Category Archives: Energy markets

OPEC: Threat or menace…?

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Michael Giberson

… or a clumsy cartel causing excessive volatility in world oil prices, or maybe none of the above. Earlier this week the Cato Institute hosted a discussion of a recent report by Andrew Morriss and Roger Meiners, “Competition in World Oil Markets: A Meta-Analysis and Review.” Panelists included Morriss, FedEx chairman Frederick Smith, and SMU economist James L. Smith. Jerry Taylor coordinated the program.

Of the group of panelists, I think it is J. Smith that has the best handle on the evidence — which unfortunately is all over the map. Yes you can find evidence that OPEC has manipulated oil prices and contributes to instability, but your can find comparable evidence suggesting OPEC has had no real effect. My preferred view is that Saudi Arabia has had an ability to swing prices up or down a bit at the margin–they being the one country willing to maintain excess productive capacity and manage it with an eye to long-run price levels. On J. Smith’s discussion of the evidence, perhaps I should become more agnostic on the matter.

If you, too, have an opinion about the effect of OPEC on world oil markets, then you ought to listen to the program and consider whether your view is well supported by detailed studies of the issue.

ADDED: Mentioned in the discussion is James Smith’s Journal of Economic Perspectives article, “World Oil: Market or Mayhem?“, available free online.

Is Iowa solar power ruling a camel’s nose into electric utility’s monopoly tent?

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Michael Giberson

Eagle Point Solar, a for-profit solar power installer and operator, proposed to build a solar PV array on a Dubuque, Iowa municipal building under a long-term contract with the city. Under the contract, Eagle Point would own the solar array and sell power to the city in a “behind the meter” arrangement.

The local electric utility, Interstate Power and Light Company (IPL), challenged the arrangement as infringing on its exclusive service territory. In April of 2012, the Iowa Utilities Board agreed with IPL that the retail electric sales contract would require Eagle Point to be an electric utility and it would thereby be prohibited from providing service in IPL’s assigned exclusive electric service area.

Eagle Point appealed and in March 2013 the Iowa District Court for Polk County overturned the Iowa Utilities Board ruling. Eagle Point was declared not to be a public utility and therefore not in conflict with IPL’s assigned exclusive electric service area. Kari Lydersen at Midwest Energy News summarized key parts of the ruling:

The ruling emphasized that since there is no state statute defining what it means to sell to the public, the utility board should have relied on a decision in a 1968 Iowa case involving the state commerce commission and a natural gas company. Based on a series of tests outlined in that case and actually drawn from a previous Arizona case involving a natural gas company, the court decided that Eagle Point would not meet the definition of either a “public utility” or an “electric utility.”

Among other things, Schemmel noted, Eagle Point would not be able or required to meet all requests for service and it would not be competing with Alliant or creating a monopoly of its own.

Schemmel also pointed out that the solar panels would not meet all of the building’s electricity needs, hence the building would still be hooked up to the grid and buying electricity from Alliant. The building’s demand for electricity from the grid would be reduced, but this would be equivalent to the demand reduction created by energy efficiency measures like weatherization, Schemmel found.

The court also considered a state law declaring it “the policy of this state to encourage the development of alternative energy production facilities” as balancing against the public interests in the law granting monopoly territories to electric utilities.

A significant factor in this case was the ability of for-profit companies like Eagle Point, but not non-profit entities like city governments, to access numerous federal and state subsidies for solar power installations. If the deal was just about power supplies the city could have simply bought the solar array from Eagle Point. But this angle is actually less interesting that the broader possibilities of the precedent to support distributed generation.

The Iowa Utilities Board could appeal the decision to the state’s Supreme Court. But at least until that happens, or if the Supreme Court affirms the district court rules, behind-the-meter distributed power systems appear to be legal in Iowa (at least if they are “alternative energy” based generators, and if they don’t result in entirely removing a customer from electric utility service).

Small renewable providers and cogenerators, start your engines.

Eagle Point Solar: Dubuque City Operations Center

Eagle Point Solar: Dubuque City Operations Center

“The U.S. has thousands of energy strategies”

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Michael Giberson

The Wall Street Journal printed a letter to the editor from Dick Gillette which gets right the response to calls for a unified U.S. energy strategy. Business Roundtable President John Engler earlier had complained the United States had no energy strategy and concluded that the nation was missing valuable opportunities because of it.

Gillette responded:

Regarding the April 3 letter from Business Roundtable President John Engler: Why are we all obsessed with our energy strategy? We are far less concerned with our manufacturing strategy and not at all about our retail strategy, as far as I can see. Why do we need an energy strategy at all, and who is “we”? Private capital has done a pretty good job of keeping our tanks full over the years without smothering GDP. “We” didn’t develop hydraulic fracking, or discover oil in North Dakota or spend billions to build refineries. Private capital did that, so what is it that “we” think we have to offer? As evidenced by Rep. Chris Van Hollen’s proposed bill to tax energy companies more heavily than other industries, in Washington an energy strategy is really just about money.

