Insull

Forrest McDonald's biography of Samuel Insull strikes me as an unreliable source of information. I can't put my finger on it exactly, but it is striking that all of Insull's enemies and competitors just happened to be either corrupt or incompetent. I suppose it's possible, but I think perhaps Mr. McDonald overlooked some of Insull's less stellar moments.

My interest in the book has to do with seeking out the origins of public utility regulation. I had once read that Insull, like AT&T's Vail, was a great advocate of natural monopoly theory and actively sought it. While McDonald mentions this a few times, he does not try to document or substantiate the claim. He notes that Insull's English upbringing left him regarding monopolies as benign, and his association with German Henry Villard left him believing in the benevolence of regulated utilities. However, it does become apparent from the narrative that the electric industry was not exactly the wild and wooly unregulated market one might suspect from reading other sources about the period.

Insull's empire was built on at least two other types of government regulation that pre-dated the Public Utility Holding Company Act (PUHCA). The first was the patent, and the second was existing public utility regulations. Insull started his career as a secretary for Thomas Edison, and eventually worked his way up to become an executive in the Edison General Electric Company (the forerunner of the modern GE). When the Morgan group forced out Henry Villard, Insull went to seek his fortune outside the electrical equipment manufacturing industry and found a little generation company.

Edison (and, to a lesser extent, others) had started into the electrical generation business by selling two different types of generators: central station and isolated power. The latter was easier to sell since the objective was to provide power for a single building; the infrastructure was either pre-existing or easily installed; and for the most part, these provided power to the new-fangled elevators. The former, however, was the route by which economies of scale could be obtained if you could only build up the distribution infrastructure and subscribership.

One could only obtain the machinery required to run a central station from about 4 companies at that time: GE, Thomson-Houston, Westinghouse, and Siemens. Each enforced a regional sales strategy, so the only way to obtain rights to buy from Westinghouse was to either be the first to make a deal with them, or to enter into partnership or to buy someone who had. So all Insull had to do was to acquire ownership of 4 of the "central" stations in Chicago and he had a lock on the whole region. So the means was institutional failure, right? Well, not really. The real issue here was patent protection: only four manufacturers existed because innovating companies like GE learned to aggressively defend their patents (from Edison's experience with the light bulb), and companies like Thomson-Houston existed for the primary purpose of buying up patents to defend (patent trolls).

At the time Insull entered the business, many cities already had a history with gas lighting companies. It didn't take long for politicians in places like Chicago to realize that they could charge them franchise fees and use the money to run their political machines. So when a new upstart -- including electrical generators -- showed up, it was relatively easy to use this machinery to keep them out, and when that proved unworkable, to aim it at the newcomers. And once the newcomers showed themselves to be reliable campaign contributors, it didn't take long for them to realize that they could employ the politicians to keep the public on a leash on one side, and competitors on the other.

By the end of the story, we learn that Insull was a generous man (who fired people for failing to say good morning) who contributed much to the war effort (in support of his native England). During WWI, he developed a powerful propaganda machinery which he put to private use after the war. At a high school reunion one time, I asked a classmate who now works for a big power company why they wasted their money on advertising since they are, after all, a legal monopoly. He said he had pointed out the same thing at a cost-cutting meeting one time, but got shot down. I think I know the answer now: the PR machinery needs to stay limber in case the public decides to bring out the torches and pitch forks and starts talking about public ownership. It is all based on Insull's war propaganda example.

Another interesting factoid: just prior to Insull's great downfall, England approached him to ask for his help in setting up their national grid. The entire national system was based on Midwest Utilities. After the collapse, for which Insull was found not guilty (not easy, given the times and the public persecution), the TVA was said to be founded on the public English example instead of the corrupt capitalist systems. Yep, they traveled across an ocean to look at a copy of the original instead of basing it on the original which itself lay in their own back yard. But propaganda isn't just for utility operators.

Reviewing some old comments

On this post about biodiesel, the comments descended into a tedious exchange with a true believer who made this statement:

Unlike a turbine, PV doesn't require a huge balance of system like wells, tankers, pipelines, storage vessels, retail distributors and the huge slavewage labor force to serve the consumers of energy. You just point the PV at the sun and the energy is delivered for free.

Actually, PV does require analogs to those very same things. Silicon mines (okay, okay, it's sand, but still ...), acid production, refineries, tankers, shipping containers, retail distributors, installers, and a labor force to build and sustain it all.

"Just" pointing the thing at the sun requires either (a) a complex system of trackers that require maintenance (do you own any motorized things that have lasted 20+ years outdoors?), or (b) accepting a lower efficiency (static PV installation).

You also need a rather expensive set of electronics and batteries to run a self-contained setup, or a very expensive delivery network (the grid).

For whatever reasons, people love the idea of PV solar so much that they don't want to hear the downside, or that there are more efficient mechanisms for generating sustainable energy.

There is now an entire website dedicated to taking down some of these cheerleaders: Low-tech Magazine. Check out articles on the energy paradox, urban windmills, algae farming for biodiesel; you may not have considered their conclusions, you may not like them, but you will think about them.

Heh

Blame America First?

No!

Drain America First! (see the comments)

Road conditions

A recent article on NPR stated that it would take $2 billion over the next decade to repair roads in Maine and "[t]he congressionally appointed National Surface Transportation Policy and Revenue Study Commission estimates that the cost of needed repairs is $220 billion -- at a minimum -- per year" to repair all of the nation's roads. This is seen as a crisis that requires federal subsidization and massive increases in federal and state funding. They are therefore starting to look at increasing gasoline taxes.

The last substantial increase in federal gasoline taxes took place in 1993. Given that we "only" used about 142 billion gallons of gasoline in 2006 (and similarly for 2007; high prices have caused a stagnation of fuel consumption), that means the federal government "only" collected about $26 billion. Given that the aggregate state collection is similar (state fuel taxes vary considerably, but average right around $0.18 as I recall), then "only" about $50 billion or so of the $220 billion is being collected. Your fuel taxes therefore need to climb from a combination of around $0.36 per gallon to something more in the neighborhood of $1.62, an increase of $1.26 per gallon.

May I suggest something else? What about supporting tolls? Though perhaps not very practical for intracity driving, they are eminently practical for freeway and bridge traffic. But first, there is a substantial obstacle to overcome: the belief, widely held in the US, that driving cars is a right and that roads should always be free. Clearly, we understand that roads and bridges are not really free, but the costs are hidden rather than explicit [1]. Tolls are a way of making those costs explicit.

As an exercise in noting how bad the anti-toll and especially anti-private infrastructure bias is, I will cite the Forbes article cited recently in the comments at MR as an example. The Ambassador Bridge is a privately built, privately owned bridge from Canada to the US near Detroit. It is the most popular bridge in the Great Lakes region: 3.3 million cross on the Ambassador vs. 3.6 million on the other four bridges combined. On 9/11, local government officials closed off the nearby car tunnel, and traffic subsequently backed up on the Ambassador. Truck wait times went to 12 hours because of the lack of border Patrol and Customs inspectors.

The tone of the article is as follows: Because some private person had the foresight to build a bridge at that location 75 years ago, and because it is the most popular truck crossing today, and because the state has not built a competing bridge nearby, somehow the owner is a bad guy. And because 9/11 brought about panic and security precautions that caused backups, the owner is a bad guy. And most of all, because he doubled toll rates for trucks and quadrupled them for cars in the past 25 years, he is a bad guy. Bottom line: private infrastructure is bad [2].

The point about toll raises is misleading. If there are four hour weight times at rush hour, this is a sure signal that the tolls are not high enough; perhaps they should consider higher tolls during the rush hour, the same way commuter trains do. If cars are Teh Bad because of pollution and AGW, then tolls should be higher everywhere, not just at the bridge (that's essentially what a carbon tax is). Here's the Environmental Defense Fund on the subject. Furthermore, bridge and road tolls have increased nearly everywhere in the past few years, not just on this private bridge. The tolls on the publicly operated San Francisco Bay Bridge were $1 in 1988, but are currently $4. That's a quadrupling in twenty years, quicker than the cited period of 25 years for the Ambassador. And London has famously begun charging congestion tolls to enter the gridlocked inner zones.

I think we can all agree that we rely on the transportation infrastructure and that we would like for it to be properly maintained. That is essentially a public good (not a pure public good, though). Every unavoidable pot-hole creates potential additional maintenance for the car owner. We would also like to see traffic reduced to the point that we don't experience delays and frustration. But fuel taxes are just one of several responses. Tolls that are reinvested in the roads are a better way of both directing the money to the most used infrastructure and directing the traffic to the best infrastructure. For example, if you had to raise tolls on a freeway to keep up the maintenance due to heavy truck usage to the point that shippers began shifting more of their traffic to more efficient railroads, that would be a good thing, no?

Oh, you did remember that railroads in the US are (for the most part) privately operated and maintained, didn't you?


-----------------------------------
[1] Note the parallel to education: we all know that school buildings, teachers, and books cost money, but the phrase "free education" is used without irony. May I also suggest a small, means-tested toll at public schools? You can call it whatever you want -- "tuition" or "user fee" -- so long as you collect it.

[2] Don't tell the people who believe that private infrastructure is impossible. They prefer the impossibility theorem to the malevolence theorem, but will fall back to the latter when it suits them.

Local, action: Buying Whole Foods' local claims

In Kevin Carson's book chapter, "Decentralized Production Technology", he has this to say about my comment about Viking appliances and planned obsolescence:

Here I take issue, at least in part, with Husman's analysis. First of all, it's hard for me to understand why the average lifetime of an appliance, as determined by the durability of its components, should as a matter of strict definition be excluded as a matter of design choice. After all, Husman himself mentions Viking refrigerators as an example of a product specifically designed for longevity. Second, he seems to be defining "planned obsolescence" far too narrowly. Planned obsolescence refers not just to how soon or how frequently an appliance breaks down as a result of problems with individual parts, but also to how amenable it is to repair. Planned obsolescence, in this latter sense, includes 1) a deliberate choice among design alternatives in favor of a design that makes repair more costly, difficult, or complicated, and 2) the use of such expedients as patents to control the availability and pricing of replacement parts.

First, as I pointed out, the Viking appliances are expensive, on the order of $6,000 for a refrigerator. And the same is going to be true of many such things: a Mercedes or Lexus is going to last longer, all things being equal, than any economy car. So I'm not opposed to including longevity as a design criteria, but rather pointing out that the longest lasting items are going to utilize the latest and most expensive elements and techniques. On the other hand, a Toyota lasts longer than its similarly priced competitors and people desire that feature. Second, I'm going to definitely concede that Kevin has a good point about repair difficulty/ease being part of the equation. The original Model T was made to be easy for farmers to repair, and they loved it. The current generation of cars is ridiculously difficult for the shade-tree mechanic to do anything but change a tire.

But that's beside the point I'm after in this post. What I'm mostly after is the fact that moving to an economy that we might prefer is going to look expensive. I introduced this with the appliance debate, but I'm going to flog the "controversy" between Michael Pollan and John Mackey for the rest of the material.

I first happened to hear about Michael Pollan during this interview on Fresh Air; I have his book Omnivore's Dilemma on my get-around-to-reading list, but this interview will have to suffice for now. It supported most of the things I have come to believe about our diet, corn, and related issues. Note especially his comments after 29:00, in which he says,

To eat in a way that is healthy for you and healthy for the environment and doesn't use a lot of energy is more expensive. That's an issue we have to grapple with. A lot of this food is elitist food, and can be called elitist food, and often is -- usually by proponents of the industrial food system. Any situation where McDonalds is claiming the high moral ground, I'm a little dubious of and this is one of them. But I think we have to confront this.

There's several different ways to look at it. One is cheap food is not as cheap as it looks. The real cost of that $0.99 burger in terms of ... is charged to public health, is charged to the environment, is charged to your health. Even though it's cheap at the register, that is not the real cost of that food. That is an irresponsible price. I don't know that people want to buy irresponsibly.

Now some people don't have a choice. There are a percentage of people in this country who probably can't afford to eat organic or even to eat more sustainably 'cause organic is not the only answer. Let's not oppose organic to everything else; there are many more alternatives out there. Grass fed beef is not organic but it's better, I think, than organic.

If you go to the supermarket, it is true that -- and you're a rational actor, and you don't have a lot of money -- if you're basically buying energy for you're family -- that's to say calories -- the rational thing for you to do under the system we have is to patronize the center of the store, all the processed food. Because a dollar will get you 2500 calories of cookies, of snacks, of potato chips and if you go to the produce aisle, it will only get you 250 calories of carrots

So, y'know, we're programmed by evolution to seek the most energy with the least effort possible and the supermarket has created an environment where that forces people essentially to buy the least healthy calories. But that's not a function of the free market, that's not a function of nature, either. That is a function of policy. There's a reason that the least healthy calories in the supermarket are the cheapest, and that is essentially "policy": we subsidize the cheap calories. We subsidize ... those calories are calories that come from corn and all those calories -- all that high fructose corn syrup -- is subsidized by our taxpayer dollars, the carrots are not.

So it seems to me that for the people who are shopping this way, the challenge is to change the set of incentives and figure out a way to make the healthy food cheaper and to make the unhealthy food a little bit more expensive.

[transcript acquired the with old-fashioned method: listen and type. I hope it's accurate.]

From the interview, Pollan's point seems to be that we should be more careful about what we eat. For example, avoiding anything with HFCS is a good shorthand for not confusing "food products" with "food". He also differentiates between good and bad organic, where bad organic is the type where free range hens never actually get outside (apparently, they haven't checked their contracts). I believe that the use of petroleum as the major input to our food is a problem since one of petroleum's alternative uses is transportation and that means that the cost of food to our poor people is rapidly becoming impacted by the transportation choices of increasingly wealthier people in China and India.

And we thought we freed ourselves of such considerations when we shucked the gold standard.

So Pollan finally ends up endorsing something like the 100 mile diet described by Alisa Smith and J.B. MacKinnon in their book of the same name. He believes that eating local means that farmers will use better inputs (no pesticides or petroleum) and that local farming will inhibit sprawl. And since localism is the point of this post, I swear I will return to it after dealing with two asides.

First, I believe he could have selected better examples. For example, by having all of our farming concentrated in Iowa, they may have eliminated birds there, but we increase the potential for green space around our cities everywhere else. He is basically proposing that we replace the native species of plants around our cities with food stuffs, which only shifts the problems around a little, but does not eliminate them. Indeed, this is the argument of Nobel Peace Prize winner Norman Borlaug, the so-called father of the green revolution. In an article in The Economist, he argues

Thanks to synthetic fertilisers, Mr Borlaug points out, global cereal production tripled between 1950 and 2000, but the amount of land used increased by only 10%. Using traditional techniques such as crop rotation, compost and manure to supply the soil with nitrogen and other minerals would have required a tripling of the area under cultivation. The more intensively you farm, Mr Borlaug contends, the more room you have left for rainforest.

Granted, Borlaug and I are offering a false dilemma here*, but the point is that Pollan doesn't seem to have thought this far through the problem (perhaps he has and it didn't come out in the interview; I haven't read the book).

Second, Tyler Cowen's critique at Slate left me flat. Tyler points out that Pollan's approach neglects to value our time and other market signals. Tyler makes a good point when he says that we may respond to higher fuel prices by driving less or buying smaller cars, but that we probably won't start growing grapes in the back yard. However, I'm surprised that Tyler doesn't more strongly endorse Pollan's descriptions of the problems of subsidization. Neither does Tyler recognize a benefit in which I expect him to be most interested, which is the improvement in food quality that might arise from a more local, fresher supply of ingredients.

While Tyler mentions the problem with the corruption of the term "organic", and agrees with Pollan that shopping at Whole Foods is an insufficient response to the three problems in the industrial food system (our health, our environment, the treatment of animals), Whole Foods founder John Mackey responded much more vigorously in a series of blog posts and public forums. As a result, each has moved a little in the direction of the other, Pollan agreeing that the Whole Foods approach is not as bad as he thought and getting better, while Mackey conceded that some of their practices needed review and changing.**

Mackey's summary of his arguments can be found in this presentation. In slides 39-41, he mentions something that has bothered me for some time now. While writing about the theme of self-sufficiency in Kirkpatrick Sale's Human Scale, I told a story about driving out to a local chile farm to acquire the green ambrosia. Even in my high efficiency automobile (46-50 mpg), it probably required a quart or two of fuel to make the round trip. Most other vehicles would require more, and most of the city lives further away from Lujan Farms than I do. The fuel required per pound of a truckload of chile would probably be much lower when delivering to a market in the center of town, but people still have to get to the market. This is an optimization problem, so the least-energy solution will not necessarily be "don't shop at Wal-Mart". Given existing social circumstances, the optimal solution will probably depend on where you live and what you drive; "shop at Wal-Mart" may actually be the solution for many people.

That is only part of the issue. When you account for all of the inputs (soil, sun, water, etc.), the fact that some geographic regions are blessed with some of these in abundance while others are not, and that economies of scale can be realized when using railroads and ships, local may not be the answer for everything. Mackey's summary of this part was, "If you live in Berkeley, you will use less fossil fuel and produce less carbon dioxide by buying rice from Bangladesh than from California." I'm inclined to think that even if that particular claim is not correct, it will be true that some foods will be less energy intensive when grown and shipped from afar rather than locally.

But is Mackey sincere when he claims that Whole Foods' supply chain is not as bad as Pollan claims and getting better? I was originally going to post about an article in Forbes that I bookmarked some time ago (To Fight Rivals, Whole Foods Buys Local). Unfortunately, Forbes can no longer find the article on their own site. Fortunately, Google can find it elsewhere, so I excerpt it here without linking:

Dairy general manager Matt Lucas began bringing the glass bottles himself from the Morning Fresh farm in Bellevue, Colo., 60 miles north of Denver. Until then, Morning Fresh had long made its name on home deliveries.
Since his Whole Foods deliveries began in 2004, Lucas estimated, his dairy's sales have increased 20 percent. Morning Fresh now sells at least 1,000 gallons a week to supply a Whole Foods distribution center serving 10 stores.
"It's a breath of fresh air to get involved with a group like that. They were so excited to get our product in their stores," Lucas said.
By strengthening -- or, as some farmers say, returning to -- their commitment to local products, Austin, Texas-based Whole Foods and Boulder-based Wild Oats Markets Inc. are fending off big chains like Wal-Mart Stores Inc., Kroger Co. and Safeway Inc., which have expanded their own organic offerings and put pressure on the smaller "natural" grocers. "With Wal-Mart barging into the lower-end organic sales, this is a way these other retailers can differentiate from what Wal-Mart is doing," said Dan Hobbs, a cooperative development specialist with the Rocky Mountain Farmers Union.
...

Small local growers often cannot offer lower prices than large-scale operations that benefit from economies of scale and cheaper labor. But fuel costs for shipping food are less for shorter trips, which in turn often require less packaging to preserve food. Buying local also shortens the time it takes produce to get to market, preserving nutrients and freshness, ....
...
Whole Foods defines a local product as having traveled less than seven hours to get to the store.
It sells more than 200 produce and floral items from more than 60 local growers in the region covering Colorado, New Mexico, Kansas and Missouri. Overall, it does business with more than 2,400 independent farms.

Apparently, Whole Foods is looking at local foods (in the article, consumer interest in local food is credited in part to Pollan's book) as a competitive advantage over purveyors of "bad organic" such as Wal-Mart. If true, it means that Whole Foods' conscience and self-interest are aligned with those of their customers, suppliers, and (if you believe John Mackey's New Agey Manifesto) employees and stock holders. If true, that's pretty cool.

A few things can be pulled out of this.

• I think the struggle between Whole Foods and Wal-Mart leaves us all better off than Pollan does. I can't tell which paradigm will win, but I am certain that having them square off with two different formulas -- and having the local farmers market and small grocery stores as well -- means that my food supply is simultaneously more secure, less expensive, and of higher quality than if someone was to start mandating that their favorite approach should be the victor. Also, Wal-Mart is a big boy, so perhaps the merger of Whole Foods and Wild Oats creates a stronger competition between the two.
• Still, as Pollan points out, it is policy that the corn industry should be as large as it is. Frito-Lay and Coke need to occupy all that premium shelf space because they have products that need to be sold to keep the machine running. In that sense, Wal-Mart is a creation of both Sams: Uncle and Walton.
• Mass producers have genuine advantages over craft production. For one, their cash prices are lower. Amana is cheaper than Viking, Kraft is cheaper than the dairy farm down the road, Wal-Mart is cheaper than Whole Foods. If I'm on a limited budget, that's going to be important.
  
• However, there are hidden costs. Note that above I said, "moving to an economy that we might prefer is going to look expensive", not "be expensive". All things considered, and on average, cheaper appliances and vehicles are typically not as long lasting or efficient, cheaper food products are not as tasty or nutritious as organic and artisan foods, and mass production relies on a massively subsidized infrastructure. We taxpayers pay for agriculture subsidies and transportation subsidies, while we as people pay for the externalities (farm runoff, smog and soot).***
  
• The cost of transportation is a factor in whether local or mass produced is less expensive. The railroad ushered in the first age of mass production and broke down state and regional barriers and built a nation while the container and container ship ushered in the age of globalization. If we are entering an era of permanently higher fuel costs, those trends may reverse. That's not all bad.
  

I am interested in understanding how to reverse some of the policy decisions of the past 150 or so years without reverting socioeconomically to what existed then (grinding poverty, extreme inequality -- contra to what populist demagogues would have you believe about today being the worst of times in those regards). Employing lean production can build a local manufacturing base that produces high quality goods at low costs with little waste, benefiting both workers and consumers. Removing taxpayer supports shifts the advantage from ADM and Cargill toward local farmers. And local governance moves power out of distant capitals and bureaucracies into our hands.

In an upcoming post, I want to say something about local energy production.

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* You could combine localism and organic methods.

** Other takes on the Pollan/Mackey "smackdown turned lovefest":

• An Open Cupboard suggests that Whole Foods should be more diligent about teaching people to shop on a low income. Easy: vegetarian.
• Whole Foods blog: Points out that Whole Foods stock took a $2 billion dive after Pollan's book came out, but also notes that may be attributable to other problems.

*** Yes, it is literally true that the corresponding costs of obesity cost us money through Medicare/Medicaid. However, that also is a matter of policy and I am not going to start using that as a pretext for dictating other people's behavior and food choices.

Energy roundup

1) News from Green Car Congress

• Hybrid sales are continuing to climb. According to the diligent folks at Green Car Congress, hybrids accounted for 3% of cars sold in May. It's weird, almost like there's some kind of incentive, perhaps something to do with the cost of fuel? Yet, the politicians tell us, the market will fail to bring us efficient cars unless we force them to do it via CAFE and hybrid subsidies. Hybrid subsidies might be a factor in their popularity, except that Toyota doesn't seem to be seeing much drop in demand after they hit the magic number that shuts off the subsidy every year.
• In another GCC article, we find that Honda is discontinuing the Accord hybrid. Apparently, "hybrid" does not equal "slam dunk". The Civic Hybrid works, the Accord Hybrid does not. Apparently, consumers haven't gone completely irrational over the "sexiness" of hybrids.
• Honda, Mercedes, and Bosch are exploring diesel-electric hybrids. Apparently they believe there may be a market in 70 mpg vehicles that can run on vegetable oil.
  

