Topic: Energy and Environment

The Wall Street Journal’s Baby Talk on Energy

Today’s Wall Street Journal features a special insert titled “Energy: The Journal Report” (subscription required) featuring 12 articles on the glories of renewable energy and energy conservation and the case for government subsidy thereof.  Those articles are so bad that it’s hard to know where to start.  Let’s look at the highlights.

Rebecca Smith’s lead story for the insert, “The New Math of Alternative Energy,” sets the tone.  While she’s happy to report the fact that no renewable energy can compete effectively in the market at the moment, she understates the cost differential between renewable and conventional fuels and is happy to parrot the industry’s optimistic forecasts about the future.  From her article, you’d never guess that there was anybody on planet Earth not bullish on 13th century energy technology. 

Ms. Smith, for example, argues that wind energy costs 6-9 cents per kilowatt hour “not counting the subsidies,” which means that they are ”approaching the point where wind power may be able to prosper without subsidies.”  But not even wind energy investors would buy that.  A recent presentation from Ed Feo of Milbank, Tweed, Hadley & McCloy, for instance, noted that two-thirds of the economic value of wind projects comes from federal and state tax benefits.  The U.K. Royal Academy of Engineering likewise recently estimated that even with a $45 per ton carbon tax, wind was substantially more expensive than conventional energy. 

Ms. Smith’s riff on solar energy is similar.  “A new generation of solar plants is on the cusp of being able to produce electricity on an industrial scale at competitive rates” she says.  But even the dubious cost estimates she presents for those facilities reveals that it costs 2-4 times more to generate electricity this way than to do so with coal.  That’s one heck of a “cusp.” 

Ms. Smith is likewise high on biomass (burning wood, plants, and municipal garbage for electricity) and geothermal energy, but little context is provided the reader.  For instance, the peer-reviewed literature finds that biomass is probably even more polluting than coal, a fact which will like put a cap on its ability to contribute to electricity supply in the future.  She then cites without any critical analysis a study from MIT finding that geothermal energy could produce 10% of the nation’s electricity by 2050 at prices competitive with fossil fuels.  Yeah, well, anything COULD happen, but what likely WILL?  Breathless predictions about geothermal energy have been with us since time immemorial but have yet to pan out despite numerous studies over the years that sound a lot like MIT’s.  Most analysts agree with Vaclav Smil that ”geothermal will remain a globally marginal, although nationally and regionally import, source of electricity.”  Not that you would know that from Ms. Smith’s article.

Finally, Ms. Smith turns here fractured gaze towards ethanol and, again, she is misled by her sources.  Keith Collins, chief economist at the USDA, is reported as saying that it costs $1.60 to produce a gallon of ethanol.  For a rebuttal, see this study from Mr. Collins’ office in 2005, which reports that the capital costs associated with producing ethanol average about $1.57 a gallon while the operating costs average about 96 cents per gallon.  That equals $2.53 per gallon.  Presumably, Mr. Collins was referring to the operating costs associated with ethanol production, which have gone up since then given the steep rise in corn prices.  But unless someone is handing out free ethanol processing plants, operating costs alone aren’t the full story.

Now, you’d never know from all of this happy talk about renewables that those not connected to the renewables energy industry are somewhat less sanguine about market prospects.  The U.S. Energy Information Administration, for instance, believes that, in 2030:

  • biomass will likely make up 1.7% of the electricity market compared to 0.9% in 2004;
  • wind energy will make up about 1.1% of the market compared to 0.4% in 2004;
  • geothermal will make up 0.9% of the market compared to 0.4% in 2004;
  • grid-connected solar will make up less than 0.1% of the electricity market; and
  • even an optimistic assumption about the growth of ethanol production suggests that it will make up only about 6% of the U.S. transportation fuels market. 

Moving right along, page two features recommended readings from Matthew Simmons, the most prominent proponent of the idea that the world’s oil fields are about to run dry.  This, to put it charitably, is a minority perspective among oil analysts.  That the Journal turns to someone like Simmons - and only Simmons - to lay in print the groundwork for readers interested in knowing more about the oil industry speaks volumes.  Much more intelligent conversations about oil with Daniel Yergin and Robert Mabro are briefly referenced as on-line supplements. 

