Austin Energy wants an electric power rate hike

Michael Giberson

Deep in the heart of the competitive wholesale and retail electric power market that is (the ERCOT system in) Texas lies a little island of small-scale socialism: the municipal electric utility called Austin Energy. While power prices are dropping all around the state due to low natural gas prices, in the Texas state capital Austin Energy is seeking a rate increase.*

Austin has long been a bit out of step with the rest of the state, so this could serve as just another opportunity for “real Texans” to poke fun at the aging hippies that have taken control of the capital’s city government.

Instead, however, you should read Martin Toohey’s excellent article in the Austin American-Statesman, “As natural gas prices dip, Austin Energy rates still to increase.” For many years the city utility has pursued a policy of fuel-source diversification. As the article explains, it is easier to see the value of a diversification plan when natural gas prices spike, and harder to see the value when natural gas prices drop sharply.

*Note that the link goes to a live (i.e. periodically updated) price chart which shows the average prices of one-year fixed rate prices in the Houston area. Similar price effects are present elsewhere in the state. Currently the price chart shows a drop from just over 10 cents/kwh during most of 2011 to about 9.5 cents/kwh in April 2012.

Do you want to be intellectually honest?

Michael Giberson

Some techniques for checking the tendency toward extreme partisanship, which can be a ready source of intellectual errors (source):

•Take opposing points of view at face value.

It is more comfortable to treat opposing points of view reductively. That is, rather than deal with a different viewpoint, we prefer to explain it away. “They just want power.” “They just serve special interests.” “They don’t believe in science.” “They are socialists.”

Taking opposing points of view at face value means that we try to pass the ideological Turing test. Could my characterization of another ideology allow me to pass as a proponent of that ideology? Could an opponent’s characterization of my ideology allow that person to pass as someone like me?

•Police your own side.

In political debates, we put a lot of energy into pointing out the errors of our opponents. When somebody writes an op-ed exposing the “myths” that surround an issue, the purpose is to debunk the other side, almost never to question one’s own allies….

Imagine instead an environment in which we primarily tried to expose intellectual error on our own side. In street basketball terms, you “call your own fouls.” The onus of calling liberals’ intellectual fouls would fall on liberals. The onus of calling conservatives’ intellectual fouls would fall on conservatives.

Policing your own side would require a conscious effort to reverse the tendency toward confirmation bias. We would have to search as hard for holes in our allies’ arguments as if they were opponents’ arguments. If the goal is to improve public discourse by removing improper arguments, we are much more likely to succeed by having each side call its own fouls than by having people call fouls on the other side.

Street basketball with teams calling fouls on one another would probably degenerate into unsettled arguments. That is, it would start to resemble politics.

•Scramble the teams.

Many years ago, some men in our neighborhood started a pickup softball game on Sundays. We quickly realized that if we formed regular teams, antagonisms would fester. Instead, each week we formed new teams on a different basis, such as odd-numbered birthdays vs. even-numbered birthdays. Scrambling the teams kept the games friendly.

Much of our partisanship reflects emotional loyalty to the ideological group with which we identify. To scramble the teams, we would need to foster situations in which liberals develop emotional bonds with conservatives.

Emotional bonds develop when people work towards a common goal. Thus, in the past, military service and foreign threats have served to break down ideological differences. Historians view World War II as a period in which American unity was strong….Overall, the end of the Cold War, which reduced the sense of common threat, may account for some of the rise in partisanship within the United States in recent decades.

We need to find a substitute for external threats as a social bonding agent. Maybe some ideological peace could be bought by having liberals and conservatives who both root for the same sports team get together during important games. Perhaps liberals and conservatives could actively participate in charitable endeavors that both can endorse.

The work of [Jonathan] Haidt and other psychologists is persuasive and disturbing. It exposes a tendency to form ideological tribes that use moral arguments as rationalizations. Tribes will go out of their way to misunderstand one another. If we want to get along better and resolve differences more easily, it will take conscious effort to overcome tribal behavioral instincts.

From: Arnold Kling, “The Tribal Mind: Moral Reasoning and Public Discourse,” The American, Thursday, April 26, 2012.

