Topic: Energy and Environment

Inflate Your Tires; Save 100% of Your Gasoline

Here’s how.

Get your favorite politician. Democrat, Republican, or whatever; it doesn’t matter.

Connect mouth to valve.

Ask, “What’s your energy policy.” Hot air will inflate tire.

“What about the environment?” More inflation.

“Should wind be subsidized?” And so forth, until tire blows.

Flat tire! Now you aren’t going anywhere.

And — voila! — gas consumption now zero.

You’ve saved 100 percent of your gas.

… Only problem – you’ll need a new tire, which is mainly petroleum.

A Falling Oil Price Is NOT Lower Inflation

I recently explained that, “If [the price of] oil keeps falling, then headline inflation will drop below the ex-energy rate, and the ex-energy rate will itself drop thanks to cheaper transportation and petrochemicals.”  This followed my equally controversial (at the time) June 3 column, “Get Ready for the Oil-Price Drop.”

Blogger Stefan Karlsson thought I had said “inflation is not a problem.”  Huh?

What I said was that a monthly or year-to-year increase in the overall CPI “gives us a fair picture of what has happened to the cost of living over the past month or year. But it’s near-useless for telling us where inflation is headed in the future.” 

I offered a graph and several examples. The price of oil fell this February, for instance, and that month’s CPI was unchanged - zero.  Did that mean inflation was zero?  Of course not. Should the Fed have eased that month because oil prices fell?  Of course not.  So why couldn’t reporters follow that same common sense when oil prices spiked in June?

The May 1991 CPI was 5 percent from a year earlier, I noted, “but it dropped to 2.9 percent within five months, as oil fell 35.3 percent.” When that happens again this year, it will not mean inflation is any less of a problem than it is right now.  It will just mean the price of oil came down.

What I wrote is backed by recent research within the Federal Reserve:

  • Todd Clark of the Kansas City Fed found “the CPI ex-energy offers statistically significant explanatory power for future [headline] inflation.” 
  • Robert Rich and Charles Steindel of the New York Fed found “the ex-energy measure generally maintained its better forecasting record for … inflation over the longer sample period.”
  • On a closely related topic, Rajeev Dhawan and Karsten Jeske of the Atlanta Fed found that “using headline inflation” to guide Fed policy “appears to be a bad idea, both in terms of the output drop and the inflation impact.” 

Those who thought the Fed should have raised interest rates in June because oil prices pushed the CPI up will soon be logically obliged to say the Fed should keep interest rates low or lower just because falling oil prices will be pushing the CPI down.  I agree with Dhawan and Jeske on this.  I think the Fed should and will raise the (fed funds and discount) interest rates on bank reserves.  But I won’t revise that opinion with every up and down in the price of oil.

Disclosure: I own shares in an ETF that shorts oil (DUG) and a mutual fund than shorts precious metals (SPPIX).  This is called putting your money where your mouth is. SPPIX was $16.81 on July 18 when my inflation article appeared, but up 26% to $21.22 by August 5.

McCain, Obama, and Clean Coal

After you’ve watched federal policymaking for a number of years, you realize that the actual effectiveness of federal programs has absolutely no bearing on their survival or level of funding. That’s because the purpose of federal programs is not to solve problems, but to provide a menu of levers that politicians can pull to appeal to certain types of voters.  

We see this at play in the 2008 election with “clean coal,” which has attracted the attention of both candidates. Obama wants to “significantly increase the resources devoted to the commercialization and deployment of low-carbon coal technologies.” Meanwhile, McCain has pledged to spend $2 billion a year on clean coal technology if elected.

Since these pledges make for good bullet points in speeches, the campaigns don’t really care about the actual track record of federal subsidies to clean coal. But after the election, the next president should hesitate to increase such corporate welfare. Here is what I noted in Downsizing the Federal Government:

The federal clean coal program funds projects that burn coal in an environmentally friendly way, but the program is not very taxpayer-friendly. The Government Accountability Office found that many clean coal projects have “experienced delays, cost overruns, bankruptcies, and performance problems.” [GAO-01-854T] The agency examined 13 projects and found that “8 had serious delays or financial problems, 6 were behind their original schedules by 2 to 7 years, and 2 projects were bankrupt.”