2) An NPR article on plug-in hybrids titled, "Corporations push Congress on Climate Policy" makes some fantastic-sounding claims:

A company called A123 Systems invented the battery pack. Les Goldman is the lawyer hired by the company to represent it in Washington. He has been bringing the Prius up to Capitol Hill, singing its praises to senators and staffers. He tells them it gets 100 to 170 miles per gallon — "and that includes charging the battery every 40 miles or so. And one charge, which takes about four hours, will cost you at the electricity rates in the Washington metropolitan area, at night at about 55 or 60 cents."

What A123 Systems wants is a tax break, not for itself, but for consumers. A decade ago, Congress approved tax credits worth up to $2,000, for buyers of new hybrids. It helped dealers sell thousands of the high-mileage cars. Now, Goldman asks the senators, why not do the same thing for these new battery packs?

Now, I assume you caught the fact that they want it for their consumers, not themselves, right? So they selflessly hired a lobbyist to point out that tax breaks helped Toyota sell "thousands of high-mileage cars". At no point does the reporter stop and ask if rising fuel prices were behind that increase rather than the tax breaks, nor does the reporter point out that A123 might perhaps benefit from those increased sales.

But let's go beyond that. Assuming the following:

• Approximately 65% of electricity energy is lost in transmission (see this great graphic). Thus, for each kW-h consumed, 3 must be generated.
• 1 kW-h of electricity is 3,600,000 Joules (3.6 MJ)
• A gallon of gasoline contains 132 MJ of energy
• Electricity costs about $0.10 per kW-h, so $0.55 to $0.60 worth of electricity is about 5.5 to 6.0 kW-h
  

That means that the plug-in hybrid is getting 40 miles per 5.5 kW-h or 40 miles per (5.5*3.6 MJ) = 2.02 miles/MJ. Inverting that, I get .495 MJ/mile, but that is for energy consumed, not energy generated. By multiplying by 3, I find that the vehicle used about 1.485 MJ of energy generated per mile. By inverting that number and multiplying by the 132 MJ/gallon of gas, I can calculate an equivalent mpg. The electricity is giving an equivalent of 267 miles per gallon for energy consumed, but about 89 mpg equivalent of energy generated because of transmission losses. Not bad.

It is also using gasoline at the rate of 170 miles per gallon. Using the higher figure, that's 170 miles per 132 MJ, or about .776 MJ/mile, roughly half the energy required to go one mile with electricity when accounting for transmission loss.

So for every mile it goes, it's consuming about .495 MJ of electricity used or 1.485 MJ of electricity generated and .776 MJ of gasoline. By adding those, I get the total average energy usage per mile. The combined efficiency -- accounting for transmission loss -- is about 58.5 mpg. That's not much more significant that what I can get in my car (50 mpg on the last tank).

Also, gasoline at $3.5/gallon is equal to $0.095 per kW-hr, or slightly cheaper than what I am using for the cost of electricity (diesel currently happens to be a much better deal at $2.70/gal).

So, instead of serving as a panacea, plug-in hybrids shift the fuel from oil to coal, natural gas, or nuclear, and shift the costs from your cheaper gasoline bill to your slightly more expensive electricity bill. Coal is reputed to be dirtier; it also happens to be burned somewhere other than in your own neighborhood. As you might guess, electric companies are behind some of these efforts to promote plug-ins.

Of course, if you were to install a wind or solar generator at the house, the electricity would be "free", but then again the sun and the wind usually aren't very effective at night when the car is parked. And, as I noted near the end of this article, some people are trying to get something for nothing by plugging their electric vehicles in at work. So here are two predictions/suggestions of what we may see in the next few years if fuel prices stay this high:

• Employers providing charging stations at worksite parking areas for charging employees' plug-ins. Install solar panels on the shelters and you increase your "green cred" while simultaneously providing shaded parking and "free" recharging. Sell extra power back to the grid (net metering) and make that unused space pay its own rent.
• Coin-op meters at large parking facilities for car charging. The coin-op serves as both parking fee and recharge fee. It would be nice if they would allow debit/credit/Paypal transactions, too.
  

3) Regarding the previous post on the news that Congress is considering a measure to block states from enacting more stringent measures: this poses a tactical problem for a decentralist. On the one hand, I'm against turning over all decision-making to a large and growing central decision-making bureaucracy and would much rather see local communities working to preserve their environment. On the other hand, opposing the federal/national Leviathan means protecting the paternalist busybody living next door. It puts you in the position of fighting for local decision-making, and then fighting against those decisions. Geez, I guess that's what Jefferson meant by, "The price of freedom is eternal vigilance." But at least I can meet my neighbors and reason through these issues. And when locals make decisions that help some and harm others, they know the score and can compensate them on the next go-round; when large nations make decisions, the far-flung citizens have little idea who is harmed or benefited, so they will remorselessly slam the same scapegoats in every round.

4) Department of Duh: The Worldwatch Institute claims that photovoltaic (PV) costs are set to decline 40% by 2010. Until just recently, as I noted back in July 2006, PV costs were rising. My guess is that consumer demand driven by both high fuel prices and worldwide government subsidization was driving the trend. Since then, the rise seems to have flattened out and even tipped the other way. If the WI predictions are correct, then Julian Simon should be calling WI founder and perpetual Malthusian doomsayer Lester Brown from the grave to say, "See? Told you so."

40% is a substantial reduction. As I noted in this post, PV is only economical under certain circumstances, but a 40% drop in prices certainly opens that up.

So why "duh"?

Well, if you know that the price is set to drop 40% in the next three years, why would you buy now? And if it is set to drop due to market supply and demand factors (which is arguable, see below), then why would you subsidize it? In fact, if many people would defer planned purchases just a little while, the over-production would create an inventory problem and drive prices down even faster.

Note from the WI report that the primary driver behind the supply increase is the money pouring into China from capital markets. Are they investing because they all believe in Peak Oil, in reducing carbon dioxide emissions, or in capturing some rents through programs like California's Million Solar Homes? If the latter, can this really be said to be a drop "due to market supply and demand factors"?

"Well, no matter" say the Big Government Greens, "whatever it takes to get there. As long as we get to screw Big Oil in the process."

How do you suppose Big Oil got that way? Hint: Among the biggest sellers of solar panels are little mom & pop companies like Shell and BP. Baptist, meet thy Bootlegger.

Centralizing to save you from your neighbors

I generally think that the California Air Resources Board (CARB) rules contain some pretty ignorant stuff, but that at least it only effects Californians. Well, and the other 6 or so states that have adopted them. But at least federalism is still gasping for breath. To people who want to be able to show those mean rotten Republican bastards in Washington that something can be done about global warming and air pollution without killing the consumerist economy, the CARB and other state standards are a great way to ... um ...

Hey! What the ... ?

According to the Green Car Congress, it looks like the Democrats running the US House Committee on Energy and Commerce are looking to pass an amendment to the Clean Air Act to "block states from establishing standards to limit the emission of greenhouse gases from automobiles."

But, Democrats don't do this, right?!

Geez, people, wake up. As noted in the comments on GCC's article, opensecrets.org shows that legislation author Rick Boucher (D-VA), Chair of the Subcommittee on Energy and Air Quality Chair, is heavily sponsored by the electric utilities.

Hope you enjoyed the Kool Aid.

Running on glue and tar

My wife and I have been discussing where the world is going to go in the post-Peak Oil era. I for one am optimistic, but concerned about the transitional period. I think that we (humanity) will develop a variety of responses to the problem(s), and that we will be better off in the end, but I am concerned about the rate at which the transition will occur. There may be upheaval and pain in the interim, regardless of who is in the White House or what policies we follow to get there.

In the comments on Matthew Yglesias recent post on gouging, we see a response to higher fuel prices that I think is indicative of lazy, uncreative thinking. Simply keep piling on one supposed remedy after another. This is creative thinking in much the same way that fixing your mistakes after rushing through a job is productive work. (for my previous thoughts on gouging, see here, here, and here).

Some things seem to escape the attention of people who think like this. For example, the crimes committed by a gas station owner can be determined by looking at his prices compared to his competitors' as follows:

• higher: gouging
• lower: predatory intent
• equal: collusion

In this environment, it might be worthwhile to keep a lawyer on staff, nicht war? And since the laws are subject to change, a lobbyist might be useful. If everyone has to have lawyers and lobbyists, that creates a competitive advantage for larger businesses. I think I can assume that people who are against gouging are also against large businesses, so why don't they understand or acknowledge these problems?

---------------------------------

Then, I was reading about heterodoxy, Cowen, and Veblen, looked up Veblen, got side-tracked by Giffen Goods, and finally came across an essay in The Nation by Sasha Abramsky entitled, "Running on Fumes". He raises the idea that gasoline is a Giffen Good, one that poorer people will come to spend more on even as its price rises because they are locked into it.

Sasha says,

Indeed, the very fact that some commentators, such as the Cato Institute's Jerry Taylor, so glibly assume (or, at least, assumed pre-Katrina) that an oil price shock can be painlessly absorbed shows just how invisible the country's poor have become to much of its pundit class.

Since Taylor's offending comments are neither quoted nor referenced, I can only guess that Taylor said something like, "let the price mechanism work" in response to calls for price controls. The month prior to Abramsky's piece, Taylor wrote about fuel prices in NRO. I would recommend reading both before proceeding with the rest of this post.

Back?

It is of course debatable whether the price mechanism will work well with regards to energy. In the comments on James Hamilton's Peak Oil in America post, Stuart Staniford claims that recent empirical research indicates a short-term price elasticity of -0.05. An older survey indicates that the long term price elasticity is around -0.8 and the short term is around -0.2. In any case, this is for a general population, not the poor, so it is only indirectly relevant to the point. If these two articles can be taken as accurate, the indicated decrease in elasticity (magnitude) indicates that it will be harder to curtail gasoline use as price goes up than it was in 1979-1983; I would assume that it would be harder for the driving poor, but perhaps not so much for the urban poor who have access to other options. (I graph oil use vs. oil price here, but have not updated it since October 2005. Note how much reduction was achieved 1979-1983.)

Near his conclusion, Mr. Abramsky claims that the decline of the rural area about which he is writing is preventable, but

prevention involves the sort of innovation the Bush Administration, besotted as it is with laissez-faire triumphalism (not to mention oil-industry campaign cash), has been reluctant to embrace.

Did you just experience a self-administered lacto-nasal enema upon reading -- in a single sentence -- that the Bush Administration favors laissez-faire policies and that laissez-faire and oil-industry campaign cash are not mutually exclusive?

Indeed, this seems to be common in discussions of gouging, Peak Oil, current pricing, and related issues. Are Mr. Abramsky and the commenters on Matthew Yglesias' blog really claiming that the oil industry enjoys laissez-faire trade policy? That seems so absurd on its face that I cannot believe it needs rebuttal.

The oil industry came of age in the Progressive Era. Oil production had steadily increased and prices decreased for the entire history of the industry through the antitrust prosecution of Standard Oil. As the automobile caught on and demand heated up, Progressives were excited to be able to subsidize a competitor to railroads. Then, as the US got involved in World War I, businessmen eager to be freed from antitrust regulation jumped at the invitation to participate in the Commodities Section of the Petroleum War Services Committee and the Oil Division of the United States Fuel Administration. Dominick Armentano points out in Antitrust and Monopoly, that A. C. Bedford, president of Standard Oil of New Jersey, was appointed as chairman of the War Services Committee. Their experience of cooperation and "supervised competition", and the concurrent worldwide embrace of central planning (think about what was happening in Russia, Germany, Italy, and even England in the period between wars), paved the way to the corporative-creating National Industrial Recovery Act. When that was struck down, the Connally Hot Oil Act of 1935 was passed without hearings to maintain stability in the oil industry. It allocated state production quotas and provided a means to enforce restrictions on interstate transshipment in excess of those quotas.

The military has been tied in to oil production or at least the Middle East arguably since Eisenhower placed troops in Lebanon in 1958 and Kennedy defended Saudi interests in 1963. More recently, in 1980 Jimmy Carter announced the Carter Doctrine, stating that the US would defend its oil interests there. You have the obvious Bush wars since then, with Clinton lobbing a few bombs and establishing bases in Saudi Arabia in between.

In addition to regulatory and military support, we also have regulatory intervention and distortion. As James Hamilton has pointed out, one reason for the increase in gas prices during the tight markets in 2005 was the fact that the national market is segmented by EPA requirements and refineries cannot easily switch between the various boutique fuels favored by - you guessed it - Mr. Abramsky's fellow travelers. Finally, we have people who insist that we need to increase gas taxes so that we, like Eurotopia, will have gasoline prices near $10 per gallon.

Any guesses as to whether The Nation favors those higher fuel prices? I searched for "carbon tax" on their site and got 78 hits; the first one says, "A carbon tax would be simple --" The author goes on to add that

And as Charles Komanoff of the Carbon Tax Center argues, at least part of the proceeds of the tax could be rebated to poor and middle-income households through the income tax system, neutralizing any inequities. The unrebated balance could be used to subsidize alternative energy research and production. Given the historical successes of government funding of basic research in computing and medicine, there's every reason to believe the products of this work would be very promising.

Another two-fer: not only do we learn that the simple tax now has lots of other little simple ancillaries, like using the simple income tax system to rebate for gas, but we also discover that the government's funding of basic research has a proven track record. They don't explain exactly how we figure out the difference in rebates between subway-riding New Yorkers and rural Californians, so perhaps it is not as simple as they first insist. Nor do they actually compare the government's track record in conducting research to anything else, like privately funded applied research. Now, I think it's possible that government gives the private sector a good run in basic research, but recall that the human genome was first decoded by a private company in 1/10 the time and budget as that proposed by a government agency. But the private sector is much better at applied research, which is what was meant by "subsidize alternative energy research and production." So they call for applied research based on the government's track record in basic research? Nice sleight of hand.

--------------------------------------

A greater protest must be registered over Mr. Abramsky's nearly complete silence on the century of other Progressive policies that have pushed the poor out of town and into the oil-based lifestyle. Once again, we can refer to Gabriel Kolko's Railroads and Regulation and The Triumph of Conservatism for an understanding of the politics underlying regulation in the Progressive Era. The tongue-in-cheek, short version is that competition was largely working for everyone except the capitalists themselves. Competition was forcing costs down so far that they were all headed for bankruptcy, so they tried cooperative arrangements. When those failed, they turned to the federal government to act as the cartelizing agent. Though Kolko doesn't specifically address it, it is easy to see that the electric power industry faced the same logic of high capital costs, low marginal production costs, and the resulting expansion, competition, system building, bankruptcy, and "need" for regulatory intervention. This eliminated the "destructive competition" in rails & utilities by constraining competition and innovation. The whole point of regulatory oversight was not consumer protection, as the unsophisticated, narcissistic state-worshipper would have you think, but rather stabilization for the industries so they could go back to peace, quiet, and regular dividends. That is why deregulation and people like Craig McCaw and Michael Milken were so upsetting to AT&T in the 1970s and 1980s, and why electric utilities are so resistant to deregulation today.

The same public who first wanted to give land grants and rights of way to railroads and canals in order to get rid of private turnpikes, and then wanted to constrain railroads because the average voter didn't understand the logic of the capital-intensive industry they had spawned, and now didn't like the fact that their regulations created a de jure cartel, wanted roads. They joined the Good Roads movement and fought for public subsidies for bicycles and then cars. When Louis Brandeis brought Harrington Emerson to the stand in the 1910 Eastern Freight Rate Cases to argue that every industry could be rationalized with and every consumer benefited by Taylor's Scientific Management, the public caught the bug for the Efficiency Movement and Technocracy Movement. They wanted to centrally manage everything. The goal was, as Herbert Croly put it, to produce "Jeffersonian ends with Hamiltonian means".

As outlined above, the Progressives in WWI and FDR's cabinet in the Depression and WWII supported a state-industrial oil policy to further rationalize oil production and distribution. In conjunction with the Good Roads and subsidization of the automobile (which gave rise to the Golden Age of manufacture and its corresponding anomie and unionism which many Progressives yearn for), the stage was set for moving out of high density urban areas and to the suburbs.

The push to suburbia has also been helped over the years with some uniquely Progressive policies. Rent control in New York City, for example (I once read that poverty-stricken Walter Cronkite lives in a rent-controlled building). The aforementioned utility subsidization, including the TVA and REA, which replaced farmer-owned windmills with investor-owner utilities. More recently, to "preserve their character" (a euphemism for "preserve their property values"), many cities (bastions of Right Wingerdom, like San Francisco) have banned urban development, forcing people out of town to find affordable housing. To pay for a wide variety of programs, some of which used to be privately provided by the working classes for themselves, cities have raised property and sales taxes (Santa Fe, for example: there's a reason you need to make $10/hour to live there, and it mostly has to do with California millionaires moving into the City Different; most of them are not exactly Goldwater Republicans). While the upper and middle classes were leaving the city to live in clean, quiet neighborhoods, these policies were all pushing the poor even further out of town.

In the specific case Mr. Abramsky addresses in his essay, the size of those towns probably needs to be smaller. They were dependent on mineral extraction and timber, both repeatedly attacked by people like Mr. Abramsky, but probably not by Jerry Taylor. Indeed, it's probably a safe bet that when people like Jerry Taylor raised the issue about the impact of stopping resource extraction on the workers, people like Mr. Abramsky glibly dismissed it, saying that the economy could easily absorb the jobs lost. But I will go further than either of them and point out something both should agree to (if they want to be logically consistent with their probable core values): continuing to live in a non-agricultural rural area is inherently energy intensive, and we should not continue to subsidize it if we really think Peak Oil is a concern.

I recently came across a site (probably something on Gristmill dealing with global warming) that claimed all of the skeptics of (Kyoto?) never provide any suggested solutions of their own. Does Mr. Abramsky offer a suggested solution for the poor people he exploits for his article? He offers a vague mention of mass transit, a system that works well in high density areas like Europe and the Northeast Corridor, but probably not in Northern California. He seems to imply that George Bush is personally responsible for the lack of mass transit despite the fact that ridership is higher than it was under Clinton.

Abramsky makes a quick offer to help them pay for oil, thus furthering the addiction that has them in this situation in the first place, and contributing to a 150 year legacy of trapping people in a state-underwritten prison. The latest insult in that legacy has been the ethanol subsidy, a Carter-era program with bipartisan support for all the wrong reasons: it reduces imports, it supports "family farmers", and it is "renewable". First used to replace lead (Pb) and reduce pollution, it actually increases certain types of pollution. The subsidies for "family" corn farmers mostly end up in the pockets of ADM. And the renewability, touted by Progressives, is having growing implications for poor people. As I noted in my review of Joshua Tickell's From the Fryer to the Fuel Tank, "Some bio-cheerleaders ... claim that a large scale shift to biofuels won't affect food prices, but that is almost certainly wrong. The amount of land required to make a dent into our petro-fuel usage would easily require both the fallow fields and some land currently used for food production. Demand up, price up, QED." Given recent headlines, I'm going to claim prescience, but I think every clear-headed person could figure this out on their own. Even Noam Chomsky figured it out in hindsight.

Finally, Abramsky also mentions the possibility of subsidizing efficient vehicles, something that has been going on for several years with mixed results*. In other words, we get some paeans to Progressive programs and a demonstration of how much good Mr. Abramsky can do with other people's money to prove that he cares. Some of his explanations are wrong, some suggested solutions are demonstrable failures, and one at least will probably make things worse (subsidizing oil? Really?!). At no time does Abramsky recognize or even seem to be aware of the contribution of his intellectual predecessors to the creation of the problems of today's poor. Instead, he turns the tables, claiming that those problems were caused by people like Jerry Taylor and policies like laissez faire and implying that anyone who doesn't accept his vaguely defined solutions is responsible for the misery and possibly death of the poor. "Laissez faire means you don't care."

Now, Mr. Abramsky is correct to question the effect on the poor, but he has come to exactly the wrong conclusion. His essay is nothing but rhetorical sleight of hand intended to impugn Jerry Taylor and anyone who dares suggest that the price mechanism is a better mechanism than any other so far identified to coordinate oil supply with oil demand. Mr. Abramsky is like George Washington's doctors who kept letting his blood, and upon remarking how sick he appeared -- probably the result of too much blood letting -- tried more blood letting.

Note that I did not say the price mechanism is the best means. Again, thinking negatively (what is that? perhaps not what you think), there may be a solution of which I have not heard yet, but until then the price mechanism is the least worst solution. Price controls are predicted by theory to create shortages, and the theory is confirmed by empirical data. A shorthand way of explaining this is the gas lines in the 70s and in Baghdad today. Surely, if the poor need gasoline, then some at high prices is better than none at any price? Ridiculing the least worst answer, or insulting the person who acknowledges it, is like accusing your doctor of murder for informing you that you will inevitably die.

Furthermore, Mr. Abramsky never seriously looks at the total effect of the price mechanism. It not only curtails demand, but it stimulates supply. Note the implications of this chart in The Economist, from the article "Venture Capitals". Furthermore, note an idea from this episode of Nova: "If you look at companies, like SunEdison, who are helping retailers put up solar panels on their roofs, you're suddenly seeing a linkage of the capital markets -- which have traditionally been very reluctant to get into solar energy -- with the retail sector. That's how you do things in America. You link the technology to the capital, and that's where the rubber hits the road." In America, the capital markets respond to a problem, while in other countries, the politicians respond. The former have to spend their own or their clients' money and are held accountable, the latter not so much.

"So what", you might say, "I don't care who produces the solution, so long as there is one. And so long as it benefits the least well off."

Well, here's so what. I'm vaguely familiar with the theory of functionalism. It says that institutions exist because a society needs them; institutions serve a purpose, a function. When I first heard of it, I immediately thought that it seems circular and lacks a mechanism to describe change; this appears to be an ongoing criticism of the theory. In any case, proponents of this theory use it to justify the existence of government agencies: obviously we must need them if they exist. If you evil bastard libertarians abolish some of those agencies, people will suffer.

That is true as far as it goes. It doesn't go far enough, though. There are two problems with it.

First, I have always believed that there are two problems faced by people who desire change: one is describing a desirable and reasonably realistic future. That is what I like about Kirkpatrick Sale. The second is to describe the path, how to get from here to there. The problem with simply saying "abolish such-and-such program" is that it doesn't describe what we reasonably expect to replace the functionality of that program or how the private institution that replaces the program will spontaneously evolve. For one thing, we don't know what it will look like or how it will evolve: if we did, we'd be in favor of planning. For another, "spontaneous" does not mean "instantaneous", and "evolve" does not mean "appear out of thin air".** So they are right to think that people would suffer if all we were saying is "abolish such-and-such", but we aren't: we are saying, "abolish such-and-such and allow some time for a better solution to evolve." Clearly, though, we need to do a better job of understanding and then explaining how institutions evolve.

