Recently in Energy markets Category

Michael Giberson

Maybe you already knew this, but I just learned a few days ago that the United States Association for Energy Economics has a working paper series online, hosted at the SSRN. Your research paper can be included (see guidelines here).

And while we're talking about the USAEE, note that the 2008 annual meeting will be this December 3-5 in New Orleans. Next year's meeting of the International Association for Energy Economics will be held June 21-24 in San Francisco.

(HT to Cheryl Morgan/MorganEnergy)

Michael Giberson

Up the Yangtze, a documentary by Yung Chang, examines changes along the Yangtze river in China due to the construction of the Three Gorges dam through the stories of two Chinese youth who took jobs on a cruise ship. The cruises are called "farewell tours" because they offer the chance to see parts of the Yangtze valley that will disappear under the reservoir created by the dam. In all, an estimated two million people will be displaced by the reservoir.

The film offers a slow-paced, almost meditative look at changes wrought by the growing body of water. Sorry energy policy geeks, while Up the Yangtze offers a few glimpses of the dam under construction, you get very little information about who, what, where, and why the dam. Instead you get a human interest story, a small slice of life. The documentary doesn't rush you to any particular conclusion, just gives you material for further contemplation. I enjoyed it.

Michael Giberson

Sebastian Mallaby provides a clear exposition of what might be considered the mainstream economics story of why "speculation" is not to blame for the current high level of oil prices.

[A] speculator can buy paper oil only if someone else sells to him. For every trader who bets on a price rise, there must be another who bets the opposite. So an increase in the number of speculative players does not show whether prices will move up or down....

What matters is who those players are: Will they aggressively push the ball up the field, or will they retreat? Sometimes the bulls are more eager than the bears, and prices spiral upward. But this is not some autonomous force that comes out of nowhere. If the bulls have the upper hand, it's generally because supply and demand favor higher prices. The fundamentals of physical oil drive the psychology around paper oil more than vice versa.

... The uncertain connection between speculation and price trends is clear in recent history. The Commodity Futures Trading Commission reports how much paper oil is bought and sold by commercial users -- oil companies, refiners -- and how much is bought and sold by speculators. During the first seven months of 2007, speculators as a group tripled the amount of paper oil they owned, buying it from commercial players. But since last August, speculators as a group have not added to their positions -- yet this was when oil prices went skyward.

It would be too much to claim that futures prices don't influence players in the physical market. But to the limited extent that speculators' influence is real, this is probably a good thing. If speculators see that oil suppliers are headed for trouble and that oil demand is trending up, they express their expectation of a higher price via the futures market. This can deliver a valuable message: Governments and consumers had better adjust before shortages get even nastier.

Tyler Cowen at Marginal Revolution has also been addressing oil prices, most recently seeking to reconcile current high oil prices with a belief in the overall correctness of the Julian Simon view that resource prices would continue to fall in the long run. I don't find my position listed among Tyler's list of possibilities - I'm closer to Alex Tabarrok's view expressed last week: "Finally, on oil - who really cares what the price is? The issue is energy, not oil. I am confident that the long run price of energy will fall."

Well, many of us care about the price of oil in the short to medium term, after all we have assets (i.e. automobiles, pipelines, refineries, oil rigs, factories) with usefulness tied to the price of oil. But in the long run, as Alex says, it is energy, not oil.

Michael Giberson

An article in the Washington Post discusses what you can do when building a new home to help keep energy costs low. Here Michael McKechnie of Mountain View Builders in Berkeley Springs, WV, provides a summary:

McKechnie outlined the major steps to building a house with the lowest possible energy costs and perhaps an eye to going off the grid at some point: "Design your house so it uses the sun's passive energy to its fullest potential, make sure the envelope around your house is tight, invest in renewable energy systems that use the sun and the wind to make free energy, and buy heating and cooling systems that use energy more efficiently."

Just like it is complicated and less effective to retrofit a ten-year old SUV to be more efficient, it is complicated and less effective to retrofit old homes. (Which doesn't mean some steps are not cost effective, of course.) The Post article provides a survey.

And what about that ten-year old SUV? Have you considered taking a rickshaw?

Michael Giberson

The marginal cost of generation from a wind power generator is essentially zero, which means once the generation is installed you pretty much want to use every bit of wind power generated. A problem, of course, is that wind-based generation is not particularly dispatchable. You don't tell it when to run, you just try to use as much of it as you can while it is available.

A further wrinkle is that, at least for some wind power locations, the winds are strongest overnight and early morning when the demand for power is lowest. And, when wind power is generated far from the consumers who'd like access to cheap power, it requires adequate transmission capability to move the power to the people. If the transmission system is limited in its ability to move all of the power available, then some of the wind generation capacity will be wasted.

Ramteen Sioshansi and Walter Short observed that there may be mutual benefits available for a power system with a large share of wind generating capacity from also implementing real-time pricing for ultimate consumers. In a paper they describe simulations they ran using data from Texas to examine the potential benefits of real-time pricing for use of wind power resources.

They find useful synergies:

• Real-time pricing tends to smooth out the normal ups and downs in consumption, because consumers tend to decrease consumption in high cost hours (which are the high demand hours), and to increase consumption in low cost hours. Smoothing out consumption means that the transmission system is less likely to be congested and therefore it is less likely that distant wind generation will be shut in by transmission limits.
• In addition, because wind power comes at a low marginal cost, whenever it is plentiful it will drive down electric prices. That effect encourages consumers to adapt their consumption to the patterns of wind power availability.