One clean coal project in Alaska gobbled up $117 million of federal taxpayer money during the 1990s.[Washington Post, April 24, 2005] But the project never worked as planned, it cost too much to operate, and it was finally closed down as a failure. But project failure is not a problem in Washington because costs are benefits to politicians. Thus in 2005 Republican legislators inserted $125 million of taxpayer money into an energy bill to revive the failed Alaska project.

Choosing What to Worry About

Paul Krugman’s column in today’s NYT laments the lack of a national policy to combat global warming. He writes:

It’s true that scientists don’t know exactly how much world temperatures will rise if we persist with business as usual. But that uncertainty is actually what makes action so urgent. While there’s a chance that we’ll act against global warming only to find that the danger was overstated, there’s also a chance that we’ll fail to act only to find that the results of inaction were catastrophic. Which risk would you rather run?

He then cites the work of Harvard economist Martin Weitzman, who surveyed the results of a number of recent climate models and found that (in Krugman’s words) “they suggest about a 5 percent chance that world temperatures will eventually rise by more than 10 degrees Celsius (that is, world temperatures will rise by 18 degrees Fahrenheit). As Mr. Weitzman points out, that’s enough to ‘effectively destroy planet Earth as we know it.’”

Krugman concludes, “It’s sheer irresponsibility not to do whatever we can to eliminate that threat” and he calls for opprobrium against those who might impede global warming legislation: “The only way we’re going to get action, I’d suggest, is if those who stand in the way of action come to be perceived as not just wrong but immoral.”

There is merit to the argument that society should consider a policy response to the threat of global warming. A small chance of an enormous calamity equals a risk that may deserve mitigation. That’s why people buy insurance, after all.

However, Krugman doesn’t accept that argument — at least, not when applied to other worrisome risks that trouble people whose politics are different than his. Less than two months ago, he wrote this about another future crisis:

[O]n Friday Mr. Obama declared that he would “extend the promise” of Social Security by imposing a payroll-tax surcharge on people making more than $250,000 a year. The Tax Policy Center estimates that this would raise an additional $629 billion over the next decade. But if the revenue from this tax hike really would be reserved for the Social Security trust fund, it wouldn’t be available for current initiatives. Again, one wonders about priorities. Whatever would-be privatizers may say, Social Security isn’t in crisis: the Congressional Budget Office says that the trust fund is good until 2046, and a number of analysts think that even this estimate is overly pessimistic. So is adding to the trust fund the best use a progressive can find for scarce additional revenue?

In Krugman’s view, policies to address Weitzman’s 5 percent risk of ecological disaster by the early 23rd century (Weitzman’s time frame, which Krugman didn’t specify) are responsible and moral, but policies to address the economic crisis of Social Security’s insolvency in less than four decades’ time are unnecessary and overly pessimistic. And Krugman clobbers anyone who suggests otherwise .

Make sense to you? Me neither.

Krugman’s double-standard on risk is not confined to Social Security. He has (rightly, IMO) blasted the Bush administration for going to war in Iraq. But couldn’t the war be justified as mitigating a small risk of a great catastrophe? Was there, perhaps, a one-in-20 risk that Hussein’s Iraq would develop weapons of mass destruction and direct them at the United States (in the next 200 years)?

I write this not to argue that the United States should be unconcerned about global warming, or about rogue states’ possession of super-weapons, or about Social Security’s (and Medicare’s) unsustainability. All are risks, and it is right for us to consider policy responses for each of them. My point is that it makes little sense to say one risk must be addressed while we should dismiss another risk with an expected value that’s probably the same order of magnitude.

Moreover, if this dichotomy is simply the product of Krugman’s political allegiances (“Red team fears are stupid, Blue team fears are heroic”), isn’t he being irresponsible, wrong and immoral?

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).