The second problem with the functionalist-statist analysis is that it is usually based on an ignorance of history. Remember, if the existence of an institution implies a need for it, what answered that need before the government agency? This is a problem with the change mechanism in functionalism - if the agency sprung from nothingness, either the need must not have existed before, or the agency didn't spring from nothingness. So how does functionalism account for how or why would such a change occur? No answer seems to be forthcoming (but I admittedly have only a kindergartener's view of functionalism). In many cases, though, the solution to the riddle is that a private institution answered the need until it was co-opted by the government. As David Beito has documented, that was the case with much social insurance. The victor (the government) also gets to write the history and teach it in the schools it owns, so few people know about institutional arrangements that probably haven't existed for generations.

Let me bring this full circle.

Sasha Abramsky and others are claiming that laissez faire is not the answer to the problems posed by high gasoline prices for poor people, they are claiming it is the problem. I'm going to consider this patently false until someone can successfully convince me that oil policy is and has been laissez faire. Even stipulating to that claim, though, their recommended solutions of subsidizing the addiction would only prolong the problem and -- given that agencies rarely die once created -- would make the problem worse if oil prices should fall. They are refusing to face the possible fact that this area of California, like the Corps of Engineers' New Orleans, should not be as heavily populated as they were in the cheap-energy past. However, had laissez faire actually been practiced instead of the heady policy brew we have endured for the past 100+ years - regulating railroads and utilities, protecting them against innovators, encouraging suburban expansion, promoting efficiency in energy production at the expense of efficiency in distribution, reliability, and end use, then perhaps the poor people described in Mr. Abramsky's story wouldn't be locked into the lifestyle they are. People like Mr. Abramsky spent taxpayer money on the system that got them into this mess, now he has 100 ideas on how to spend more to keep them in the manner they have come to expect: poor, dependent, and hopeless. Ecologists refer to this approach of endlessly proposing the same solutions to the unintended consequences caused by an earlier round of similar interventions as "parachuting cats."

Given the power to enact their vision, they would systematically destroy every last vestige of spontaneous, private order in an effort to build community values. But such governments have a tendency to collapse of their own weight. When they do, the survivors look around and note that the community was kept together only by the fear of the increasingly necessary police state. There is no community spirit in such a place. Look at what the inhabitants of Russia have been enduring after the collapse of their system. Listen to this article on NPR about the lack of community values in Albania. No, really, listen to it. Generations of socialist theory have wiped out everything they knew about civil society. In America, de Tocqueville marveled at the Association phenomena; in Russia, people wished for their neighbors' barns to burn down.

That is why I prefer private to public institutions. I don't believe in market "magic"; too often have I been a disappointed consumer. Private solutions may not be perfect, but neither are state institutions. Too often have I also stood in DMV lines.

Cooperatives and associations are more democratic than an agency run by career bureaucrats. Furthermore, even Hirschman now acknowledges that Voice works only when Exit is a viable option. As a result, on average, private institutions are flexible and responsive and will evolve; public agencies are rigid and arrogant and will stagnate.***

Nobody resents an association they neither belong to nor pay for, even when that institution stands for something they loathe, but everyone hates paying for those parts of the government they oppose (agriculture? military?). Those who oppose democracy distrust private organizations and vote to suppress them (think Red Scare, Alien and Sedition, Palmer Raids, Radio Caracas Television). Those who genuflect to democracy cannot understand why people would vote for what they would call "undemocratic" programs and politicians. To comfort themselves, they develop theories of conspiracy, brainwashing & propaganda, or false class consciousness. They then begin to support politicians who promise to thwart those poor demented creatures, the opposition; in the end, the democrats line up to vote for the fascists, who proceed to replace private institutions with state institutions. The democrats are surprised when the anti-democrats take control of the machine and use it in surprising ways, perhaps even contrary to its original intent.

A public policy and agency require no imagination or creativity; simply - and I mean simply - propose a blunt mechanism for addressing whatever problem vexes you, then either declare victory or ask for more money and authority. The clever politician does both at once. Opponents can always be demonized as unpatriotic, asocial, and dangerous. A private institution requires work, creativity, conviction, persuasion, and innovation. It promotes civic values. Think Wikipedia, an institution created by libertarians (yes, Virginia, Jimbo Wales is one of those people). That is why I think that government is the intellectually lazy man's solution, and why it endangers the poor man whom he seeks to save.



* Yes, the Prius is great, but I get 46+ mpg with my non-hybrid. Somehow, the powers that be decided that hybrid was better than diesel, even though diesel fuel can be made easily from waste oil and renewable oil. I would argue that this is rather short-sighted, but not atypical. Also, several years ago I remember reading about the skyrocketing price of Suburbans in Arizona due to a shortage of them; apparently, the state was subsidizing a version with an alternative fuel modification (LNG or propane), but you could still run it on gasoline, so people were driving in from out of state and taking ownership of a friggin' Suburban at taxpayer expense for the purpose of saving gas. Personally, I think that if there is a role for the government here, it is to fund an E-prize as Lovins et al describe in The Oil Endgame. Remember, however, that the E-prize is named after the Ansari X-prize, a privately funded prize that has been moderately successful.

** In case you think I'm exaggerating about the strawmen used by anti-libertarians, look at what this says about libertarianism: "Libertarians believe (like Marxists believed back when there actually were Marxists) that if the government just shriveled away, a paradise would naturally spring into existence." Spring? It took hundreds of years to kill some institutions that themselves had to evolve over hundreds of years; only a fool would think they could be replaced overnight. Similarly, only a fool would think that "stroke of the pen, law of the land" equates to "problem solved". They are generally surprised to find out about "unintended consequences". Other than that, Midas' claim that things claimed by libertarians have never existed exposes the breathtaking ignorance of actual history usually found in people who read only popular history books. He could try starting with Homage to Catalonia or The Machinery of Freedom and work his way up from there.

*** Size is also important: I will take a small, decentralized public institution to a large corporation. Centralization and the distance between the top of the hierarchy and the end users or customers are also factors.

Really? That's all you can come up with?!

James Kunstler has this to say about flying to Maui (which he apparently did before his latest jaunt to Chicago):

For all of you out there disposed to twang on me for riding a jet airplane all the way to Maui, please consider that United flight 35 would have flown from San Francisco to Maui with or without me on it. Here's the deal: I had to go to San Fran to give a talk at the Commonwealth Club. From there, I had a lecture gig on Maui. I stayed three extra days and nights -- since I'd come all that way.

Where have I heard that argument before? Wasn't it Arianna Huffington justifying the use of a private jet because it happened to be going where she was going? All during that period of time that she was lecturing us on the evils of SUVs? Or was it Al Gore, whose prolific use of energy at his house and in his travels is justified by the fact that he has important stuff to do and lots of people to entertain (as opposed to you and I, whose lives are so much less significant)?

It's not that I really care if they do those things. I object to their telling me how to live my life while and insisting that I shouldn't do what they do. And this is such a lame rationale: every passenger just happens to be going to the same place the planes are going. Sometimes they have things slightly more important to do than "give a talk" ... which could have been done on videotape, via satellite, or over this newfangled internet thingy.

Sustainability Conference II

Sustainability Conference I

The attention given to solar was completely unrealistic. I happened upon Kunstler's blog; he accused Democrats of as much "magical thinking" as Republicans in this post. WRT solar power, he's right. There was no realistic discussion of this: a few people were obviously interested in it, and a few had done enough research to know the reality, but did not seem to have been dissuaded.

1) The keynote speaker said the cost of solar is going down. Bzzt. As I noted earlier, it has been going up in lockstep with oil prices, though it seems to be plateauing. If each dollar buys less solar panel, given a fixed or declining amount of money left over after other purchases (which is what the End of Suburbia was preaching), you aren't going to be able to buy as much solar in the future. My suspicion is that there are two causes for the rise in price: increasing demand with flat or slowly increasing supply, and subsidies. The former was driven by the increase in fossil fuels in 2003-2006, and may eventually correct itself. The latter is self-fueling (see below).

2) How much power does the average user use? The US national average in 2001 was 888 kW-h/month. Mine is something like 600 kW-h per month. If I had a 1 kW solar array and got 6 hours insolation (direct solar exposure) per day for 30 days, I could generate 180 kW-h per month. That's 1/3 of what I need, 2/3 if I double the size of the system. And I live in New Mexico where we get 6-7 hours of insolation a day (and we have something like 260 cloud-free days per year); the calculus is much tougher if I live in NYC or Seattle where they get far less insolation.

3) Two costs were given at the conference. One was $16,000 for a 1.5 kW system (roughly $10/W). Another was that the typical system costs $0.25 - $0.40 / kW-h to operate. Someone asked if that included sell-back (net-metering). The answer was obscure (I don't think the speaker heard it correctly), but the proper answer should have been: no, but it doesn't matter much. You can only sell back at the rates you pay for electricity, which is about $0.10/kW-h, so it's still 2.5-4 times the cost of commercial supply, i.e. it's no free lunch. Also, you can only sell back to the electric company up to the amount you use. Look at it this way: if you are currently paying $60/month for electricity, you will be paying $90/month for the loan for the system after accounting for rebates and sell-backs. You will also still have that monthly bill from the electricity company, but it will only consist of the subscriber fee plus tax.

Note that these were for grid-tie systems. An off-the-grid system will run at least twice as much, and the batteries require extra care (a well-ventilated area to dissipate the hydrogen generated during storage) and replacement on a regular basis (10-20 years). Incidentally, "grid-tie" and "net-metering" means that the PV system produces more than you use through most of the day, produces just about what you need in the afternoon/evening, and you rely on the grid at night and in the morning; which means someone still has to run a power plant.

3a) Let's look at this. The 1500 W system will be operational in a location that gets about 6 hours of insolation per day. That comes to 65700 kW-hours in the 20 year lifetime of the system. That means the cost of electricity is about $0.24/kW-h, rather toward the low end of the other prediction. This doesn't take into account system degradation, line losses, and so on, which would all drive the cost per kW-h higher. Take the $6,000 tax rebate back and it still comes to $0.15/kW-h. This system was enough to cover the speaker's own daily use.

3b) One thing that occurred to me during the movie I discussed in the previous article (link at top) -- and was later pointed out by one of the builders in the panel session -- was that in the coming era of higher energy costs (remember, this is their basic assumption), the system would be more and more valuable. In other words, if electricity costs increased to something on the order of $0.20/kW-h, the system would be viable at the low end of the calculations above. It would definitely pay for itself quicker if energy costs rose above $0.25/kW-h. That's an interesting bet, especially if you switch to a plug-in hybrid.

4) One of the builders, a self-described long-time left-wing activist, made a point of saying how the Bush Administration had "hammered down" any subsidies for solar power.

4a) Let's review the Clinton Administration environmental initiatives:

• Signatory to Kyoto, never submitted to the Senate for ratification, never did anything about it.
• Some 11th hour rules made in 2000 (first directed in 1996) on arsenic in drinking water changing the maximum exposure level.
• Propose a “Million Solar Rooftop” program, but never pressed it. That's about it.
  

This chart from here shows that Clinton Administration funding for Climate Change programs basically increased from 603 million to 1.1 billion. Not impressive.

Funding for Technology Programs to Combat Climate Change (in millions of dollars)
1993	1994	1995	1996	1997	1998	1999	2000 Estimated	2001 Proposed
603	796	960	788	764	825	1,009	1,095	1,432

This isn't to say that the Bush Administration is exactly the Teddy Roosevelt Administration (or even the Nixon Administration) in terms of its environmental activity, but Clinton only topped him in rhetoric. However, from what I can find, current Climate Change spending is somewhere in the $3-4 billion dollar range. Clinton: 40% increase in 8 years, Bush 400% in 6 years. Of course, since you can't actually pin those numbers down to find out exactly what we're getting for the "investment", I'd guess we had a case of Clinton = Bush = 99% BS. I say that because I suspect that both administrations counted obvious boondoggles (such as ethanol from corn programs) as Climate Change remediation.

I also found that the Bush rhetoric has been a regular but undiscovered drumbeat. This article's author thinks the rhetoric is new, despite earlier press releases like this, this, and this. I think Kunstler is right to be cynical.

4b) Let's review the politics and economics of subsidies. Subsidies are sometimes known as "corporate welfare", which, as we all know, both Republicans and Democrats are against. It is a mystery how they keep getting passed, init? In the solar industry, the subsidies happen to help out little Mom & Pop companies like British Petroleum, Canon, Kyocera, Mitsubishi, Sharp, and GE Energy. Also keep in mind that the subsidies are not secret: the suppliers know about them, too. They know that the bargaining limit for prices will go up by the amount of the subsidy, so they can basically leave production levels where they were before the subsidy even as they raise prices by the amount of the subsidy. The subsidy is no benefit to the consumer when it all goes to the manufacturer, so this merely becomes transfer from taxpayers to PV manufacturers. This is probably one reason for the rise in PV prices, especially in Europe. Still in favor of them?

Conclusion:

I believe we would be much better off with fossil fuel energy prices that more closely reflected the social costs. That's what Mankiw's Pigou Club promises, but it's also what a cap & trade program would bring. Both Kyoto and the 1990 Clean Air Act contain forms of cap & trade programs; the SO2 program in the 1990 Clean Air Act is thought to be very successful (which Administration signed that?) at reducing Acid Rain (resulting in things like this). Raising the cost of production of coal-fired or natural-gas-fired electricity by requiring providers to buy CO2 permits does a much better job of encouraging alternative solutions for two reasons:

First, people might not choose solar. They might choose to cut down on energy consumption with, for example, more insulation, better house design, more efficient vehicles, and/or better urban design. This would be a much better way of balancing our needs with the supplies and AGW forecasts because it would stretch existing supplies. This is the soft energy path favored by Amory Lovins. It is also an example of the principle of substitution noted by Julian Simon, and an example of adaptation recently suggested by Roger Pielke in Nature. Cutting energy use could also be combined with the adoption of alternative energies, enabling us to get there easier. In other words, rather than replacing my entire 600 kW-h usage with solar, I could perhaps cut my energy usage by half and then buy a 1500 W system that meets all of my needs.

Second, making fossil fuels more expensive would not subsidize and therefore support the least efficient providers of solar energy. If there are, say, three providers, the most efficient (least cost) provider would sell all he could make at a price that the competitors could not match up to the point at which consumers would turn to the next least cost provider. Once demand rises that high, the least cost provider would raise his prices to those of the competitor and pocket the extra income because the only alternative consumers have is not the least cost provider. If demand is high enough that the two most efficient providers cannot meet it all, they will raise their prices to meet those of the highest cost provider. As demand continues to increase, the least cost provider will see higher returns, and can therefore command more investment to expand his facility to the point that he might put the least efficient (highest cost) provider out of business. In such an environment, the highest cost provider has an incentive to try to improve his processes to match those of the least cost supplier; either that or risk going out of business altogether (which is fine, since it leaves the two lower cost providers in business at the prices commanded by the second lowest-cost provider). The subsidy thwarts the entire scheme by allowing even the highest cost provider to raise prices in order to capture some of the subsidy from the consumer. It is thus an incentive to capture market share and a disincentive to do it by increased efficiency at using inputs. More investment will go toward marketing than engineering and production management.

Unfortunately, the default setting of people at these conferences is

Democrats good, Republicans bad (and libertarians evil embodied)

Or, alternatively

Command and Control, Tax and Spend, Policymaking Government Good, Market-based Reform Bad

If they could perhaps be bumped off their default settings, I think I could stand listening to the rest of what they had to say. Unfortunately, they wanted to start the second half of the conference worshipping Cuba as the example of the path we should take with another film called The Power of Community. Sorry, I am actually offended by cults of tyrannical, murderous, autocratic personalities.

NOTE: Now that I'm looking up the Cuba film, I'm sorry I missed it. Apparently, one of the responses to the loss of their patron, the Soviet Union, and the subsequent collapse of their system was to establish farms with property rights (property rights in a broad sense - it is owned by a local community) and private markets (at which said community trades). The same thing that brought China out of the Cultural Revolution. Private property saves the day again?

Still, it's limited freedom within an overall oppressive atmosphere. One rooftop farm has this description: "Running free on the floor are gerbils, which eat the waste from the rabbits, and become an important protein source themselves." Yummy, can't wait. Most reviews of the film are the same fawning fluff, but only in a picture caption on this did I find a reference to the private markets. And abelardlindsay comments on The Oil Drum post about the film that Cuba is much less efficient at turning energy into wealth than its neighbors.

Sustainability Conference I

I attended a sustainability conference this weekend. It started with scariest "documentary" ever seen, "The End of Suburbia", a very one-sided point-of-view film that does not attempt to examine both sides of the Peak Oil issue (or at least the portion they showed didn't). The only two laughs of the first half of the conference were sparked by James Kunstler's use of "clusterf#@&" and "$#!tstorm". Though they carefully crafted the message to point out that "Peak" doesn't mean "End of", the editors then went on to paint a picture of 21st century living devolving into 16th century living. Jim Hamilton's How to Talk to an Economist about Peak Oil is highly recommended reference material, including the comments.

Politically, the film was relatively balanced: when they talked about politicians not getting or acknowledging the problem, they started with photos of the Kerry campaign. When discussing increasing militarization of the Gulf region, a commenter noted the Carter doctrine. Clearly, the Bush/Cheney doctrine and the neocon plan to re-shape the middle east is a continuation of that doctrine (Carter/Reagan involvement in Afghanistan, Iran, Lebanon, Bush I in Kuwait, Iraq, Somalia, Clinton in Kuwait, Afghanistan, Somalia, Iraq, Sudan).

I have two notes on this: In 1956, Hubbert predicted peak American extraction in 1965-1970. It actually occurred in 1970-71. Unfortunately, most of his followers have portrayed production curves as if they were symmetric, half before and half after the peak (notably, Hubbert didn't, if the tail on this is any guide). Technology has been improving, including technology for scraping the last little bit out of every well, so more will be pumped after the peak than before, as shown in the chart below (note that the actual (blue) line is gradually drifting above the pseudo-Hubbert-style symmetric prediction (yellow)). What does this mean for world oil peak? The counterargument is that, yes, technology has been improving, so we're only pumping it dry faster than ever.














Other note: The only alternative fuel covered by the documentary was hydrogen. While I agree with the assessment (hydrogen is not an energy source, it is an energy carrier), hydrogen is not our only potential fuel. Nor is fuel replacement our only potential hope (see next post on this subject).

Global Warming Part III - The Case for Continuing Skepticism in a Nutshell

Part I - The Physical Science in a Nutshell
Part II - The Social Science in a Nutshell

So, if I think there is something to global warming, how can I still consider myself to be a skeptic?

First, my skepticism has always fallen on the alarmist tone taken by the true believers.

When John Christy's satellite measurements failed to align with the theory, the true believers were ready to dismiss the data. In one online debate I had with a global warming enthusiast, he responded by condemning John Christy as incompetent and by bizarrely declaiming the importance of satellite and balloon data because what was of primary concern were ground temperatures, not atmospheric temperatures. Now that the data have been corrected and are closer to the other predictions (though they are still lower than other data sets), they claim that this is as it should be. It's easy to gloat when the data get realigned to your preconceived view of the world, but what happens when they don't? In other words, what made them convinced of their rightness long before the data problems worked out?

Consider the example of the Premature Ice Age alarmism of the 1970s. Activists are quick to point out that the claims never showed up in scientific journals despite the 1971 Schneider and Rasool article, "Atmospheric Carbon Dioxide and Aerosols: Effects of Large Increases on Global Climate" (Science 173, 138–141) in which they claimed, "our calculations suggest a decrease in global temperature by as much as 3.5 °C. Such a large decrease in the average temperature of Earth, sustained over a period of few years, is believed to be sufficient to trigger an ice age." True, the Premature Ice Age scare was more of a popularization by news magazines, but that didn't prevent it from drawing policy makers into its orbit, did it? And now that everyone has agreed that was an unlikely outcome, the same alarmists that espoused it are dismissing it as irrelevant - not because they were wrong, but because the science was not published in scientific journals. Yet, they believed it and wanted immediate action, the same as they did with other manufactured scares. History is replete with such scares (opium, marijuana, Germans in the WWI era, Commies in the 1950s, there will be mass starvation and England won't exist by 2000, the saccharin cancer scare in the 1980s, the silicon implants scare in the 1990s, Y2K disaster, nucular (r) meltdown), but very few repenters.

More recently, people blamed the 2005 hurricane season on AGW and predicted more of the same. It escaped their attention that the problem was not the strength of Katrina (it was degraded from Category 5 to Cat 3), it was the fact that it hit a large population area with two unique characteristics: it was below sea level, and it was poorly protected by a set of water projects whose funding had been diverted by years of bipartisan corruption and ineptitude. Many seized on that opportunity to hype the idea that AGW means more severe hurricanes, but few if any publicly apologized when 2006 failed to yield even a single landfall hurricane; in fact, people still mistakenly use the Katrina/NOLA fiasco to support such statements as, "Extremes are non-linear in their effects." The dearth of hurricane landfalls in 2006 alone doesn't disprove AGW any more than 2005 proved it, but there should be little doubt as to which side gets the most press. They trumpet loudly when the data fits their theory, but fail to sound retreat when they don't.

Second, my skepticism extends not only to the abuse of the science models, whose expected outcome keeps becoming less in line with the extremists and alarmists each time they are updated, but to the supposed implications. Those include the assumption that if global warming is a fact, that (1) man must be responsible, (2) it must be reversed, and (3) only central planning can reverse it. I am unsure about the first of those claims, but I think it is probably true. Still, it concerns me that there have been drastic variations in the past that cannot be explained with human behavior.

The second is worth some examination. The idea that the warming must be stopped or reversed is predicated on two assumptions: that the ideal temperature is that which existed in the past, and that stopping or reversing is going to be less costly than adapting. There are lots of reasons to question which climate is best.

• More people die due to extreme weather events in the winter than in the summer.
  
• The recent Stern Review notes that crops will do better under a mildly warmer climate, though much worse under a substantially warmer climate. That suggests that the best climate may be slightly warmer.
  
• Plants grow larger in CO2-rich environments. Because the amount of nitrogen does not increase, all things remaining equal, they are no more nutritious (in fact, pound for pound they are less nutritious), but all things do not remain equal. Those plants require less water because of decreased transpiration, and since it is frequently water rather than fertilizer that is a limiting factor, this means crop yields may go up in the future. I note, for example, that dry-land cotton crops yield about 300-500 pounds/acre, whereas the same plants yield 500-800 pounds/acre when irrigated.
• As noted in Part I (linked at the top), CO2-driven warming means specifically warmer nights and winters. That means longer growing seasons with fewer crop freezes in the spring and fall. It also opens up more viable cropland to the North and at higher elevations. In fact, Greenland is seeing increased agriculture and decreased reliance on hunting, and Germany is seeing later eiswein harvests while other grapes are moving farther north and uphill, resulting in the increased consumption of red wines grown locally; that strikes me as a neutral to positive change, not a change for the worse.
  
• The climate has - all by itself, without human intervention - fallen into an Ice Age in the past and will likely do so in the future. Crop yield will definitely plummet when that happens. Should we do something to forestall it?

The third implication - that only central planning will fix the problem - is at least a little dubious. In fact, I believe that most AGW enthusiasts have been thrashing about for something to revive central planning ever since the collapse of communism, and global warming has provided it. This would certainly explain their rejection of any and all skepticism early on. AGW is a perfect problem for them: The bad outcomes are 100 years away, so planners have no need to show any progress now. If the predictions become more dire, they can raise the alarmist tone of their rhetoric; if the predictions become less dire, they can claim success as the result of existing policies. Heads they win, tails you lose.

