Friday, 21 August 2015

A Capital-Driven Oil Glut?

Russell Gold of the Wall Street Journal reports today that even as oil prices sulk at $40 per barrel, oil producers just keep on pumping, even at what analysts believe to be losses. He doesn't mention it, but it is even worse in the oil sands (notice I did not say "tar sands") of Alberta, where their discounted price (because of the difficulty of transporting crude to market from Northern Alberta, and the reason for their desire to build Keystone XL) is more like $24 per barrel. Ouch, that hurts, eh?

A common explanation for the persistence in production, even at losses, is competition for market share. Saudi Arabia has actually increased production. Russell Gold, taking the same line as oil pundits, explains that this is Saudi Arabia trying to avoid losing Asian customers to competitors.

But there is another explanation. Saudi Arabia has always had low production costs -- somewhere in the neighborhood of $8-$10 per barrel. See the graphic below, from Agora Financial and Total S.A. It is true that most producers are now operating at a budget loss, but not a production loss.  The difference between the budget breakeven and the production breakeven is the difference between the orange blocks and the blue blocks below. As one can see, most producers are still selling their oil for more than the variable costs to produce it. The capital, most of the difference between orange and blue, is sunk. If you are a producer, you stop producing when your marginal price drops below your variable costs, not your total costs. Your capital is sunk; what are you going to do about it anyway?
Breakeven Costs For Selected Producers

This is the problem with a capital-intensive oil industry: that production continues even at loss levels. A heavy loading of capital makes the industry sluggish to change, and less responsive to price fluctuations. I guess that's a consequence of the capital-intensive oil industry. But that ignores the role that law and policy have played in contributing to this overcapitalization.

We have seen this before, actually. Fisheries have in the past been plagued by overcapitalization. Chronically poor fishers have gone out to fish out a depressed and overfished species just because they have a boat, and no other plausible use for it. It does not cost too much to pay the variable costs of fishing (gas, crew), so why not? What else are you going to do with that boat? That, in sum, as most ably researched by Jim Wilen, is an important cause of overfishing worldwide.

In the United States and Canada, we feed this overcapitalization, just as we fed, through fisheries policy, the overcapitalization of the fishing industry. The overcapitalization of oil and gas goes beyond the approximately $4 billion per year bestowed upon the oil and gas industry by the American taxpayer for over 100 years. All oil and gas exploration and drilling subsidies have to do is change the decision environment enough to convert an unprofitable situation to a profitable one. How inefficiently overcapitalized the oil and gas industries are, we do not know. Oil and gas subsidies are so old, there is no baseline.

So, oil continues to flow. And that's in significant part thanks to the American taxpayer.

Thursday, 16 July 2015

Koch Brothers, Socialists

The Koch Brothers and their putatively conservative friends, like Americans for Prosperity, have reached new heights of Orwellian messaging. Charles Koch has complained in the past that politics "tends to be a nasty, corrupting business," preferring instead to "advancing libertarian ideas." Above such nastiness himself, Charles opines that "[c]ompanies should earn profits by creating value for customers and acting with integrity, the opposite of today's rampant cronyism."

This must surely be the reason that the Koch Brothers are opposing a Florida ballot initiative to allow homeowners to finance rooftop solar panels with third parties that are not necessarily their local utility. The ballot initiative has the support of Georgia Tea Party activist Debbie Dooley, as well as the Republican Liberty Caucus of Florida and the Libertarian Party of Florida. Americans for Prosperity Florida opposes the ballot initiative "because they are not free market." 

