ’ comparison with macroeconomics is heterogeneity. Taubes is careful to point out that individuals have different metabolic experiences and achieve homeostasis with different combinations of fat, carbs, etc., so while low-carb nutrition may allow some people to strike a healthy heart and weight balance, others may be able to eat more carbs and do the same. Heterogeneity means that there’s no one-size-fits-all hypothesis … and as any Austrian macroeconomist will tell you, that’s the argument they put forth about macroeconomic models and aggregation. Heterogeneity in the capital structure in reality means that models abstracting from such heterogeneity are more likely to mislead.

Tedious peak oil claims from the EU Energy Policy Blog

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Michael Giberson

Not all peak oil analysis comes across as sloppy, misleading, and a bit tedious, but this one does: “Peak Oil Driving The Global Gas Shift.” Of course sloppy analysis abounds on the internet, and the best approach is usually to ignore it, but this example appears on the somewhat respectable site of the EU Energy Policy Blog.

The introduction to the article is set up as a contrast to the rosy outlook of a Citigroup report that claimed the shale gas boom was set to transform into an oil boom in North America. Not so fast, our author warns. Then, after a few “peak oil-friendly facts” picked from a subsequent US Energy Information Administration report (link), the author gives us the bad news from Iranian production:

The shrinking spare capacity of the OPEC states, of 2.5 Mbd, is almost exactly what Iran was exporting until late 2011, following a year average 2.6 Mbd in 2010, but since 2011 and for reasons only partly related to sanctions, and closer related to depletion, its oil output is falling: Iran’s net exports and export supply capacity may stand at only 2.2 Mbd today. Some sources suggest even less than that. In 1976, Iran could produce 5.75 Mbd and export far more than 4 Mbd to a world market that, at the time, consumed about 62 Mbd compared with 89.7 Mbd today. Explaining this while denying depletion and the impact of oil consumption growth in exporter countries and worldwide is mental gymnastics!

Allow me to attempt the “mental gymnastics,” which in this case seems to be the mental equivalent of sitting on a balance beam and swinging my legs: to wit, the internet search! Yielding an EIA country report on Iran and this chart:

Iranian Total Oil Production and Consumption, 1977-2010

EIA, Iranian Total Oil Production and Consumption, 1977-2010

The International Energy Agency’s numbers on Iranian oil production look much the same. Admittedly, our author is making claims about 2011, and especially about changes since 2011 (i.e. production over the first month or two this year), while the chart about only shows data through 2010. So imagine a slight drop for 2011 and a sharper drop for early 2012, perhaps like the drop seen in 2002. The IEA’s more recent analysis of Iranian oil suggests that production fell by 1.5 percent in February 2012, to the lowest rate in three years.

But can we call this a Peak Oil omen? Obviously, as the chart shows, Iranian oil production is down from the high levels of the 1970s. But, with the helpful labels inserted by the U.S. EIA “Iranian Revolution” and “Iran-Iraq War,” it is easy to see that the so-called above-ground factor of politics and war have driven the most significant swings in production. In addition, the chart makes clear that net exports (and most of the numbers cited in the paragraph quoted are net export numbers) depend on production and domestic Iranian consumption.

So far as I know, peak oil is a theory about production rate limits enforced by physical realities, not a theory about international trade. Net export data is at most suggestive. And especially when the trade data cited comes from a period of explicit trade sanctions imposed by nations who previously were significant trading partners, it seems all to easy to believe that the above-ground factors of politics are dominating the export data changes, and not the physical limits of depletion.

The author follows the Iran discussion with a wide-ranging sketch of gas market shifts, global energy policies toward renewables, and hopes for electric vehicles – the sort of view of the world you can have from reading many government reports on energy policies. Ultimately the author asserts a global move from oil, despite its high value, to natural gas, despite its lower value.

To me, the economics of the conclusion seems less than well worked out.

 

 

Getting a little LED off my chest

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You know what? I’d happily spend the $27.98 for the 6 LED chandelier bulbs at Costco IF THEY WERE DIMMABLE. Yes, I know I’m shouting, but crikey, if you want people to use less energy, MAKE IT EASIER FOR THEM. Seriously, electronics engineers, what’s the problem? Who on earth thinks that people want to sit under a brightly-lit chandelier without being able to change the lighting level?