I have no more faith in the government solving this problem than in solving poverty. The free market (or what there was of it) was arguably doing a better job of the latter prior to Johnson's Great Society (both income disparity and income-based poverty rates were falling until around 1968, and have been flat or increasing since then), and if anyone is going to find viable alternatives to carbon-based energy, it is going to be lots of scientists acting independently, i.e. not the government. If there is one thing the government can do, it's to stop supporting the existing paradigm through subsidy and regulation.

In fact, that is the lesson that we should be taking: the government is a contributor to the current situation, and there is bipartisan guilt, so why should we trust the government to remain neutral in the "new" era? Reducing our contribution to CO2 buildup is going to require changes in technology and product mix on the supply side, customer values on the demand side, and changes in social, political, and economic structures. There is no "right" answer to this, and planning arguably only works well when an answer is already known when all that remains is getting there from here. Here, Hayek is correct.

Global Warming Part II - The Social Science in a Nutshell

Part I

It is unfortunate that people think that Global Warming is exclusively a phenomenon of physical science. Activists tend to argue as if scientists have proven anthropogenic global warming (AGW) as an accomplished fact. By that, I mean that they believe that the outcomes predicted for 100 years from now are fully realized today. This is made odder when they insist that we do something about it - if it were already done, what point is there in "doing something about it"? It is the fact that global warming is something predicted for the future that compels us to make changes now in the hopes that we can alter that future.* However, there are two reasons why AGW is not exclusively the realm of the physical sciences:

On the one hand, all predictions of future CO2 content rely on estimations of the continuation of present patterns of energy and natural resource use. Those depend largely on social, political, and economic conditions and developments. This trend is unlikely for two reasons:

1) The first reason it is unlikely is that our energy use patterns are extremely likely to change. Going back 200 years, we depended mostly on humans, water, wind, whale oil, and wood for our energy needs. 150 years ago, we started making a transition to coal. 100 years ago, we started making a transition to oil (and the Anglo-Saxon whaling fleets collapsed). Today, our needs are met by a broad variety of coal (for electricity production, augmented with natural gas and to a lesser extent, wind), oil (for heating and transportation), natural gas (for electricity and heat), and nuclear energy, and the forests have been coming back, especially in North America. We are about due for another change, eh?

a) On one hand, there are some people that believe that we will be forced to change our energy sources by our own avarice. Citing the "irrefutable" research of M. King Hubbert, they claim that we are about to hit the peak production of oil, after which oil will become much more expensive. They may be right.

b) On the other hand, there are a number of us who think that there are other good reasons for transitioning away from fossil fuels regardless of Hubbert's predictions. Not only are those fuels ultimately physically limited in quantity, but they are inefficient in a number of other ways: they inherently cause pollution (spills, SOx, NOx, particulates, and CO2, all externalities); they are the funding source for despots and terrorists who try to gain control first of the resource and then of the markets (rent-seeking through violence and then cartelization); and they are politically unpopular and hard to find, extract, and distribute, leading to capital-intensive organizations that use unknowing political activists to gain control of markets, subsidies, and regulatory bodies (more rent-seeking via the Baptist-bootlegger method). Meanwhile, other entrepreneurs are searching for alternative energy sources and storage/distribution systems, including nuclear (both fusion and fission) and solar (including photovoltaic, thermal, wind-based, and biomass). When they succeed, they will begin pulling market share and then political influence away from the fossil fuels. Case in point: we learned just recently (NY Times article: Tech Barons Take on New Project: Energy Policy) that Solar Barons have decided to start lobbying for subsidies, displacing the Oil Barons. "The investors in recent years have poured billions of dollars into alternative energy start-ups in areas like solar and wind power or the production of fuel for cars from feedstock and crop waste. Many of these projects, they say, could stall without subsidies or government mandates for greater energy efficiency."

c) Meanwhile, other scientists are working on ways of averting forced warming, including using sulfates and other products to reflect solar energy back into space (the "smoke and mirrors" gambit) and sequestering CO2 in plants, underground, and in the ocean (plankton tend to consume CO2, so efforts to increase plankton populations may prove effective). A combination of these may be useful.

2) The other reason it is unlikely that trends will continue is that if it does in fact begin to get hotter, and the results are increasingly worse, there will definitely be a shift in the political, economic, and social structures to counteract the warming problem. These may be forced conversion to mass transit, urbanization, and so on, or it may consist of mass migration to cooler climates, wars, and so on, or possibly even mass starvation. I am obviously not endorsing these, but rather pointing out that these are possible responses that are clearly outside the domain of physical science or at least show an exchange between physical and social science.

Thus, the real question is not whether or not global warming is or is not real, but rather what the appropriate set of responses to the existing science should be. This lands the question squarely in the camp of economics, though I also think there will be questions of politics and sociology. I should note that I've previously suggested that the most promising means of dealing with CO2 concerns application of Coase via tradable permits, but this calls out two perplexing reactions: the anti-free-marketeers demand free trade in the form of Kyoto but otherwise oppose it on principle, and the free-traders who cite Coase refuse to accept the fact that a government is required to define those property rights and thus make that market work.


* Note this is different than Tyler's statement (and the claim made in the comments), "We already have wrecked our environment with global warming; the truth is, it is simply too late to do anything about it." I am turning that on its head and asking if it can be undone in the future by political means now, why do we claim that it is an accomplished fact? There can be no "before it's too late" if it is already too late.

Global Warming I - The Physical Science in a nutshell

When I was working on my Master's thesis, it suddenly occurred to me one night as I wrestled with ModTran that one aspect of it closely corresponded to the science involved in global warming. I was trying to calculate the effects of the atmosphere on light; light is electromagnetic energy; global warming is the result of what happens when energy tries to radiate from earth to space.

My problem had to do with what happens when light from the sun, which can be approximated as a black body of approximately 6600 K (or other values, depending on what you're doing), comes through the atmosphere. A black body emits light over a broad range of wavelengths in a manner first successfully described by Planck (his breakthrough that led to the development of quantum theory). Only three things can happen as energy moves from one medium (space) through another (the atmosphere): it can be reflected, absorbed, or transmitted. It turns out that there are several "windows" in the atmosphere that selectively pass light of certain wavelengths. The largest window happens to correspond to the wavelengths to which our eyes respond (roughly 0.4-0.7 microns), so it is called the visible window or band. This also happens to correspond to the peak wavelengths of the sun. Other windows lie in the ultraviolet spectrum (shorter wavelengths than visible) and the infrared (longer wavelengths).















Planck's curve for a 6600 K blackbody














Atmospheric transmission curve such as the one above are commonplace (this one from here)

When the earth warms, it also has characteristics of a black body, but it is considerably cooler than the sun (nearer 300 K). As a result of being cooler, the peak wavelengths are much longer (see also Wien's Displacement Law). Thus, the ability of the earth to radiate energy back to space depends more (though not exclusively) on the windows in the IR than those in the visible spectrum. The extent of those windows are governed by the gases in the atmosphere which selectively absorb in specific wavelengths.















Planck curve at 300 K, about room temperature (note the vertical scale has changed but the horizontal has not)

CO2 is mostly active in the 3-5 micron region called Midwave Infrared or MWIR, though it is also active in the extremely long wave IR (LWIR). Methane has two very strong spikes in the Short-to-Mid wave IR. CO, O2, and O3 are also active in a few areas. However, the number one most important gas is the vapor of dihydrogen monoxide, which is potentially lethal in its liquid form, has been found in many lakes in North America, and has been found in cancer cells. Also known as water vapor, this gas forms between 0 and 2% of the atmosphere depending on local conditions (as opposed to CO2's 0.04% and methane's 0.005%). That is, water is absent in very hot deserts and in very cold regions (such as the poles). Water vapor is active in every region of the electromagnetic spectrum, from light to long wave IR (LWIR). No other molecule comes close to water's ability to respond to incident radiation because of water's unique molecular shape. Whereas CO2 is laid out symmetrically on an axis, H2O is shaped more like Mickey Mouse's head. This gives it the ability to vibrate in many modes at many frequencies (think of the molecules as masses attached by springs, like John Belushi's bee antennae); since frequency is inversely related to wavelength, this means H2O interacts at many wavelengths.




















Each of the charts above shows where that gas by itself is active in absorbing energy, except the last which shows the cumulative effect. Note the similarity to the atmospheric transmission near the top (this one is inverted, since it is showing absorption rather than transmission). Also, note that the shape of the cumulative curve is far and away dominated by water's contribution. This curve comes from the excellent, 8 Volume The Infrared and Electro-Optical Systems Handbook, Joseph S. Accetta and David L. Schumaker, eds., specifically out of vol. 2, Atmospheric Propagation of Radiation.



Water is thus the greatest contributor to the Greenhouse Effect, though not to the phenomenon known as Global Warming, or more precisely, Anthropogenic (man-made) Global Warming (AGW) or "Forced" global warming (see also this from RealClimate) . Without the Greenhouse Effect, we would likely not exist. The Greenhouse Effect is what keeps Earth from being an icy ball in space; I have read that without the atmosphere, the average temperature of Earth would be about -18 degrees C. Using only the Greenhouse Effect, the average temperature would, however, be about +30 degrees C, way too hot. In fact, the average temperature is about +16 degrees C (average around the whole world, including the poles). I have read that the difference is apparently accounted for by convection and the energy required to melt and evaporate ice and water, respectively, (which was why I said that the the earth's ability to radiate back to space did not depend exclusively on atmospheric transmission windows in the IR spectrum), though that may overstate the case for convection and state change.

I have no doubt that the atmospheric content of CO2 is increasing. The Mauna Loa data (here) and even the difference between what we have sampled lately and the default ModTran values shows that.

Given just these facts, we can surmise that an increase in CO2 will make the most difference where its contribution are relatively greater than those of the sun and water. Those are at night (when the sun is not contributing) and in deserts and over poles (where water content is lower).

Electric Utility economies of scale

I have been trying to get this right, so this may just be another unsatisfactory article in a series (others here and here).

Let's suppose that in the late 19th century, you are using kerosene to light and coal or some other fuel to heat your house. In comes Mr. Tesla and his alternating current and Mr. Edison with his electric lamp. Suddenly, you are able to get the same benefits at a lower price. In a complete analysis, we might have to account for the energy required to refine the kerosene, and the resources required to mine the coal and oil in order to get a complete comparison, including externalities, but they were probably roughly equivalent.

The big advantage there was the price, and that was made possible by economy of scale of using large generators and large distribution networks. By economy of scale, I mean that the cost of producing your consumption plus that of your neighbors was lower when using one large generator than each of you using a small generator. A small generator would cost you not only the fuel, but the upkeep and depreciation, both of which are buried in the price of retail electricity.

Over the intervening years, however, we began using the electricity for more than just the light and heat. The number of variety of appliances exploded; it is thought that the small electric motor was as important to the late industrial revolution as the steam engine was to the early revolution since it freed workers from the line and allowed them to be organized in different ways. Small appliances were thought to free people - especially women - from the drudgery of household work, since now machines could wash, dry, wash dishes, store large amounts of perishable food and eliminate the need for a daily trip to the grocery store, etc. The television became the primary form of entertainment, replacing the local pub, lodge, or club.

At some point, then, the economy of scale exploded to more than just a simple replacement of what had gone before (light and heat). Huge generation capacities were built and then overtaken, forcing utilities to build ever larger plants farther from the cities that use the power; transmission systems became intercity and then interstate; and the cost of electricity fell as never before as the utilities, with their high fixed cost of capital and low variable cost, sought to pay for the capacity rather than the actual marginal cost of power delivery.

At last, it has gotten to the point where the transmission facilities are sometimes several hundred miles away, and the system is built to run at high capacity so that the heat and line losses are now the overwhelming feature of the system. The plants run mainly on coal and nuclear fuel, both of which create enormous externalities. There is now a diseconomy of scale: many smaller plants and shorter, less complex distribution systems would be more efficient than the behemoths now operating, but it would force us to grapple with the pollution, noise, and infrastructure to transport fuel in and waste out.

How did it get this way? Where were the regulators?

The problem is that the regulators helped make it this way, contra Kos. Just as the electric utility business was getting started, the main player asked to be regulated. Samuell Insull worked with Nikola Tesla to create the industry as it exists today. At the time, Tesla invented a generator that created the alternating current electricity while Edison was still trying to sell everyone on direct current electricity. The problem with direct current is that you lose power to line losses, so that over very long distances, there is very little power left. To get enough electricity down the line for the end user, you have to elevate the voltage at the near end to dangerously high levels. That meant that the brightness of your lights and the safety of the system depended on where you were relative to the generating plant. Tesla's breakthrough idea was that alternating current was a more efficient way of moving electricity over long distances because you can use transformers to increase and decrease the voltage. Power equals voltage times current, and power lost as heat equals current times line resistance squared. To maximize power delivered as a percentage of power generated, run the voltage on the line high so the current and therefore line loss is low, then use transformers to drop the voltage at the user end to something safer. From a safety standpoint, it would be better if you had low voltage direct current in your house, but from an efficiency standpoint, it would be better if you had a large AC generator supplying all of the houses.

Insull saw the advantage of Tesla's system, commercialized it, and began building or taking over distribution systems. In the popular literature, he is characterized as becoming concerned over the possibility that someone might monopolize the electricity industry. It sounds very altruistic to be so concerned with the plight of others, but it must be emphasized that he volunteered to become a regulated monopoly rather than a state-owned industry. With the cooperation of the state, he eliminated any potential competition (along with a great deal of real competition). In most states, the mechanism by which this is accomplished is not a clause which says, "A monopoly is forthwith granted to ...", but rather by a clause which rather innocuously states something like (from the New Mexico Statues Annotated, 62-9-1)

A. No public utility shall begin the construction or operation of any public utility plant or system or of any extension of any plant or system without first obtaining from the commission a certificate that public convenience and necessity require or will require such construction or operation. This section does not require a public utility to secure a certificate for an extension within any municipality or district within which it lawfully commenced operations before June 13, 1941 or for an extension within or to territory already served by it, necessary in the ordinary course of its business, or for an extension into territory contiguous to that already occupied by it and that is not receiving similar service from another utility. If any public utility or mutual domestic water consumer association in constructing or extending its line, plant or system unreasonably interferes or is about to unreasonably interfere with the service or system of any other public utility or mutual domestic water consumer association rendering the same type of service, the commission, on complaint of the public utility or mutual domestic water consumer association claiming to be injuriously affected, may, upon and pursuant to the applicable procedure provided in Chapter 62, Article 10 NMSA 1978, and after giving due regard to public convenience and necessity, including reasonable service agreements between the utilities, make an order and prescribe just and reasonable terms and conditions in harmony with the Public Utility Act to provide for the construction, development and extension, without unnecessary duplication and economic waste.

So, without defining "public convenience", "public necessity", "unreasonable interference", "unnecessary duplication", and "economic waste", all competitors must stand in front of the public utility commission and prove that their new plants, systems, or extensions are necessary and convenient, but don't interfere, unnecessarily duplicate, or waste. Invariably, they fail the tests. Further, since any competition is unnecessarily duplicative (what is necessary duplication?), potentially economically wasteful (sometimes they go out of business), and probably afoul of the other provisions, it's unlikely that you could ever find competition to be lawful.

Other actions by the state over the past 100 years have only strengthened the power of the electric power industry. In the Depression, Roosevelt eliminated the nascent wind power industry by introducing the Rural Electrification Administration (REA). He also put government directly into the market by starting the Tennessee Valley Authority (TVA). These two reinforced the economy of scale, overbuilding, and the interdependent network architecture of the industry. After World War II, the Department of Energy was created to both promote and to regulate nuclear power, a clear conflict of interest which led them to first convince utilities in the 1950s that nuclear was the safe way to expand in the post-war boom, and then to change the requirements and increase the prices after the utilities made the commitment. Later on in the century, when it was thought that all this coal-generated power was fouling the air and water, Congress solved the problem with a nod to the interlocking constituencies of the coal-fired power generators, Eastern coal mines, and coal miners unions, requiring a technological solution to the problem (flue scrubbers) rather than allowing them to choose the low-cost option (low-sulfur Western coal), keeping the older and less efficient plants online, and ironically resulting in more sulfur dioxide emitted than if they had chosen a more market-like approach (the one that finally surfaced in the 1990 act, with its Coasian cap-and-trade sulfur market). Even more recently, we saw the nearly incredible result of California's pseudo-deregulation, in which the state left its role as referee and entered the market as a player. California became the middleman between the producers and the consumers, artificially held consumer prices down while demand soared. This led to rapidly mounting costs and eventually to rolling blackouts. Since the difference between the price and the cost was born by the state, they pumped millions of taxpayer dollars into Enron, and then had the chutzpah to blame the free market!

I hold out the hope that the decentralizing capacity of solar and wind energy is destabilizing to these entrenched political-industrial interests. Thus I read things like this interview (hattip: Mutualist Blog) with Travis Bradford, author of Solar Revolution: The Economic Transformation of the Global Energy Industry with hope, but also with a good deal of skepticism. Typical of all such journalism, the Alternet interviewer and commenters commend Bradford for sounding like techno-optimist Amory Lovins and not like Doomslayer Julian Simon, of whom they have probably never heard except in disparaging tones. Like Lovins, et al, in Natural Capitalism, Bradford seems to be arguing that technorevolution will happen and should happen simultaneously. To the extent that something will happen, why agitate for it? It's like encouraging people to breathe. To the extent that it should happen but might not, I see little in the interview to indicate that Bradford or many of the commenters are aware of the technical problems with solar. The "thoughtful" solution to the drawbacks of any one solution (wind, solar, geothermal) seems to be that we will have an integrated system of geothermal and wind to provide the base generation (and probably nuclear and coal for at least the next 100 years), with additional wind and solar to provide the peak generation, but this doesn't bring forth visions of an environmentally benign, decentralized or anarchist utopia.

For one thing, there is the problem that alternative energy is only "on" for part of the day. This means that you need some way to obtain power at night, when it's cloudy, or when it's not windy (if you're depending on wind). The two normal solutions for this are batteries and grid tie. Between the chemicals and processes required to produce polysilicon and other photovoltaic architectures, and the chemicals used in batteries, these aren't exactly the environmentally benign technologies we've been led to believe. The Alternet commenters mention Copper Indium Gallium Diselenide (CIGS) - what are the chances that those are surface deposits that can be mined in an environmentally and democratic way and that they don't require vast quantities of caustic chemicals to process? Then there is the problem of grid tying: yes, if you run a standalone system (in the neighborhood of $50-100k for the average household, with battery and PV cell replacement every 10-30 years), you don't have to coordinate with anyone else. For us mere mortals, grid tie is a less expensive alternative. It also requires a massive effort to centrally coordinate the decentralized grid: standards, inspections, licensing, legislation, etc., plus there is the fact that it requires the existing, centralized generation and distribution system to operate. Kirkpatrick Sale thought the electric grid was too large, too complex, and therefore too fragile back in 1980 when a few central utilities were tied together, so just imagine how much more complex when every house is tied to it and we are all billing one another for generation and use.

There are two passing references to Howard Hayden's Solar Fraud; Why Solar Energy Won't Run the World: one says that he assumes prices stay constant, the other that he has ties to the nuclear power industry. Neither addresses his criticisms, which I will try to summarize in a future post.

Outsourcing fuel production

Last year, I can't remember where but it was a discussion about Just in Time in the oil industry, I suggested that it was probably more profitable to refine gasoline abroad and ship in just the finished gasoline, or at least gasoline less the final blending additives. Why? Because a shipful of oil is essentially gasoline plus some useful additives plus a lot of junk. Why should we pay to ship the junk? We also have to find someplace to dispose of it. Wouldn't it make more sense to just ship that part of the oil that we want (gasoline being primary)?

It turns out that some foreign oil tycoons have figured this out and are making it work for two reasons. Not only is the explanation above true, but expected demand is rising in places like India and China, reducing the risk of building new refineries abroad for export to the US. According to Steve Levine and Patrick Barta in today's WSJ (subscription required?), Mukesh Ambani is guiding Reliance Industries into a very lucrative market to take advantage of this 2-for-1. According to EIA figures cited in the post, gasoline imports into the US have risen from 7% to over 12% of the market between 200 and 2006. The gap between what refiners (including US refiners) pay for a barrel of oil and what they get for the refined products has risen from $3 to $13, drawing new competition into the market.

technorati tags: energy "Just In Time"

The Pigou Club

Greg Mankiw started a list of economists and others who favored a Pigouvian (or Pigovian if you must, the man's name was Pigou for crying out loud) tax on carbon via a tax on gasoline, and called it the Pigou Club. Others chimed in. Lynne Kiesling and Patri Friedman declined to join. Patri is half right when he says the problem with it is that the proceeds from the tax might be wasted: they might also miscalculate the tax rate.

I have some questions for members of the club:

• When you fill up, do you seek out the most expensive gas you can buy? Why not?
• What is your personal price elasticity for gas? What is the shape of your demand curve? Is it kinked?
• When the Pigovian [sic] tax is passed, what steps do you plan to take to reduce your consumption? Or do you simply expect everyone else to change their lifestyles.
  

Cuz, y'know, enquiring minds want to know.

For what it's worth, I'm slightly* in favor of gasoline price increases. If I'm not mistaken, gasoline prices have gone up all by themselves over the past 2 years. If we must have intervention, let's:

• Remove all federal and state subsidies to the oil industry. I'm not sure what all that entails, but let's charge back any costs of terminal operation and security, tanker security, pipeline security, and cleanup costs as user fees for a start.
  
• Make sure 100% of fuel taxes to go to highways in proportion to the traffic thereon. That means no more windfalls to state and federal governments in the form of excise taxes on oil pumped, by the way.
  

Yeah, that sounds a lot like a free market. Just to be a consistent contrarian, I propose that the cost of the Iraq conflict be 100% paid out of a gasoline tax (though I think it is only partially "about oil"). Divide expected costs for the coming year plus the difference between actual and expected costs from last year by the number of gallons expected to be sold this year and add that to the price of a gallon.

* I'm still concerned about the effect on poor consumers, as are the compassionate libertarians at Econlog. Sorry, couldn't find the specific post, though I did see this wry observation from Arnold Kling:

the biggest reason that Detroit has such a stranglehold on auto innovation is the regulatory structure that Washington set up, particularly in response to Ralph Nader. Today, I'll bet that it takes more lawyers than engineers to bring out a new car. Deregulate autombiles, and small, innovative companies will have a chance.

technorati tags: "free market environmentalism" regulation Pigouvian tax

Prudhoe Bay waste

I was driving home the other night and heard the tail end of a snippet of Chuck Schumer's bloveating about the Prudhoe Bay shutdown.

From what I understand, BP had a leak. When they investigated the leak, they discovered that the corrosion in the pipes exceeded the corrosion they would expect in those pipes based on their computer models. Therefore, they decided to shut down more pipelines in order to carefully assess the corrosion and their models. If true, this is very prudent, exactly what I would expect a company - whose green credentials are sound, BTW - to do. At a loss of short term profit, you figure out why your assumptions or your execution or whatever is wrong because doing so in in your long-term interests.