Really?? This is not free market, to facilitate new entry into the electricity supply business? To allow outsiders other than utilities to provide an alternative to regulated monopoly electricity service mode? It sounds like flat-out socialism, to me, protecting incumbent industries regardless of their economic merit. Sounds like the cronyism that Charles says he finds so offensive, protecting incumbent industries because they share an ideology. There really are few industries in the modern world that have been as allergic to innovation and efficiency as the electricity generation industry. In 1920, a kilowatt-hour delivered to the grid by a coal-fired power plant was about twenty percent of the energy contained in the raw coal. By 1999, that figure was thirty-three percent. That stands in pretty stark contrast to Moore's Law, that semiconductor processing speeds double every two years or so. Rooftop solar threatens to upend this dinosaur of an industry. Actually, with the restrictions on entry, as the Kochs would have it, it is more of a guild than an industry.

Florida does provide for net metering, the requirement that utilities buy back, under reasonable terms, excess electricity generated by residential owners of solar rooftop. The rub is that most homeowners cannot afford to buy and install solar rooftop panels without some financing. Under the Floridians for Solar Choice ballot initiative, homeowners can receive financing from some outside funder. The utility itself is not, under Florida law, permitted to finance solar rooftop panels to its customers. It is only allowed to sell electricity to its customers, not help them generate their own. The Arizona Public Service Company, the state's largest utility, received funding from the Koch Brothers to fight net metering in Arizona, attempting to keep rooftop solar out of the state. The Arizona Public Utilities Commission ruled that utilities had to allow net metering for rooftop solar owners, provided they paid a $5 monthly fee for access to the grid

That is the crux of the problem, and why the Koch Brothers are acting like such socialists, protecting their anachronistic utility friends under the guise of "freedom." Solar rooftop is disruptive, and it does in fact threaten the traditional hub-and-spokes, regulated utility model for electricity generation. Rooftop solar, cheap as it has become, threatens to make obsolete the large, expensive baseload power plants, many of them coal-fired and looking at a bleak future anyway.

The socialist dinosaurs in Florida have countered with their own ballot amendment, which contains this following language:
This amendment establishes a right under Florida’s constitution for consumers to own or lease solar equipment installed on their property to generate electricity for their own use. State and local governments shall retain the ability to protect consumer rights and public health and safety, and to ensure that consumers who do not choose to install solar are not required to subsidize the costs of backup power and electric grid access to those who do.
This sounds uncontroversial, attempting to conceal its real opposition to solar, and it skirts the tough issue -- what exactly would be a reasonable grid access fee for residential rooftop solar homeowners? Is the Arizona $5 fee too much? Too little for utilities to recoup their fixed costs of providing grid support?

This would be a good debate to have, one that is ongoing in Arizona, what residential rooftop homeowners should have to pay their utility to essentially have them back up their electricity generation. But is obscured by the sophomoric demagoguery that has, with the Koch's blessing, taken over the discussion in Florida. If you are sympathetic to the Koch Brothers, you would have to be disappointed that they do not seem interested in this discussion, but merely wish to entrench the incumbent utility industry, to protect their regulated profits at the expense of technological progress in electricity generation. This is not the first time that the Koch Brothers have allowed their high-minded principles to trump the discomfort of telling their friends they're wrong, they should do things the Koch way. Three years ago the Koch Brothers, funders of the libertarian think tank Cato Institute, tried to capitalize on the death of William Niskanen by claiming the right to buy his shares, trumping claims by Niskanen's widow, Kathryn Washburn. Their goal? To knock out the leader, Ed Crane, in favor of someone that the Koch Brothers wanted. What do you expect from a couple of good old-fashioned socialists but a coup at Cato?

Friday, 26 June 2015

Alberta Increases Its Carbon "Price"