Anyway, here’s my recommended reading - Michael Lynch’s absolute demolition of Simmons’ popular but dubious book Twilight in the Desert

Next up is Matthew Dalton’s article on page four titled “The Bottom Line,” subtitled, ”Utilities typically have had little incentive to reduce demand for their product.  States are trying to change that.”  Now, think about this for a minute.  What would we make of an argument that went like this - ”Shoe companies have had little incentive to reduce demand for shoes AND THIS MUST CHANGE!”  We’d think the person is crazy, that’s what.  And we’d be right.

The gist of the piece is two-fold.  First, Mr. Dalton reports that there is a move afoot to guarantee electric utility companies a profit no matter what their revenues might be.  If they earn less than the guarantee, the ratepayers write them a check.  If they earn more than the guaranteed level, the utilities write the ratepayers a check.  Everybody wins - or so Mr. Dalton reports.  Of course, if you run this sort of an idea past an economist, he or she would bust a gut laughing.  One could spend hours listing all the bizarre incentives that would follow from such a regime and the inefficiencies that would result.  But since Mr. Dalton never bothered to do so, the reader is unaware of anything besides the neon-lit free lunch sign.

Second, Mr. Dalton reports that many people want utilities to be rewarded for expenditures on energy conservation made on behalf of their rate payers, which he reports is something of a novel idea.  Nonsense - utilities have been handsomely paid to do just that for two decades now, and state programs to underwrite those utility investments in energy conservation go by the name of “demand-side management” and “integrated resource planning.”  In fact, RAND economists David Lougrhan and Jonathan Kulick report that U.S. electric utilities spent $14.7 billion on energy conservation for their ratepayers between 1989-1999 but found that sales declined by only between 0.3-0.4%.  The cost of saving electricity in this manner?  14-22 cents per kilowatt hour - a lot more than it would have cost those companies to generate power.

Mr. Dalton makes a big point of the fact that utilities support these sorts of reforms.  Well, gee, what company wouldn’t happily accept a state guarantee of robust earnings regardless of performance?  Once again, there’s no hint anywhere in Mr. Dalton’s piece that anyone of consequence fails to share his giddy anticipation for this brave new world to come.      

Reporter John Biers mails in a vacuous piece titled “Texas’ New Tea” about how Houston is poised to become the center of the renewable energy biz, transforming the former oil town into the international headquarters of Big Green, Inc..  While his article might as well have been written by the city’s Chamber of Commerce, it would be nice to provide some perspective.  For example, how much capital is flowing in to Houston to underwrite renewable energy investments versus how much capital is glowing in to Houston to underwrite fossil energy investments?  I can guarantee you that the dollars associated with the latter are light years beyond those associated with the former and that rising oil prices are doing far more for the city’s economic health than anything else.  He might have also asked how much of that venture capital is being driven by government regulation and subsidies.  The answer would be “all of it” - which speaks volumes about how precarious those investments might be. 

Page 12 gives us a fawning portrait of Hal Harvey, director of the environmental program at the William and Flora Hewlett Foundation.  Reporter Jeffrey Ball writes a story that isn’t far from what we might see in People magazine.  We get some policy discussion, but it’s little more than froth - nothing serious.  I guess some editor decided that it was important to offset Erica Herrero-Martinez’s equally empty piece a couple of pages earlier on ex-Greenpeacer Patrick Moore, who now likes nuclear power.  More trees die for no good cause.

Reporter Matt Chambers strikes out big-time with his article “A New Playing Field,” on page 12, subtitled “As oil-futures trading moves out of the pits, the impact may be felt far from the exchange floor.”  There is a really big story to be written about how the huge flood of dollars flowing in to the futures market is driving spot prices and how poorly those investments have performed of late.  But Mr. Chambers is too busy to notice, wrapped up as he is in the impact that new electronic trading regime is having on the floor at the NYMEX.  In short, he misses the forest for the trees.

Reporter Christine Burma gives us on page 13 the now standard “How to Cut Energy Costs” article that one has probably read a hundred times in Parade or in similar newspaper inserts or lightweight magazines.  Thank God the Journal is here to give us another.  

Finally, reporter Leila Abboud brings us back to a major topic of Rebecca Smith’s piece.  To wit, how can government’s make renewable energy more attractive to investors?  Yet again, superficiality rules the day.  Some countries, she tells us, have adopted policies requiring companies to purchase renewable energy at government-established prices.  This, she says, invariably pushes the costs on to consumers.  “In contrast,” she notes, other countries have adopted ”renewable energy portfolio standards,” which require companies to purchase a set amount of renewable energy for their customer base. 