Let's understand a few things about the situation.

1. The law does not require periodic maintenance or corrosion controls on this type of pipeline. See this article in USAToday.
   
2. They perform periodic maintenance and corrosion analysis anyhow. I saw a show last year (Discovery Channel) that showed the use of maintenance pigs in the pipeline, but can't find a link to it. This is a high tech industry that takes every gallon spilled very seriously (and the more so as the prices rise).
   
3. There was a recent leak of 210 gallons that prompted an internal investigation. This was in the wake of a leak on another pipeline that leaked 201,000 gallons.
   
4. As the result of the investigation, they decided to do the prudent thing and shut it down. The shutdown will cost BP $30 million per day. Perhaps not so incidentally, it will cost the state of Alaska $6.4 million per day. This is not a decision made lightly. And also not one that is forced upon them by a regulator. And also, incidentally, one that is likely to cost them money in lost market share even if it does drive prices up in the short term.
   

So, there is no market failure here; maintaining these lines is in the interest of operators. They understand that so well that they actually monitor the lines and run sophisticated computer models and maintenance pigs with high tech telemetry. It is costing them money, but they are taking the long term rather than the short term view (another market failure claim defanged). But Chuck Schumer (a trained lawyer) and John Dingell (a lawyer who once studied chemistry) insist that this means that we need more regulation. Sez newly-minted petro-engineering expert Schumer,

"The bottom line is we cannot afford for this incident to be a canary in the mineshaft. Now is the time to aggressively search for and fix any other problems before another disruption causes a national energy emergency."

Schumer said officials should review the inspection schedules companies file to determine whether pipeline operators are adhering to their required plans.

What will regulators do? Insist that someone do maintenance on these lines.

Y'know, like they already do.

Other than that, this is a chance for guys like Schumer and Dingell to insist that we "get our energy house in order". One suspects that they mean something that requires lots more intervention than simply allowing drilling in ANWR, but it would be hard to square their calls for action and their belief that we don't need more or cheaper oil through such drastic measures.

Technorati tags: energy"market failure"regulation

Gouging?

Almost all of the attention surrounding the rising costs of energy has been directed at Big Oil, and the price rises are attributed to their greed. Were they less greedy in the past, when prices were lower?

But what about Big Sun? According to the experts over at Solar Buzz, the price of Photovoltaic modules was decreasing until June 2004, and has been rising since (see image and their extensive statistics).














How does that compare to what oil has been doing?













It looks like prices were steady on the oil front until late 2003, and decreasing in the PV industry until June 2004, and since then both have been climbing. There are at least two ways to look at it:

• Bad: Energy costs impact people of limited means (poor people, retired people on fixed incomes) hardest.
• Good: Rising energy costs mean more conservation, more searching for oil, more searching for alternatives.
  

Which one you favor or emphasize depends on whether you more heavily weigh the short or long term, respectively. You might also quibble with how Solar Buzz creates their statistics, but I think the overall trend is sound. Whether you invest in oil production or solar production, profits are improving in both sectors and look to continue doing so for the foreseeable future. Given the situation in the world, and the fact that we are not nearly ready for the 100% (or even the 5%) solar solution, oil looks to be the stronger investment opportunity for some time to come.

Technorati tags: gouging energy

A diesel takes LeMans!

First there was this bit of news about a diesel dragster breaking the 8 second barrier, now (via GreenCarCongress) the news that an Audi turbodiesel took the LeMans 24 hour race with a 4 lap lead. This comes on the heels of their win at the 12 hour Sebring race.

The Audi is a twin turbocharged V12 diesel that develops a scant 650 hp (485 kW) but a jaw-dropping 811 ft-lb (1100 N-m) at somewhere around 5500 rpm. One advantage that the diesel brings is greater efficiency and therefore - since the cars' fuel tanks are limited by LeMans rules - fewer pit stops. The Audi pitted 27 times, the 2nd place car 32.

Made of an aluminum block, this is not a stock engine (damnit!), but it still sends a message that this ain't your father's nasty old diesel Oldsmobile. Audi has a history of doing this to major racing series, the last time being the damage they did with all wheel drive (the Quattro technology that finally prompted a limit on their intake manifold to even things up).

The same thing ... only different

I recently came across a post with a point in it that I considered to be irresponsible, especially coming from environmental economist John Whitehead. In it, he claimed that "Electric utilities are natural monopolies -- business firms that must operate on a massive scale in order to bring costs down so that the product can be priced affordably." What on earth does "affordably" mean, exactly? That's a forgivable error if made by a laymen, but not by a practicing economist, especially an environmental economist interest in conservation.

The entire argument surrounding electric utilities and natural monopoly seem to be circular when "affordability" is taken as the reason. From what he's saying, it was recognized that electric utilities realize economies of scale, in other words, that marginal costs fall as the scope of the organization gets larger. It's true that coal-fired plants are extremely efficient on a large scale, and a single centrally planned distribution system is cheaper. So then why do they want them to change (the focus of the rest of the article)? Apparently because the system of franchised electric delivery has external costs like forced global warming, pollution, and the like, bringing into question whether the existing system is cheaper when comparing social cost instead of private cost.

But, focusing on private cost, the current system is "cheaper" in comparison to what, exactly?

The alternative to the current organization of the electric industry is not "the same thing but without regulatory controls on the prices". John even comes close to touching on this when he says, "The natural inclination of monopolies is to raise prices so that profit is maximized ... but electric utilities are heavily regulated in return for government's gift of monopoly status." If the government has given them monopoly status, it may not be a natural monopoly at all. Yet everyone treats the subject as if they are a natural monopoly and that regulation was necessary.

What is the purpose of regulation? Assuming no self-interest, we could say that suppliers favor it because there are increasing returns to scale, that politicians prefer it because they are looking out for the common good, and that consumers prefer it because energy is cheaper. It is true that the current scheme for generating and delivering electricity would be more expensive if there were no regulations. However, if there were no regulations, the industry would not be so organized. This reduces to the argument that if the existing system were different, than it would not be the existing system.

Further, what happens when we relax the assumption of no self-interest from above? We understand that suppliers favor regulation because they are rent-seekers and politicians prefer it because they are power-seekers. I don't have any source for these conclusions, but it seems easy to extrapolate from Gabriel Kolko's findings in the railroad, banking, and other regulated industries.

How does such regulation work? Competitors aren't banned outright, but rather are thwarted by "public benefit" clauses. If I decide to start my own utility -- let's say I'm going to use a solar system -- I must first obtain a license. At the hearings, the license will be opposed by someone (a lawyer for existing utilities) who will argue that because my method of generating electricity is more expensive, then it will not benefit consumers and therefore my license should be denied. In fact, arguing only on private cost, this will be correct because solar costs about $0.20/kW-h to generate, compared to about $0.02/kW-h to generate from a nuclear plant and $0.03/kW-h to generate from a coal-fired plant. But if that is the case, I will fail on my own without need for a regulatory agency to interfere -- what purpose do they serve? If it is redundant to prevent high cost competitors from entering competition, it seems obvious to conclude that the purpose of the regulatory agency is to prevent lower cost competitors from entering competition, which largely undermines the argument that regulated monopolies are the low cost method of providing energy.

I have now asserted that the current organization of energy utilities is the low-cost method, but that the method by which they protect the organization undermines the claim about being low cost. What gives?

Electricity generation was pioneered by Thomas Edison and underwent significant innovation by Westinghouse and his genius engineer, Nikola Tesla, in the late 1880s and early 1890s. Urban areas were the first to be electrified because of the population density. Rural areas were electrified by a distributed system (windmills) until the advent of the REA. I propose that the following alternative history may have shaped the industry if natural monopoly regulation never appeared in the lexicon: Competitors would set up on opposite sides of each town and begin building distribution systems until they hit the territory supplied by other producers. The redundant generation and distribution systems would indeed have been more expensive to producers. If you were in the neighborhood supplied by a less well managed producer, your electricity would be more costly and/or less reliable. People in the marginal neighborhoods could entice the better supplier to build inroads, so prices would be tempered by competition. Businesses would relocate to the better-supplied neighborhoods, depriving the higher cost suppliers of revenue and opening them to bankruptcy, failure, and takeover. Weaker competitors would have reason to combine efforts, for example by sharing lines as well as by merging. Some companies might sell generation capacity and specialize in distribution while others did the opposite. The market for electricity would tend toward consolidation, but would also be tempered by new entrants and competition between large rivals in much the same way as the auto industry is.

Electricity would in fact have been more expensive to the consumer as well as the producer. But that does not necessarily leave consumers worse off than they are now for two reasons: first, more expensive electricity means less generation and less pollution, and second because of the increased importance of conservation measures.

Some measures were already available to consumers with the technology available to them at that time, but there can be no doubt that consumer technology would have taken a different course. Electrical heating is just about the least efficient method of heating a house, but it grew in popularity because the price of electricity was held artificially low compared to natural gas until deregulation in 1980. Passive methods for cooling and heating were largely abandoned because fans, air conditioners, and central heating were so cheap and convenient. Fluorescent lights were invented by Tesla and displayed at the 1893 World's Fair and were in wide use by 1938, but were not made compact and inexpensive enough for household use until the 1990s. Would there have been more emphasis on developing them if incandescent lighting were more expensive? Skylights are an easy alternative, but only recently exploited by Wal-mart in the design of their stores. Low ambient lighting and focused task lighting might have come into vogue earlier instead of the high levels of ambient lighting now almost universally used.

Furthermore, consider what might have been the case if we had developed distributed methods of generation. Currently, about 2/3 of the energy that goes into electric generation is lost as waste heat. Windmills already existed and are currently the favored method of renewable energy, but only in large windfarms. What if every household had one of those old Aermotor windmills like they used to? Surely, a method for sharing my excess power with my neighbors would have grown up, even if it meant that we paid someone to run lines and then run interconnection and backup systems. In such an environment, it would be more feasible for the average homeowner and business to install solar on the roof in order to decrease costs or even improve profitability.

I propose that all of the methods currently advocated for lowering household energy bills would have been more highly developed had there been no public utility regulation. The current organization is the low cost method of delivering energy, but not of consuming it, its uses (lighting, heating and cooling, etc.), or its substitutes (passive design, renewable sources). It's even arguable whether the current system is the low cost of delivering energy given the potential benefits of distributed generation (heat loss, land lost to powerlines, lower susceptibility to system-wide failures). Yes, the centrally planned public utility has an efficient generation and distribution system, but the alternative is not the same system with unconstrained pricing. The alternative is a collection of substitutes, distributed and competitive generation, innovative distribution schemes, and so on.

These are the same outcomes for which advocates of fuel, gas, or other energy taxes implicitly hope. More expensive gasoline is thought to both push consumers toward more efficient vehicles, mass transportation, and different living circumstances (denser communities), while simultaneously coaxing suppliers into developing the more efficient vehicles as well as alternative forms of energy.

The use of energy on roads was made possible by the Progressive "Good Roads" movement of the early 20th century as a direct assault on the supposed market power of the railroads (which, at that time, were ironically almost all in bankruptcy because of the pressure of competition, hence their interest in the Interstate Commerce Commission and its ability to act as a cartelizing agency). The substitution of electricity for passive lighting, cooling, and heating was made possible by the Progressive public utility regulation movement of the early 20th century as a direct assault on the supposed market power of the electric utilities. We are suffering as a result of both of these attempts to scientifically organize society from that era, but the central planners never seem to learn their lesson.

It is arguable that had this regulation not been adopted, we would have seen slower economic growth over the last century. We would not have the same magnitude of environmental concerns that we have now, nor would we have the same means to address them. However, growth would not be so slow as we would calculate if we simply increased the price of electricity over the past century because the pace and direction of consumer technology would have been different, too. In this way, central planning is focused on short term outcomes and market solutions are more flexible in the long term, which is exactly opposite to what central planners will tell you.

Just in Time to blame for gasoline price spikes

I think I first saw someone (Nader?) making the title's claim on the Tonight Show. With Johnny Carson.

It has been frequently charged that the oil industry has been influenced by JIT (see here (2004), here (1996), and here (1996)). The argument goes like this: The number of refineries in the United States has fallen from 279 in 1975 to 205 in 1990 and further to 149 in 2004. As a result, the industry is susceptible to supply shocks, which causes spikes in prices and subsequently reduction in domestic output. The effects of hurricanes Katrina in Rita are given as an example: in 2005, Katrina caused the shutdown of 9 refineries in Louisiana and 6 more in Mississipi, and a large number of oil production and transfer facilities, resulting in the loss of 20% of the US domestic output. Rita subsequently shut down refineries in Texas, further reducing output. The GDP figures for the third and fourth quarters showed a slowdown from 3.5% to 1.2% growth. Similar arguments were made in earlier crises.

However, JIT students question whether JIT as it has been developed by Ohno, Goldratt, and others was even in use by the petroleum industry. JIT requires a reduction in inventory capacity, not production capacity. From 1975 to 1990 to 2005, the annual average stocks of gasoline have fallen by only 8.5% from 228,331 to 222,903 bbls to 208,986 (EIA data here). Stocks fluctuate seasonally by as much as 20,000 bbls. During the 2005 hurricane season, stocks never fell below 194,000 thousand bbls, while the low for the period 1990 to 2006 was 187,017 thousand bbls in 1997. This shows that while industry storage capacity has decreased in the last 30 years, it hasn't been decimated.

On the other hand, the storage capacity as a fraction of the daily use has decreased. American consumption has increased fairly steadily during the same period that the storage capacity has been slightly diminished. In 1975, there were approximately 20 days of storage (stocks divided by domestic production); in 1990, 14 days; in 2005, 11.5 days. When expressed as a fraction - or as the number of days' use - it has declined. This is an industry-wide phenomenon, however, and not part of a corporate plan to reduce inventory as JIT would require.

During the same period, natural gas transportation was deregulated. There has been a gradual shift away from fuel oil toward the use of natural gas for heating. It is therefore not surprising that fuel oil stocks have declined from 92,000 thousand bbls to 37,000 thousand bbls, with most of that drop coming in 1979-1986 (to 46,000 thousand bbls). EIA data in file pet_stoc_wstk_dcu_nus_m.xls at the EIA website.

Further, domestic gasoline production capacity has been increased since 1975 from 14,961 thousand bbls per day to 15,572 in 1990, and 16,894 in 2005 (EIA data). In addition to the crude that is imported for production of oil, refined gasoline importation has increased from 200 thousand bbls/day in 1982 to 1,110 thousand bbls per day in 2006, or about 6% of the total. Most of that oil is imported through the Eastern PADS district, not the Gulf Coast. Thus, the domestic gasoline production capacity has not only increased from 1975, but the total import and domestic capacity has increased while the natural variation risk has been distributed (at an increased exposure to political risk for the imported fuels).

At the same time that natural gas was deregulated (thanks, Jimmy Carter!), airlines were deregulated. There has been increased refinery output of kerosene (jet fuel) as a result. From 1982 to 1990, jet fuel production increased from 753 thousand bbls per day to 1,311 thousand bbls per day, and then to 1,557 thousand bbls per day in 1999, where it peaked as a result of the subsequent economic slowdown. It currently stands at 1,538 thousand bbls per day average over the past year. Thus, it seems amazing that gasoline production has increased at the same time as jet fuel production with fewer refineries. This is an increase in effective production capacity, not a decrease.

Other questions would have to be addressed in order to determine whether the 2005 fluctuations were due to adoption of Just In Time, other industry practices, or other factors:

• Has domestic production capacity grown increasingly concentrated in the Gulf Coast region since 1975? Why or why not? It seems likely that Gulf of Mexico oil production has increased since then, and that production off the California coast has declined in the same period, so my estimate is that the answer to this question is yes. If my intuition and the reason for it are both correct, this is a change caused by something other than JIT.
  
• Has domestic storage capacity grown increasingly concentrated in the Gulf Coast region since 1975? Why or why not? It seems likely that storage follows production, so again I estimate the answer is yes, and again has little to do with JIT.
  
• Were there any periods prior to 1975 in which a hurricane hit the Gulf Coast, did prices fluctuate as a result, by how much, and what were the conditions immediately preceding (i.e., were spot and futures prices already rising or falling)? I believe that a large part of the problem in 2005 was that the market was already nervously watching the increase in prices when the storms hit.
  
• Have the reductions in numbers of refineries been actual shut-downs of plants, or consolidations of multiple plants under consolidated management?
• The automobile industry is arguably more consolidated than the oil industry, though both are clearly engaged in strong competition. Yet, only one or two automobile manufacturers are actually practicing or attempting to practice JIT, while the others have made starts toward it and then abandoned the quest (see, for example, GM's experience with NUMMI, or Chrysler's demise since the Daimler-Benz takeover merger. It seems unlikely, therefore, that the entire oil industry could have adopted JIT principles in unison in the 1970s and followed through until 2006. Is there any claim on the part of major refiners or distributors to be using JIT methods?
  
• What was the effect of growing worldwide -- especially Chinese -- demand for oil? In other periods, were the markets in a state of contango or backwardation? For example, gasoline stocks were lowest during the 1997 period, probably because the price of oil fell so low that nobody wanted to store product while prices were falling.
• How much of the reduction can be explained by the unpredictability introduced by the multitude of regulations introduced between 1989 and 1992? In that period, the oxygenated fuels legislation was passed, giving EPA the power to demand sudden changes in fuel blends (so-called "boutique" fuels). It makes no sense to keep finished gasoline on hand when the EPA could suddenly declare a new blend; thus there has been a rise in stocks of blending distillates concurrent with the decrease in finished gasoline.

Economic vs. JIT rationales

Oil and other companies routinely shut down facilities for reasons other than the application of JIT. One of those reasons may be economic rationalization: when the benefits of operating no longer outweigh the costs, including opportunity costs, the plant may be economically inefficient. JIT has never subscribed to such considerations directly; in fact, following Waddel (Rebirth of American Industry) this thinking may be based on Brown-style accounting and Sloan management, which are based on DuPont's use of ROI as the measure of profitability. Waddel contrasts that with the cash flow definition of profitability used by Henry Ford and Toyota. Ford during the Rouge era would have sustained and Toyota does sustain practices and plants that appear to be economically inefficient if they serve a strategic interest, especially if they improve flow and speed. Thus, another problem with JIT is that some of the application appears to be counterintuitive and at odds with traditional accounting (GAPP) and managerial economics as practiced in large corporations post-Sloan.

The real reason

In my research, I have found nothing that indicates that refiners are actively attempting to apply JIT theory to their operations. The real reason for the price spikes in 2005 were:

• increased demand for petroleum in China and elsewhere,
• inability or lack of desire on the part of the Saudis and other OPEC members to increase supply
  
• nervous markets as a result of trouble in Iraq, Argentina, and elsewhere,
• a recovering economy in the US,
• and two large storms that hit the Gulf Coast nearly simultaneously.

George Bush was right when he said that we are addicted to oil. We refuse to do anything to change our lifestyles -- hey, we can quit anytime! Instead, we blame the oil companies (who bring us what we want), the Arabs (who are actually a minor supplier compared to domestic wells, Canada, Mexico, and Argentina), George Bush and Dick Cheney (as if the problem started in 2001), and anyone else who could plausibly be blamed. But price is a result of both demand and supply, and we as consumers are responsible for one side of that equation.

We have met the enemy, and he is us.

Gas price theory

Earlier, in my Ungouging post, I proposed a model in which independents lead the price raises in order to preserve their stocks during a decline in refinery output. Since I wrote that comment, I discovered something about who leads the prices. In "Retail Gasoline Price Cycles across Spatially Dispersed Gasoline Stations" (JLE Vol 47, April 2004) Andrew Eckert and Douglas S. West describe something called Edgeworth Price Cycles. An Edgeworth cycle is characterized by constant undercutting of prices until they hit the marginal cost, at which point someone will restore prices to a higher point, after which the undercutting begins anew. The larger competitors usually attempt to restore the prices, and let the independents lead the undercutting.

However, if I am correct in saying that independents drive the price increases in crisis situations, then this indicates a change in strategy. In Edgeworth cycling, as I understand it, the majors initiate price increases, but I have the independents initiating the price increase in the crisis. These aren't necessarily contradictory: the majors are initiating a restoration to a "preferred" or "normal" or equilibrium in Edgeworth cycling, whereas in the crisis a new equilibrium is being sought. The new equilibrium is probably understood as a temporary equilibrium that will fall as the crisis passes until we return to Edgeworth cycling. Still, this would be a switch in strategy from "fighting for market share by initiating undercutting" to "maintaining cash flow to get through a crisis".

If my theory is correct regarding the negative effects anti-gouging laws would have on independents, and if I can believe the welfare implications in Michael Noel's Edgeworth Price Cycles, Cost-based Pricing and Sticky Pricing in Retail Gasoline Markets", then I think this would imply that anti-gouging laws would be decidedly bad. On the other hand, if the majors initiate the price rises in the crisis, and the brunt of anti-gouging laws actually do or can be made to fall on them (a mighty big "if"), that may have a different effect on welfare, though I'm not sure exactly what it would be. At the very least, I think it means queues during a crisis, with a differential welfare impact on the working poor than on the rest of us. For the sake of clarity, their time being less valuable*, they can better afford to sit in line than pay higher prices, albeit with some impact on their personal lives.

So my question is, "Who initiates the price searches during a crisis?" We would need prices reported constantly, probably at least twice per day, from before a crisis period and then throughout its resolution, judging from some of the literature I've been reading on Edgeworth cycling. Seems like a good project for someone looking for research fodder because it would require finding a market demonstrating regime switching (Edgeworth) that switches to an entirely different meta-regime (equilibria seeking in a crisis), gathering data in several markets where independent presence in the market varies, and gathering data on the credible threat of anti-gouging prosecution in those same areas. Eckert and West used gastips.com, while another researcher's wife collected the data. Web-based gasoline collection sites are notoriously spotty, while few people's spouses would be willing to constantly travel around recording gas prices before and during a gasoline crisis.

* By "less valuable", I mean that using their normal wages it is less costly to a low-wage laborer than to a $400/hour lawyer to sit in line. I often wonder whether that is a very useful view of things. After all, if the lawyer is late to work, he probably won't lose his job. When a single working mother sits in a doctor's office for 4 hours, whose time is really worth more? On the other hand, who is more hurt by higher fuel prices - the lawyer or the laborer? Keep in mind that these aren't the only strategies open to them: there is always carpooling, public transport, etc.

Ungouging

On this post at Prof. James Hamilton's EconBrowser, I got into a debate over gouging. Below appears my last comment. The background is that some of the debaters believe in gouging, but insist that something so obvious need not be defined, or define it with vague terms like "human decency". They then switched tactics and insisted that it had already had been defined in the law. However, the legal definitions are not helpful in actually defining the practice as differentiated from a "regular" rise in prices. One person started posting lists of links gleaned from Googling, which another commenter noted was akin to throwing sand in his opponents' faces. One commenter claimed to have already "settled" the issue on another blog (Calculated Risk). I think most of the rest is eventually explained...

------------------------------

I'll try to make this as clear as possible: The thousands of links generated by search engines are irrelevant to me. I don't care whether there are anti-gouging laws or not because politicians and regulators have their own agenda. I care about two things in this discussion:

1) Can anyone define "price gouging" in such a (scientific) way that we can distinguish it from normal, everyday "price raising"?