In fact, the U.S. has thousands of energy strategies. Some will succeed, some will fail, as always. But there is no reason to believe our tanks won’t be full at affordable prices for decades into the future.

Yes, thousands of energy strategies in this country, perhaps even millions. When values are diverse and knowledge is dispersed, letting a thousand energy strategies bloom really is the best approach.

 

Europe wood. Wood you?

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Michael Giberson

From The Economist, “Wood, The fuel of the future“:

WHICH source of renewable energy is most important to the European Union? Solar power, perhaps? (Europe has three-quarters of the world’s total installed capacity of solar photovoltaic energy.) Or wind? (Germany trebled its wind-power capacity in the past decade.) The answer is neither. By far the largest so-called renewable fuel used in Europe is wood.

In its various forms, from sticks to pellets to sawdust, wood (or to use its fashionable name, biomass) accounts for about half of Europe’s renewable-energy consumption. In some countries, such as Poland and Finland, wood meets more than 80% of renewable-energy demand. Even in Germany, home of the Energiewende (energy transformation) which has poured huge subsidies into wind and solar power, 38% of non-fossil fuel consumption comes from the stuff. After years in which European governments have boasted about their high-tech, low-carbon energy revolution, the main beneficiary seems to be the favoured fuel of pre-industrial societies.

Also note, “because wood can be used in coal-fired power stations that might otherwise have been shut down under new environmental standards, it is extremely popular with power companies.”

And:

But if subsidising biomass energy were an efficient way to cut carbon emissions, perhaps this collateral damage might be written off as an unfortunate consequence of a policy that was beneficial overall. So is it efficient? No.

Wood produces carbon twice over: once in the power station, once in the supply chain. The process of making pellets out of wood involves grinding it up, turning it into a dough and putting it under pressure. That, plus the shipping, requires energy and produces carbon: 200kg of CO2 for the amount of wood needed to provide 1MWh of electricity.

This decreases the amount of carbon saved by switching to wood, thus increasing the price of the savings. Given the subsidy of £45 per MWh, says Mr Vetter, it costs £225 to save one tonne of CO2 by switching from gas to wood. And that assumes the rest of the process (in the power station) is carbon neutral. It probably isn’t.

And there’s more, so read the whole thing, but you get the idea. A real case study in unintended consequences.

Who is the renewable power policy “playground bully”?

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Michael Giberson

According to a poll by Fallon Research, “Nearly 60% [of Ohio voters] would pay an extra $3 a month on a $100 dollar energy bill to support the development of electricity from clean sources.” It is an interesting factoid, I suppose. My initial response is to wonder whether state electric power regulations in Ohio somehow prohibit Ohio voters who are so inclined from buying “electricity from clean sources.” If so, the regulations should be revised so that consumers have the opportunity to buy the kind of electric power they want.

Heather Taylor-Miesle, of the NRDC Action Fund, apparently thinks differently. She reads the survey results and thinks, “Great, this is a good reason for state regulators to force everybody to buy clean-sourced electricity, including the more than 40 percent who said they didn’t want to pay as much as 3 percent extra for clean-sourced electricity.”

Can we imagine polling Ohioans on whether they support the Cincinnati Bengals or the Cleveland Browns, and then having state regulators require every consumer buy a T-shirt from the majority-favored team? Why should electricity policy involve state-mandated purchases?

Granted, electric power production involves environmental harms and we might find state and federal policies useful in addressing these harms. But renewable-power purchase mandates are a inefficient way to pursue environmental goals. Granted also, there may well be positive information spillovers from research and development of less-polluting technologies. Renewable-power purchase mandates are an especially ineffective way of promoting the growth and spread of knowledge.

The main point of Taylor-Miesle’s Huffington Post piece was to suggest the conservative, pro-market policy group ALEC was playing the “playground bully” by advocating repeal of state renewable power purchase mandates. I find the suggestion hilariously backward.

So far as I have seen reported in the press, ALEC isn’t out threatening violence for state legislators who refuse to comply with ALEC’s wishes. So far as I know, ALEC operates mostly by distributing policy papers and hosting conferences where people talk a lot. I’ve never heard of a playground bully hosting a public policy conference.

Of course the policy that Taylor-Miesle favors is a policy of coercion: state renewable power purchase mandates simply require electric power retailers to purchase some fraction of their power from government-approved “clean sources.” Should a utility fail to comply, the state will impose penalties. Should a utility fail to pay, the state will seize money in the utility’s bank accounts. If that doesn’t work, the state eventually will close the utility down.