I put the word price in the title in quotations because the province of Alberta has announced plans to tighten its emissions standards under its Specified Gas Emitters Regulation, the first-ever policy in Canada to impose some sort of a pricing mechanism on greenhouse gas emissions. You read that correctly: Alberta, home to the "tar sands" (I prefer the older term "oil sands"), not climate-taxing British Columbia, was the first to impose a price on carbon emissions. In fact, other than Boulder, Colorado's carbon-tax-like electricity surcharge, this was the first in North America. The catch is that the SGER is not a carbon tax unless one of the specified emitters exceeds a particular emissions "intensity," a measure of emissions per unit of production. The requirement was a twelve percent reduction from baseline levels. The bottom line was that emitters were only required to become more efficient with their greenhouse gas emissions, rather than actually reduce them. The price for being unable to sufficiently reduce emissions was $15 per ton of emissions over the required levels (12% below baseline), working out to a pretty low average cost of under $2 per ton. So this is not a carbon tax, but still, Alberta, which passed the legislation in 2003 and implemented the regulation in 2007, was first. Now, Alberta has announced that they will ratchet up both the price – from $15 per tonne (that's "ton" in Canadian) to $30 per tonne – and the reduction from baseline – from 12% to 20% -- by 2017. That is a welcome first step.

Earlier, in June, newly-elected Alberta Premier Rachel Notley announced that she would seek help on environmental policy from the national and Ontario offices of her New Democratic Party, a party that occupies a very liberal political left in Canada. I groaned, because I have historically found the NDP's climate policy positions a bit facile. The national NDP leader, Thomas Mulcair, has called for cap-and-trade because "polluters [should] pay for the pollution they create instead of leaving those costs to the next generation." There has always been a for-the-little-guy-against-the-big-guy populism in the NDP, and unfortunately climate policy has been similarly hostage to this party principle. The NDP, historically a very green party, even opposed British Columbia's carbon tax on the grounds that it hurt individuals. (Oy) I am heartened to see that the Premier has asked University of Alberta economist Andrew Leach to chair a climate advisory panel to help devise a new provincial climate policy.

Expect some change. The new Premier has said she's not a big fan of the current regulatory scheme, so this recent announcement is likely just a stopgap. She is also reported to be skeptical that a cap-and-trade plan is right for Alberta, so that leaves …. hmm, a carbon tax? Chair-designate Leach has written quite sensibly in the past that carbon pricing is not a "panacea," but depends on the stringency and the context. But at this point, it is hard to imagine any kind of scheme that is not a plain old carbon tax. Alberta will probably not try to one-up its neighbor, but seems likely to eventually accept a provincial carbon tax like British Columbia's. Trying to imagine some regulatory scheme to regulate Alberta's specified gas emitters just seems too anachronistic to me. What could you possibly tell Alberta's eight coal-fired power plants besides simply, "shut down"? What kind of a standard would be applied, above and beyond the already existing federal plan to phase them out? What about gas plants? What would their standard be, and why? I am hard-pressed to imagine a climate policy for Alberta other than a carbon tax.

Friday, 8 May 2015

Canada's Climate Will Change, and So Will the World's

Apologies to my readers whom have somehow managed to do without me for several months while I battled with teaching a new course.

Wow. Holy Bob and Doug Mackenzie. I would guess that the vast majority of Americans would not have had the slightest idea that the earth moved underneath the second-largest country in the world, and the United States's largest and most reliable trading partner. The most conservative of Canada's ten provinces, and the one that is most reliant on oil and gas production for economic growth, Alberta, tossed out a Progressive Conservative Party Premier (that's "Governor" in Canadian) and elected ... the leader of the New Democratic Party (NDP), Rachel Notley as its new Premier. Fox News calls the NDP "left of center." Huh? No, sorry -- the NDP is left of George McGovern. The center (such as it were in Canada) has historically been occupied by the "Liberal" party. This election is the equivalent of Wyoming electing Elizabeth Warren as its Governor.

Why is this so significant for Canada? Canada's palpably creepy Prime Minister Stephen Harper hails from Alberta (although originally from Ontario), has led the Progressive Conservative Party that housed every single Alberta premier since the Party's founding in the 1990s, and has devoted enormous federal resources and political capital to helping the oil sands industry in Alberta.
The spurned incumbent, Jim Prentice, was very closely allied with the Prime Minister, and in fact was the Environment Minister when Canada announced its sensibly Canadian plan to phase out coal-fired power plants over the ensuing forty-five years. The oil sands are not going away, but they will have to deal with a very different government. To think about the NDP, just imagine Elizabeth Warren, only not as reasonable. Stephen Harper must be sitting in his Centre Block office wondering, "what am I going to spend my time doing now?"