It is true that the effects can be small, but even with some conservative assumptions in the simulations, the authors found that usage of wind power could be increased by more than 80 percent. Don't get hung up on that number, which very much relies upon the assumptions going into the simulation. Take away the idea that a series of small marginal adjustments in consumption, responding only to price signals, can have significant effects on the use of low marginal cost renewable (or any other form of) power generation.

The authors also note that many political analysts object to the idea of exposing consumers to highly variable real-time power prices. They re-ran the simulations limiting the real-time pricing regime solely to commercial and industrial consumers. Commercial and industrial consumers represented a little over 60 percent of the demand in their historical data, and the new runs of the simulation showed that just about 60 percent of the benefits were retained with the more limited application of real-time prices.

(Like the Hogan talk mentioned yesterday, the Sioshansi and Short paper was presented at "The Economics of Energy Markets" conference at IDEI.)

Michael Giberson

Recently, William Hogan gave a presentation at IDEI and the Toulouse School of Economics titled Electricity Market Design: Coordination, Pricing and Incentives, or, as he more colloquially puts it early in the talk, "Electricity market pricing, and how to think about it."

The 42 minute video is available from the EU Energy Policy Blog. Slides from the talk are also available.

Hogan's presentation was part of a conference on "The Economics of Energy Markets", the 2008 version of the annual Conference on Energy at IDEI. Papers from the conference are also available.

Michael Giberson

That is the goal. Few numbers show up in the Christian Science Monitor article to support that claim, but the people discussed are launching a business with the goal of improving the design further and then go to production. The key innovations appear to be in the cheaper process to produce the appropriately shaped mirrors and build the supporting structure.

Whether they ultimately succeed or not, the article comes with a video showing a board bursting into flames, so at least the designers are having fun:

Out on a lawn at the Massachusetts Institute of Technology with joggers and traffic passing nearby, Spencer Ahrens is demonstrating what looks like either the future of solar power - or perhaps a death ray.

Thrusting a 12-foot board up into the air in front of a large mirror-covered satellite-type dish, Mr. Ahrens, an MIT graduate student, waves the board, looking for an elusive sweet spot where reflected sun rays converge.

With three student teammates looking on, he steadies the board once its tip begins to glow. Shining white in the reflected solar rays, the wood suddenly bursts into flames. Students laugh as smoke billows in the breeze.

This burning-board trick may seem like a YouTube stunt, but it's actually a visceral demonstration of a device with a serious purpose: to make super-cheap solar heat.

Lynne Kiesling

The New York Times has an article today that supports the anecdotal evidence I reported last month: consumers are substituting out of low fuel economy cars and into high fuel economy cars.

With gasoline prices topping $4 a gallon, consumers are overwhelming dealerships with demand for the littlest vehicles in the showroom.

Mr. Libby said that the tiny Honda Fit is on a dealer's lot an average of 11 days before it is sold, half the time of traditional quick sellers like the Cadillac CTS and Mercedes-Benz C300 luxury sedans.

"These are amazingly low numbers for a car of this type," he said. "If gas prices stay where they are, I think we'll see this for quite a while."

Hybrids are even more difficult to buy. Four of the 10 fastest-selling vehicles are hybrids, led by the Toyota Prius, which sells within four days of arriving at the dealer, according to J. D. Power. The average time to sale for the industry in June, by comparison, is 57 days.

But while inventories are low, manufacturers cannot move quickly enough to increase production of popular small cars like the Toyota Corolla, Honda Civic and Ford Focus.

Michael Giberson

What is the current and future state of regional wholesale electricity markets?

FERC wants to know, and so it has assembled a panel of experts to appear at a July 1, 2008, technical conference to be held at the Commission. All interested persons are invited to attend, and there is no registration required.

The conference also will be webcast - the official notices says it will be available for a fee, but the event page on the Commission's web calendar says the webcast is free. I don't know which version is correct, but maybe someone from FERC will clear up the confusion.

The agenda (as included in the second notice):

Review of Wholesale Electricity Markets

9:30 Opening Remarks

9:45 ISO New England, Inc.

Gordon Van Welie, President and Chief Executive Officer
Hung-po Chao, Director, Market Monitoring

New York Independent System Operator
Karen Antion, Interim Chief Executive Officer
David Patton, President, Potomac Economics

PJM Independent System Operator, Inc.
W. Terry Boston, President and Chief Executive Officer
Joseph Bowring, Manager, Market Monitoring Unit

12:00 Break

1:00 California Independent System Operator

Yakout Mansour, President and Chief Executive Officer
Keith Casey, Director, Department of Market Monitoring
Frank Wolak, Chairman, Market Surveillance Committee

1:45 Midwest Independent Transmission System Operator

T. Graham Edwards, President and Chief Executive Officer
David Patton, President, Potomac Economics

Southwest Power Pool, Inc.
Nick Brown, President and Chief Executive Officer
Richard Dillon, Director, Market Development and Analysis

3:15 South and West Regions

Charles Whitmore, Senior Market Advisor Division of Energy Market Oversight, Office of Enforcement

4:00 Adjourn

For those of you interested in looking this stuff up on the FERC website, the official docket number is AD08-9-000.

Lynne Kiesling

On Wednesday Toyota announced that they would release a plug-in hybrid vehicle by 2010, and that they will manufacture hybrid versions of all vehicles over the next 20 years. The battery in the PHEV will be lithium ion, but Toyota is working on developing nickel metal hydride batteries, as well as other battery technologies and storage options.

Toyota seems to be taking what I think of as a portfolio approach to our vehicular future, as described in this Wired article:

The company's ambitious "low-carbon" agenda includes cranking out 1 million hybrids a year and eventually offering hybrid versions of every model it sells. In the short-term, Toyota says it will produce more fuel efficient gasoline and diesel engines and push alternative fuels like cellulosic ethanol and biodiesel. It's also pumping big money into lithium-ion batteries. With fuel prices going through the roof and auto sales going through the floor because of it, Toyota president Katsuaki Watanabe says the auto industry has no choice but to move beyond petroleum.