The state is the bully here. Taylor-Miesle is like that kid on the playground hiding behind the bully, egging him on. ALEC, on the other hand, wants to reduce the bully’s reach a little bit.

Ralph Nader on gasoline prices

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Michael Giberson

If you’re looking for another point of view on gasoline prices, Ralph Nader has an article in Counterpunch, “The Gas Gougers.” In the article Nader blames speculators, a lazy media, and a business-friendly government for the recent 50-cent run up in gasoline prices.

There was a time when even a few cents increase in the price of gasoline or natural gas would provoke Congressional investigations, actions by state Attorneys General, and condemnations of the producer countries, the OPEC cartel and Big Oil from presidents and the heads of antitrust divisions of the Justice Department or the Federal Trade Commission. That is, until smooth, smiling Ronald Reagan came to Washington, D.C. with his mantra that “government is not the solution; government is the problem.”

Curiously, “Reagan came to Washington” back in January of 1981, so I’m having trouble understanding how that moment connects to a gasoline price increase in January 2013, some 32-years later.

Nader might say his point is that now the industry can raise prices and not worry about government interference. But if the industry could freely raise prices without government interference, why did they wait 32 years to claim this particular 50-cent per gallon prize? Why didn’t the oil and gas industry raise their prices this much a year ago, or two years ago, or thirty?

Each price surge in recent decades seems to have different principal causes. This time it seems to have been precipitated by surging prices of crude – easily manipulated – and in the U.S. the permanent or temporary shutdown for repairs, of too many refineries.

Believe it or not, the U.S. is now a net refined petroleum importer because of the continuing refusal by the industry to rebuild or expand refinery capacity on the very sites where many refineries have been shut down, often in favor of offshore, cheaper installations.

Whenever supply and demand for refined oil products is tight, all it takes is for one or two refineries to suspend operations, other than for repairs, and the prices surge all over the country.

The “easily manipulated” price of crude oil? So again, explain why the industry keeps manipulating the price up and then back down again? Perhaps more to the point, why did the industry tolerate 15 to 20 years of low and relatively stable crude prices starting in the mid-1980s (during the Reagan administration!)?

“Easily manipulated” and yet seemingly so hard to control.

And, believe it or not Mr. Nader, the U.S. is now a net refined petroleum products exporter–not a net importer–and has been since mid-2011. Somehow, despite the continuing refusal to rebuild or expand refinery capacity, we have petroleum products in such abundance that we can ship them overseas. I’m sure once Mr. Nader figures out his facts are exactly backwards, he will immediately revise his claim and give the oil and gas industry credit for maintaining surplus refining capacity.

And it turns out that one or two refineries (in California) can suspend production and have essentially zero effect on prices anywhere in the country (but in California, as price data from last year reveals). Similarly, disruptions of refineries in the Northeast don’t seem to spread consequences too broadly across the country.

Nader thinks political grandstanding and government participation in oil markets and refinery operations is called for: Obama should use his bully-pulpit to put the heat on Congress; Obama should release oil from the Strategic Petroleum Reserve to push prices down; the Defense Department should build it own refinery capability and sell excess products into the market to suppress prices.

Nader seems to pine for the energy policies of the 1970s–before Reagan came along–but maybe he should review that decade of periodic energy crises, government oil and gas price controls, import tariffs and oil allocation schemes, calls for energy independence, and repeated Presidential addresses to the nation about the seriousness of increasing energy scarcity. I don’t think it worked as well as he seems to think it did.

Current Gasoline Prices: In which I offer to save the Senate some time

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Michael Giberson

Reported in The Hill’s E2 Wire: “Senate to hold hearing on surge in gas prices.”

Senate Energy and Natural Resources Committee Chairman Ron Wyden (D-Ore.) will soon convene a hearing on soaring gasoline prices that he contends have “no reasonable explanation.”

Average nationwide gasoline prices have risen by nearly a half-dollar per gallon since the beginning of the year.

“I think you ask the question, ‘what is going on to make the prices go up so dramatically now?’ The custom has always been — one we didn’t enjoy in America but it has been sort of a tradition — [that] prices go up in the spring. We are still in the winter,” Wyden said Friday.

Let me explain the issue, clear up the confusion, and save the Senate and a handful of expensive lobbyist the trouble of having a hearing.

Since the middle of December, the world price of oil (Brent benchmark) jumped up to about $117 bbl. On average over the last 20 years, gasoline prices equal approximately 70 cents plus the price of crude oil times 0.027. With a priced of crude oil of $117, we should expect a gasoline price of about $3.859.

