Topic: Energy and Environment

Excessive Cold vs. Excessive Heat: Costs of Hospitalization

“Excessive Heat Can Run up Hospitals’ Bad Debt Expense for Treating the Uninsured: Report,” trumpeted a trade publication called Inside ARM (Inside Accounts Receivable Management).

The first paragraph informed us that, “ A report by the Agency for Healthcare Research and Quality suggests hospitals may find they are treating more uninsured patients suffering from heat exposure and exhaustion, resulting in more medical bad debt.”

Turns out that about 6,200 people were hospitalized in 2005 due to excessive heat and weather conditions, at an average cost of $6,200.

But in the penultimate paragraph of the report, we find out that 6,500 were hospitalized due to extreme cold weather conditions at an average cost of $12,500 per stay because the hospitals stays tended to be longer.

Final tally:

Hospitalization costs from exposure to extreme heat – $38.4 million

Hospitalization costs from exposure to extreme cold – $81.3 million.

Wonder what the numbers would have looked like, absent any global warming, which should have increased minimum temperatures more than maximum temperatures or, more importantly, had there been no greenhouse gas producing air conditioning or heating.

Pickens’ Hot Air

The NYT editorial board is all aquiver over T. Boone Pickens’ plan to increase wind-generated electricity in the United States. A Times editorial gushes:

[Pickens would] develop wind power in states with steady, forceful winds (like Texas) and use it instead of natural gas to produce electricity (natural gas now generates about one-fifth of the power in the United States). He would then use the natural gas saved to fuel cars and trucks. He predicts that oil imports would drop by 40 percent and the country would save $300 billion a year.

Just one problem: Increased wind power may not free up that much natural gas.

Nat gas–fired generation has some important characteristics: Turbine generator nat gas plants are relatively cheap and quick to build, but they can be expensive to operate because the fuel is pricey. The plants can be put into service (“dispatched”) and taken out quickly with little start-up cost. Moreover, nat gas turbine plants can be very small (some are the size of a tractor-trailer) and emit little pollution relative to coal-fired plants, so they can be sited close to (and in) areas of heavy electricity demand.

Given its profile, nat gas generation is often used for “peak” production — that is, used for periods when demand is great and must be satisfied immediately (e.g., hot summer days when air conditioners are running full-blast, “work hours” when factories and offices are consuming a lot of juice) as well as to address localized power problems (e.g., areas that are at risk of brown-outs). This contrasts with coal-, nuclear-, and hydro-powered plants that are expensive to build but relatively cheap to run, that are difficult to idle and to site, and that are used, accordingly, to provide “baseline” power to large areas. (I should note, in charity to Pickens, that nat gas “co-gen” plants are also used as part of the baseline supply.)

Wind-powered generation is an intermittent source of electricity that may not be available during periods of peak demand. Its product, as envisioned by Pickens, would have to be transported over great distances on the nation’s overly-congested power grid — from the “wind-swept plains” to population and manufacturing centers — in order for it to satisfy much of the nation’s energy demand. Thus, it’s unclear how wind-powered electricity can effectively displace much of the 20 percent of U.S. electricity that is currently produced by natural gas. (In contrast, all renewables, combined, produce about 2.4 percent of U.S. electricity.)

If anything, wind-powered generation seems better suited to replace some coal-fired generation (especially in Texas where Pickens is building a $10 billion wind farm and where coal is often the marginal source of power). But since coal isn’t a transportation fuel, this displacement wouldn’t reduce the nation’s dependence on oil — unless there’s a breakthrough in battery technology that would make electric cars more practical. Moreover, if the nation does increase its dependence on wind power, then we would likely have to increase our dependence on nat gas peakers to cover those days when wind isn’t available (which often are those hot days when air conditioners are cranked up).

This is not to say that wind-powered generation should be ignored. The United States will likely overcome its current energy woes through a mixture of technology advances and conservation efforts, and wind may be part of that mix. But Pickens’ claim that wind power could be used to displace 40 percent of U.S. transportation fuel seems like little more than hot air.

Oil Speculators, Headaches and Brain Tumors

Blaming speculators for high oil prices is like blaming a death on headaches rather than the underlying brain tumor. Speculation is a symptom, not the disease. It’s the tight supply-demand equation that creates opportunities for speculators to profit, although it’s less clear whether that necessarily increases prices.

So instead of bitching and moaning about speculators, our politicians should attack the fundamental problem by reducing barriers – and transaction costs – to increasing supply and reducing demand. But let’s not do it by increasing subsidies, which ultimately means more money out of the pocket of the taxpayer (who is also the consumer).

‘Ballooning Commodities’?

“The S&P GSCI commodities index is up 73% in the past 12 months,” writes Edward Hadas of breakingviews.com in The Wall Street Journal.