Why is the world going to change just because of a provincial election for a province of 4.1 million people? It's what Alberta represents to Canada, and what Canada represents to the world. Alberta has always been the most conservative of the provinces, the most energy-focused, and the most socially conservative. That Alberta voters have turned against its economic engine in favor of a liberal populism and more concern for the environment is extremely important. Imagine what American politics would look like if all of a sudden Texas elected an environmentally conscious and liberal Democrat like, oh, how about Elizabeth Warren? And what would that do to a President Ted Cruz (who was born in Alberta, by the way)?

So who cares about Canada? Why does a shift in Canada mean anything significant on the world stage? Well, first, Canada is the sixth-largest oil producer in the world, accounting for about 4% of world crude. But Canada and Norway are the two oil giants that viewed as socially and globally responsible. If Canada become discernibly more concerned about climate change, that would remove one of the major stumbling blocks to an international climate treaty. Even with the ascendance of Prime Minister Voldemort, Canada punches well above its weight in terms of serving as a moral conscience. Its New York City diplomats, like those from Scandinavian countries, avoid illegal parking. If Canada, a country heavily dependent upon oil production and export for its economic health, can turn the corner, then it will be harder for other countries, like the United States, to plead helplessness.

Monday, 12 January 2015

My 5-year-old Son's Rosa Parks Question

In advance of Martin Luther King's birthday, my wife and I have been checking books out of the public library on Dr. King's life, and the civil rights movement in general. Our local elementary school has certainly dedicated a significant part of its teaching year to the civil rights struggle.

My wife is Caucasian, so our children are half-Asian, but we have always taught our children, Katharine and Allen, that they are persons of color, even though they are only half. Their half-Asian status came up last night because my wife was reading to our 5-year-old son Allen about Rosa Parks. He learned the rule in those days that black people were supposed to sit in the back of the bus, and white people sat in the front. Aware of his half-Asian status, Al thus asked, "does that mean that Katharine and I would have had to sit in the middle of the bus?"

Friday, 2 January 2015

Thomas Piketty and Mancur Olson

Thomas Piketty's Capital in the Twenty-first Century has garnered a lot of attention this past year, as I've noted. One of the many striking things about Piketty's account is the idea that wealth inequality is a process, and a one-way ratchet at that: wealth inevitably concentrates in the hands of a few, gradually and over time. By "gradually," he means a long time: we are headed back to the vast differences in wealth in place at the beginning of the twentieth century, but that process has been slowed by two world wars and the Great Depression, which knocked everybody back, so that the world became more equal. Wealth inequality has not yet, by Piketty's account, recovered from those economic catastrophes.

A slightly different version of Piketty's story has been told before. In The Rise and Decline of Nationsthe late economist Mancur Olson described a one-way ratchet of increasing unemployment, stagflation, and the ultimate economic decline of nations. Over time, Olson argues, a country with a stable political environment allows special interest groups to develop. Special interest groups exist only to engage in rent-seeking – the achievement of favorable government policy that secures above-normal rents for members of the special interest group. Why else would members of special interest group pay dues, unless they expect the group to obtain benefits they could not obtain themselves as individuals? Drawing upon Olson's earlier magnum opus, The Logic of Collective Action, how else can one even explain the existence of special interest groups, given the potential for within-group free-riding?

The provocative result of Olson's work is that this decline is almost inevitable. Over time, special interest groups form, they secure enough above-normal wealth, and what is left over is below-normal wealth for everybody else. Once special interest groups gain a foothold, their influence over policy grows, and their gains at the expense of society accumulate. Exceptions to inexorable decline exist, but are uncommon. A large and sudden shock from a trade liberalization might scramble the economic order faster than special interest groups can form or mobilize. Or, disruptive technologies might lead to a creative destruction. But absent such serendipitous shocks, the die is cast. 