"Without focusing on measures to address global warming and energy issues, there can be no future for our auto business," he told reporters in Tokyo, adding, "Our view is that oil production will peak in the near future. We need to develop power train(s) for alternative energy sources."

He then goes on to point out that oil supplies will not dry up and internal combustion will not disappear overnight, and that a portfolio approach will address the various uncertainties and differences in local market conditions across time and place.

Lynne Kiesling

Another rollercoaster day on oil markets ... here's an interesting observation from a Bloomberg article on the topic:

"Refiners are managing the crude supply they have on hand because they are worried about weak product demand,'' said Tim Evans, an energy analyst for Citi Futures Perspective in New York. "Both gasoline and distillate demand over the last four weeks are down from a year ago.''

Fuel consumption averaged 20.4 million barrels a day in the four weeks ended June 6, down 1.3 percent from a year earlier, the department said.

U.S. gasoline demand increases during the summer, when Americans take to the highways for vacations. The peak- consumption period lasts from the Memorial Day weekend in late May to Labor Day in early September.

On a related note, I am glad to see more and more analysis and discussion about the interaction of the weak dollar and higher commodity prices (including oil, metals, and food). One reason commodity markets are so unsettled right now is that interaction, and while I'm not expert enough to comment on it, I'm glad to see it discussed (in, for example, Steve Hanke's op-ed in the Wall Street Journal yesterday on rice prices).

Lynne Kiesling

There are a couple of very interesting recent solar developments that have substantial economic implications. First, the blue sky stuff: courtesy of Slashdot, a team of researchers in the Netherlands have demonstrated avalanche effects in semiconductors that can be used in solar cells (here's the original article). Avalanche effects mean that instead of having a 1:1 relationship between a photon and an electron, in which 1 photon releases 1 electron, it's physically possible in these nano-scale semiconducting materials to have 2:1 or even 3:1 -- 2 or 3 electrons released per photon in the material. This means twofold or threefold increase in the possible energy intensity of the solar cell material. These nanocrystals are even inexpensive to manufacture. How cool is that?

What are the economic implications of this new material and new knowledge? The low energy intensity of solar cells has been a factor in making solar a less cost-effective means of generating electricity than fossil fuels, which are extremely energy intensive. This avalanche effect can mean smaller, more energy intensive solar cells, which changes the cost structure for solar. I think it will certainly shift the long-run average cost curve downward, which creates an opportunity for solar retailers to reduce prices. A lower solar retail price shifts the price ratio between solar power and all other electricity power sources. For example, the price ratio between solar-generated and coal-generated electricity would shift such that at the margin, consumers would substitute out of coal-powered electricity and into solar-powered electricity. If I were better at generating the isoquant and indifference curve graphs electronically, I'd show it here graphically ... but the logic is straightforward.

In brief, innovations like this one increase the margin on which solar can compete with fossil fuels.

Another solar development that's amenable to economic analysis is described in this Financial Times article from Monday.

The solar power business is bracing itself for a collapse in prices that could lead to a shake-out in one of the most promising areas of the renewable energy sector.

However, a price slump could hasten the take-up of the technology which would help boost the overall volume of future activity, even as margins fall, industry analysts and officials add.

Expectations of falling prices have been partly sparked by a surge in the level of manufacturing capacity for solar panels. This is likely to lead to demand outstripping supply for the first time in years.

Another factor driving prices is uncertainty over the degree of government subsidies in some key markets for the technology.

Interesting, interesting, interesting. Over the past decade the demand for solar cells has shifted out, leading to increased prices and to supply pressure on inputs like silicon (which is also an input into a lot of other products, so it's a very competitive global market). Now we are starting to see the supply response, with more solar manufacturing capacity coming online and the use of other materials, as entrepreneurs wanting to enter the market innovate around input supply constraints and costs. This market entry is shifting out the supply curve, and from the sounds of the FT article, the magnitude of the supply shift is large relative to current demand. Consequently, they anticipate a fall in solar cell prices due to the large supply shift. Even if the demand curve stays the same, this supply shift means that retail prices of solar cells would fall, leading to increased adoption of solar technology. More realistically, demand is likely to continue shifting out, which may mitigate some of the price reduction.

Another interesting fact in this article: where is a lot of this new manufacturing capacity coming online? China.

Think about the economics of the interaction of these two developments. Taken together, they imply a potentially dramatic decrease in solar power manufacturing costs and retail prices. It will be fascinating to see how this market continues to develop.

Michael Giberson

Steven Stoft, at the EU Energy Policy Blog, observes that market driven conservation is a slow process:

Conservation is the main way consumers respond to high market prices. When price goes up, consumption comes down--but it takes a while for the full price effect to play out.

Market-driven conservation is a slow process--slow to get going and even slower to stop. Looking at recent high oil prices, people noticed that gasoline use was slightly higher in 2006 than in 2005, and many concluded that higher prices were not working to curb gas consumption. People thought the same in 1974, when the price of oil tripled and world oil consumption fell only 1 percent.

Market-driven conservation starts slowly because the best way to conserve is to switch to better technology. People don't buy cars and refrigerators until they need new ones, and companies take years to design new, more efficient models. It wasn't until 1980 that changes in technology began to pay off.

After 1980, oil prices went on a sustained nosedive, but, Stoft observes, the conservation effects of consumers choices in response to the higher prices continued to be felt.