Schmidtz on the philosophy of property

Michael Giberson

At Bleeding Heart Libertarians, University of Arizona philosopher David Schmidtz discusses what a good concept of property does for society. He sums his view concisely at the end, reproduced below. Go read the rest of it for the background and support for these conclusions.

To summarize, in more concrete terms, when a system of property is working, it enables people to live good lives together by helping people to solve a cluster of key problems:

  1. It puts people in a position to produce.
  2. It puts producers in a position to trade.
  3. It fosters creative destruction by encouraging people to experiment, and to shut down experiments that are not working, and to acquire and transmit information about which experiments work and which do not.
  4. It limits externalities.  That is, it results in people having to pay the costs of their own experiments, and also in people being able to enjoy the benefits of their own experiments, thereby helping a society make progress. In most times and places, this will mean a mixed regime in which important bits of property are held by the public but in which the primary means of production are in private hands. That kind of mixed regime has been tested repeatedly in practice. Evidently, and for well-known reasons, it just works better.
  5. It limits transaction cost.  A system must enable producers to take steps to minimize the cost of getting their product to their customers. The roads must be good. Tariffs must not prevent them from dealing with foreign suppliers, and so on.
  6. It enables producers to grow their business, setting up production processes that exploit opportunities for productivity-increasing division of labor and economies of scale.

A system of good property law and good government does these six things, then stops.  Property rights don’t do everything for people, any more than do traffic lights, or plumbers, but this much they can do: they can structure people’s opportunities and incentives such that the most profitable thing people can do is to be as useful as possible to the people around them. The key to explosive economic growth is simple: Secure our possessions well enough to make it safe for us to be a part of the community. Put us in a situation where the key to personal prosperity is to devise ever more effective ways of making the people around us better off. That isn’t everything, but it is a lot.

The energy price version of “this time it’s different”

Michael Giberson

David Wessel’s economics column at the Wall Street Journal takes a look at an IMF analysis of commodities prices since 1973. In the process, he makes an odd claim about energy prices.

CHART: Commodity prices since 1973 from the IMF World Economic Outlook

Commodity prices since 1973 from the IMF World Economic Outlook.

Wessel writes:

To help distinguish temporary trends from long-lasting ones, International Monetary Fund economists recently charted the inflation-adjusted prices of four baskets of commodities—energy, metals, food and agricultural raw materials (such as logs, cotton, rubber, wool and others) since the 1970s. For what it’s worth, the IMF’s bottom line: “The weak global economic outlook suggests that commodity prices are unlikely to increase at the pace of the last decade.”

But the IMF charts illuminate a bigger story.

• Something significant did happen in the 2000s: a sea change in what had been a downward drift in prices of commodities (other than energy) for decades. The consensus explanation: Demand from China, India and other emerging markets grew very rapidly as these big economies sprang to life….

• Energy prices are truly different. For one thing, they are much more volatile than other commodity prices for all sorts of reasons, including recurring geopolitical risks that oil supplies will be disrupted. For another, they are clearly rising—up 163% over the past four decades. The consensus explanation of energy’s exceptionalism: Rising oil prices depress economic growth and that depresses prices of other commodities.

• Metals prices have risen significantly in the past several years, as the IMF chart shows… Still, metals prices are roughly where they were in 1973, a clear contrast to the price of energy, which appears unlikely to ever be as cheap as it was then.

• Over the past several decades, the price of food is down substantially—despite the growth in the world’s population and the well-discussed change in the diets of the increasingly prosperous Chinese, and even after the uptick of the late 2000s. Food prices are roughly half what they were in 1973. Half. That long-lived trend is likely to continue.

Why should we believe “this time it’s different” about energy prices?

It seems an especially odd claim given the near two-decade period from about 1985-2003 during which energy prices were essentially the same as in 1973. That can’t happen again?

Maybe we’ve reached the global limits on energy-resource productive capability, but I doubt it. Instead I think we’ve seen significant growth in energy demand over the last decade or so, more or less exhausting any excess capacity (or, in economics jargon, the energy demand curve is now intersecting with a relatively inelastic portion of the energy supply curve). Energy supply has been increasing in response, but the effort is slow-moving, so we get higher and more volatile prices in the meantime.