According to U.S. EIA data, the current national average price for “Gasoline–All Grades” is $3.851. (See the Febrary 25, 2103 data in this EIA price series.)  The current gasoline “price surge” is giving us a price which is typical given current world crude oil prices.

No need for a hearing, simple arithmetic will do.

 

Smil: No imminent danger of peak oil, but will peak oilers admit it?

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Michael Giberson

Vaclav Smil wonders, now that 2012 appears to have yielded a new record level of global oil output, will “some catastrophists and peak-oil cultists” have to back off their gloomy outlooks? See Smil, “Memories of Peak Oil,” in The American.

Here is my prediction: No peak oiler will find 2012 oil production data as reason to move away from peak oil gloom.

We can even operationalize my prediction by adding some parameters: I predict that no blogger at The Oil Drum who is on record as believing world oil production peaked sometime between 2004 and 2010 will post on that site within one year an updated claim concluding peak oil will not happen until after 2030.

Marc Gunther profiles Whole Foods CEO John Mackey

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Michael Giberson

Marc Gunther has a good brief profile, “John Mackey: hippie, libertarian, CEO.” I haven’t read Mackey’s new book yet, but may try it this summer. If nothing else, Mackey will provide an interesting counter to Milton Friedman’s famous views on what is now called “corporate social responsibility.”

But Gunther’s essay makes an curious turn, shifting from profiling Mackey to editorializing against Mackey’s embrace of free-enterprise capitalism. Gunther writes:

He can be … [i]deological is his view that markets can solve virtually every problem. He writes, for example, that “in the long arc of history, no human creation has has a greater positive impact on more people more rapidly than free-enterprise capitalism.” Maybe so–although democracy has done a lot for people, too–but Mackey’s faith markets and distrust of government is so absolute that he seems willfully blind to the notion of market failure.

Gunther shifts back, briefly, into biography–college dropout, eastern philosophy, yoga, mediation, veganism–then returns to Mackey’s views on business. Turns out that Mackey thinks some businesses and even whole industries (big Phama, most of Wall Street) have gotten off track, so I wonder why the claim he is “willfully blind to the notion of market failure.”

After a few more details Gunther notes Mackey’s market-oriented optimism and winds up with:

Eventually, he may turn out to be right. But so far, markets have done an imperfect job at best of rewarding the better companies and punishing bad actors. Sure, Lehman Brothers, Bear Stearns and Countrywide all collapsed … [but] tobacco companies are doing fine. Factory farms — a favorite target of Mackey’s — are doing OK, too. Nor are markets solving the climate crisis, or protecting the human rights of factory workers in China or Bangladesh. Only governments can do that.

If it is true that “only governments can” protect human rights of factory workers, then at the least Gunther ought to be weighing the costs of government failure against the costs of market failure. And really, which is more serious, failure of competition in markets to weed out ‘bad actors’ rapidly or failure to protect human rights?

If we count that not all corrupt businesses fail quickly as some kind of failure of free enterprise, then ought we also count that not all corrupt governments fail rapidly as a failure of politics? Of course, corrupt markets and corrupt governments tend to go hand in hand.

And, by the way, “Nor are markets solving the climate crisis”? Tell me, Mr. Gunther, how well is democracy working on climate change policy?

Where is faith most misplaced, in markets or in governments?

Europe is burning more American coal

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Michael Giberson

Natural gas production is booming in the United States. The resulting low natural gas prices are helping the fuel displace other energy sources, most particularly the use of coal to produce electric power. As U.S. demand for coal falls, so has its price and as a result international coal buyers are increasingly turning to U.S. suppliers. One big buyer: Europe.

Ironies abound in this Washington Post report on growing European use of coal. The EU has elaborate and costly greenhouse gas regulations while the U.S. has failed to implement any systematic federal greenhouse gas policies. European nations like Germany, Spain, and Denmark are frequently cited as models for their support of renewable energy. And, with these policies in place, greenhouse gas emissions are falling in the United States and Europe is burning more coal. Apparently good intentions are not enough. The Wall Street Journal had a similar report yesterday: “U.S. Coal Finds Warm Embrace Overseas.”

One more point: All that “good news” about reductions in U.S. greenhouse gas emissions is mitigated a bit by tracing through the economic logic. We’ve displaced some coal consumption by increased gas consumption, but much of that coal is simply being burned in Europe or China or elsewhere. U.S. coal production has been relatively flat for two decades, but U.S. coal exports have doubled since the 2006. (See EIA data here.) So we’re cutting emissions, but there will be essentially no climate change pay-off from the cuts. This same consequence would have arisen had the U.S. shifted from coal to natural gas because of carbon taxes or an effective U.S. cap-and-trade scheme (except in that scenario we pay more for energy rather than less. Technological improvements rule!).