Topic: Energy and Environment

Energy Price Controls in China

From our “never thought I’d live to see the day file,” Chinese Prime Minister Wen Jiabao announced yesterday that China would freeze energy prices as a means of combating inflation and appeasing public anger over escalating fuel prices. Well, been there, done that. If past is prologue, don’t expect a happy ending to this story.

Intellectual Honesty and Oil Prices

During the GOP presidential debate Saturday night, moderator Charlie Gibson - anchor of ABC’s World News Tonight - asked the candidates whether “intellectual honesty” demanded that they forthrightly tell the American people that oil prices were only going to get higher? None of the candidates really answered the question, so allow me to do so.


Oil prices might indeed be on a rocket ship upwards for as far as the eye can see, but market actors don’t think so. At the New York Mercantile Exchange, oil for delivery from next month through December 2016 is showing a downward price trend. In short, the people with the most money on the line - who will live and die (economically speaking) by these assessments - aren’t buying Gibson’s assertion about the future.

More evidence can be found the behavior of oil inventory holders. At present, oil inventories are being released to the market –hardly what one would expect if inventory holders thought that oil prices will continue their long march upward.

Of course, market actors could be wrong. Energy forecasts have such a poor track record that one should probably resist making any concrete predictions about the future. So while Charles Gibson might well be right that oil prices are only going to go higher, it is not “intellectually dishonest” to suggest that might not be the case.

$100 Oil

One of the big stories today is news that oil deliveries for February topped $100 for the first time in history yesterday and are again over $100 today. Lots of ink has predictably been spilled covering this story, but it’s unclear why. The $100 threshold is purely psychological and holds little import to the market. The macroeconomy is hardly more affected by $100 oil than it is by $98 oil. Likewise, the great public hunt for the “tipping point” at which oil price increases induce significant changes in consumer behavior is akin to Captain Ahab’s hunt for Moby Dick. Since oil prices began their run up in 2003, demand has remained relatively strong and consumers have responded far less robustly than they did during the price run-up from 1975-1980. Although it is unclear why consumers are so much less inclined to conserve fuel today than they were yesterday, there is little reason to expect any radical change in consumer response to fuel price increases in the short term.

The more interesting question is why oil prices have risen so dramatically since August of last year – one of the three or four largest price increases of the last 30 years. The standard explanations – turmoil in oil producing regions, demand growth in India and China, global crude oil shortages, speculation, and low oil inventories – are not very satisfactory. Turmoil in oil producing regions has, if anything, declined since August. Demand growth in India and China is hardly a new phenomenon. Oil production in the 3rd quarter of 2007 actually increased (4th quarter data is not yet in) and Middle Eastern producers are increasing discounts available to buyers of heavy crude. Oil inventories are likewise being liquidated - hardly a sign that speculators are hoarding oil to drive up price.

The only significant change in world crude oil markets has been the buy orders coming out of the United States for crude oil destined for the U.S. Strategic Petroleum Reserve. Oil economist Philip Verleger believes that most of the recent price movement can be traced to that fact alone, although the evidence for that proposition is not dispositive.

Regardless, there is little reason to succumb to panic. First, there is strong empirical evidence to suggest that consumers invest efficiently in automotive fuel efficiency. Hence, long-run demand response may prove much more robust than short-run demand response. Second, the economic burden of high gasoline prices today is greatly overstated relative to what that burden has been in the past given the increases in per capita and median household income. In fact, the “hardship price” of gasoline (that is, gasoline prices adjusted for inflation and changes in household income) is about average what it has been since the end of World War II. Third, belief that high oil prices are important macroeconomic events that are capable of triggering recessions or worse have been shattered by recent experience. Fourth, the fact that inventories are being released - not built up - tells us that market actors are betting that today’s high prices are not long for this world.

Taken together, those observations imply that government should treat high oil prices with benign neglect. If consumers want to reduce their fuel bills, there are ample opportunities available for them to do so. A good rule of thumb - even for non-libertarians - is that government should not do for you what you can do for yourself.