The laws cited use arbitrary values of 10%, 25%, and 30 days without explaining why 10.1% is gouging and 9.9% is not, or why the average 30 days ago is applicable in an industry renowned for its seasonal nature rather than 365 days, or why only booked costs are considered at the exclusion of demand, opportunity, and future costs.

2) Can anyone defend the use of the pejorative phrase, "price gouging", showing that the distinct phenomenon described in (1) is always and everywhere harmful and therefore deserving of a morally charged name?

After reading through the posts you cited on Calculated Risk, I think you share a belief with Bill O'Reilly: that there is a True Price which can be calculated according to the simple formula

True Price = (cost of inputs) + (fair markup)

This would explain your attention to the prices of the mixed fluid in the tank and whether you need to look at the books to determine whether price gouging has occurred. This simple formula is intuitively appealing, but was abandoned by economic science with the "marginal revolution" of the late 19th century when they discovered that explaining prices requires the incorporation of the consumer utility (demand). Alfred Marshall [summarized it] eloquently:

"We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens."

So I might rewrite the formula above (at the risk of being chastised by Prof. Hamilton for simplifying that which ought not be simplified in this way) with a function f() to account for demand, and expand Marshall's explanation to include risk (of running out, of losing market share, of losing money) and other things not accounted for (X):

Price = (cost of inputs) + (fair markup) + f(Quantity Demanded, risk, X)

The problem with this is that the quantity demanded is itself a function of price, and we end up with a transcendental equation that must be solved by iteration because - as my e-mag professor taught me - "by iteration" sounds better than "guessing" in peer-reviewed journals. However, guessing is exactly what gas station operators must do until the public starts publishing their marginal utility functions.

How might this occur in practice?

One morning, the station operator gets a call from his supplier, telling him that they lost power to the refinery and won't be able to make his delivery this week. That's a problem, because at the rate he is selling, the tank will be empty by the Tuesday and most of his business comes on Friday and Saturday. So he calls a jobber who has been trying to win his business and asks if he can deliver. "No," comes the answer, "but if you had called an hour earlier I might have. Storm affected everybody. Maybe I can scare some up and call you back." Mild panic begins to set in because he uses gas as a loss leader to keep a steady stream of people coming through the door to buy 5 cents worth of soda for $1.49, so he calls a less-hospitable refiner and asks him. "Sure," he says, "but it's going to cost you and we can't deliver until Thursday." So our manager agrees to half a tank to buy himself some time, and then gets a call from the jobber who informs him that they convinced a refiner in California to ramp up production and send some this direction by the weekend. In other words, they are bidding on a scarce commodity that has just gotten scarcer.

But he still won't get a tanker in till Thursday, and he calculates that he'll run out on Tuesday. When he runs out, he still has a payroll, rent, utility bills, and loans to pay back, and people aren't going to come by just for the soda, so he needs to make sure he keeps some in the tank. He has a couple of options: shorten his hours, shut a few pumps down, or raise prices. You can see three other stations from his property, so shortening the hours and shutting pumps down to create an artificial shortage is only going to lose market share and do nothing to address his fixed costs, so he thinks about raising prices.

This is a risky game, but because of the shortage, his options are limited. If he doesn't raise prices, he is going to run out, and he is going to run out faster if his competitors raise their prices while he stands pat, so both of those scenarios say raise. If he raises prices, and they don't, he won't sell anything: bad. If he raises prices, and they follow, he'll be okay. Three of the four combinations say "raise", the other says "stand pat." Fortunately for him, at least one other competitor if not all of them is facing the same calculus, so once one raises, everyone will follow. Odds are they raise.

(A similar problem follows for whether he shifts the relative prices of the high-test and low-test: consumers will shift to the lowest cost fuel (relative) and run it out faster.)

But now that he has decided *to* raise prices, it still isn't clear by *how much*. He needs to cut demand 20%, a competitor needs to cut demand 40%, another needs to cut 10%. On the whole, we know that the regional capacity was down about 15-30%, but that's only clear in hindsight, and that's only an average (it probably varied from one firm to another between 0% and 100%). At the time, the prediction was 30%, so on average everyone in the region needed their demand to go down that much. We have been repeatedly reminded by the Peak Oil pessimists that gasoline demand is inelastic, but we know it's not *perfectly* inelastic, so we know that prices need to rise by more than the demand fall we desire (percentage-wise). How much? One might use a rule of thumb of 2x the desired demand drop (60%), another might try starting at 20%, take stock of the effect on demand and the actions of his competitors, and then change again. That is what solving by iteration means, and Figure 4 on this page shows how complex this is as the jobbers, refiners, futures markets, and spot markets are all seeking a balance at the same time as our protagonist. There is no "correct" or "true" price; supply and demand can move independently of one-another and are coordinated by means of changing the prices at the raw, refined, and retail levels.

BTW, we know that the average needed to have been 30% by the reports available at the time. Gasoline demand is inelastic, so we know before we've started that we will exceed the 25% test used in some jurisdictions, and we've just flat blown through the 10% used in others. Using the 60% mark, and having a retail price of about $2.40 prior to the storm, we find that prices should have gone to about $3.84. That's a remarkably close estimate, and we should applaud the guy who checks and adjusts 6 times rather than the guy who went straight to $4 because he was taking the most interactive path and his *average* price was lower as a result. If everyone used this rather than the direct approach, the chances of overshooting the equilibrium level will be lower. Yet these guys are made out to be the villains.

This storytelling exercise is interesting only in illustrating the heuristics they may be using, but science by story-telling is fraught with danger and I invite courteous criticism. Still, at this point, the only thing I have found that distinguishes this type of price rise from a "normal" price rise is (A) the cut in useful capacity (which shows up as a decrease in *used* capacity in the EIA figures), (B) the bidding that ensues for the remaining capacity and for stored supplies, and (C) redirecting the output of other refineries into this market. That's exactly what you can see from the EIA data, the increases in the spot and futures markets, the increase in imports, and the subsequent rise in prices in CA due to gasoline being shipped east (arbitrage). It isn't surprising that there is a delay in the import data; it takes time to ship it in. And it isn't surprising that costs would go up when you get gas from different refiners than normal: if they were the low-cost refiners, wouldn't they already be the source? If not, then it probably costs more to bring oil from them into a new market. I don't see "gouging" there, I see "raising prices to balance supply and demand", same as they do every day. But let's go further.

Let's say that one of our protagonist's competitors is a vertically integrated major. They may have a lower cost both before and during the crisis; before because of economies of scale, and during because they can internally redirect unaffected refinery capacity to make up for lost capacity. Before the crisis, they are content to let the independents be the price leaders because the majors make money from gas, not sodas. During, they are still willing to sit back and let the independents drive the prices and take their extra profit. Is that gouging? After all, they aren't facing the availability problems as the independents, and they are the low cost suppliers. Perhaps. Is that bad? I don't think so. After all, they are the low cost suppliers. They make more money because they are more efficient. If they didn't exist, the independents would be happy to raise their prices and make their money off gas instead of soda, but then the independents would probably integrate and we'd be right where we are. They aren't acting as price leaders, they're acting as price followers. If they keep their prices low out of the goodness of their hearts, and thereby drive the independents out, they risk prosecution for "predatory pricing". If they try to match them exactly, they risk prosecution for collusion.

But let's look at the system operating under threat of prosecution for gouging alone. The independents are loathe to raise prices because they don't have the legal or accounting infrastructure to defend themselves. So I'll make five testable predictions for communities with two characteristics: (a) a credible threat of prosecution *and* (b) frequent crises (Florida comes to mind as meeting both, as does Houston during the intra-storm period):

1) More cases are brought against majors, but a larger percentage of cases are won against or ceded by independents

2) There are more attempts to use non-price demand adjustments, especially by independents (because of the threat of prosecution and the cost of having to defend against the charge, even if not true)

3) Vertically integrated companies are more dominant (because they have corporate counsels, they can adjust their accounting over a longer period to absorb higher crisis costs, and they have access to more supply through a crisis)

4) Regular prices are higher prior to crises and the price rises are lower through the crisis (because there are fewer independents using the fuel as a loss leader and/or trying to win market share, and the majors have more options for bringing fuel in during the crisis period)

5) Vertically integrated companies are major donors to AGs and politicians who make threats against "price gougers"

We actually saw evidence of this in Houston, where the AG made threats between Katrina and Rita. In one story in the WSJ (25 Sep 05) , there was a description of a station that had shut down pumps (they forced him to re-open them), and others of people waiting in line for tanker trucks to show up.

"I've had people making U-turns and getting behind me," he said, beginning to unload his cargo at the Exxon station near Beltway 8. The station was selling gas at $2.65 a gallon, its pre-Rita price. Drivers were clogging the pumps as a line of 25 cars snaked into the station. As one driver plowed over an orange safety cone, Mr. Gonzalez yelled to the driver who merely shrugged before pulling away. "It's unbelievable; they think this is the end of the world," Mr. Gonzalez said.

Furthermore, when the oil prices collapsed in the late 90s, then-Energy Secretary Richardson floated an idea to provide relief to domestic oil producers. Now-Governor Richardson just sent out an energy-relief check to his constituents. When Jeffords defected and Jeff Bingaman (D-NM) took over as Energy Committee chair, they floated the idea of a "counter-cyclical tax credit" which would operate between $11 and $14/bbl. At the time, he was third on the OpenSecrets.org list of Senators receiving money from Oil & Gas companies with $136k. In 2002, Pete Domenici was #5 with $164k on the Oil & Gas donation list at Opensecrets.org. Current Texas Senator and former anti-gouging Attorney General (the a-g AG?) John Cornyn was #1 with over $500k. John Kerry was #1 in the Senate in 2004 with $305k. W gathered in about $2,627k. I predict passage and signage of an anti-gouging law, followed by consolidation within the industry and generally higher prices.

-----------------------------

Since then, we find that New Jersey has achieved awards against Sunoco and Hess, with suits pending "against 10 of 18 independents." A suit against Shell is also pending, and BP settled before a suit was filed. If everyone is raising prices, how the hell can anyone be raising above the average? Specifically, "investigators found more than 100 violations at 400 gas stations, including stations illegally raising prices more than once every 24 hours, charging more than the posted prices and failing to maintain proper records, the state said in suing Sunoco, Amerada Hess, Motiva Shell and several independent gas station operators."

1) Collecting this data is notoriously difficult. In my next post, I'm going to talk about a research idea I have (for any grad student that wants to tackle it, not me), and found out that one researcher had his wife collect the pricing data. Another researcher used Gastips.com. So how did the State of New Jersey find time to collect data on 400 stations? Is this really the best use of their time?

2) Should it be illegal to raise prices more than once every 24 hours? Better keep these guys clear of the New York Stock Exchange.

3) Charging more than the posted price seems to me to be fraud - why let them off with a plea and a fine? I smell "legal technicality" that wouldn't hold up under appeal.

4) "Failing to maintain proper records" - any guess as to what this is? My guess is that the state defines gouging as "changing the price when they have not received new deliveries," and so when people don't keep detailed records of each delivery, they get nailed for that, too. Or, they required the gas stations to keep their own pricing records so that they provide the rope with which to hang themselves. Ever read the 5th Amendment? It says, "No person ... shall be compelled in any criminal case to be a witness against himself."

Oh well, all's fair in love and populist pandering.

Fifty-one point three!

I got 51.3 mpg on the last tank - and I was afraid I would never approach the record of 52.4.

Sorry, I know it's a terribly geeky thing to get excited about, but it's certainly a lot more exciting at $2.859/gallon than at $1.50. Meanwhile, "my" senator, old Budget Hawk Pete, they used to call him when he chaired the Senate Finance Committee in the hard-spending Reagan years, is busy calling in Jed and asking him why his customers keep buying fuel and cursing him for selling it to them. Apparently, no amount of reason will keep politicians from being politicians.

technorati tag: gouging

[UPDATE] And this coming just a few weeks after Pete and his buddies passed a landmark pork bill for the oil industry.

Gougers II

These two articles were next to each other on the front of the WSJ Online edition (I suspect these are pay articles):

High Price of Gas is Boon for Biofuels
Exxon Mobil Profit Surges 75%

Honestly, you couldn't make this stuff up if'n ya wanted to. In 1998, when the price of oil collapsed to $11 per barrel, the then-secretary of the Department of Energy, who happens to be the now-Governor of New Mexico, proposed a bail-out for the strategically critical oil companies who were being hurt by that "unfortunate" turn of events. Today, the populists want the oil companies to bail us out.

In fact, that was still a part of the Democrats' strategy as recently as 2001, when the Senate Energy Committee, led by Jeff Bingaman (D-NM) after the Jeffords defection, produced an energy bill with this interesting bit of pork in it:

Sec. 606. Crude Oil and Natural Gas Development Credit. Counter-cyclical tax credit for domestic development drilling and enhanced recovery work for natural gas and oil during periods of very low oil prices. Applies when oil is below $11/barrel, phasing out at $14. Intended to maintain stable investment in new drilling to keep the oil and gas service industry employed and to maintain stable natural gas supplies.

Actually, the oil companies already are "bailing us out". How many people actually changed their behavior when Katrina and Rita took 1/3 of the refineries offline? A few, but our consumption didn't fall by anywhere near 1/3. Somehow, the entire industry (or collection of industries) that pump, transport, refine, transport, and market gasoline were able to respond to that unplanned series of events, with barely a bump in the supply. Obviously, since people went right on doing what they wanted, and willingly paid the advertised price, we benefitted from that service. For this we should thank them; they don't ask that, though. They just want to be paid the advertised asking price.

We ought to be damn glad they make lots of money when things go badly and we refuse to change our own behavior. Just imagine if there were no more money to be made in a crisis not of their or our doing? There wouldn't be less money to be made, either, so it wouldn't benefit anyone to redirect fuel from areas like California to areas like Georgia. In the wake of both Wilma and the other storm, the prosecution of "gougers" by the state of Florida, there have been shortages in southern Florida. Duh.

Meanwhile, the recent spate of gasoline prices rises due to rising Asian (Chinese) demand, a decade of depressed exploration and development worldwide, constantly rising western (especially American) demand, tension in the Mideast, and bad weather have raised the related issues of global warming, terrorism, the energy dependence of our way of life, and the central player - petroleum - to levels not seen since 1983. Americans are interested once again in fuel economy, and Toyota and VW are ready for them while GM has its thumb up its collective butt. Every environmentalist in the world ought to get up every morning and thank the CEO of Exxon Mobil that he and the other oil companies are making record profits and not running a loss in order to "hook" us on cheap oil. They ought to realize that BP and Shell, also raking in record profits, are putting those profits right back into their solar and hydrogen research.

The populists - Bill O'Reilly, Dick Durbin, Dennis Hastert, Dick Morris, Jack Kingston, etc. - are calling for action against the oil companies. Newsflash: The problem isn't them. They only supply it and take the best price they can get. Otherwise, they would have run the price up years ago, and it would not have collapsed again in the last week. The problem is us; we keep demanding more and more fuel. Anyone suppose that any of the people listed above has changed their lifestyle by switching to a more economical car?

The only politician I've seen say anything approaching sensible on this issue has been Nancy Pelosi, who called for a repeal of "the tax breaks and subsidies provided to oil and gas companies in an energy bill President Bush signed into law earlier this year." In other words, let's return to something approaching an actual free market, not the mishmash of rules, regulations, tax breaks, sweetheart deals, subsidies, etc.

Amen.

Graphical Oil Paths

I've been thinking about a graphical depiction of the future of oil prices and production. Below is the updated but entirely American version of Figure 3 in Amory Lovins' Winning the Oil Endgame (which depicts world consumption). The data comes from the EIA historical website (production and oil prices to the refiner, adjusted to 2005 dollars with the BLS inflation calculator). (click on graph for a larger version)













Here's the narrative: Starting in 1973, production (demand) rose rapidly until the Arab embargo of 1979. Then, prices rose rapidly and production (demand) fell. By 1990, production (demand) had risen again to about the same level as it had been in the mid-70s, but real prices were lower. Prices remained steady even as production (yes, also demand) had risen far above what they had been in 1979. Lately, as everyone is well aware, prices have again risen, even as production (demand) skyrocketed throughout the 90's and 00's. But in the last few months, demand has finally fallen off. (The chart uses annual values until we get to January 2005, at which point it switches to monthly values through July. Both price and quantity values were not available for August, neither was available for September. I guessed that prices would be up and quantity down for September because ..., well, because it was obvious.).

So, now what? There are, as I see it, three options:

• The Peak Oil Pessimist path: Prices will continue to increase, but supply will now constrain demand and will gradually fall.
• The pseudo-Simon Optimist: We will continue to find more oil and prices will come down. I call it "pseudo" because I don't read Simon as having said we will always find more. He said that we will never run out, and that's a different statement.
  
• The Substitution Optimist: We will find substitutes and alternatives, driving both the price and the quantity consumed (supplied) down.

These are depicted here (click on graph for a larger version):















I'm curious about the pseudo-Simon path: will these charts of price vs. production always climb to the right, with periodic epicycles?

Technorati tags: peak oil, julian simon, amory lovins

Biodragster

Cool - via mode5, this Cummins diesel dragster has just dropped into the high 7 second range (7.98) for a quarter mile at 167 mph, running biodiesel from Blue Sun. Cool photographs of what happens when things break on dragsters on the Cummins site. For perspective, Tony Schumacher's current records are 4.437 s and a top speed of 336.15 mph in a top fuel dragster.

Now, drag racing ain't exactly the greenest sport in the world, but it serves a purpose that racing always has: it proves out new technology, lowering the acceptance barriers for consumers. No, you aren't going to be running nitromethane in your commuter vehicle any time soon, but you are much less likely to make stupid comments about how slow and powerless diesels are once you've seen someone take a NHRA trophy with one. And Cummins, a real diesel engine manufacturer, is using a modified engine from a Dodge truck with over 30,000 miles on it!

biodiesel

Porky's II: Back to the Energy?

From the Green Car Congress, the recent Republican refinery bill will blow money on this:

• Directs the DOE secretary to establish and to carry out a program to encourage the use of carpooling and vanpooling to reduce the consumption of gasoline.

I have an alternative solution that could solve both without requiring $1 of taxpayer money. It's called the price mechanism. Higher demand and lower production lead to higher prices, curbing demand and promoting construction of new capacity. Problem solved.

To their credit, it also addresses these problems:

• Cuts the number of "boutique fuels"--i.e., different blends mandated by regional regulation or sold to specific markets--from 19 to 6.
• Encourages the construction of new refineries to increase supply by streamlining siting procedures; providing regulatory risk insurance for refiners; mandating the siting of three refineries on designated federal lands; authorizing the president to enter into a contact to have a refinery permitted, constructed and operated to make petroleum products for military consumption; and removing a number of regulatory barriers.
• Promotes new pipelines by altering siting requirements for pipelines and for pipeline expansions.

Cutting the number of boutique fuels was addressed by Jim Hamilton a while back, so, Congress, good job on that. Relaxing regulations to allow new pipelines and to streamline the construction of new refineries is okay, provided they don't "relax regulations" in a way that shields oil companies from liability in case of a spill or damage to a neighboring property. Wish I had enough faith in these guys. Building on federal lands sounds a lot like giving them below-market leases. I'm also skeptical about the requirement to build a refinery for the DoD.

They do realize that these steps may lead to a decrease in the price of fuel, completely undermining the attempt to encourage car- and van-pooling, don't they? These guys do.

Finally, they had to add on these proofs of their own stupidity:

• Outlaws price gouging in gasoline or diesel sales.

• Permits the DOE secretary to sell petroleum products from the Strategic Petroleum Reserve (SPR) to finance construction of the additional capacity needed to fill the SPR to 1 billion barrels.

Run that second one by me again? They are selling the contents of the SPR to make the SPR even bigger? Hey, let's sell off all of the equipment in the factory so we can buy a bigger factory!

And could someone please define "gouging" to me in a way that is specific enough that not everyone would be guilty, and also in a way that everyone would be guilty if they were actually doing it? One definition I heard proposed was that anyone lifting their price more than 10% about the regional average is a gouger. Under that definition, if everyone tripled their prices, nobody would be guilty of gouging.

Meanwhile, not to be outdone on the pork barrel spending, or perhaps complete lack of math appreciation, Sen. Lieberman proposes that we require 30% of all cars sold be hybrids or "alternative fuels" models within 3 years. Um, Sen. Lieberman, the best anyone is predicting they can do by 2010 is between 3% and 7% (for a roundup of forecasts, see here). That includes the ability to design, test, troubleshoot, and fabricate cars, their assessment of fuel prices between now and then, and their ability to do these things as Totoya increases its market share. Meanwhile, Toyota is building them just as fast as they can, but you idiots think that incentives will make them come out faster. Furthermore, the faster you introduce hybrids, the faster we drop the price of oil.

Look, fellas. Leave it alone. We have the more expensive gasoline that every good environmentalist always wanted (not as expensive as they wanted it, but at least more expensive). This will encourage the steps everyone wanted. SUV sales have cratered. Toyota, Honda, and Ford are all selling hybrids. VW and Mercedes are selling turbodiesels. Biodiesel is competitive. Heck, bicycle sales are up. The market works; please don't screw it up.

Energy Intensity vs. per Capita GDP

From the EIA, I plotted this:














Norway and Canada are profligate energy users. "But," you protest, "it's colder there!" Yes, but it's colder in Japan, too. Japan, though, doesn't have much hydro from which to produce electricity; they have to import it all. The expense of importing all of their energy disciplines them to make better use of it. The spot marked "United" is the US.

Gougers? Clap 'em in irons!

At lunch the other day, while listening to Rita coverage, one feller suddenly piped up and said, "I think they oughtta arrest everyone one of them gas station owners that gouges!" Upon further discourse, it appeared that the problem he was addressing was that every gas station in town had raised prices at the same time (it's a small town, so he was probably actually able to check them all). I resisted the urge to ask him to explain the difference between "raising prices" and "gouging" since I doubt whether he uses that pejorative whenever the price on his favorite Lite beer or milk goes up. His reasoning for his agenda was made clear: the gas in their underground storage tanks still cost what it cost when they filled up, "and there ain't no way they all filled up at the same time."

It seems to me that all you have to do is think it out: what happens when one distributor fails to raise his prices when everyone else raises theirs? We don't have to guess: Pacific Biodiesel already tried the experiment and here's what they found out:

"Now, as Hawaii gas prices top $4 a gallon in some areas, the Kings haven't increased their price more than 10 cents a gallon in five years. The price on their Oahu pump is stuck at $2.64 and they don't see it going up much at all because biodiesel is not tied to oil markets."

That's a good point about the decoupling of biodiesel from volatile petroleum markets. However, there are two problems here: the first is that he has been getting his feedstock waste oil from restaurants whose second best alternative was to pay someone to filter or get rid of it. As petrodiesel prices rise, the temptation for others to jump into the market will rise, and there will be competition for that fryer oil. What was once a non-scarce (free) input is going to become scarce (not free). Pacific should raise their prices now so that they can invest in themselves, improve their efficiency, and prepare for the coming competition. The second problem is that as competing prices rise to $4, Pacific's diesel market share should rise to 100%, which they cannot possibly meet with existing capacity. Indeed, that is already the case:

"We've kept prices tied to our costs of production and doing business," said Mrs. King, the company's marketing and communications director. "We started this business because we wanted to prove that we could make a viable alternative ... that eventually could be cheaper."