“In contrast”?  They are two policies of the same genre, and both policies will impose costs on consumers.  Only the form is different.

Ms. Abboud then goes on at length about what she calls “The Danish Success” in promoting wind energy.  Believe it or not, government can in fact construct Potemkin Village industries if the production subsidies and consumption mandates are aggressive enough.  Heavy-handed government can succeed in Denmark just as easily as it can succeed in the old Soviet Union if your definition of success is meeting the planners’ dictates.  But such policies only “succeed” in an economic sense if they produce competitive industries that don’t need further subsidy.  And in Denmark, they have not.

But even if we accept Ms. Abboud’s curious definition of “success,” its not obvious that it holds any relevance to the United States.  Denmark is slightly smaller than the combined area of Vermont and New Hampshire and has a population about equal to that of Cook County, Illinois.  Supplying a tiny population over a small amount of land with 25% of its electricity from wind is one thing - doing so over the entire expanse of the United States is quite another.

Ms. Abboud then goes on at some length about how America does less than Japan to subsidize renewables.  Well, yes.  And that’s all to the good.  Yet Ms. Abboud writes that “As governments continue to experiment with policy alternatives, the key is that whatever policies they employ must be predictable and reliable.”  Of course, predictability is all to the good.  But more important is that the policies produce net gains to the economy, which means enhancing overall efficiency.  That’s the supposed “end” of government intervention in markets.  The intervention is the “means” and not, pace Ms. Abboud, an end unto itself.

One could spend a lifetime slamming dross in the news pages of the Wall Street Journal - particularly when it comes to energy.  Only the driving need to be more productive with my time keeps me from doing so on a daily basis.  But when something as bad as this insert comes along, something must be said. 

EU vs. Gas-guzzlers

The commissioners of the European Union endlessly preach about the need for carbon taxes and costly regulations that will reduce the quality of life for regular people. But those same commissioners get driven around in low-mileage vehicles. Fortunately, they are getting attacked for this hypocritical attitude.

Sadly, the embarrassment will have little impact. American politicians — including President Bush — want to force Americans into smaller (and more dangerous) cars, yet periodic efforts to require them to live by the same rules have proved fruitless.

The EU Observer reports on the controversy in Brussels: 

EU commissioners are finding themselves under scrutiny to see if they are putting into practice the green values that Brussels is increasingly preaching, with most of the 120-strong fleet of officials cars comprising gas-guzzling, C02-emitting giants.

…[T]he vast majority of the 27 commissioners use the standard-issue vehicles such as Audis or Mercedes — high on security features but rather lower on environment friendliness — to be ferried here and there across Brussels; sometimes even the few hundred metres between commission buildings.

…A commission spokesperson said, “It’s an individual decision for commissioners what their service car should be but as a general rule, the commissioners choose cars that are functional and safe for what they are doing.”

New Climate Change Report Out Today

The Intergovernmental Panel on Climate Change (IPCC) released a new climate change study today at a news conference in Paris. The study reports that global warming caused by human activities is now a virtual certainty, and paints a startling picture of the effects of global climate change. Still, not everyone is in complete agreement as to the severity of the threat. “Anyone who says that the planet is warming at an increasing rate is simply dead wrong,” says Cato scholar Patrick Michaels, author of Meltdown: The Predictable Distortion of Global Warming by Scientists, Politicians, and the Media. Dr. Michaels’ full comments are available here.

A French Global Warming Tax Against the U.S.?

Al Gore has a new ally in his fight for new taxes and regulations to limit carbon emissions. The New York Times reports that, for all intents and purposes, Jacques Chirac is blackmailing the United States: 

President Jacques Chirac has demanded that the United States sign both the Kyoto climate protocol and a future agreement that will take effect when the Kyoto accord runs out in 2012.

He warned that if the United States did not sign the agreements, a carbon tax across Europe on imports from nations that have not signed the Kyoto treaty could be imposed to try to force compliance.

Trade lawyers have been divided over the legality of a carbon tax, with some saying it would run counter to international trade rules. But Mr. Chirac said other European countries would back it. “I believe we will have all of the European Union,” he said.

Hurray for Profits

Good news from the oil industry: ExxonMobil announced a record after-tax profit of $39.5 billion for 2006.