Stoft also notes the broad power of prices:

The power of price lies in its ability to act in a million ways at once, many unexpected. Even when price directly affects people, they don't always recognize it. ... Even the energy gurus of the physics camp, who now push for stricter standards and ignore energy prices, owe their careers to OPEC's high prices. I say this not to belittle their work, but to point out how fundamental and varied the price effect is. Price changes everything. And the whole world responded to OPEC's high prices.

Michael Giberson

Geothermal power generators use temperature differences between the surface and areas deeper in the earth to move a gas or liquid through a loop and drive a turbine. (One example is the Chena Geothermal Power Plant in Alaska. See the related project at the Chena Hot Springs Aurora Ice Museum, which uses 165°F water from a geothermal well to help keep the ice museum cold.)

Ocean thermal power systems work on similar principles, but, to state the obvious difference, underwater rather than underground. A story in the LaCrosse Tribune (Wisconsin) discusses work by an 80-year old Wisconsin engineer who obtained some patents on related inventions in the early 1980s, but saw interest in ocean thermal generation drop off as energy prices fell.

The system uses the difference between the heat of the ocean's surface water, about 80 degrees in the tropics, and the colder water deeper down to force ammonia through a turbine that turns a generator to produce electricity.

The electricity then can be converted into various sources of power, such as hydrogen, and then used to operate something like a hydrogen-cell car.

...The proposal describes the energy system as free of pollutants and, like the wind, cost-free as well.

"This can work 24 hours a day, 365 days a year, because of the enormity of this source," Foust said. "It goes all the way around the earth, deep and wide."

The term "cost-free" is incorrect, of course, both in reference to ocean thermal and wind energy power systems. The system cost something to build, cost something to maintain, and occupy real space in the water that would otherwise be available for other uses. Which is why, as inventor Foust is quoted as saying later in the article, "These alternate energy programs are only viable when the cost of energy is high."

A recent report by the Texas Comptroller of Public Accounts assessing energy resources for the state was dismissive of the prospects for ocean thermal energy conversion, saying, "ocean thermal energy conversion (OTEC) is the least accessible form of ocean power, and perhaps the least useful for the U.S." (From the Texas state government's The Energy Report 2008.) But all such assessments depend on the particular resources and technologies assumed, and both technology and our understanding of resources constantly changes.

In particular, the report observed that the relatively shallow waters in the Texas Gulf do not have sufficient temperature differences between the surface and the ocean floor. Offshore Hawaii, on the other hand, has more potential. Another alternative would be to use temperature differences between surface water and geothermal sources beneath the ocean floor. For example, use offshore oil and gas wells in the Gulf to gain access to higher temperatures under the ocean.

At some price for electricity, such possibilities become economical.

Lynne Kiesling

This weekend the KP Spouse told me about a couple of his colleagues, both of whom drive Chevy Avalanches, live in the suburbs, and used to drive to work. One of them has started taking the train and is trying to sell his Avalanche, because he doesn't want to keep spending what he has to on gasoline.

The other one has parked his Avalanche, and has been shopping for a small car to drive. He found a dealership in the northern suburbs that had a Hyundai Elantra in that bleh green color that was just rolling off of the delivery truck; all of the other colors (black, silver, etc.) already had a waiting list. He put a deposit on the bleh green Elantra over the phone to make sure it didn't get sold while he was getting up there. Needless to say, he paid the sticker price for the bleh green Elantra.

See what $4.25 gas will drive people to do?

Michael Giberson

Today a Washington Post article discusses the most recent oil price forecast from Goldman Sachs analysts Arjun N. Murti and Jeffrey Currie, which have oil prices averaging $141/bbl for the second half of 2008. As usual, it isn't hard to find an analyst with a contrary view, and the article presents some counter arguments. (One observer notes that even with GS's prediction of a oil price between $150 and $200 in the next several months, the company merely rates Exxon Mobil as "neutral." Suggested is that even within the firm, not all persons are believers.)

The article notes Murti's track record for newsmaking high price forecasts which subsequently are reached, and presents a somewhat selective graphic in support. How good is Murti's record? The text explains that the famous $50-$105 prediction from March 2005 was directed at the next 6 to 24 months. (Discussed here in March 2008 as "Foreseeing $105/barrel oil") Price swung up to about $78, then down, and two years after Murti's prediction - in March of 2007 - prices were about the same level as March 2005: near $60/bbl. Of course, prices did mostly stay within the predicted range and some contemporary predictions had prices falling to $30, $20 or lower. Probably safe to say that Murti's risky forecast turned out to be better than most.

GS's Currie gives the short-hand version for the most recent forecasts:

"World GDP wants to grow at 3.8 percent, whereas the best we can come up with for trend supply growth is 1 percent," he said. "So something has to give. And that means prices have to rise to curtail demand growth."

Perhaps you'd like something more systematic than a newspaper account? For you, then, is James Hamilton's "Understanding crude oil prices" (title links to abstract, here is a direct link to the article).

Hamilton employs three different approaches to assessing crude oil prices. First, he takes a fairly basic look at statistical correlations in time series analysis. Second, he examines the lessons from economic theory. Third, he examines various fundamental conditions affecting supply and demand for oil.

One thing looking at the time series data tells you is that the current price tends to be the best predictor of the price a quarter from now ("the real price of oil seems to follow a random walk without drift"), but the variance is wide (beginning at a price of $115, it would not be surprising based on historical price movements for prices a quarter from now to be as high as $156 or as low as $85).

In his economic theory discussion he considers storage arbitrage effects, possible effects of financial market trading, and effects expected given that oil is a depletable resource. In the fundamentals discussion, Hamilton considers the role of the OPEC cartel, the changing elasticity of supply and demand, and whether oil markets may now be figuring in a scarcity rent (implied by Hotelling's model of a depletable resource).