...

This month, the Kings started registering regular customers so it could control sales.

"It's been nuts the last few weeks," said Mrs. King, who restricted sales on Maui on Sept. 1 to drivers registered with the company and expected a similar restriction on Oahu soon. "We were overselling. We are not taking any new ones."

Production capacity at the two Hawaii plants is 1.2 million gallons of biodiesel a year.

So just as we might have guessed, they had to resort to some non-price mechanism. Registering regular customers was an issue that popped up in biodiesel forums a few months back when prices first started to rise. Many small biodiesel outfits were concerned that they were selling out of fuel to people who had never been customers before, and the regular customers who supported them in the lean years couldn't get any. Lots of regular supporters were angry that biodiesel prices were rising just at the moment they should have been able to say, "See? We were right: biodiesel is a lower cost alternative."

I'm sorry, but I think that raising those prices in accordance with market demand is exactly what the biodiesel producers should do. As I pointed out in my marginal post, the most expensive fuel that must be brought forth to meet the demand determines the minimum market price. The low cost producers reap a profit (a rent, as Ricardo explained). After years of floundering, subsidization, and marginalization, the biodiesel sellers deserve to reap a fortune as the newly minted low cost seller. Furthermore, they can use the money to expand production during this (what I believe to be soon-to-pass, i.e. temporary) price environment. But most of all, by raising their prices, they will be sure of having enough for the regular customers. Given a choice between dino diesel and biodiesel at the same price, most customers will go back to the most convenient station, regardless of what's in the ground. The biodiesel pumps won't run dry faster, so biodiesel regulars can still go out of their way to patronize their favorite producer (and they should!). The enthusiasts ought to be happy that everyone is jumping on the bandwagon: after all, did they want biodiesel to be the fuel of the future only for the enlightened, or for everyone?

To get away from biodiesel for the moment, most gas station operators, especially the independent stations, make very little money on the fuel. The retailers get squeezed in periods of high fuel prices because consumers tend to shop around more when prices are high or rising, so you can't let your price float above your competitors'. If you look at the difference between what you are paying today and current wholesale prices, and compare those figures to 1997 or so (when oil dipped down to ~$11), you will find that the retailers make the same or less per gallon. Accounting for inflation, that means they make less per gallon in real terms, but even if it were the same, they make less profit as a percentage of the purchase price than they did.

Furthermore, those operators typically use gasoline as a loss-leader to get you into the store to buy high margin items like coffee, sodas, snacks, and Lotto tickets. Running out of gasoline effectively kills them off because they still have rent to pay and investments in corn chips that aren't turning over. And one day, they are going to have to pay for the next tank, at a much higher price than "what's in the ground". (And yes, they have to pay that price in California even when the shortage is in the Gulf region, if you believe Jim Hamilton's analysis). Keeping their prices artificially low is a sure-fire way of running out and not being able to afford that next tank. So, yeah, raising their prices is good for them.

But I would go further and argue that higher prices are good for the customers in times of gasoline scarcity. The choice is usually (and falsely) posed as between "gougers" and reasonably priced fuel, but the real choice is between high priced fuel and no fuel. Higher prices force people to decide whether they are choosing the most efficient mode of transportation and whether they are choosing valuable trips. Early indications are that people have been adjusting their behaviors (via Environmental Economics blog, and nice Trek reference, John). If prices had headed skyward in Houston before Rita, there would have been a whole lot more carpooling and less half-empty vehicles leaving the city, and fewer empty cars sitting in empty gas stations. In fact, the lines leaving the city might well have been faster.

From today's Wall Street Journal ($), "Getting a Gallon of Gas In the Energy Capital Is Not So Easy to Do; As Houstonians Return Home, Supplies Run Very Thin; Following the Exxon
Truck" by Gary Macwilliams and Melanie Trottman,

"I've had people making U-turns and getting behind me," he said, beginning to unload his cargo at the Exxon station near Beltway 8. The station was selling gas at $2.65 a gallon, its pre-Rita price. Drivers were clogging the pumps as a line of 25 cars snaked into the station. As one driver plowed over an orange safety cone, Mr. Gonzalez yelled to the driver who merely shrugged before pulling away. "It's unbelievable; they think this is the end of the world," Mr. Gonzalez said. [emphasis added]

Duh! Raise your prices! It's good for the environment!

Anyone want to bet whether or not the station's management is concerned with anti-gouging prosecution? I'd guess that's exactly what is going on, judging by this exchange highlighted at Catallarchy (along my nomination for the best blog post title this month).

GREG ABBOTT, TEXAS ATTORNEY GENERAL: I'm the very first person to step up and believe that our free and open markets here in this country are very effective at setting prices. And that's the way it works all the time except in times of crisis. In times of crisis when people are literally struggling to try to protect and save their lives, it is not a free and open market.

It's a market that is ruled in this case by complete uncertainty and people grabbing the first thing they can. And I might add, it is an artificially created market. In our efforts to go after price gougers, we found one instance down by the Gulf Coast where a gas station had 20 pumps that were available to provide gasoline for customers, but to create artificial demand and to decrease the supply, the gas station shut down half of those pumps until we stumbled upon it.

We found it and we caused them to open back up their pumps and back again the price went to the normal gas price. But we're dealing with a situation where people are having to flee by the millions from the Gulf Coast in order to save their lives. As a result normal market forces don't apply. ... It is only in these exceptional circumstances when law must step in and ensure that people will be protected.

ABRAMS: Dr. Bernstein, your response.

BERNSTEIN: I don't agree. I think that, again, don't hit the American people with more of the poison that has caused the disease. It's governmental restrictions on the market, particularly environmental laws.

ABRAMS: ... That's a nice macro argument. Let's talk specifically about what the attorney general is saying, is he's saying I'm only talking about disasters. I'm talking about a very finite short period of time, period.

BERNSTEIN: Again, what you do by diminishing the price below market levels as you are going ... you're going to increase the demand, more people are going to want the product.

ABRAMS: But everyone wants it ... in a disaster. Everyone wants it, we know that.

BERNSTEIN: First law of economics is the lower the price, the more you increase the demand. ...

ABRAMS: So you're talking broadly and you're saying that there's no merit to the attorney general's argument, which is that in a finite period in a disaster the wake of a hurricane for a short period of time, it's not a good thing for the government to occasionally step in.

BERNSTEIN: Yes, that's right. What you do is cause shortages. What that means is people who want the product and have the means to by the product cannot buy it because you’ve raised the demand ...

ABRAMS: All right, attorney general ... what do you make of that?

ABBOTT: The argument doesn’t make sense. Obviously it's a theory. It's a theory that works in a macro context. It does not work in times of emergency. In times of emergency we as a country have an obligation to help take care of those who are most vulnerable. We are dealing with real-live people, not with theories. We are dealing with people who are trying to flee a very deadly hurricane. ... And they have to get out of the hurricane's way. In order to do so, they should not be bilked by price gougers.

How about a new rule: People who think gougers should be jailed should be ... told to stop making idiots of themselves and to stop providing moral cover to the demagogues.

gas prices
biodiesel

Energy Sources 2

I'd like to update the calculations I did earlier, and include a few handy conversion rules of thumb for anyone thinking about electric vehicles. These calculators are handy:
EIA Kids page
Convert-Me

100 hp = 74.6 kW = ~75 kW
155 lb-ft = ~210 N-m (the torque in a VW TDI 1.9 l engine)

The energy content of a gallon of gasoline is 130.88 MJ. The energy content of a 15 gallon tank of gasoline is 1963.2 MJ. That's also 545.3 kW-h. At $0.098/kW-h for electricity, that "tank" will cost about $53 from the Electric Company (makes gasoline look pretty cheap, eh?).

If you tried to use marine batteries with a 12 V charge and 255 A-h capacity (20 hour discharge rating), you would have to carry 178 such batteries with you. Um, well, actually, using a 1.4:1 charge efficiency (you have to put 40% more in than you get out), you have to carry 250 batteries with you. At 60 pounds apiece, they weigh about 15,000 pounds (6800 kg). It might take up some space, too. And, you're probably going to have to fill it daily with $53 worth of electricity.

If you fill it in 5 minutes, you're going to need 202 A per branch (28 of them, each with 9 batteries in series to drive a 108 V system). That's going to require 5600 A total! What if you take 8 hours to fill it, like at home or work? You still need 32 A per branch, or about 59 household circuits of 15 A each. You better leave for work a little early in the morning, because that's going to take some time to plug in! Of course, this is assuming that you want to fill all the way up the same way you do in a gas station. Electricity is different: the transmission grid is much more widely distributed than the gasoline "distribution" grid, so you can fill up a little at work, a little at home, and so on, rather than making one trip a week.

People running those electric vehicles are a little smug about it, acting as if they are getting something for nothing. The guy in Canada running a Prius on solar - maybe he is onto something. $0.21/kW-h for solar as opposed to $0.05/kW-h for gasoline, but still, at least it's clean (I don't know what the lifecycle costs for the solar panels are, offhand, but I think they pay for themselves within 7 years ... in places farther south than Canada). But the Californian who powers his off the grid? He is getting his energy from petrofuel-powered electricity. Only about 9% of the energy in the coal actually gets into his motor, so all he has discovered is an expensive way to shift the costs and pollution around. And a way to get a lot of attention.

I found one source who claimed that you need about 80 kW of power to accelerate an average car to 60 in 10 s or less. If I use a constant acceleration (2.58 m/s^2), I get 45 kW for a 4000 pound (1363 kg) car. 80 kW seems reasonable if you introduce some inefficiencies.

It is tough to compare internal combustion engines (ICE) and dc motors. A 100 hp (75 kW) gas burner probably gets 100 ft-lb of torque, and a 90 hp turbodiesel gets 155 ft-lb of torque, but a 18 kW (continuous) motor might get more like 100 ft-lb of torque, and it will start generating it at very low speeds. Still, a 75 kW dc motor is tough to find. Here is an example of an integrated electric motor conversion kit for a VW rabbit (the Voltsrabbit), and here is a dc "wheelmotor". The conversion kit includes the 20 kW motor, while the largest wheelmotor is 14.4 kW. So you just install 4, right?

Okay, so the thing is going to be underpowered, and the batteries are going to weigh a ton. Well, more like 7 tons. So isn't there a better way to power the system? I see that the average price you can expect for a PEM fuel cell stack is about $6000-$11,000 for a 1 kW stack. Given that the average engine is said to cost $3000 for a 100 kW engine, that says prices need to be in the $30/kW range for fuel cells to be competitive (I've seen the figure $40/kW in several places 'round the net). I'll be generous and assume the current $7/W is double the manufacturing cost, so they only need a 10 x improvement in cost performance. That's one reason for the skepticism about hydrogen power.

The other reason is the hydrogen itself - where is it going to come from? From what I can tell, even from reading Winning the Oil Endgame, it's going to come from oil or other fossil fuels. So, uh, what is the benefit?

I think this only emphasizes the point that if we want to see more efficient vehicles, we need them to be a lot lighter. With a car that weighs half the one you have now, you can have a motor half as large to get the same performance. That 4 x 14 kW wheelmotor setup (56 kW) becomes feasible.

Energy Sources

I remember coming across an exchange a long time ago in a blog or newsgroup in which one poster was pointing out that consumers received less energy than was available in the amount of coal burned, and that this was proof that we are losing energy. A respondent pointed out that energy must always be lost when transforming from one form to another. That's true, but the problem is that the forms of energy we currently use to "create" electricity (yes, I know, I know) aren't sources of energy, but rather stores of energy. This outline might help students to the energy debates place energy sources conceptually:

Sources:

• Solar
• Nuclear
• Gravitational

Storage:

• Petrochemicals (oil, coal, natural gas)
• Chemical
• Natural
• Biomass
• Manmade
• Batteries
• Fuel (gasoline)
• Non-chemical
• Wind
• Tide
• Capacitors
  

Transmission

• Electricity (the "grid")
  
• Fuel
• Natural gas pipeline
• Gasoline and diesel distribution system
  

Ultimately, we should probably try to get all of our energy from sources, since the stored energy in petrochemicals is probably going to get more expensive to extract. Those sources are what people refer to as "renewable".

For use in transportation systems, we can either hook the system to the grid (electric trains) or carry energy in some sort of transportable form (fuel or batteries). Fuel happens to be a very good way to both distribute and carry stored energy because it is very compact. Batteries and electricity are not as efficient. I recall reading one time that if you tried to fill up electric cars at the same rate as you add energy into standard gasoline powered cars, the grid would only support a few cars at a time (few as in only 5-10 cars in NYC at one time).

[Update: I did the calculations using the energy content of gasoline and the assumption that the average consumer pumps 15 gallons of gas in 5 minutes. That's 1,963 MJ in 300 seconds, approximately 6.54 MW. The Indian Point Nuclear Plant has two generators capable of 971 and 984 MW capacity. Less than three hundred cars could fuel up at any given time. Since they already run at 98% and 88% capacity, the real number of cars that could fuel would be much less at peak hours. You could fill about 570 cars off the Palo Verde plant's three generators. Also, to replace a 100 hp engine (not very large), you would need a 75 kW motor. That's pretty large for a dc motor, especially running about 1681 rpm or so (that's what it would take to go 120 mph in a direct drive vehicle with a 2' total diameter). I think the real problem with dumping that much energy into a vehicle in 5 minutes is going to be the current required; most people won't be able to lift the cable(s).]

That's a problem, but it doesn't completely negate the idea of electric vehicles. After all, you could plug in and trickle charge both at work and at home (and at the supermarket, the fuel station, etc.). Furthermore, people have suggested other means of getting electricity into the car, including solar, fuel cells, and trading batteries at the future version of a gas station. In fact, it has been widely suggested that you could fill a fuel cell car with hydrogen from a filling station, and then plug the vehicle in at your destination and use it to power the grid. Pretty cool, if you can pull it off!

Actually *reading* the article better than reporting on the reporting of the article ... by the author!

I'm not sure how the Pimentel and Patzek study first entered into the blogosphere. Surely people don't read Cornell News Service press releases, do they? But that story got picked up verbatim by several other press outlets, and now it's "science". Do you suppose it's possible that the Cornell News Service was notified of this research breakthrough by David Pimentel, a researcher at ... Cornell?

If you look on the web, you can see that Pimentel, an entymologist, has been an activist for some time. While that's not bad in and of itself, it seems safe to say, based on comments that he has made, that he assumes his conclusions are true, and then sets out to prove them. That's no different than, say, the Department of Agriculture and the Department of Energy, who also "know" that ethanol from ADM corn is a positive energy producer. The problem is that without doing the research ourselves, we can't tell who is right or wrong, and we certainly can't rely on either group to be disinterested observers.

One thing we can determine, however, is that the reporting on the subject lacks depth (DeLong might say "Why, oh why, can't we have decent science reporting..."). Consider this "money quote" included in the Cornell press release:

"The United State desperately needs a liquid fuel replacement for oil in the near future," says Pimentel, "but producing ethanol or biodiesel from plant biomass is going down the wrong road, because you use more energy to produce these fuels than you get out from the combustion of these products."

That's a fairly broad statement, but what does the actual article in question, "Ethanol Production Using Corn, Switchgrass, and Wood; Biodiesel Production Using Soybean and Sunflower", have to say about the subject?

(3) For biodiesel production, there are two problems: the relatively low yields of oil crops ranging from 1,500 kg/ha for sunflower to about 2,700 kg/ha for soybeans; sunflower averages 25.5% oil, whereas soybeans average 18% oil. In addition, the oil extraction processes for all oil crops is highly energy intensive as reported in this manuscript. Therefore, these crops are poor producers of biomass energy.

So, which is it? Is the problem "biodiesel from [all] plant biomass", or "biodiesel from soybean and sunflower"? Since the set "all plants" is not limited to soybeans and sunflowers, it makes a difference, but the meme is passed through sloppy reporting, with titles such as "Corn Ethanol and Biodiesel Net Energy Losers".

The Pimentel/Patzek article contains some hard-to-justify assumptions. For example, energy associated with 11 kg of stainless steel, 21 kg of steel, and 56 kg of cement is included "per 1,000 kg biodiesel oil from soybeans". An additional 160,000 kcal of "Cleanup water" (not my units) is charged for every 1,000 kg biodiesel, but no explanation is made of why this water can't be reused (or how water is measured in kcal - is that the energy to heat it? to pump it?).

By far, however, the energy and cost required to make biodiesel from soy is dominated by the price of the beans and the lime used in their production, according to the article's assumptions. Apparently, lime is only required when rotating soybeans with corn. Under circumstances where soybeans were grown exclusive of corn (for example, after oil tops $180/bbl), it would be reasonable to neglect lime from both the energy and the cost calculation. Do that, and the energy inputs fall from 11,878 to 9,064 kcal. Further, I am going to make the admittedly rather risky assumption that wear & tear on stainless steel, steel, and concrete is negligible, and that I can recycle my "cleanup water" (by using a filter whose cost is negligible over dozens of batches). My new energy input is 8,394 kcal, and my output is still 9,000 kcal (from the note on Table 7 in the article), so I actually have a net energy output of +7%. The cost with these new assumptions is $925.10/ 1,000 kg of biodiesel, or $0.625/kg after "taking credit for the soy meal", and therefore $0.58/l using their specific gravity of .92. That compares favorably to the $0.84 they got, and is less than twice as expensive as petrodiesel. See what a difference a few assumptions make?

I don't see any process chemicals in the paper's description of the biodiesel transesterification process, so maybe he is assuming a different process or that the catalysts are 100% reusable. That would count against renewability. I also don't see any description of capturing the heat given off by the slightly exothermic reaction (that would count in favor of renewability). They didn't subtract the portion of the energy that went into the meal from their inputs, though they did subtract that from their monetary costs (in favor). They assume coal is used in the generation of electricity, but I don't see any reason why solar couldn't be used to provide either the electricity or the steam, or why the water couldn't be captured by cistern (two counts for). That's the way Mike Reynolds would do it.

And I damn sure didn't see any analysis of rapeseed, jatropha, algae or waste cellulose as biodiesel feedstocks, since all are more promising than soybeans or sunflowers. For the cellulose, I maintain that the energy inputs to the plant mass shouldn't even count since they would be committed to the production whether or not the biodiesel is made, and they are captured in that part of the plant used for food.

Dr. Doty does a much better analyzing the assumptions in the comments at Green Car Congress.

What of the lost corn? Most of it goes to cattle feed anyhow, so it would drive up the price of beef. Dr. Pimentel doesn't seem to have a problem with that. Also, it is worth pointing out to the commenters at GCC that Pimentel is hardly "in the pocket of big oil". He's a solar and wind energy advocate. However, I wonder if he knows just how hard the case for wind power is? Or whether he has considered that PV is only net energy producing over a very long period? Suppose it's 4:1 over a 20 year period. A biomass-based fuel that gets only 1.2:1 EROIE will achieve that same output over the same period of time when used iteratively (of the 1.2, plow 1 back into the next season's crops and sell the .2).

Pimentel may well be right about corn ethanol and soy biodiesel. The fact that these two products must be subsidized to be economically viable, and that ADM and others lobby for the subsidies and try to block competitors, should say something. But that doesn't mean that all biomass is untenable, so it would be nice if scientific reporting was up to snuff on this topic.

How do you bet? (Updated)

Let's say that you are very concerned about oil depletion. Not just concerned, let's say that you are Highly Vested in some response to The End of Oil; maybe you own a biodiesel plant. I think you should try to be as profitable as possible for two reasons: one, so that you can plow the profits back into the business, and two, to send a signal to other fence-sitters to enter the fray. You are basically making a bet that oil prices will rise, and you should profit from that outcome.

High petroleum prices will not only drive more people into your arms, they will also temper demand through a variety of mechanisms. You probably see that as a good outcome even if it doesn't have an effect on your wallet because it reduces greenhouse gas emission and other pollution and may have other effects you perceive as beneficial. Therefore, you should also be concerned that prices may go down because lower oil prices will allow people to relax as they did after Saudi Arabia relaxed their embargo in the mid 80s. That means more pollution, more dependence on oil, and perhaps a setup for a crash (if you believe such things).

You aren't certain that oil prices are going to be higher. Let's say that you are only 90% certain that oil prices will go up in the future, meaning (leaving out other possibilities) that you are 10% certain that they will go down. This could be a real problem for your wallet, your business, and for mankind. What should you do?

You should bet that oil prices will decline by hedging your much larger bet that they will rise. You can do this by buying a put option on a contract for delivery some time in the future.

Let's say that oil is currently $60, and you think it could go to $90, but it might go to $30. You are already vested in a bet that it will go to $90 with your biodiesel plant, so you invest a much smaller sum into put options at $60. If oil goes to $90, you are covered. If oil goes to $30, you exercise or sell the option (I'm' not even going to tackle the math on what strike prices or contract prices because (A) I'm not qualified, and (B) your eyes would glaze over). You then use the proceeds (60-30=30, multiply by the number of options) to keep yourself in business through what you think could be a temporary bear run for oil - maybe you live off it, maybe you subsidize biodiesel prices, maybe you plow it back into the plant to increase the profitability.

Of course, buying puts for delivery at the current price is the same strategy you might pursue if you thought all of the peak oilers were flat-out wrong and that oil prices are eventually going back down. Ironic, no?

This discussion on EconBrowser is good - many interesting points about oil futures trading.

Update: As it turns out, there was an article in today's WSJ (sorry, pay site) that described the success of the mirror image of my suggestion. Airlines are in a constant gamble that oil prices will stay flat or decline because rising prices can't be passed on to customers easily. For one thing, the airlines are in tight competition with each other, and for another, they also face competition with buses, trains, and automobiles. Southwest perked up the markets today on news of 41% higher earnings this last quarter. How?

"Southwest has secured financial hedges that limit 85% of its fuel costs during the year to an equivalent average oil price of $26 a barrel. That saved Southwest $196 million in fuel costs in the quarter, reducing the increase in Southwest's per-gallon jet-fuel expenses to 25%, compared with twice that for competitors."

More here, here, and here. The first is an article questioning whether failure to hedge is a breach of fiduciary responsibility, the second is Southwest's annual report, and the third is an academic article on hedging strategies for jet fuel. Another reason to keep flying Southwest.

NatCap - finally!

I finally finished Natural Capitalism after numerous detours and ... well, the final parts of the book were quite painful. I'd like to start summarizing both NatCap and Winning the Oil Endgame, both books penned by Amory Lovins with other authors. Before I do, though, it may take a while to get it into a clear and concise format.

Meanwhile, the first impression I have is that the primary difference between the work of Lovins et al and Julian Simon is not of their data and conclusions, but rather their rationale and prescriptions. Both books extensively document the myriad ways in which people have addressed, are solving, and will continue to solve scarcity problems. While Simon's Ultimate Resource made the case that problems will be solved because of the interaction between incentives, creativity, human capital (education times population), and other factors, the Lovins books make that case that we should solve those problems and that market incentives are insufficient.