That is great news because it means the company will have more funds to reinvest in exploration, refinery expansion, drilling platforms, chemical plants, and all those other brilliant machines that American families benefit from every day.

The firm invested $20 billion in exploration, structures, and equipment in 2006 and $18 billion in 2005. See here and here.

High profits are a signal to ExxonMobil management, other energy companies, and Wall Street to feed this industry more capital and to continue increasing energy production. That’s good news for U.S. energy security and U.S. consumers.

The bad news with high corporate profits is that governments confiscate so much of them. In 2005, the firm paid current income taxes of $23 billion on pre-tax profits of $59 billion, for an effective income tax rate of 39%. (The firm also paid $31 billion in excise taxes to governments). Of course, Exxon simply collects these taxes on behalf of governments–the ultimate burden falls on individuals.

(In 2006, income taxes were $28 billion on pre-tax earnings of $67 billion, but I couldn’t find the breakdown of current vs. deferred tax)

Anyway, kudos to Exxon for their fine performance!

Bush’s Alternative-fuel Boondoggle

A column explains how huge ethanol subsidies enrich special interests like Archer Daniels Midland:

Ironically, the president’s call echoes a more severe proposal by his 2004 campaign opponent John Kerry — a recommendation that a National Center for Policy Analysis study found would not “reduce future U.S. dependence on foreign oil.” The president’s plan also proposes an expansion of the so-called Renewable Fuels Standard (RFS), which currently mandates that refineries produce 7.5 billion gallons of ethanol per year by 2012.

But, as Heritage Foundation energy analyst Ben Lieberman points out, “if ethanol were a viable fuel, you wouldn’t have to mandate it in the first place.” Indeed, ethanol — whether made from corn or trendy cellulosic sources like switchgrass — is simply not viable as an alternative for the fundamental reason that a gallon of ethanol only goes 75 percent as far as a gallon of gas.

…For the farm lobby, the renewable mandate is easier to understand. It means money. Lots of money. To make ethanol price-competitive, the federal government subsidizes its production to the tune of 51 cents a gallon, costing U.S. taxpayers $4.1 billion a year.

Fueled by the RFS, Big Ethanol producer Archer Daniels Midland rang up record 2006 profits that would make Big Oil blush. Now Bush is proposing to increase the mandate to a fanciful 35 billion gallons by 2017 (whether consumers buy it or not). And as the federal honey pot grows, it is naturally attracting more flies.

Meanwhile, a Wall Street Journal column notes how the ethanol subsidy has a big negative impact on other users of corn, and even causes harm in other nations:

What we have here is a classic political stampede rooted more in hope and self-interest than science or logic.

…[F]ederal and state subsidies for ethanol ran to about $6 billion last year, equivalent to roughly half its wholesale market price. Ethanol gets a 51-cent a gallon domestic subsidy, and there’s another 54-cent a gallon tariff applied at the border against imported ethanol. Without those subsidies, hardly anyone would make the stuff, much less buy it — despite recent high oil prices.

That’s also why the percentage of the U.S. corn crop devoted to ethanol has risen to 20% from 3% in just five years, or about 8.6 million acres of farmland. Reaching the President’s target of 35 billion gallons of renewable and alternative fuels by 2017 would, at present corn yields, require the entire U.S. corn harvest.

No wonder, then, that the price of corn rose nearly 80% in 2006 alone. Corn growers and their Congressmen love this, and naturally they are planting as much as they can.

…[F]or those of us who like our corn flakes in the morning, the higher price isn’t such good news. It’s even worse for cattle, poultry and hog farmers trying to adjust to suddenly exorbitant prices for feed corn — to pick just one industry example.

The price of corn is making America’s meat-packing industries, which are major exporters, less competitive. In Mexico, the price of corn tortillas — the dietary staple of the country’s poorest — has risen by about 30% in recent months, leading to widespread protests and price controls. …Thus is a Beltway fad translated into Third World woes.

…The scientific literature is also divided about whether the energy inputs required to produce ethanol actually exceed its energy output. It takes fertilizer to grow the corn, and fuel to ship and process it, and so forth. Even the most optimistic estimate says ethanol’s net energy output is a marginal improvement of only 1.3 to one. For purposes of comparison, energy outputs from gasoline exceed inputs by an estimated 10 to one.

