Topic: Energy and Environment

The Gray Lady Deflates “Peak Oil” Fears

An excellent article by reporter Jad Mouawad in today’s New York Times knocks the stuffing out of those warning for the nth time that we’re about to run out of oil. What the doomsayers overlook is that existing fields typically deliver about 35% of their oil to the market. Until recently, the rest had been deemed unrecoverable for economic reasons.

But as technology improves and oil prices go up, what was once deemed unrecoverable becomes, well, recoverable. And that has a big impact on supply. Oil analyst Leonardo Maugeri has estimated that if recovery rates (which hovered around only 10% a few decades ago) were to move from 35% to 40%, that would be akin to adding a new Saudi Arabia to the global crude oil market. Maugeri’s recent essay in Newsweek covers a lot of the same ground.

Mouawad’s piece well demonstrates this dynamic at work in the Kern River oil field in Bakersfield, California. First discovered in 1899, the field has been producing for about a century and is still going strong despite numerous predictions over the years that the field was on its last legs.

I’ve said it before and I’ll say it again: the New York Times does a better job reporting business news, industrial trends, and microeconomic developments than any other newspaper — and perhaps magazine — in the world. Today’s piece is an excellent example of why serious people need to read that newspaper.

Paternalism Runs Out of Gas

I was filling up the minivan on Saturday when a woman at a nearby pump approached me and said, “Can you do me a favor? I don’t know how to pump my own gas.”

My first reaction was puzzlement. She was probably in her 30s, driving an SUV with what looked to be one or two kids inside. How could she be driving a car all these years and still not have figured out how to pump her own gas? Then she said something that instantly made it all clear.

“I’m from New Jersey.”

New Jersey, of course, is just about the only state left that requires that all gas stations within the state be full-service. Defenders of the ban on self-service pumps claim it is safer and more convenient for motorists and that it does not cause higher prices. None of those arguments hold water against the decades of successful experience with self-service pumps across the country. If a gas station attendant could pump your gas more safely and conveniently and at the same price, why do so few stations offer full-service anymore?

On top of its economic inefficiencies, the New Jersey ban on self-service is an insult to the good people of New Jersey. Their own state government is telling the world that its citizens are not smart enough or responsible enough to be trusted to handle a gasoline pump. When it comes to the routine task of filling up our vehicles, the paternalistic government of New Jersey treats its citizens as though they are children.

As I witnessed first-hand over the weekend, that paternalism can leave its citizens overly reliant on the kindness of strangers whenever they venture away from home.

Gore the Glutton

After learning of Al Gore’s huge appetite for electricity at his Nashville home, I dug out my past electricity bills for comparison. 

Gore has a huge mansion to power, but he also consumes four times more electricity per square foot than my family. Is the inventor of the Internet running a computer server farm out of his home?

According to news accounts, Gore’s home is 10,000 square feet and he consumes 221,000 kwh of electricity per year.

My family’s home is 3,200 square feet and we consume 18,000 kwh per year.

Gore’s home is about three times larger than ours, but he consumes 12 times more power. Thus, adjusting for home size, Gore is plowing through four times the electricity. 

Our house has drafty doors and cathedral ceilings causing our electric heat pump to work overtime–it is not a model green home by a long shot. Thus, how Mr. Gore and family manage to vastly out-consume us per square foot is a big mystery. 

Pots & Kettles at the RNC

Somehow, I’ve found myself on an email distribution list for the Republican National Committee’s opposition research team.  Every couple of days or so, I get something documenting how the Democrat of the moment is out to lunch on this or that issue, speaking or acting hypocritically about some matter, or is an all-around crook or ne’er-do-well.  These packaged emails - intended primarily for the press - are the equivalent of political drive-by shootings with footnotes.

Today’s edition, however, is exquisite.  Titled “Hillary’s Kerryaoke on Energy,” it purports to document Hillary Clinton’s crazy statements and votes on energy policy.  Here’s what we learn:

  • Hillary Clinton is a big proponent of energy independence and calls for a big Manhattan-style project to get us there.  “ ‘If we landed a man on the moon and brought him back safely to Earth within a decade as President Kennedy had promised in 1961, we know we can do this,’ said Clinton to the AP the other day in the course of promoting her $50 billion program to reduce the nation’s dependence on foreign oil.  The RNC’s complaint?  She sounds just like John Kerry did in 2004.  My complaint?  She sounds just like President Bush, who proposes to spend at least that much to jack-up the Strategic Petroleum Reserve - and that’s before we even begin tallying up the costs associated with his ethanol madness, his clean coal, nuclear power, and renewable energy subsidies, and a plethora of related costly interventions.  
  • Hillary Clinton wants to impose special taxes on oil company profits to help fund this $50 billion initiative of hers.  Can’t complain with the RNC attack here.  But someone ought to remind these young operatives that George Bush is likewise happy to levy special taxes on oil companies to fatten government coffers.
  • Hillary Clinton voted 17 times against ethanol subsidies and even once dared to cast a procedural vote against an energy bill containing clean coal subsidies.  The RNC is outraged - OUTRAGED! - that the New York Senator would eschew federal attempts to rig energy markets and intervene in private investment decisions.
  • Hillary Clinton has voted eight times to prevent drilling in the Arctic National Wildlife Refuge.  I’m not sure that the “free market” position is to drill, but I am pretty sure that drilling there would have no appreciable impact on U.S. energy security.

You’ll probably hear some echoes of this RNC hit-piece on right-wing talk radio shows over the next week or so.  The point the RNC is trying to make is that she TALKS a good game regarding energy independence, but hasn’t always voted that way.  Well, if I have to choose between someone who means the crazy rhetoric he is dishing out and one who really doesn’t, I’ll take the latter. 

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.”