The author goes on to speculate about speculation, concluding, “This bubble could get bigger still.” Unfortunately, he assumes the S&P commodity index (which is shown in a graph) demonstrates a huge ongoing boom in the prices of commodities in general. In reality, all the index shows is that oil prices doubled over the past year and that most of that increase happened in the past four months. Energy commodities (mainly crude oil) account for 78 percent of the S&P GSCI commodity index.

The price of crude oil rose from $100 a barrel on March 4 to $136 on July 8, so the energy-dominated S&P GSCI index naturally soared too.

What happens to the widely reported “commodities boom” if you leave out oil? Look at The Economist’s index of 25 farm and industrial commodities, which excludes oil. The Economist’s commodity price index fell from 271.9 on March 4 to 265.6 on July 8.

It is on the basis of such fatally flawed evidence as the S&P commodity index that Congress has been trying to bully the Commodities Futures Trading Commission into bullying U.S. commodity traders to stop some sort of “commodity boom.”

The dollar was also quite stable during the past four months, contrary to numerous angry and overconfident Journal editorials about the alleged commodity boom being caused by the supposedly falling dollar. The Fed’s broad index of the dollar’s value was 95.97 on February 28 and 95.97 on July 8.

Gasoline Affordability Index: Sliding Back to the 1960s

For some time now, the real price of gasoline has exceeded the heights it reached during the 1980s. But what about its affordability?

The following figure, which assumes a current price of regular gasoline of $4.10 a gallon, plots trends in the U.S. gasoline price from 1949 through mid-2008, using three different measures: (a) nominal (or current) dollars, (b) real (i.e., inflation-adjusted) dollars, and (c) a “gasoline affordability index” (GAI) which is the ratio of the real disposable personal income per capita to the real gasoline price, indexed to 1960 (that is, 1960 affordability =1). [See Notes 1-3 for data sources.] The higher the Index, the more affordable the gasoline.

This figure shows that:

  1. Both the real and nominal price of regular gasoline are the highest they’ve been since at least 1949.
  2. Gasoline affordability peaked in 1998 at 3.32, relative to 1960 (=1).
  3. Today the gasoline affordability index is at 1.35, lowest since 1982 when it was 1.31.
  4. Today gasoline affordability is down to levels of the mid- to late-1960s.
  5. Relative to 1998, the price of regular gasoline increased by 287 percent in nominal terms and 208 percent in real terms. However the affordability index declined 59 percent.

The disposable personal income per capita between 2007 (average) and May 2008 increased by $1,627 (in real 2000 $) according to the BEA, while the average person’s real expenditures on gasoline increased by $493 (or less). See Note 4.

Unfortunately, gasoline prices aren’t the only ones to have gone up. Energy prices are all up, as is food. So it won’t be surprising if these increases more than eat up any advance in disposal personal income. I’ll check this out one of these days.

Notes

  1. The figure uses the price of regular leaded gasoline from 1949-1975, the arithmetical average of average of regular leaded and regular unleaded gasoline for 1976-1990, and regular unleaded for 1991-2008. For 2008, I have assumed a gasoline price of $4.10 per gallon. Gasoline price data are from the Department of Energy (DOE), Motor Gasoline Retail Prices, U.S. City Average, available at http://www.eia.doe.gov/emeu/mer/prices.html.
  2. For estimating the real price, I used the implicit price deflator for GDP from the Bureau of Economic Affairs (BEA), available at http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp, Table 1.1.9 (for 1949-2007) and Table 2.6 (for May 2008).
  3. Data on real disposable income per capita are also from BEA, available at http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp, Tables 2.1 (for 1949-2007) and Table 2.6 (for May 2008).
  4. Average annual motor gasoline consumption was 475 gallons per year in 2007, and the real gasoline price over this period increased $1.04 (in real 2000 $). Average consumption has probably declined somewhat from last year.

Nordhaus’s Less-than-optimal Climate Strategy

In “Pointless to rush a carbon emissions plan,” the Toronto Globe and Mail’s Neal Reynolds compares Yale Professor William Nordhaus’s “optimal” approach to controlling greenhouse gases and finds it superior to approaches that would impose deeper controls more rapidly, such as those favored by Stern, various EU leaders, and many in the US.

Under the Nordhaus approach, which is also discussed by Keith Johnson at the Wall Street Journal, costs of control would start at 0.3 per cent of global GDP in 2010 (currently around $60,000 billion), increase to 0.5 per cent in 2015, 0.6 per cent in 2020 and peak at 0.9 per cent in 2065. He estimates the net present value (NPV) of climate change damages absent any controls at $22 trillion. Under this so-called “optimal” approach, the NPV costs of controls would be $2 trillion and climate change damages would be reduced by $5 trillion (i.e., the “optimal” policy would provide net benefits of $3 trillion, but residual damages would be $17 trillion). As he explains, “More of the climate damages are not eliminated because the additional abatement would cost more than the additional reduction in damages.”