And because corn-based ethanol is less efficient than ordinary gasoline, using it to fuel cars means you need more [fuel] to drive the same number of miles. This is not exactly a route to “independence” from Mideast, Venezuelan or any other tainted source of oil.

…If cellulose is going to be an energy miracle — an agricultural cold fusion — far better to let the market figure that out. Not that any of these facts are likely to make much difference in the current Washington debate. The corn and sugar lobbies have their roots deep in both parties, and now they have the mantra of “energy independence” to invoke, however illusory it is. If anything, Congress may add to Mr. Bush’s ethanol mandate requests.

Taylor vs. Woolsey this Sunday on Foreign Oil

This Sunday, I’ll be debating former CIA chief James Woolsey at a “conservative summit” in Washington, D.C., sponsored by the National Review. The topic: “Resolved: That the federal government should act to reduce America’s dependence on foreign oil.” James Woolsey, of course, will take the affirmative. 

Unfortunately, it seems as if there’s no room for new attendees, so if you’re not already registered for this weekend confab, you probably can’t get in. There is a good chance, however, that the debate will air live on C-SPAN (either I or II). So if you’ve got nothing better to do at 10:30 am EST Sunday, you might want to tune in.

The last time I tangled with Woolsey directly, it was during a hearing of the House Armed Services Committee in July 2005. Both he and I were part of a four-member panel to testify about the Chinese National Oil Company (CNOOC) bid to buy a controlling interest in UNOCAL. Woolsey argued that the merger was the first shot of WWIII. I argued that it’s no business of ours whether UNOCAL stockholders sell their shares to CNOOC and that it’s no skin off America’s nose one way or the other. For those who missed the resulting fireworks, let me just say that I tore him apart and did so in grand style. I fully expect to do so again this weekend.

Each of us will have five minutes at the NR event to state our case. That’s a tall order. There is a lot that can be said — and has been said — about the alleged evils of foreign oil. Rather than get too deep into the policy weeds (that can wait until the Q&A), I think I’ll use the few minutes I have at the start to say something like the following:

The case for importing oil is the same as the case for importing, say, computer chips. If it’s cheaper to buy something from abroad than to produce it here at home, then the economy in general — and consumers in particular — are made wealthier by imports. Governmental interventions to discourage energy imports are, by definition, government interventions to discourage the use of cheap energy.

Mr. Woolsey contends that the government must act because foreign oil supplies are increasingly subject to disruption. True enough. But that’s why market actors are busily stockpiling oil in private inventories. They are saving oil for a rainy day in the hopes of making a profit if and when that disruption occurs. Private investors are also sinking increasingly large sums of money into oil futures in order to hedge against other investment bets and to diversify equity-heavy portfolios. This has further increased the stock of oil held off the market for future use. 

Many petroleum analysts, such as Philip Verleger and William Brown, think that private inventory buildup and the surge of dollars into oil futures markets is responsible for a large part of today’s price. How large is unclear, but Brown thinks that oil would sell for around $27 a barrel today were this not going on. Think of this as an oil tax — imposed by the market itself — to account, in part, for the possibility of future supply disruptions. In short, what makes James Woolsey think that the market isn’t already hedging sufficiently against the possibility of import disruptions?

And let’s not forget that a supply disruption anywhere in the world will increase the price of crude oil everywhere in the world. Accordingly, even if we imported zero oil, we would still be just as economically vulnerable to a terrorist attack on Saudi oil-producing facilities as we are at present.

Mr. Woolsey’s argument that dollars spent on oil imports funds Islamic extremism is only partially true. Oil revenues in the Middle East are established by global supply and demand, so even if the U.S. spent no money on Persian Gulf oil, producers would see the same revenue coming in the door — all things being equal. 

Regardless, there is no correlation between oil profits and Islamic terrorism. A thorough examination of oil prices from 1983 to present compared with data concerning Islamic terrorist attacks (both in frequency and in body counts) reveals no relationship between the two whatsoever. We’ll soon be publishing the regression analysis to prove it.

In sum, foreign oil is cheap oil. Market actors have every incentive to take the risks of supply disruption into account when they buy products from abroad. Consumers can hedge against these risks, if they are so interested, in any number of ways. Government has no business doing for us what we can do for ourselves. Conservatives have no business embracing government dictates about what oil companies can buy and sell absent Mr. Woolsey’s consent.

I probably can’t pack all that into a five-minute opening statement, but we’ll see.