Topic: Energy and Environment

‘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.

Scientists Gone Wild

One of the oft-encountered talking points offered by the Left is the extent to which the Bush administration has alternatively ignored, intimidated, and done violence to the scientific community. The picture being painted is that of a know-nothing Christian fundamentalist in the thrall of corporate America waging unremitting war against the Enlightenment.

While there is enough truth to this charge to give it legs, the “science” lobby is scarcely blameless. For all the moral and ethical posturing surrounding the sanctity of “the scientific process” and the need to keep the same safe from assaults by power-hungry politicians and ignorant political mob action, climatologist James Hansen’s recent call to literally criminalize disagreement with him about climate change is a more radical assault on the the scientific process and the scientific method than anything forwarded by the Bush administration.

Now, James Hansen would probably argue that he’s not interested in criminalizing disagreement per se; he’s interested in criminalizing dangerous, life-threatening speech that the speaker knows is fraudulent. Perhaps. But exactly what is the nature of this special mind-reading power that allows James Hansen to determine that Rex Tillerson, head of ExxonMobil, believes X but says Y? Is it so beyond the realm of possiblity to think that Rex Tillerson actually believes what he says (pace, say, commentary by our own Pat Michaels on the subject)? Or does James Hansen presume to know Pat Michaels’ true and secret thoughts as well?

To the extent that James Hansen’s views are embraced by the self-appointed gendarmes of science, politicians are right to suspect that climate change alarmism is heavily influenced by the lust for power, the demands of ego, and the pursuit of political agendas that go far beyond a disinterested search for scientific truth. Moreover, one can’t help but wonder about the strength of an argument that requires the threat of force to silence critics.

Call me an idealogue, but criminalizing skepticism about scientific theories is probably not the best way to facilitate the quest for scientific truth.

An Irrelevant Europe - Best for the World?

In a recent op-ed Robert Kagan laments that (Western) Europe is sliding into irrelevance. But that might be the best thing for the rest of the world.

Don’t get me wrong, the world owes plenty to Europe. It’s given the world great art, architecture, literature, and music. It’s also given the world the ideas of universal education, the scientific method, research institutions, property rights, rule of law, democracy, religious freedom, and freedom of thought and expression, among other things. These ideas and institutions coalesced to power the engine of progress that drives the economic and technological development that have improved human well-being — not only in Europe but elsewhere — to levels far beyond what our ancestors could have imagined. Consequently, today we live longer, healthier, more educated, freer, and wealthier than ever before. But for the past century, Europe seems determined to undo all the good it’s ever done.

Europe gave the world the ideologies of Fascism and Marxism, which were responsible — or provided rationalizations — for 100–150 million deaths worldwide, including many outside Europe, most notably in China, Cambodia and North Korea. Then in a few short decades, despite having risen Phoenix-like from the ashes of destruction of World War II, instead of brimming with optimism, Europe has taken a decidedly pessimistic turn.

It no longer believes in progress. Its birth rate has dropped below replacement rates, yet, despite its protestations of equality, fraternity, secularism, and respect for human rights, it’s unwilling or unable to welcome or integrate immigrants of different colors or religious backgrounds into its societies. And one by one it’s abandoning the great ideas that brought it, and the rest of the world, progress, and advanced human well-being.

Its political leadership, although democratically elected, has abandoned democracy in its pursuit of a united Europe. The more the idea of the EU fails in democratic tests — most recently in Ireland — the more devious its politicians’ machinations to bypass popular approval.

It has abandoned scientific inquiry, relying instead on mantras such as the “science is settled.” Having abandoned science, it now relies on superstition, manifested in the notion of a global-warming-triggered apocalypse of Biblical proportions if average temperatures exceeds 2 degrees Centigrade above pre-industrial levels — an apocalypse complete with death, disease, pestilence, droughts, famines and floods. Not only is there no evidence for this, this superstition persists despite the current reality that more Europeans die in winter than in summer, Europe’s long history of misery and want during cold periods and plenty during warm eras, and that even as media coverage of extreme weather events becomes more compelling and ubiquitous, globally the deaths and death rates from such events are in long term decline. If Europe had spent a fraction of the resources in adapting to climate change as it did on complying with the futile, but politically-correct Kyoto Protocol, it might have reduced by thousands the death toll of its 2003 heat wave.