He concludes "the low price-elasticity of short-run demand and supply, the vulnerability of supplies to disruptions, and the peak in U.S. oil production account for the broad behavior of oil prices over 1970-1997." As for the period after 1997, he tentatively concludes, "the profound change in demand coming from the newly industrialized countries and recognition of the finiteness of this resource offers a plausible explanation for more recent developments. In other words, the scarcity rent may have been negligible for previous generations but is now becoming significant."

Reader John Mashey, in a comment on my post "Are oil prices too high?", wonders whether we are at an inflection point (i.e. a fundamental change in the relationship between oil prices and the world economy). Hamilton seems to suggest that the inflection point was 1997/1998.

In my mind the interesting issue concerning the relatively tepid supply response to historically high oil prices concerns whether we are becoming short of producible oil resources, or just short of the tools to produce more oil resources with. My view remains the same as it was the other day, when discussing that confused New York Times article:

The world is running out of oil production capacity because there is a global dash for oil. This dash is the oil supply response, and it is probably not too soon to conclude the world oil production will be higher this year than last, even as we are short on oil production capacity.

Hamilton's piece didn't quite disrupt this view, but I am becoming more open to the possibility. I think additional careful look at world oil supply would be helpful.

Michael Giberson

Tom Igoe, a physical-computing researcher at New York University, said the Prius mpg display is one of the best examples of technology "where green meets information systems."

"For a long time," he said, "we have known that people will change their habits if they are exposed to feedback in real time."

From "For Hybrid Drivers, Every Trip Is a Race for Fuel Efficiency" in the Washington Post. The article notes that real time energy use tools are available for the home as well.

Interesting article. I wonder whether some of the hypermilers described in the article -- when they took longer routes to avoid going up steep hills -- were actually always saving energy. But on the whole, we'd all be better off with more direct feedback on our energy consumption decisions.

Michael Giberson

Word is, the Alaska natural gas pipeline is just about ready to get started. The thing is, it has been just about ready for 30 years. In the Energy Tribune, Alaska-born Ron Oligney diagnoses the problems that have kept progress on the Alaskan gas line at bay. Posturing by populist politicians plays a big role, but Oligney's analysis is deeper and richer.

The common theme for these governors ... was that they were "seeking the highest good for all Alaskans." The current governor is better than any of her predecessors ... in that she has an almost unbelievable approval rating of 90 percent. She has charmed the masses, which in Alaska means a few hundred thousand people. The problem is that Alaskans and their politicians feel quite certain that they are just one BP-Conoco news release, one governor, one special session away from getting The Gas Line. A common statement in Alaska is, "Have you heard the news? The Gas Line is getting ready to take off." And so it has been. For 30 years.

The principle of "highest good" is a lopsided concept in a state where there is very little private ownership of land or minerals. Just as in a foreign country, the game is one of inducing investment from those with the money (oil companies) and then changing the rules as necessary to extract the maximum benefit for the locals. Stirring up the mob against the evil outsiders (oil companies) keeps the populist in power. In foreign countries, the end game is nationalization, sometimes once per generation. In Alaska, taxes are the proxy. (Note: the situation in Texas and Oklahoma is much more intrinsically stable because of private land ownership - many legislators and some of the voting public are also mineral owners.)

Lynne Kiesling

Google's blog has a post describing their new investment in BrightSource Energy and linking to lots of background information on their renewable investments. BrightSource does large-scale solar.

This is part of Google's RE < C initiative, through which they channel their investments with an objective of making renewable energy cheaper than coal-fueled energy. Their FAQ gets at the question of why Google would be doing this:

This initiative is not just about creating clean, affordable electricity for Google - though we are keenly interested in making our business as environmentally sustainable as possible. If successful, this effort would likely provide a path to replacing a substantial portion of the world's electricity needs with renewable energy sources. We want to do our part, but that won't be enough alone to thwart climate change; we need a worldwide green electricity revolution to do that.

OK, fine. But what's the return to Google? They clearly don't see it as a short-run bottom-line reduction in their own energy costs. So what's motivating it? Brand capital and reputation capital? I have my ideas, but I would like to hear yours.

Lynne Kiesling

The WSJ Environmental Capital blog has been doing a great job of keeping up with the wind power industry in the U.S. lately. Today's post about Iberdrola's planned investment in wind power in the U.S. is a good summary, with links to some of their other recent posts on the subject.

How to read this? For starters, it's another sign the U.S. wind power market is going great guns regardless of what Congress does for clean-energy tax credits. As we noted last week, the Department of Energy figures wind power could provide 20% of U.S. electricity by 2030--with or without subsidies. And T. Boone Pickens put the first $2 billion down on his $10 billion bet on the world's biggest wind farm in Texas last week, without waiting for the tax credits to be renewed.

One interesting aspect of Iberdrola's investment plans is how the New York Public Service Commission's concerns about electricity prices may influence some of their investment decisions:

But the New York Public Service Commission, the five-person body that has to give the final green light, is leery. It's worried Iberdrola's deal could harm consumers by raising power prices; it argues the deal would give Iberdrola a virtual monopoly, since the Spanish utility could control both generation and transmission of electricity. So, the New York commission is proposing that the world's biggest wind-farm operator divest some of its wind farms to win regulatory approval.

The post then goes on to note that those who are interested in environmental policy are upset about the NYPSC's objections, because their highest priority is increasing renewable energy capacity to meet New York's goal of having 25% of their power generated from renewable sources by 2013. I think increasingly we will see the tension between the regulatory objective of low electricity prices and the regulatory objective of reduced fossil fuel generation that is evident in this example.

