Topic: Energy and Environment

Oil Price Collapse — Bad News?

In the Washington Post today, staff writer Steven Mufson gets space on the front page to tell us about how the oil price collapse is playing out for oil producers, rival energy generators, and, ultimately, for consumers. Much of what follows is obvious — prices are declining because the economic collapse is hammering demand — but other aspects of the narrative offered by Mufson are on shakier ground.

Ed Morse — managing director and chief economist of LCM Research and a favorite “go-to” guy for print reporters — says, “The last five years saw the rebirth of the use of oil as a critical instrument of foreign policy by key resource countries, Iran, Russia, and Venezuela in particular. With oil and natural gas prices having collapsed, the power of their weapons has been waning rapidly…” Really? When, exactly, have oil-producing states used oil as a weapon in foreign policy over the course of the 2004-2008 price spiral? Have there been embargoes I’ve missed? Strategic production cutbacks tied to the Israeli occupation of the West Bank? Or substantive threats about the same that have been used as an effective lever in international relations? Not that I know of.

The only example I am aware of that Morse might cite to back up his claim is Russia’s ongoing dispute with Ukraine over natural gas prices. But gas producers have leverage in markets that oil producers don’t have, given the much higher transaction costs associated with changing buyer-seller relationships.

In short, Morse’s first claim — that oil producers have been using oil as an effective foreign policy weapon during the boom — is utterly without foundation. His second claim conflates natural gas with oil markets in a manner that muddies the issue. Belief in the “oil weapon” is like belief in UFOs; lots of people claim to have seen such things — and some continue to fear such things — but every attempt at verifying existence has come up empty. The reality is that embargoes can’t deny oil to consuming states given the fungible nature of the international oil market and severe production cutbacks will do far more harm to producers than consumers — which is why we never see those sustained production cutbacks play out.

Next, Mufson implies that energy secretary Steven Chu made some sort of gaffe when he told reporters on Tuesday that OPEC was “not in my domain.” Now, it may be correct that, politically speaking, OPEC is in his “domain,” but the reality is that American pressure on OPEC never has and probably never will have an effect on decisions made by the cartel. OPEC’s aim, after all, is to maximize revenue. Can the U.S. talk OPEC into decisions that will cost OPEC money? Chu’s right to suggest that no mere U.S. energy secretary is capable of such a thing and probably shouldn’t waste much time laboring for such an unlikely end. Bully for Chu — for a few moments at least, he had the courage to say what almost no energy secretary before him has ever dared to say.

Unfortunately, Chu quickly spends his intellectual capital with me in the very next paragraph when he warns that oil prices will likely rise over time. Well, they may, but there is no statistically significant trend toward higher oil prices if we examine quarterly data from 1970 forward. Oil prices move around a lot, but they have always migrated back toward an equilibrium price in the inflation-adjusted mid-$20 range. The belief that oil prices march ever higher over time is widely shared, but has no historical basis.

Chu’s worries about higher prices dovetail with the related warning (this time, from OPEC president Chakib Khelil) that the price respite is only temporary. Soon enough (two years, Khelil says), demand will pick up again and then where will we be? Low oil prices mean cuts in upstream investment which means that, down the road, we’ll get even higher prices than we would have had, had the price collapse never occurred.

Now, it is true that the oil market always has and probably always will move in boom and bust cycles with price spirals and price collapses feeding off one another. But historically, those cycles take a lot longer to play out than a couple of years. We heard the same warning against complacency in 1986 when oil prices went through their last bust cycle — but it wasn’t until 18 years later (2004) that prices recovered and moved into boom cycle once again. And that experience is fairly typical. The time between peaks and valleys in global oil prices run about 20 years apart and have been doing so for over 100 years.

Producers love to warn against low oil prices because, well, they hate them. But the idea that low prices are bad for consumers is one of those things that is so obviously at odds with the reality that one should take such warnings with a heavy block of salt. Domestically, those warnings have been used to justify producer subsidies that fail to pass any reasonable economic test.