A Moment of Idiocy, of Real Idiocy

The above title is the correct assessment of the new energy bill that President Bush just signed into law less than 24 hrs after the House approved it by a 314–100 margin. House Speaker Nancy Pelosi, speaking just prior to yesterday’s vote, gave the politicians’ assessment: “You are present at a moment of change, of real change.”

Of course, it’s not that much of a change for politicians to substitute their collective judgment for the private decisions of consumers who have strong incentives (stronger than politicians!) to make the most efficient choices. Still, the new energy bill — assuming Congress sticks to it — will make some changes:

  • The incandescent light will be phased out of existence beginning in 2012.
  • Average fuel economy for new vehicles will move from the current 25.0 MPG to 35.0 by 2020 — a standard that only the Toyota Prius and Honda Civic hybrids currently meet.
  • New government mandates and subsidies will push the domestic ethanol industry to some 36 billion gallons in sales by 2020. (This will actually lessen fuel efficiency because ethanol gets considerably worse mileage than gasoline.)
  • The move to more biofuels will continue to increase food prices as farmland is reallocated to the production of energy stocks.

All this leads to one question: Why are these mandates necessary? If the changes are as sensible as Congress and the White House claim, consumers would make them privately. Indeed, the data indicate that consumer preference for fuel-efficient cars is stronger than what the economics would justify.

So then, what is this energy bill really all about?

ADDENDUM:  Beth Douglas Kelly, a mechanical engineer who specializes in energy R&D, emailed me about a bit of sloppiness in my parenthetical that ethanol gets worse gas mileage than gasoline. My statement is correct but, she points out, it’s not that important — it simply means that a certain volume of gasoline gets you farther than the same volume of ethanol. That fact bypasses the important questions of gasoline’s and ethanol’s costs (understood in a broad sense).

Here are the important comparisons:

  • What is the cost per mile for gasoline vs. ethanol? (Currently, gasoline still beats ethanol when you take into account the loss of gas mileage.)
  • What are the environmental externalities of gasoline and ethanol? (Here, ethanol seems to be better but there’s still some argument.)
  • What are the other externalities of gasoline use vs. ethanol use?
  • Will consumers ever be made to bear (and thus judge between) those costs, or will politicians continue to hide them?

Stranger in a Strange Land

A few days ago, I was quoted in an AP story as saying that scientists as scientists are in no position to dictate federal policy to address global warming. A rather predictable outcry followed, prompting my defense here.

Amazingly enough, that somewhat provocatively titled post did not soothe the savage environmental beasts. Michael Tobis, a climate scientist at the University of Texas Institute for Geophysics, posted a rather angry shot over at Grist (the preeminent gathering place for environmentalists on the web) arguing that economists and economic analysis have absolutely nothing to add to the policy conversation about global warming. An editor over at Grist kindly invited me to respond, so I Fisked the man and responded to the commentary about two-thirds of the way down the page in a post titled “Taylor Defends Taylor.”

What exactly informs this “economists are a plague upon mankind” view of the environmental Left? My guess is that it is a combination of things. First, environmentalists deeply resent the fact that anyone would presume to put a price tag on things they value. Second, many environmentalists do not understand economics very well and thus fall for all sorts of cartoonish depictions about what economists do and what they think. Third, economic analysis does not support many environmental fantasies about the future of humankind under either the “business as usual” scenario or under the environmentalists’ vision of the Book of (Environmental) Revelation.

Of course, speaking of “economists” generically — as if all economists are alike — is as dubious as speaking of “environmentalists” generically. If the environmental Left really wants an informed criticism of economics, they would do well to pick up Robert Nelson’s Economics As Religion: From Samuelson to Chicago and Beyond.

Scientists to World: Cut Greenhouse Gases Now! World to Scientists: Zip It!

Yesterday, 215 scientists released a petition in Bali - site of a global confab to talk about whether and how we should talk about a future treaty to reduce greenhouse gas emissions - that “begs” the world to cut greenhouse gas emissions in half by 2050. I was quoted in an AP story on the matter to the effect that scientists are in no position to intelligently dictate such a policy. And as expected, some in the blogosphere howled.