To me, it makes no sense to show that people have and are solving problems and then make the case that they should. It's like writing an extensive argument on why you should breathe as a moral duty. There's certainly no moral advantage to doing what you should do or what you are going to do anyhow. When people give to charity, that's arguably moral because they are exercising their free will in the absence of either coercion or material advantage to themselves. When they give to the poor through taxes they would pay anyhow, there is little moral about that. If you have the choice between paying taxes and going to jail, there is no truly free choice made there, no matter if the federal budget was 100% dedicated to charitable support or to making nuclear weapons. (you could make arguments for becoming a tax revolutionary, leaving the country, etc., but that misses the point, which is that doing things about which you have no choice, like breathing, is amoral).

The other aspect of the Lovins argument makes even less sense. A core component to the Lovins argument is that conservation doesn't cost, it pays. Over and over, they make the claim that the savings from conservation measures save more than they cost, and the savings go directly to the bottom line. (As I'll document later in this series, they equivocate repeatedly on this point) If that is so, and based on their extensive documentation of people taking such actions without state-sponsored incentives, then what, exactly, is the need for such incentives?

I have done X in the past, am doing X now, and will do X in the future because it's in my interest.

Simon's interpretation: Eric has done, is doing, and will do X because it's in his interest.

Lovins interpretation: Eric has done and is doing X. It is in his own interest. However, we don't believe that he will do as much as he needs to in the future because markets are imperfect, economists are stupid, and people are irrational, so we need to provide incentives to make sure he does X in the future.

After wading through pages and pages of diatribe against capitalism and economists (all of them unnamed), you finally get to some of Lovins' policy prescriptions: feebates, golden carrots, silver carrots, investment programs, exchange programs, rent-seeking, corporate welfare, urban design and planning, and other such programs. The only case they seem to make for these, other than the general case of enacting Green policies, is that they wish to see change sooner rather than later. Fine, but then why the vitriol against the profession of economists, about which they seem to have studied very little? (I will substantiate that claim in a post by itself)

I agree with them that these things need to be done eventually, but I think that the Simon case is the more compelling for policy prescriptions (especially when bolstered by his own as well as the Lovins data). Laissez faire, or at least, do no harm, including incorporation of Coasian policies, such as tradable emissions permits, but I don't see the need for speed. Why the crisis? Or, to be more precise, why the crisis again? These people seem to forget that (A) they cause at least as many problems as they solve with their past policy prescriptions, such as the Good Roads Movement, anti-trust laws (which prevent vertical integration, price manipulation, and other policies described in NatCap), anti-diesel California emissions laws, etc., and (B) that they keep loading these crises upon us without remorse or recollection about the last gloom & doom scenario that failed to materialize. Global Winter in the mid 70s? England not being a country in 2000? Global famine by 2000? Widespread oil shortages by 1990? None of those bogeymen ever appeared, yet this - THIS! - crisis is a real crisis. Have you no sense of decency, sir, at long last?

Drum on Peak Oil

I liked Kevin's series on Peak Oil, but it seemed a little bit lite compared to what I have been reading on the subject lately (see books below, plus a few on Photovoltaics and Biodiesel). I had comments here, here, here, here, and here.

Two disturbing trends that I saw in the comments and elsewhere in the world: the first is the idea that there is a "true" price of oil, and the second is the idea that people don't respond to market signals until their is some sort of panic-inducing, earth-shaking discontinuity.

A market is not a place or a thing, it is a process. A price is a description of the state of that process at one place and time. The process is the discovery of the cost of:

• production of a product at a place,
  
• transport from that place,
  
• risk factors including weather and political strife,
  
• the productivity of production and transit workers,
  
• the productivity of production and transport capital,
  
• rent of manufacturing, warehousing, wholesale, and retail space,
  
• taxes in each place and in transit,
  
• regulatory conditions at the production location and in transit,

as well as

• the same product at a different location and transport from that place,
  
• production of competing products,
• the opportunity cost to each producer (what could they have invested in or manufactured instead of this product? How many could they have manufactured with different pricing and feature points? How many could they sell to people in a different location?),
  
• the opportunity cost to each transporter and warehouser (how much are they losing by dedicating assets to this rather than another producer?),
  
• the opportunity cost to each retailer (how much are they losing by dedicating floor space and sales staff time to this instead of other products?),

as well as

• the cost of deferring the purchase decision,
• the opportunity cost to the consumer (the foregone value of things not bought because of the proximate purchase),
• the cost of a substitute product or manufacturer

I'm sure this is not a complete list, but it is sufficient to show that a price aggregates a tremendous amount of information from producers, their competitors, and consumers into a single data point, and that the constituents of price are so complex that it should be more surprising that they don't regularly fluctuate than that they do.

I have a co-worker who is bothered to the point of distraction that everyone on a plane is probably paying a different price. He believes that this is inefficient, and I believe that he believes that because he believes that there is a One True Price. All of the other prices fluctuate around the OTP because of "unnatural" discounts and "unnatural" markups.

I dare you to find any product for which everyone pays the same price. Gas? Drive around town and note the differences, then consider the fact that people don't all fill up on the same day and contemplate the daily variation in gas prices. Milk? There are different prices in the same cooler in a single store, prices are different from store to store within the same chain, and prices vary from one chain to another. Cars? Except for possibly Saturn 8~) , nobody pays the same price at the same dealer, much less in different dealers and different cities. So why should airplane seats be any different?

It has been a while since I've seen the claim, but it used to be common to find people on the internet going on about how markets can't be efficient because one day Enron is worth billions and the next day it's in the tank. They ask, "Was it worth billions one day and then that changed the next?" The answer is obvious that it was not, but the market constantly adjusts to new information. The market saw to it that they did "collapse in a wave of accounting scandals" long before regulators and prosecutors got in on the act. Efficient doesn't mean omniscient.

The second disturbing problem is that there seems to be widespread belief that people don't respond to market signals, especially with regard to oil and energy. The geologist's approach, as Julian Simon thoroughly explains, is ignorant of human nature and the ability to act on the price signals coming from the market. That approach, shared by the Ehrlichs, Browns, and Meadows of the world, takes past demand trends to make future forecasts. Then they make a claim about production falling off, and then wildly exaggerated claims about shocks and price spikes. Ironically, that is exactly what they accuse Simon of doing, reversing production and demand (that he shows production going up forever and demand falling off). Unfortunately, the Club of Doom just can't seem to understand the logic of the situation.

My guess is that the short-run demand curve for gasoline is nearly vertical near the current price at any given time, with perhaps a slight knee at higher prices. That is, gas prices can fluctuate up and down on a daily basis a few cents, and people will not change their behavior one bit. However, if gas prices spike way up above some psychological point (e.g. 20 cents above current price, or above the next higher quarter-dollar), people will become a little more thoughtful about their use of their vehicle. My other guess is that the long-run demand curve is more elastic; this guess is born out by recent news about flat sales for heavily discounted SUVs, and long lines for ... ah, ... Prii? What is the proper plural for Prius? The rate and persistance of price rise are therefore additional factor in people's decision-making processes.

Prices can rise for a variety of reasons (see above), not just because supply starts to dwindle. If demand outstrips supply even as supplies increase, prices may rise. It looks like the reason for the current high price of oil is due to rising Asian demand (though Venezuelan politics may not be helping the situation). Therefore, we need not hit a peak in production in order to start seeing the sustained higher prices that will lead people to buy conservation.

When (indeed, if) we ever see a peak in production, it is likely to come about slowly. Shell, ExxonMobile, and BP aren't all going to wake up one morning and say, gee, we don't have any new projects on the horizon and just within the last 24 hours the production of individual wells started to decline. Instead, what we are likely to see is that new production comes online slower, with longer gaps in between new finds, and those findings are smaller than previous fields. It won't be sudden, but rather will play out over a period of years (because that's how exploration and extraction work). During that time, prices will drift higher gradually. As they do, fields that are already online but not economically viable to pump will be brought online.

Furthermore, existing technologies that are in the lab or in the startup stage will be brought online as prices rise. If an existing technology is feasible at $3/gal, we won't see much of it until gas gets to $3/gal. That's no surprise and makes perfect sense. If the existing technology was feasible at current prices, it would be available now. Once gas is permanently over that point, we will see the market share of the new technology begin to accelerate. Claiming that X is not and will never be a viable alternative for gasoline on the basis that X costs $3 while at the same time claiming that gasoline prices will easily climb to $5 or more is obviously faulty logic. Who would pay $5/gal when a technology is available that will cost $3/gal?

So I believe that as we near peak oil (and I believe that what we will see is peak demand, not Hubbert-style peak geologically viable production), demand will have more of an effect on prices than production, that the price rises will be as gradual as or even gentler than what we have seen so far, that the sustained higher prices will drive conservation efforts, and that 10 years hence, inflation-adjusted oil prices will be lower than current prices even after oil sales have declined (again, due to demand reduction, not supploy disruption).

I am willing to wager $1000 on it.

BTW, if you think oil prices will spike, invest heavily in oil companies. Investing in Shell or BP has the added attraction of being a bet on hydrogen and photovoltaics.

Woohoo! Smart finally here

First stop: Reno (Jalopnik, by way of Green Car Congress). Smart, I get. This, I don't. Sorry, Chris. I just don't. I mean, when are they going to finish with the beta version and release the real thing?

And this is just too fucking cool: a diesel Lamborghini.

FarFromPumpin - FME

I posted this answer in a Samizdata comment section to a post on global warming.

What can a free market environmentalist do?

1) Work on your own environmental footprint where it's in your self interest. Replace your incandescents with fluorescents, consider an efficient vehicle the next time you buy one (VW TDI, Smart, Toyota, Honda, even Ford has a hybrid Explorer), and so on.

2) Insist that your government follow the greenies advice where the cost/benefit makes sense. For most people, things like solar and wind power are hard arguments to make because the payoff takes so long (10, 20, perhaps 30 years), but the government will probably still be occupying its buildings and conducting business as usual 30 years hence. Also, Amory Lovins' research for the DoD's use of fuel seems to me to be correct: it takes 9 gallons or so of fuel for every 1 gallon delivered to a weapons platforom. Therefore, the DoD should invest heavily in lightweighting and alternate power systems for its vehicles, vessels, and aircraft.

3) This is more controversial, but here goes: insofar as you think Coase was correct, someone has to enforce tradable emissions permit rules. Therefore, you should support well-designed cap & trade programs.

Those steps, though not consistent with a night watchman state, are consistent with a libertarian ideology.

The rest of the comments are here. Some of them are quite interesting. Many seem to be against any kind of non-private action, but there are plenty of expensive public good suggestions made. Nobody explains how to square the apparent contradiction (though, as Coase also showed, sometimes lighthouses are produced privately). Also, there is this.

My assumption is that even if global warming turns out to be due to albedo or other explanations, the buildup of CO2 in the atmosphere is undeniable and there is a possibility that we could induce forced warming. By "we", I also mean China and India as their economies catch up (and someday, we hope Africa joins the party).

However, we develop cleaner and greener technology every year. After all, nobody wants to haul or heat waste products like sulphur, so it's in our own best interest to reduce pollution. The automobile is ripe for vigorous innovation, since only about 1% of the energy consumed goes into moving the payload (you, the driver) from A to B (you are about 5% of the mass, and only about 20% of the energy goes into moving the vehicle from A to B, while the rest goes into repeated acceleration from stop, fighting the wind and road friction, and making noise and heat). As a result, newer entrants to the industrial club get to leapfrog past old technologies straight into new ones. Most Chinese cell phone users never owned a landline, so the poles, repeaters, cables, and handsets won't have to be built and therefore Chinese telecommunications have smaller environmental footprints than if they had to build two systems (like the West did).

So, for the most part, the problem will become solved because it is in our interest to have it solved even if it weren't for the global warming potential.

Farfrompumpin - Oil's effect on the economy

Okay, I admit it, I like blogging about energy. There's a story in the NY Times today that asks the question about why the spike in oil & gas prices haven't negatively effected the economy. I contend that they have - both because I believe that there is a lot of trepidation out there because of it (see recent news on inflation) and because of the related heavy weight elephant in the room which may be partly to blame for the prices, namely the occupation of Iraq. The thing I found most interesting in the NY Times article were the accompanying graphics, which showed that pump prices are still about $0.75 below the 1980 inflation adjusted prices ($3 vs. $2.25), that the amount of energy required to produce a dollar of GDP was still way below what it was then (9000 BTUs vs. 17 ,000 in fairly steady decline since then), and spending on energy is mostly below what it was even a few years ago (6.5% of GDP on energy now as opposed to 8% in 73, exploding to 13.5% in 82, falling to 8% in 85, steadily declining to 7% in 96, then dipping to 6% in 97-99, and back up to the current level), but that the amount of household income spent on fuel, while below what it was in the 80s (8%), is starting to tip up ever so slightly right now (from 4 to about 5%). All of these are rough estimates from the charts.

The increasingly weak link between energy and GDP vs. what it was in the days of Arab Oil Embargos is well known, but the tip-up in household spending is something the Bush Administration should be alarmed about. And possibly take some blame for (though of course they can't be blamed for the fact that the Chinese are also putting demand-side pressure on the price).

Incidentally, the link to Carl Bialik's article in today's Wall Street Journal about aging statistics (statistics that have aged to obsolesence, not stats about the elderly) is funny because it discusses the increasing size of gorillas, i.e. "the million pound gorilla". Carl suggests that you try googling for gorilla and various weights in 100 pound increments. If the WSJ would make this stuff free, I'm sure there would have been hundreds of links to it by now.

Two new cars I would like to drive

The first is, of course, the Smart car. Use the United States selection to see some interesting marketing information, especially regarding safety. Use a European country to see what models are possible (they will only be marketing a limited number of models in the US at first). I'd really like to try the 101 hp Brabus roadster. It weighs only 790 kg, and the engine weighs only 60 kg (that's about 132 pounds). That gives it Toyota MR2-like performance. I would be more interested in the regular Smart car if I lived in a big city where parking was at a premium.

The other is predominantly electric battery powered, and it has very interesting design points. Interesting, but perhaps a little too quirky. And with a top speed of 80 mph, I doubt it's an exhilarating drive. Good way to show off a technology, however. Hat tip to Kathleen for the links.

Modern protectionism

Two recent statements about protectionism/subsidization got me to thinking about some big trends. The first was an article from Doug Bandow on how other countries - especially Europeans - free ride on American development of new chemical entities and pharmaceuticals. For support, see here and here. The second was an article by Peter Drucker (by way of MR) discussing how the Bush steel tariffs have distorted the steel-using industries' use of materials. In both cases, we had an unanticipated consequence. My question is: what other similar forms of protectionism and subsidization may be leading to long-term and major changes in the world that other nations can free ride?

A1) Transportation. European countries have artificially induced oil scarcity in their countries through taxation, and Japan has an actual scarcity. This forces their consumers to seek more fuel efficient automobiles (turbo diesel in Europe, hybrids in Japan). Will America be able to free ride off of their policies? Or will they be off of oil before we are, while our Big 3 are relegated to a niche market (light trucks)?

A2) Transport again. Will we be able to free ride off of the development of light rail in other countries? I think this is a tougher problem because the population density in America outside the NE Corridor is so much lower than that of Europe and Japan that it simply isn't feasible outside that area. Berlin's population density is 11,400 inhabitants per sq. km in the inner city, Paris has a density of 20,000 inh./sq. km in the inner city, New York has an inner city density of 10,194.2/km² (26,402.9/mi²), Tokyo is 13,333 / sq. km, London has about 5100 /km², but a place like Los Angeles or San Francisco only have about 2400/km^2. As you can see, between Dallas and California, except for large urban centers like Denver, the density is too small to support any kind of mass transit.

A3) Energy. Will the US be able to free ride off of Japan's development of methane hydrates? Off of Portugal's and Holland's investment in wind generators?

Oil Peak and overhype

This is funny: three posts in a row dealing with oil. Not intended, I swear.

Okay, today I'm looking around for things related to my VW Golf TDI. I come across a couple of sites specifically called something like "Peak Oil Awareness Group." More information here. According to a post in one, you should sell your SUV because in a couple of years or months, you won't be able to give it away. No kidding! Someone actually believes that.

One of them (maybe the same poster) referred readers to this, the Oil Endgame. I've read about this book before, maybe even tried to tackle this online version. 330 pages on the computer monitor isn't my idea of fun, though. Although it seems relatively even tempered (the foreward is by George Schultz, not exactly the Marxist-in-environmentalist's-clothing of-the-week), there are a few breathless moments:

The Prius is a 5-passenger, near-zero-emission, 55-mpg, ~$20,000 midsize sedan

Near zero emission? Um, no, it burns gasoline and gets about the same mileage (50) as my car. In any case, there is another bit of misdirection in that same section:

Unpopular? Ever since it went on sale in October 2003, the Wall Street Journal has listed it as the fastest-selling automobile in the United States, flying off dealers’ lots in 5–6 days ....

Well, not really. When it first went on sale, I easily test drove it and found it to be a complete dog. The dealer even smirked when I asked to take it out on a test drive. The original model had no cruise control (the Prius, unlike the Insight, was built more for urban than for highway travel). It was only in the next model year that they started "flying" off of dealers lots.

The other misdirection to that statement has to do with the amount of time they sit on the lot. Toyota is not only a lean manufacturer, they are the lean manufacturer. I think it takes Toyota less than 2 weeks to build a car to order, and they don't build until they are ordered. The whole point is to minimize the amount of time a car sits on the lot. As soon as someone buys that one, the dealer orders another, and it shows up 2 weeks later. This is as opposed to, say, Ford or GM, where they order dozens at a time just to get into the chain. They all show up at once and then sit on the lot for months.

As an aside, I have been charting my performance. I noticed that the cost per mile for fuel finally tipped up from $0.03, where it has been for several years, to $0.04. Upon further investigation, I found that it had tipped from $0.033 up to $0.035, which Excel rounded up. The reason? More aggressive driving, perhaps? No. Starting in Fall '04, the price of fuel started going up and stayed up long enough to have an effect on my long-term costs. If I was driving an SUV, my mileage would be about 1/3 of what it is, but gasoline hasn't stayed up as high as diesel, either. Still, it would cost you about $0.10 per mile to run an SUV, meaning you spend about $10k in fuel for every 100k miles you drive, while I only spend about $3k. You buy another car, I buy a good computer.

Accelerating long-term dependence on Arab Oil

I can't remember when and where I saw it - a couple of years ago in The Economist, I think. Anyhow, it was a graphic that showed proven reserves in each country. Saudi Arabia has so much more than even the second place country that it's not even close. 6:1, I think. Anyhow, the point was made that anyone who decides to cut himself off from Saudi Arabia is simply going to speed up the day when his own reserves are gone, and Saudi Arabia will be all the more dominant.

The Pump ANWR fervor will only lead to faster depletion of the stocks within our own territory, at the expense of what is supposed to be untouched country. Yeah, it's probably pretty desolate up there. Yeah, there's probably less than a gross of people who have ever visited. But what's the point? We're better off in the long run letting oil prices rise so that people will shift their spending habits.

And after looking at the Energy Bills spewing forth from both parties a while back, I suspect there's no small amount of pork in the offing.

Open Source Automobile

For a long time I've thought that there could be an Open Source automobile. There would be many benefits, but also many problems. Here are my two starting points for thinking about this: the VW Beetle (old one) and RedHat.

The Bug was an incredibly versatile platform for a true People's Car (Volks Wagen). From the Baja Bug to chop tops, lowriders to ragtops, you can still find dozens of websites devoted to the car. It nearly was an open source vehicle in the sense that you could buy nearly any part (with the possible exception of the pan) from an aftermarket manufacturer. There were even shops dedicated to selling those parts, usually complete with a knowledgeable salesman/mechanic who can advise you on modifications, a rarity even at most factory-authorized dealerships these days.

The other model in my thinking has been RedHat. How do they make money selling something you can download for free? The way I understand it is that they make money three ways: first, they combine the free stuff into an easy-to-install package, saving you the time and effort to download and burn it all. Besides, if it's free off the internet, but you need to get on the internet to access it, you have to have something already running to access the free stuff - that's either a waste (buying an OS just to download a free OS) or an incredibly nerdy thing to do (having multiple computers in your house or using your friend's computer to download). The other ways RedHat makes money is by selling documentation and training. Some of the founders even work on custom applications.

Okay, so how do you transfer those models into brick and mortar manufacturing? Also, how do you deal with regulatory, quality control, and profitability concerns?

Here's a rough sketch of how I think it can be done.

1. Get a design made at a design house to your specifications. I'd want something that was fairly plain but that invited customization, like a WRX.
2. Build several of them and work the kinks out.
3. Build a short production run and have them tested at the Insurance Institute.
4. Resolve all of the problems and test them until you have a high rating.

Great, now you've got a well-designed car. What about the open source part?

1. Get a website and publish the full drawing package. The drawings are available contingent on the user's agreement not to use them for profit unless he has been certified by you to manufacture the parts or vehicles.
   
2. Begin building your own vehicles.
3. Offer a certification service and charge money for it. Perhaps charge a percentage per part or car.
   

Anyone could use the drawings for free to make their own car. Anyone wishing to make parts or cars for profit would have to become certified.

The certification service would have two stages: one for the manufacture of parts, and another for assembly of completed vehicles. It would consist of an initial inspection of their plant and processes, and subsequent sampling of their products. Heck - you might want to use the better manufacturers for your own cars. People receiving such certification are getting the benefit of aready-made, proven, safety-tested design and the right to use your name or logo as a way of conveying the mark of quality to consumers. Once a network of certified parts manufacturers pops up, consumers will know that they can get high quality replacement parts. Small machine shops could use this to supplement their income, and a network of certified assemblers would make a ready-made network of repair shops.

By the way, this is almost an ideally Lean manufacturing process. Dozens of small shops located near their customers, each building one at a time. The certifying team should probably include a lean sensei to advise each shop on the latest poka yoke benchmarks.

The great thing about open source software is that dozens of small tinkerers can work on code to improve and/or customize it. I haven't talked about that aspect, yet. Basically, I envision a similar type of arrangement as Netscape has for Mozilla: anyone can tweak the code, but only the official version can be called Mozilla. If you want to make a new fender, that's fine, but it will not be certified. The Open Source Auto car company should establish a discussion forum on their website to allow people to introduce and trade new parts ideas. When something appears to be really popular, build a car with it, crash test it, and certify the new part and/or assembly.

I can see where version control would become a major challenge. The other possible avenue is that you have a few certified assemblies, but many parts certified for aftermarket use only (not manufacturing). Manufacturers who want to use the uncertified parts for original equipment manufacture are on their own - it's no longer a certified vehicle they are selling. Which brings up the problem of watering down the brand for everyone else.

You could possibly control this by phasing out older certifications and announcing up front that their would only be a few alternative assemblies allowed. Let's say you allow five powerplants (gas, turbodiesel, turbo gas, hybrid, electric), five body styles (plain, convertible, off road, hot rod, utility), who cares about color (not a safety issue), three interior designs (cloth, leather, performance). I think it's important right up front to attract two crowds: the street rodders and the enviromentalists. Once they find out about a company that encourages people to tinker with their cars, you're going to end up with a very creative design team.