Do low oil prices “make it harder for more expensive wind and solar projects to compete,” as Mufson asserts? No. Wind and solar energy does not compete with oil because only a tiny amount of electricity is generated by oil in the United States. Low coal and natural gas prices make it hard for wind and solar to compete. True, fossil fuel prices tend to move roughly in tandem over time, but precision is everything here. Low oil prices do not “cause” natural gas and coal prices to fall and thus do not directly undercut wind and solar.

Finally, what about the dog that’s not barking — that is, what about the claim heard ad infinitum from people like Thomas Friedman and James Woolsey that oil profits are military steroids for Islamic terrorists and that eliminating the same would cut Islamic terrorism off at the knees? So far, we find little evidence that al Qaeda or related groups have been particularly harmed by low oil prices. That shouldn’t surprise — there is no historical correlation between oil prices and Islamic terrorism — whether we’re looking at number of terrorist attacks or fatalities from the same.

[Cross-posted at NRO’s The Corner]

Department of Energy Boondoggles

The Wall Street Journal recently looked at the trouble the Department of Energy will have efficiently spending all the extra cash allocated to it under the stimulus bill. The article noted: “The Energy Department has had limited experience pulling off big, transformative energy projects.”

Actually, the department has undertaken big projects many times, but the Journal is correct that it sure as heck hasn’t pulled them off. Indeed, the history of big federal energy projects is one of boondoggle, boondoggle, boondoggle.

Unless President Obama has a magic formula that fundamentally changes the nature of government management, Americans can expect a horribly wasteful energy spending spree in coming years.

The Looming Horror of Global Cooling

George Will reminds us of the global disaster that faced us back in the 1970s:

In the 1970s, “a major cooling of the planet” was “widely considered inevitable” because it was “well established” that the Northern Hemisphere’s climate “has been getting cooler since about 1950” (New York Times, May 21, 1975). Although some disputed that the “cooling trend” could result in “a return to another ice age” (the Times, Sept. 14, 1975), others anticipated “a full-blown 10,000-year ice age” involving “extensive Northern Hemisphere glaciation” (Science News, March 1, 1975, and Science magazine, Dec. 10, 1976, respectively). The “continued rapid cooling of the Earth” (Global Ecology, 1971) meant that “a new ice age must now stand alongside nuclear war as a likely source of wholesale death and misery” (International Wildlife, July 1975). “The world’s climatologists are agreed” that we must “prepare for the next ice age” (Science Digest, February 1973). Because of “ominous signs” that “the Earth’s climate seems to be cooling down,” meteorologists were “almost unanimous” that “the trend will reduce agricultural productivity for the rest of the century,” perhaps triggering catastrophic famines (Newsweek cover story, “The Cooling World,” April 28, 1975). Armadillos were fleeing south from Nebraska, heat-seeking snails were retreating from Central European forests, the North Atlantic was “cooling down about as fast as an ocean can cool,” glaciers had “begun to advance” and “growing seasons in England and Scandinavia are getting shorter” (Christian Science Monitor, Aug. 27, 1974).

Will George Will or his successor do a similar column around 2039 about the hysteria over global warming?

High-Speed Stimulus

Over the past two decades, U.S. cities have wasted close to $200 billion on high-cost, low-performance rail transit projects. But that will nothing compared to the plans rail nuts have for high-speed intercity rail.

Last November, 52 percent of California voters approved $9 billion in funding for a San Francisco-to-Los Angeles high-speed rail plan. The total cost of the plan is expected to exceed $45 billion, and California expects Uncle Sam to pick up at least half the tab. If it does, Florida, Illinois, Texas, and a few dozen other states will all want federal funding for their own high-speed rail plans.

The House version of the stimulus package included no money for high-speed rail. The senate version included $2 billion. Thanks to Senator Harry Reid (D-NV), who wants a Las Vegas-to-Los Angeles high-speed rail line, the final version of the bill included $8 billion. (Conservatives have attempted to portray this as an earmark, but Reid says the $8 billion will be distributed through competitive grants.)