Michael Giberson

At yesterday's open meeting of the Federal Energy Regulatory Commission, the Commissioners established a hearing to determine whether Energy Transfer Partners, L.P. and its affiliates engaged in market manipulation in violation of FERC rules. At stake is a possible penalty of over $200,000,000 in proposed fines, recovery of "unjust profits", and interest.

As was discussed here before (see link below), the companies are alleged to have manipulated wholesale gas prices at the Houston Ship Channel to benefit ETP's financial positions and other physical positions between December 2003 and December 2005. In addition, ETP's pipeline affiliate is alleged to have discriminated between affiliated and non-affiliated companies in the provision of transportation services, in violation of related laws and regulation.

At the heart of the manipulation charge is this claim:

Enforcement Litigation Staff asserts in its brief that voice recordings and trade data demonstrate that ETP manipulated wholesale natural gas markets in Texas during the period of December 2003 through December 2005 by: (1) orchestrating its financial and physical portfolio to profit from lower prices as HSC; (2) selling fixed-price gas for prompt month delivery at HSC for less than a competitive price; (3) reporting these artificially lower prices to Platts Inside FERC, which included them in its monthly HSC index (IFERC HSC index); and (4) benefiting from lower prices reported in the IFERC HSC index. (Paragraph 7 from the FERC order)

The anti-manipulation regulation at issue is section 284.403(a) of the Commission's regulations as it was at the time of the actions. Section 284.403(a) stated:

Any person making natural gas sales for resale in interstate commerce pursuant to §284.402 is prohibited from engaging in actions or transactions that are without a legitimate business purpose and that are intended to or foreseeably could manipulate market prices, market conditions, or market rules for natural gas.

In my initial review of a industry trade journal article that alleged manipulation I said I wasn't too impressed with the case. The case built up in the article was reasonably detailed but mostly circumstantial, with comments from anonymous traders thrown in. However, unlike FERC, presumably the reporter did not have access to company voice recordings and proprietary trading data. If the allegations prove justified, I guess I'll have to be impressed by that part of the initial article.

The original article also included assertions of a possible "regulatory gap" that may require legislative action to cover, but investigations by FERC and the CFTC apparently have not been hampered by lack of legal authority.

The CFTC also pursued ETP on related charges. In March 2008, the CFTC announced it obtained a $10 million civil penalty as part of a consent order settling charges against ETP and three subsidiaries. An announcement made by the company points out that the "agreement between the CFTC and ETP contains no findings of fact or conclusions of law." Which is not the same thing as claiming they didn't do it, of course.

Michael Giberson

No doubt consumers think oil prices are too high. For the moment I'm wondering if oil prices are too high even for OPEC.

High prices induce a number of adjustments, some of which have long term repercussions. Last time there was an oil price shock at all comparable to the present was around 1979-1981, when world oil prices reached near $100 (in $2008). High prices then helped support continued growth in non-OPEC oil supply (which really got started during the oil crisis of 1973) and spurred substantial consumer interest and investment in energy efficiency. Over time the adjustments contributed to a nearly 20-year long period (roughly 1986-2004) of prices below 1973 prices in real terms.

Additional evidence comes from a paper, "OPEC's Demand Curve," by Marc Vatter. Vatter estimates world demand for oil, the effect of oil prices on world income, and non-OPEC supply in order to calculate the net demand for oil faced by OPEC. Vatter suggests that while oil price shocks can be profitable for OPEC - no surprise there - to the extent consumers and non-OPEC suppliers see the price increases as long lasting, they make adjustments which reduce OPEC's income in the longer term.

Most of the article itself is focused on explaining and defending various statistical assumptions and devices employed in the process of generating his estimates of supply and demand, but even a non-specialist reader may benefit from scanning the article. He sums up his estimates by saying, "we should not expect prices to fall below [$81 a barrel in $2008] for long" given current non-OPEC supply and world oil consumption. Below $81 a barrel, OPEC net income falls.

Vatter doesn't explicitly peg the upper end of OPEC's desired oil price range, and possibly the recent economic growth around the world - most obvious in China and India - makes his data analysis over the period 1974 to 2005 less than dispositive, but I would guess a price above $100 in real terms reduces the net present value of long term income for OPEC nations.

If real prices fall below $80 in the next few years and stay below $80 for a while, that will be reason to believe that oil prices now were too high even for OPEC.

Michael Giberson

You don't want them picking up their ideas about oil on the streets:

And the education must begin early, he told a luncheon crowd of industry professionals at OTC.

"When we don't inform our children about petroleum facts," he said, "someone else is going to do the job for us."

"He" is Abe Palaz, director of educational and R&D Partnership at Halliburton, talking about the engineering talent pool for the oil and gas industry, to an audience at the Offshore Technology Conference. The OTC, apparently the place to see and be seen in the oil and gas business last week, recently concluded in Houston.

The Houston Chronicle has had coverage, supplemented by the Chronicle's own energy blogging at NewsWatch: Energy.

ADDED: A related story from the Houston Chronicle: Worker shortage looms large.

Lynne Kiesling

I handed out the Washington Post story on biofuels that Mike posted on Wednesday in one of my classes, and it was very timely, as they were presenting case studies of proposed biofuels investments. The one thing I went out of my way to point out to them was an appalling, shocking example of flimsy and incorrect economic logic:

Don Endres, the chief executive of VeraSun and owner of 20 percent of its shares, grew up on a farm in Watertown, S.D., where his father and grandfather raised corn. His brothers are still farmers.

Endres says ethanol plants aren't to blame for high corn or food prices. He notes that the corn used to make ethanol isn't the kind that people eat anyway.