Europe is now on the verge of abandoning the quest for technological progress, preferring instead to be ruled by the so-called precautionary principle which, as applied by Europe, actually increases human misery and death. It does this by discouraging, if not vetoing, new and safer technologies that could displace older and less safe technologies on the grounds that “safer” is not good enough — it has to be absolutely safe.

The precautionary principle was used to justify relinquishing its use of DDT, which was easy, because Europe had already conquered malaria. It is also used against genetically modified crops. The misapplication of the precautionary principle, coupled with its abandonment of scientific inquiry evident in the torching and destruction of experimental trials on genetically modified crops and its reliance on superstition, has resulted in a de facto ban on such crops in most of Europe. But giving up such crops isn’t hard either. Western Europe is well fed — in fact today it worries more about obesity than hunger — and its farmers’ excessive productivity is actually a drag on its taxpayers. Some Europeans would also give up nuclear and coal, but that would actually be giving something up, so protestations to the contrary, that will come about only after renewable energies mature and are better able to pay for themselves without subsidies.

But worst of all, Europe is once again exporting dangerous, misanthropic ideas, which unfortunately are echoed even in the US where many are in thrall of European ideas, no matter how ill-conceived. These ideas are couched in doublespeak, such as the European version of the precautionary principle, which could kill as many people as the failed ideologies of Fascism and Marxism.

Europe talks endlessly of helping developing countries and offering token amounts of aid but then refuses to reform its agricultural policies which would do a lot more for helping the latter help themselves. At the same time it bemoans the new prosperity of long-suffering Asia that has lifted over a billion out of a poverty that Europe has not known since even before the French Revolution because it’s enabled by and rides on greater energy use. And for that, some Europeans threaten punishment through carbon tariffs.

But energy use and economic development are inextricably linked not only in China and India but in Europe and elsewhere. Even as energy use fueled economic development, it freed human beings from back-breaking physical labor, allowed women to escape the drudgery of household work, equalized economic opportunities for women, reduced the need for child labor, liberated animals from being our beasts of burden, and enabled brains to displace brawn, laying the foundation for a less energy-intensive economy.

Europe campaigned actively, but fortunately unsuccessfully, to ban DDT. Despite this, African nations, deferring to European “expertise” on matters technological while fearing a European boycott of their agricultural exports if even trace amounts of DDT are found on them, have been slow to adopt DDT to combat malaria — fears that Europe did nothing to dispel and may, in fact, have actively encouraged. For the same reasons, Africans have been reluctant to turn to genetically modified crops to reduce hunger and malnutrition. And once again, Europe is standing silently by if not actively discouraging the use of genetically modified crops.

For context, consider that over 6 million people die each year from malaria, hunger and malnutrition, a toll that annually rivals that of the entire Holocaust. Yet Europe has done little to help or reassure Africa in this regard, thereby abandoning one of the Holocaust’s most important lessons, namely, inaction can be no less culpable than active participation.

Europe may be able to walk away from further economic and technological development, but the rest of the world can’t afford to, not if it values human and environmental well-being.

An irrelevant Europe could save innumerable lives in the developing world. And that might be best for this world.

Econ 101 for Democrats

Executives from Goldman Sachs and Morgan Stanley met with Democratic staff members of the Senate Energy and Natural Resources Committee last week to make the case that trading in energy contracts is not the reason that oil prices are rising. Judging by Jeff Birnbaum’s report in the Washington Post, it’s not easy to teach Democrats about economics:

But the executives were met with skepticism and occasional hostility. “Spare us your lecture about supply and demand,” one of the Democratic aides said, abruptly cutting off one of the executives.

Another aide “warned the executives that no matter what arguments they muster, it would be hard to prevent Congress from acting.” So much for fact-finding and economic sanity in an election year.