While Olson is primarily concerned with allocative inefficiency and Piketty with distributive effects, it is striking to notice the parallels of their theses. Both see a one-way ratchet, not a cycle. Both see their stories as mostly inevitable, checked only by random, infrequent, exogenous shocks. But why, save for the few exceptions, should spirals be inevitable? Why can't developed countries stave off the tyranny of special interest groups and periodically re-invent their economic identities? In Piketty-world, why can't the ninety-nine percent rise up in electoral anger and smite down the one percent?

There is one answer for both Olson's and Piketty's puzzles. In both cases, a narrow segment of society – Piketty's one percent and Olson's special interest groups (though there is clearly overlap) – garner above-normal rents, use them to invest in capital, and then use legal rules and institutions to protect that capital. This has the effect of both widening wealth inequality and blocking reform. For Piketty, the missing piece was the use of law to secure outsized rents for the one percent, while for Olson, the missing piece was the use of law to protect capital, developing an elaborate legal super-structure around it to protect it from changes in its legal or economic environment. The legal system is used in Piketty's world to obtain capital and in Olson's world, to protect capital from regulatory interference and reform. Governments at all levels have demonstrated an inclination to use "carrots" instead of "sticks" to achieve policy goals, and the carrots frequently take the form of some capital promotion or protection. Scattered throughout the Internal Revenue Code are carrot-like provisions that lower the cost of private capital or increase the returns to private capital. This two-staged exploitation of the legal system has the dual effects of exacerbating wealth inequalities and grinding legal and economic reform to a halt.

Wednesday, 17 December 2014

A State Carbon Tax?

Washington State Governor Jay Inslee has announced that he will propose some sort of a carbon pricing program to help raise revenues for his state's starved budget, which is currently about $2 billion in the red (over two years, and out of a total budget of about $33 billion), and which includes a Washington Supreme court-mandated increase in school funding. The details remain sketchy at this point, like whether it is a carbon tax or a cap-and-trade program (Greeenwire is calling it a "carbon  fee" and the Seattle Times is reporting it as a cap-and-trade), but the Governor is hoping that it will produce $400 million per year. He has tied it to transportation funding, which both parties in Washington state would agree is badly needed.

Inslee is a Democrat and Republicans have a majority in the Washington Senate, and are just barely a minority in the State House, so prospects of passage might appear dim. But this is a state where the parties still seem capable of working together. Republican state senator Curtis King of Yakima (the hometown of Justice William O. Douglas) criticized the Governor's plan for linking such a tax to general spending projects like transportation projects, but praised the Governor for proposing something in advance of January budget negotiations. (Can we get some of those Republicans down here in Florida?)

I have one problem with this. Washington State still has to figure out a way to comply with the Obama Administration's Clean Power Plan to reduce emissions from the electricity generating sector. Washington's goal is already a heavy lift -- 1,379 lbs./MWhr down to 215 by 2030 -- this is a state with only one coal-fired power plant so it does not have much low-hanging fruit to pick. I would save my political capital for when I needed to propose something for the Clean Power Plan, which is going to really cost Washington State. What Washington could do, much more directly if it truly wishes to fund transportation projects, is just raise its gasoline taxes, currently at 37.5 cents per gallon. That is high (ninth among states) but Washington is one of seven states with no state income tax. If I am a motorist in the Emerald State, I would accept a gasoline tax as the price of having good roads and bridges (a major and important bridge collapsed in Northwest Washington in 2013), and could separate that from carbon reduction measures. Washington State consumed about 64 million barrels in 2013, or 2.7 billion gallons. A tax of 10 cents per gallon would raise $270 million dollars, and 15 cents would raise about $400 million, the hoped-for amount raised by the carbon "fee," or permit price, or whatever it is going to be. Do it now, when gas prices are low!