AAARGH! Does he fail to understand the principle of substitutability? Let me say this slowly and clearly: different crops compete for the use of scarce land. Ethanol plants, and the subsidies that make it more attractive to build them, increase the demand for a type of corn. That makes it more profitable for farmers to plant that corn, and to do so they reduce their plantings of soy and corn for food (for both humans and livestock). That reduction in supply, in combination with global economic growth that increases food demand, raises prices.

Thus Mr. Endres is entirely incorrect. Ethanol plants do contribute to high food prices, despite their use of non-food corn.

And he's not alone in making this fallacious argument. I'm sitting here listening to NPR's Morning Edition, which just did a story about this question (I'll post the link when it's available), and one of the contributors to the story was Iowa Senator Charles Grassley (who is himself a farmer). Not only did he make the same incorrect argument as Mr. Endres, he even went one further and bit into a kernel of the corn used for ethanol, to show how inedible it is!

Politics really is just theater, isn't it? Sadly, my taste in theater tends toward Shakespeare and Tom Stoppard, not toward self-aggrandizing gimmicks.

Here's my question: are folks like Mr. Endres and Senator Grassley really that economically illiterate, really that stupid? Or are they hoping that everyone else is that economically illiterate, and that they can use this fallacious argument for their own political expediency? In either case, I find it shocking.

Michael Giberson

If you haven't had your fill of ethanol-and-the-high-price-of-food-everywhere stories, today the Washington Post takes a look from the point of view of an Iowa farmer.

Johnson is a one-person summary of how high corn prices are washing through the world of agriculture and climate change. Normally, he plants half of his 900 acres with corn and half with soybeans. He alternates crops on each field because it is better for the soil.

But last year he planted 500 acres of corn and 400 of soybeans, and this year he will do the same. "The market was screaming, 'Farmer Johnson, plant more corn, plant more corn,' " Johnson says.

Well, the market may be screaming for more corn, but much of it is due to the hard, swift kick in the bushel-basket delivered by Congress:

In 2005, the Republican-led Congress and President Bush backed a bill that required widespread ethanol use in motor fuels. Just four months ago, the Democratic-led Congress passed and Bush signed energy legislation that boosted the mandate for minimum corn-based ethanol use to 15 billion gallons, about 10 percent of motor fuel, by 2015. It was one of the most popular parts of the bill, appealing to farm-state lawmakers and to those worried about energy security and eager to substitute a home-grown energy source for a portion of U.S. petroleum imports. To help things along, motor-fuel blenders receive a 51 cent subsidy for every gallon of corn-based ethanol used through the end of 2010; this year, production could reach 8 billion gallons.

The article is part four in a series on high food costs around the world.

Lynne Kiesling

By now you all have probably heard that Hillary Clinton and John McCain are proposing gasoline tax holidays this summer to take some budget pressure off of voters who drive a lot (c'mon, let's be honest about the true audience of these proposals). Barack Obama does not support such a proposal.

Criticizing this proposal is truly like shooting fish in a barrel, and others have done it more thoroughly and eloquently than I can (thanks to the WSJ's Environmental Capital for the link).

So will the populist impetus take the day on this issue, or will there be room for reasoned economic analysis to convince voters that this is a stupid policy? Depends on who they are and how much they drive, probably.

Michael Giberson

Wow, this article on international oil supply and demand from the New York Times is fascinating, and not in a good way. Did they fire the editors? It is like a bad action movie - fast-paced, a few colorful characters, far too many plot twists, and if you stop to think you spoil the effect. It just doesn't add up.

Here is one thread of an idea, followed through the article:

But as prices flirt with $120 a barrel, many energy specialists are becoming worried ... Higher prices have done little to attract new production or to suppress global demand, and the resulting mismatch has sent oil prices spiraling upward.

Have you ever actually seen a price spiral upwards? Not me. Nor downwards either. Later in the article:

"It's a crunch," said J. Robinson West, chairman of PFC Energy, an energy consulting firm in Washington. "The world is not running out of oil, but rather it's running out of oil production capacity."

I think the reporter didn't understand what "running out of oil production capacity" meant to the story.

Still later:

In fact, high prices have sparked a global dash for oil. ... In some cases, the hunt has been successful. ... To make up the shortfall, the world is increasingly turning to fuels made from unconventional sources, like biofuels or heavy oil.

The world is running out of oil production capacity because there is a global dash for oil. This dash is the oil supply response, and it is probably not too soon to conclude the world oil production will be higher this year than last, even as we are short on oil production capacity.

Oil production capacity is expandable, of course, as more tools can be built, more geologists trained, more wells drilled, more reservoirs analyzed, and so on. But just like a new oil discovery doesn't show up in your gas tank the next day, it takes time.

(HT to The General)

Lynne Kiesling

I'm taking a little time this morning to catch up on the reading I've missed over the past month, while I've been focused elsewhere. One worthwhile observation, with which I agree, comes from Virginia Postrel's note about carbon policy positions of Presidential candidates, among other things:

It's infuriating how all three presidential candidates prattle on about the need to fight global warming while also complaining about the high price of gasoline. ... The last thing you'd want to do is reduce gas taxes during the summer, as John McCain has proposed. That would just encourage people to burn more gas on extra vacation trips--as any straight talker would admit.

Michael Giberson

According to a year-long study of gasoline prices in the state of Washington, variations in prices across the state "are due to the cost of obtaining and transporting fuel to stations and local competition - not illegal price manipulation."

The state's Attorney General commissioned the study, which was conducted by University of Washington economist Keith Leffler.

"West Coast refineries are running at capacity," [Washington Attorney General Rob] McKenna said. "We're importing higher-priced refined gasoline to meet consumer demand, which raises average prices at the pump. Any glitches in the supply system can cause significant price spikes. Meanwhile, crude oil costs nearly four times as much as it did five years ago."