I do not believe in leaving public policy to “guys in white coats” - in any discipline. And that’s not necessarily a proposition that vitiates against environmentally-friendly public policy. Climate scientists do not have the training to tell us whether the costs associated with reducing greenhouse gas emissions are less than, equal to, or greater than the costs of business as usual. And that’s something you would want to know before signing off on greenhouse gas emission reductions. When climate economists have explored that matter, they find little to support such emission reductions even if we accept the prognostications about the future coming out of the IPCC.

Likewise, economic calculations about the same are heavily predicated on how you feel about future costs and benefits. If you believe in valuing dollars and lives in, say, 2150 as much as you value dollars and lives today, then it’s hard to accept IPCC reports and not conclude that GHG emission cuts pass a cost-benefit test. If you apply a discount rate of, say, 3, 5, or 7 percent, then it’s hard to accept IPCC reports and not conclude that GHG emission cuts don’t pass a cost-benefit test. But how you value the future is subjective, and economists have no objectively “better” preference regarding that matter than you or I.

Many have argued that we should value our great grandchildren’s lives and money as much as we value our own. Fine - there is nothing objectively wrong with that belief. But if you do, hand in your Rawlsian membership card. That’s because you’re endorsing a policy that will transfer wealth and well-being from the relatively poor (us) to the very rich (them). That is, even if the Stern Review is correct about the economic costs of climate change, real per capita income in developing countries will be higher than that of the developed world today by 2100. Moreover, if you value the future every bit as much as you value the present - and thus embrace, say, a 0.1% discount rate - then simple math suggests you ought to be saving just about everything you earn.

I do not believe that “the experts” in any field should be dictating climate policy because there are plenty of important value judgments built in to those policies and experts however defined have no objectively better values than you or I. I do believe, however, that any serious reflection on the ethics of reducing greenhouse gas emission will find that the case for such a policy is harder to make than you might think, even if you accept what the IPCC is telling us.

England’s Free-Market Future?

No, the title does not refer to possible policy changes if Tories win the next election (after all, that would require a smaller-government agenda). Instead, it is a somewhat tongue-in-cheek reaction to a story in England’s Daily Mail about couples who choose sterilization because they think children cause an unacceptable carbon footprint.

It is probably reasonable to assume that these people have a statist orientation. Since voting patterns and ideological orientation tend to be passed from one generation to the next, the electorate presumably will shift over time in a more market-friendly direction (or at least won’t shift as quickly in the wrong direction).

From the article:

Had Toni Vernelli gone ahead with her pregnancy ten years ago, she would know at first hand what it is like to cradle her own baby, to have a pair of innocent eyes gazing up at her with unconditional love, to feel a little hand slipping into hers — and a voice calling her Mummy. But the very thought makes her shudder with horror. Because when Toni terminated her pregnancy, she did so in the firm belief she was helping to save the planet.

…At the age of 27 this young woman at the height of her reproductive years was sterilised to “protect the planet”. Incredibly, instead of mourning the loss of a family that never was, her boyfriend (now husband) presented her with a congratulations card. …”Every person who is born uses more food, more water, more land, more fossil fuels, more trees and produces more rubbish, more pollution, more greenhouse gases, and adds to the problem of over-population.” While most parents view their children as the ultimate miracle of nature, Toni seems to see them as a sinister threat to the future.

…Toni is far from alone. When Sarah Irving, 31, was a teenager she sat down and wrote a wish-list for the future. …Sarah dreamed of helping the environment — and as she agonised over the perils of climate change, the loss of animal species and destruction of wilderness, she came to the extraordinary decision never to have a child. “I realised then that a baby would pollute the planet — and that never having a child was the most environmentally friendly thing I could do.” …[Her husband] Mark adds: “Sarah and I live as green a life a possible. We don’t have a car, cycle everywhere instead, and we never fly. We recycle, use low-energy light bulbs and eat only organic, locally produced food. In short, we do everything we can to reduce our carbon footprint. But all this would be undone if we had a child. That’s why I had a vasectomy. It would be morally wrong for me to add to climate change and the destruction of Earth.”