He also estimates that proposals that emphasize “excessively early reductions [make] the policies much more expensive… For example, the Gore and Stern proposals have net costs of $17 trillion to $22 trillion relative to no controls; they are more costly than doing nothing today.” By his calculations, his proposal is clearly superior to these other reduction proposals.

However, while Nordhaus’s prescription may indeed be the most “optimal economic approach” to slow global warming, it isn’t the optimal approach to addressing global warming. This is because it ignores adaptation. Some adaptations may reduce climate change damages more efficiently than mitigation. Perhaps all or part of the $2 trillion that Nordhaus would spend on mitigation should, instead, be invested in adaptation. That might reduce damages by more than the $5 trillion. In any case, with adaptation in the mix, $5 trillion may well be the lower bound for the optimal reduction in climate change damages. And, of course, emission reductions that seem to be optimal under 0.9 percent of GDP in 2065 in the absence of adaptation may, once adaptation is thrown into the mix, no longer be optimal.

In fact, a recent Cato Policy Analysis indicates that in the short-to-medium term, adaptation — specifically, reducing vulnerability to climate-sensitive problems that might be exacerbated by climate change — would provide greater benefits than mitigation, and at a much lower cost. Most of those benefits come from the fact that one approach to adaptation is to advance adaptive capacity. Significantly, that can help society cope not only with climate change but, more importantly, to other problems that are more important than climate change now and in the foreseeable future. Thus the ancillary benefits of increasing adaptive capacity are very high, higher than climate change damages in the absence of any controls according to the Cato Policy Analysis.

Notably, Nordhaus acknowledges to having “relatively little confidence in our projections beyond 2050.” To his credit, this skepticism informs his recommended approach, but it would probably have been best to avoid stretching the analysis to 2200.

Sometimes such long-range analyses are justified on the grounds that that’s the best that can be done. But even if that’s so, it misses the real issue, namely, whether even the best available analysis is good enough for making trillion-dollar decisions which, moreover, extend out centuries hence. At these temporal distances, Nostradamus may be just as credible as Nordhaus, or Nicholas Stern, for that matter.

Humility isn’t an offense, and it ought to be acceptable for economists and policy analysts—even those whose stock in trade is climate change—to admit that they haven’t a clue what the world will look like beyond 2050 (if then).

Nordhaus’s numbers indicate that estimates of pre-control damages and post-control residual damages frequently are substantially larger than either the costs or benefits of emission controls. But the treatment of damages (i.e., impacts) of climate change in the Nordhaus analysis is somewhat sketchy. As far as I can determine, none of the damage studies properly account for adaptive capacity, particularly considering that that capacity ought to increase if societies accumulate wealth, human capital and technology at rates implied by all the socioeconomic scenarios used to derive future emissions (and climate change). (See, for example, here.) Thus, both pre-control climate change damages and post- control residual damages could be substantially overestimated.

[Some argue that they disbelieve that economic growth will be as high as assumed, but in that case they should also disbelieve estimates of future climate change and impacts predicated on that growth.]

To summarize, the Nordhaus analysis probably overestimates climate change damages. In any case, the Nordhaus approach could be made more optimal by adding to it an adaptation component that would enhance societies’ adaptive capacities (by reducing present day vulnerabilities to climate-sensitive problems and boosting economic development and human capital in developing countries). In fact, optimal carbon taxes (or cap-and-trade approaches) can only be determined after completion of more comprehensive analyses that include full and equal consideration of adaptation and any ancillary (net) benefits.

Of course that still leaves the problem of relying on analyses over time frames that demand, in Coleridge’s words, “willing suspension of disbelief.” Instead of suspending disbelief and succumbing to gullibility, I would recommend a somewhat different approach (see here, p. 37).

On Onions, Oil, and ‘Speculators’

Politicians who blame “speculators” in futures markets for the run up in oil prices — such as Sen. Byron Dorgan (D-N.D.) writing in this morning’s USAToday — should consider a lesson from the lowly onion.

Onions are one of the few commodities in the United States for which there are no futures markets, according to an item published Friday in Fortune magazine. (Futures markets allow the sale of commodities for set prices at future dates.) It seems that in the late 1950s domestic onion producers blamed those same speculators in futures markets for driving onion prices DOWN. They successfully lobbied Congress to ban all futures trading in onions, a ban that is still in place a half century later.

So has the absence of futures-market speculation kept onion prices low and stable? Quite the contrary. According to Fortune:

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics’ belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April.

Sen. Dorgan and his allies will need to find someone else to blame for volitale and rising oil prices.