My guess is that we will see inflation-adjusted oil prices back at 1973 levels within the next five years.

RELATED: The recent IMF World Economic Outlook analysis that inspired Wessel’s column.

Natural gas reserves may rapidly disappear (and later reappear)

Michael Giberson

At Toronto’s The Globe and Mail, Nathan Vanderklippe reported, “Low natural gas price casts doubt on ‘proven’ reserves.”

He explains how rapidly falling natural gas prices can cause reserves to disappear. And, by the way, with higher prices reserves can just as quickly reappear. It isn’t magic. But the nature of oil and gas reserves is not well understood, often not even within the energy policy community, so it is worth looking at this relationship between prices and reserves.

Frequently in public policy discussions of oil and gas, reserve amounts get talked about as if they are estimates of all of the remaining oil and gas that will be developed. Reserves are actually just estimates of the currently discovered petroleum resource that is technically recoverable using current technology and anticipated to be profitable to develop at expected prices.

It is the last part of the description – “anticipated to be profitable to develop at expected prices” – that may be responsible for the disappearance of natural gas reserves this Spring. As Vanderklippe discusses, prices expected for this year and the next few were somewhat higher last year while reserve reports were being prepared (in the $3.50 to $4 range). Looking at the same set of resources at today’s much lower price (current futures prices for May are just over $2 an mmBTU) and a perhaps sizable fraction of reserves reported last year may no longer be profitable to develop. And if some of today’s reserves are no longer profitable to develop, the natural gas is no longer countable as a reserve. Experts quoted in the article suggest drops of from 20 percent to 40 percent of proved reserves due to lower prices.

But of course the natural gas resource doesn’t disappear when the reserve numbers fall, the gas just gets reclassified into a sub-commercial category, “contingent resources.” When prices rise again (or the cost of developing resources falls), the natural gas resource can just as suddenly reappear as a reserve.

One other reserve definition note: the reserve numbers most frequently mentioned in policy reports and news articles are “proved reserves.” As described in the Petroleum Resources Management System, the industry standard reserves definitions, proved reserves are a  fairly conservative estimate of the discovered resource anticipated to be profitable to develop at expected prices. Nine times out of ten you actually expect to produce more than the proved reserve estimate.

(Note that Vanderklippe’s article refers to Canadian reserve reporting practices, in the United States the Securities and Exchange Commission determines reserve reporting requirements which may vary from Canadian practice.)

If you must subsidize energy, subsidize wisely

Michael Giberson

Earth Track has dedicated itself to uncovering the government policies that it finds harmful to the environment, with a particular focus on the effects of energy subsidies. From various quotes in the press from Earth Track founder Doug Koplow, I gather I may not always agree with his views of public policy and the world. But a casual review of the extensive work Earth Track has done on subsidies suggests that its work is, as it aims to be, pretty thorough and reasonably unbiased.

Koplow, noted for his criticism of energy subsidies, reports being asked which kinds of energy subsidies he does favor. His response – “So which forms of energy should we subsidize?” – notes that while he is not opposed to energy subsidies in principle, in practice there are many reasons to be cautious.

The realism exhibited with respect to the ways policymaking actually works is refreshing.

Great strides have been made combating price gougers in Venzuela

Michael Giberson

Venezuela “President” Hugo Chávez  has put his government strongly behind efforts to combat price gouging, which in this context means selling a good for more than the government’s permitted price. The policy has had the usual effects: shortages of ordinary consumer goods and queues reminiscent of Soviet-style communism.

The New York Times reports, “With Venezuelan Food Shortages, Some Blame Price Controls.” Obviously those “some” are greedy capitalists and their economist lackeys, but Chávez isn’t buying into such corrupt and self-serving claims by economic elites. Instead, “[Chávez and his ministers] blame unfettered capitalism for the country’s economic ills and argue that controls are needed to keep prices in check in a country where inflation rose to 27.6 percent last year, one of the highest rates in the world.”

That’s the ticket: the more problems the government creates, the more reasons the government claims it is needed to solve problems.

HT to Paul Walker at Anti-Dismal, who offers a curated selection of quotes from the article.

MORE: A news story from 2010, “Venezuela closes price-gouging shops.”