Until you have good quality dimmable LED bulbs on the market, you’ll pry my incandescent chandelier (and can light) bulbs at your peril from my cold, dead hands.

Learn Liberty video: should government regulate monopolies?

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Lynne Kiesling

I am happy to say that Learn Liberty has published another video that we did together. This one is a short one in which I talk about government regulation of monopolies, essentially laying out Schumpeter’s argument that when entry costs are low, monopolies do not persist because monopoly profit serves as a lure to entice entrepreneurs and innovators to create new value propositions (“new combinations”, in Schumpeter’s words) that break down market barriers and definitions.

Those of you with an electricity/natural monopoly background will notice that I assiduously stay away from economies of scale and subadditivity of costs as a cause of monopoly formation. Couldn’t keep the video at 3+ minutes if we opened that Pandora’s box!

The Learn Liberty page for the video also has a description and some discussion of the issues.

Innovative retail competition: is it finally starting … and in Chicago?

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Lynne Kiesling

This may be the beginning of what I’ve been arguing for over the past decade plus … today in Smart Grid News, Jesse Berst reports that Constellation Energy has teamed up with Best Buy to enable customers to come into the store, switch their retail provider, and buy home energy management devices (see also the brief note in the Chicago Tribune). Jesse observes that

It has been fascinating to watch power retailing develop in areas such as Texas and the United Kingdom. In the early days, we thought it would be all about price. As it turns out, price is important but it is just the table stakes. To become a market leader, you have to establish brand trust. You have to bundle the power with other products or benefits. And you have to make that bundle ultra-easy to find and purchase.

Absolutely correct. This is the kind of Schumpeterian retail innovation that is a value-creating hallmark of competitive rivalry.

At first blush it also has some similarities with mobile phone retailing — I presume that the retail provider to which a customer can switch is Constellation, and not Direct Energy or any of the other retail providers in the Illinois residential market. I’ll be interested in seeing if Best Buy is willing to make similar arrangements with those retailers. If their contract with Constellation precludes such arrangements, then we run into the murky area of whether or not exclusive dealing contracts are anti-competitive. But if, say, Target strikes a deal with Direct Energy, and Costco and Walmart get in on this innovation, then the retail landscape really starts to look like mobile communications retailing, and things get very interesting.

Note also that this type of market channel is a way for consumers to learn, which is a crucial process in the liberalization of retail sales in an industry that has been vertically integrated and regulated for over a century. Regulation defines product characteristics and boundaries and thus determines the type of product that the consumer is purchasing, so for over a century residential customers haven’t had to think about what they are buying and whether there are ways for them to get more value out of the transaction and relationship. They had no choice, so why give it any thought? Now starts the process of individuals learning how and why they may create more and different value from changing their retail relationship and changing the technology they use in the purchase and management of the electricity they consume.

As it happens, the Best Buy in this pilot is my neighborhood store, so I’ll check it out and report back what’s interesting and important. Free the electricity consumer!

Students: apply now for IHS summer seminars!

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Lynne Kiesling

Over the weekend Mike praised the Institute for Humane Studies teaching workshop he attended last summer. I’ll add to that an IHS recommendation for students: attend as many IHS summer seminars as you can while you’re a student!

More than ten week-long seminars sponsored by the Institute for Humane Studies apply classical liberal ideas, such as individual rights and free markets, to topics in history, economics, journalism, policy, and more. From breakfast until the evening reception, you can debate and discuss the ideas of liberty with enthusiastic professors and peers from around the world. IHS covers all meal and program costs. Undergraduates, graduate students, and recent graduates are eligible to apply.

In my experience both as student and as instructor at IHS summer seminars, they are intellectually challenging and engaging, and will be thought-provoking in ways that go well beyond your academic courses. I’ve learned so much in economics, philosophy, political theory, and other areas, and have developed important and meaningful relationships that have enriched my life.

Explore and learn more about IHS summer seminars today. The application deadline for this summer is March 31, which is fast approaching.