In general, the report observed that retail gasoline prices were higher because the cost of crude oil was higher, regional variations in wholesale prices were closely related to variations in the cost of supplying fuels to terminals (though exceptions are noted), and competition within city areas is the most important factor behind remaining differences in regional retail prices.

Current average retail Washington prices were reported to be the sixth highest in the nation, in part because, as the report explains, Washington state gasoline taxes are highest in the nation.

Perhaps unlike Vermont*, gasoline consumption per person is going down in the Pacific Northwest. The Seattle Post-Intelligencer reported:

Washington, Oregon and Idaho residents are guzzling less gas per person, according to a report released Thursday by Sightline Institute, a Seattle-based think tank.

Motorists used on average nearly a gallon less each week in 2007 (7.8 gallons) than they did in 1999 (8.7 gallons), the lowest per-capita level since 1966.

Despite growth in population, overall gas consumption has been relatively flat in the region in the last nine years, the report said.

"The biggest single impetus is higher prices," said Clark Williams-Derry, research director of Sightline. "When prices rise, people start to make different kinds of choices. ... We're traveling a little less. We're making shorter trips and fewer trips."

*Or maybe Vermont, too, is using less gasoline, despite the note yesterday saying that vehicle miles traveled in the state is up since 2000 even with higher prices. The Kansas City Star reports that gasoline consumption is falling nationwide:

Michael Giberson

Free Press columnist Ed Shamy offers "a stroll through The Burlington Free Press archives about gasoline prices," beginning January 16, 1974, continuing to today:

Jan. 16, 1974: Gasoline in short supply in Vermont. Entire communities without a single open filling station. And gasoline is obscenely expensive, an average of 48.7 cents per gallon for regular.

Jan. 19, 1974: AAA poll of 113 Vermont service stations shows most are open 7 a.m. to 7 p.m., most closed Sundays, all limiting sales to $3, and charging an average of 49.6 cents per gallon.

April 2, 1974. Some Vermont vendors are selling gasoline for as high as 53 cents per gallon for regular. Rampant speculation that oil companies may be gouging consumers.

...

Oct. 1980: "People will drive five miles to get 2 cents off on a gallon," says the manager of a Berlin gas station during a price war.

May 1981: Three gas station owners in Londonderry predict a painfully slow summer tourist season because gas has reached an eye-popping $1.399 per gallon. Rampant speculation that oil companies may be gouging consumers.

May 1989: President of the Vermont Chamber of Commerce says, "When it breaks that $1.50 a gallon figure, that's when it starts to affect people."

...

August 1999: Burlington man: "Terrible! It was $1.19 the other day. Today it was $1.21. They've got you where they want you, and they are going to keep you there until they bleed you to death." Rampant speculation that oil companies may be gouging consumers.

...

September 2005: "I didn't know until yesterday that my pumps wouldn't go over $2.99," says a gas station owner in Elmore.

November 2007, with gasoline prices averaging $3.02 per gallon in Vermont: "Everybody keeps wanting to see what's that point of impact where people start to cut back. We keep setting the benchmark, and people continue to travel," a AAA spokesman says.

Today: $3.50 per gallon and rising with no end in sight.

Shamy adds a footnote: "In 2000, each Vermonter traveled 11,167 miles in a motor vehicle, according to the U.S. Transportation Department. By 2005, there were more of us and still each of us traveled more -- 12,379 miles."

Michael Giberson

In an op-ed in the Washington Post, Lester Brown and Jonathan Lewis seem overly generous in their interpretation of the motivations for the now-obvious-failure of ethanol policy in the United States:

Food-to-fuel mandates were created for the right reasons. The hope of using American-grown crops to fuel our cars seemed like a win-win-win scenario: Our farmers would enjoy the benefit of crop-price stability. Our national security would be enhanced by having a new domestic energy source. Our environment would be protected by a cleaner fuel. But the likelihood of these outcomes was never seriously tested, and new evidence has shown that the justifications for these mandates were inaccurate.

I must have missed the analysis indicating that ethanol was intended to create crop price stability. I thought the hope was always that the policy would push food prices up. Isn't that how increases in demand work?

Also, the national security argument for ethanol always struck me as false. We import most of our oil from Canada and Mexico, and with oil a fungible product in an international market, it is hard to see just how some other nation might wield oil-withholding as an offensive threat.

Possibly the move to increased ethanol could have lead to environmental improvements, but biofuel mandates are a bad way to implement policy even if it were true that they produced benefits. As a practical matter, the environmental arguments for ethanol have always been mostly a smokescreen. Ethanol policies were never popular in Iowa because of their potential for improving air quality in Los Angeles or New York City. "Food-to-fuel mandates" always smelled like political pork to me, so I guess I've never had a generous opinion of the motives of its political supporters.

(In fact, there is some danger that all ethanol technologies will be unfairly tainted by an association with current failed policies mostly intended to drive up corn prices. Supporters of non-corn-based alternatives for making ethanol may want to distance themselves from the pork-barrel politicking of the agribusiness lobby.)

Of course, Brown and Lewis are promoting a change in policy, for which the support of politicians is needed. I suppose, purely as a rhetorical device, it is useful to not describe the targets of your appeal as a bunch of .... Well, it is probably useful not to finish that sentence.

The Brown and Lewis editorial does bother me in parts. Does most of the energy used to make ethanol actually come from coal? I would have guessed oil for fuel and natural gas for fertilizer. Also, like many people (myself included), Brown and Lewis are eager to blame world-wide high food prices on ethanol policy, but most of the analysis I've seen in the newspapers is thin. The argument makes a lot of sense, but there are other obvious factors (high fuel costs, incr