Earmark or not, $8 billion won’t even cover the down payment on a high-speed rail network. Based on the projected costs of California’s system and the length of high-speed rail proposals in the rest of the U.S., I estimate that a national high-speed rail network will cost the U.S. well over $500 billion. By comparison, the Interstate Highway System, adjusted for inflation to today’s dollars, cost $450 billion.

What will high-speed rail do? As my Cato policy analysis reveals, studies in California and real-life examples in Europe shows that its main effect will be to put profitable airlines out of business. It will only take about 3 or 4 percent of cars of the roads in rail corridors. Though costing more than interstate highways, a national high-speed rail network will never carry even a fifth as many people as the interstates, and virtually 0 percent of the freight. High-speed rail operations might save a little energy, but the energy cost of construction will more than wipe out any long-term operational savings.

Adding $8 billion to the stimulus bill will do nothing to stimulate the economy, as there are no shovel-ready high-speed rail projects in the country. But it does put us one more step down the path of wasting another half trillion or so dollars on an obsolete form of transportation.

FutureGen Boondoggle

The Senate stimulus bill apparently contains $2 billion for “FutureGen.” Here is what my assistant, Harrison Moar, found out about this project:

FutureGen was launched in 2003 by President Bush as a public-private partnership to build a low-emission coal-fueled power plant and demonstrate technologies to capture carbon dioxide. The government was to share the cost of the project with 12 private energy companies. The project was originally estimated to cost $1 billion, but by 2008 the estimate had ballooned to $1.8 billion. By mid-2008, $176 million had been spent.

In 2007, the Department of Energy chose a single site for the project in Mattoon, Illinois. But after the project’s estimated cost started soaring, the department changed direction in 2008 and cancelled the Mattoon project. That was a good decision, but the government had still flushed $176 million down the drain. The department’s new idea was to focus on developing other clean coal projects in different locations at an estimated taxpayer cost of $1.3 billion.

FutureGen has involved pork barrel politics since the beginning. As the department originally considered various project sites in Illinois and Texas, the state governments in those states deployed aggressive lobbying to woo federal officials. Upon news of possible cancellation of the Mattoon project in 2008, Senator Dick Durbin of Illinois swung into action using all his tools as the second-ranking senator to continue the funding to his state. He even threatened to block appointments to the Department of Energy unless it reversed its cancellation decision.

Meanwhile, a House committee considered issuing subpoenas to the Department of Energy to get the details of the decision to change course on the project. Illinois Republicans and Democrats alike have sought to use various legislative means to continue funding for the Mattoon facility.

The FutureGen project illustrates the near impossibility of making rational economic decisions with government subsidy projects. Even if a government agency were well-managed and made decisions based on sound cost-benefit analyses, projects become incredibly politicized. Now, with the stimulus bill, it looks like the Mattoon boondoggle has another lease on life.

Week in Review

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Cato Leads Opposition to Fiscal Stimulus

In reaction to statements from Obama administration officials who say “all economists agree” that the only way to fight the economic recession is to go on a massive government spending spree, the Cato Institute took out a full page ad in the nation’s largest newspapers that showed that those words were not true. Signed by more than 200 economists, including Nobel laureates and other highly respected scholars, the statement was published this week in The New York Times, The Washington Post and many other publications.

On the day the ad ran in The New York Times, Cato executive vice president David Boaz added more names to the list of economists who are skeptical of the spending bill.

Commenting on the principles behind the stimulus, Cato adjunct scholar Lawrence H. White and fellow economist David C. Rose discuss why we can’t spend our way out of this mess:

You can’t solve an excessive spending problem by spending more. We are making the crisis worse.

In The Wall Street Journal, Cato senior fellow Alan Reynolds examines the numbers and discovers that each government job created  will cost taxpayers a staggering $646,214 per hire.

The stimulus package now moving through Congress will spend nearly $1 trillion that the government does not have. With the nation already $1.2 trillion in the hole, Cato director of Tax Policy Studies Chris Edwards discusses the sheer illogic behind pushing for stimulus at a time like this:

If I get up in the morning and drink five cups of coffee and that doesn’t stimulate me, I don’t go and drink another five. I’d recognize my addiction problem and start reforming my bad habits. Federal policymakers should do the same.

For more on the stimulus plan, read Edwards’s Tax and Budget Bulletin, “The Troubling Return of Keynes,” (PDF) co-authored by Ike Brannon, former senior adviser to the U.S. Treasury.

During the House vote on the stimulus bill, just 11 Democrats voted against it, leaving Boaz to ask, “What Happened to the Blue Dog Democrats?

“Blue Dogs supported fiscal responsibility at some vague point in the misty past, and they will strongly support fiscal responsibility at some vague point in the future,” writes Boaz. “But right now they’re going to vote to put their constituents another $825 billion in debt.”

Obama Promises to Close Guantanamo Bay Detention Center

Cato legal policy analyst David H. Rittgers explains why he approves of Obama’s choice to shut down the prison at Guantanamo Bay and offers advice on how to proceed with the plan:

The Founders wrote the Bill of Rights after a violent insurgency brought on by government oppression, and the principles contained therein are no weaker while countering today’s terrorists. Using national security courts to try the detainees in Guantanamo opens the door to closed and classified trials of domestic terror suspects. This degradation of essential liberties is unwise and avoids the social function of trials.

Listen to a Cato Daily Podcast interview with Rittgers to learn more about the future of the Gitmo detainees.

In the forthcoming Cato Handbook for Policymakers, Timothy Lynch, director of Cato’s Project on Criminal Justice, lays out a plan for the future of our government’s strategy for dealing with terrorism. (PDF)

Gore Global Warming Hearing Goes on Despite Snowstorm

Undeterred by a snowstorm that shut down schools and gave federal workers “liberal leave,” the Senate Foreign Relations Committee held a hearing on global warming this week with star witness Al Gore. Gore promoted ways to end climate change through cap-and-trade legislation and investment in renewable energy, reported U.S. News and World Report.

In a Cato Policy Analysis, author Indur Goklany offers his commentary on how government should handle climate change.

Cato senior fellow in environmental studies Patrick J. Michaels offers his analysis on climate change, and how the international community should react.

Appearing on Fox News, Michaels, who is a former Virginia state climatologist, asserts that when it comes to climate change, there is no immediate emergency. For more, don’t miss Michaels’s new book, Climate of Extremes: Global Warming Science They Don’t Want You to Know, co-authored with Robert C. Balling Jr.

Obama’s ‘Bold’ Action on Climate Change

I was invited to comment yesterday over at the New York Times on President Obama’s memorandum to the EPA to reconsider its earlier denial of a waiver requested by the state of California; a waiver that would allow that state to impose its own fuel efficiency standards for passenger vehicles and light trucks so as to reduce that state’s greenhouse gas emissions. The simple point I wanted to make at the Times is that allowing this waiver to go through would largely allow that state to dictate fuel efficiency standards for the nation as a whole. I argued that this is probably a bad thing — state action that imposes significant policy changes on the nation as a whole ought to be enjoined and those decisions ought to be left to Congress.

For those of you interested — and who have a strong stomach — read the comments on the board that follows. You might think that there is nothing particularly radical or even ideological in the argument I made. Apparently, you would be wrong.

This morning, I had a chance to reprise that discussion as a guest on the Diane Rehm Show. With me in the studio was David Shepardson, the Washington bureau chief of the Detroit News and Phyllis Cuttino, the director of the Pew Environment Group’s U.S. Global Warming Campaign. You can listen to the show online if you like, but in case you don’t have the time, here are the highlights:

Both Mr. Shepardson and Ms. Cuttino were nearly breathless about the bold, historic step allegedly taken by President Obama this week. Yet is seems to me that telling the EPA to rethink a decision made some months ago — with no stipulation that it actually reverse course — is something short of a political earthquake.  “Bold action” would be legislative proposal to increase federal fuel efficiency standards, impose a federal carbon tax, institute an ambitious cap & trade program, etc. I’m not saying I support that sort of “bold” action, but please — let’s keep things in perspective.

Ms. Cuttino argued at every turn that energy efficiency equals emissions reductions. But it does not. Energy intensity in the United States declined by 34% from 1980 through 2000, but energy consumption increased by 26% over that same period. More ambitious gains in energy efficiency promise no better. For instance, energy intensity in China declined by 70% over that same period while energy consumption increased by 80%.

The only way to reduce greenhouse gas emissions is to increase the marginal price of fossil fuels OR to strictly ration their availability. Everything else is a dodge. Reducing the marginal cost of energy or energy-related services — which is exactly what energy efficiency standards do — will not, in aggregate, reduce energy consumption.

Alas, Ms. Cuttino refused to acknowledge historic reality. When asked by guest-host Susan Page why the environmental community opposes a carbon tax in lieu of energy efficiency standards, she said that such a tax would be regressive. Well, that’s true. But so is a fuel efficiency standard, which imposes a tax on vehicles at the point of purchase. Unfortunately, I did not have the opportunity to jump in with that observation.

Still, Ms. Cuttino does not speak for the environmental community on this. No less than Al Gore is an enthusiastic supporter of (steep) carbon taxes (to be offset with corresponding tax cuts elsewhere).

Ms. Cuttino kept making the point that higher fuel efficiency standards are a free lunch. They will save motorists money, save U.S. automakers from bankruptcy, and rescue jobs in the auto sector. “Who doesn’t want better fuel efficiency?” she asked. Well, apparently, most people who buy cars don’t — not if they have to pay higher sticker prices for that fuel efficiency or give up other amenities. If it were otherwise, then there would be no need for a federal requirement, now would there?

Of course, polls tell a different story. Sure, if you asked me whether I wanted my car to get more miles per gallon, I would say “yes.” But fuel efficiency is not a free good that drops from the sky. There are trade-offs; higher sticker prices (as even California acknowledges in its petition for a waiver), smaller cabins, lighter weight (a safety concern for some) and reduced performance in some areas. Should decisions about how many and what kind of trade-offs to accept in return for fuel efficiency be made individually by consumers or collectively by politicians? I never found time to make that point, but that’s the nub of the issue.

On several occasions, Ms. Cuttino tried to dismiss my criticisms by saying, well, industry always says that the technology doesn’t exist to meet federal standards or that it would prove to costly, but — what do you know? — people like me were wrong then and I’m wrong now. Of course, I never made either of those arguments. I simply noted that there are no free lunches and that fuel efficiency comes at a cost. Heresy!

Ms. Cuttino’s repeated attempts to conflate “Jerry Taylor” with “industry” were particularly annoying. She is the one in favor of bailing out the auto industry. I am the one who is trying to protect the federal till from their political piracy. It’s a curious world when someone who wishes that bankruptcy would be allowed to take its course over at GM is somehow painted as an industry apologist.

National security externalities were also briefly touched on. Ms. Cuttino argued — as do many — that our consumption of oil strengthens anti-American actors abroad by lining their pockets with petrodollars. I pointed out that there is zero statistical correlation between oil profits and terrorism or oil profits and hostility from state oil producing regimes. Sure, it’s better for Iran to have less money than more, but the conceit that reducing oil consumption reduces problems abroad is completely without foundation.

There was, of course, the usual tripe about how how a strong plurality of Americans want this or want that and that a majority of Americans believe this or believe that. I countered with a hardy ”So what?” A plurality of Americans also believe that evolution is an atheistic fiction, so the fact that a majority of Americans think X does not mean that X is true or that X ought to be the law of the land. Unfortunately, a listener in the second hour complained that this sort of response was so snarky that it didn’t warrant anyone’s time. But why?

At the end of the show, I made the point that a couple of the callers seem to be under the impression that I favor a carbon tax. Not so — I said, look, if we have to reduce greenhouse gas emission then a carbon tax makes a lot more sense than an automotive fuel efficiency standard … but I am not there yet. Ms. Cuttino replied, in a rather annoyed voice, that it is impossible to argue with someone who doesn’t believe in climate science or global warming. But when did I say that? I don’t believe that ”climate science” is a figment of the imagination or that the world isn’t warming. I simply believe that the costs of doing something about that warming by reducing greenhouse gas emissions are greater than the benefits — an entirely different matter.