Oil tax forces single cause attribution folly

A silly NYT headline claims that Rise in Oil Tax Forces Greeks to Face Cold as Ancients Did.

The tax raised the cost of heating oil 46%, which hardly sends Greece back to the Bronze Age. Surely the runup in crude prices by a factor of 5 and a depression with 26% unemployment have a bit to do with the affordability of heat as well?  And doesn’t the unavailability of capital now make it difficult for people to respond sensibly with conservation, whereas a proactive historic energy policy would have left them much less vulnerable?

The kernel of wisdom here is that abrupt implementation of policies, or intrusion of realities, can be disruptive. The conclusion one ought to draw is that policies need to anticipate economic, thermodynamic, or environmental constraints that one must eventually face. But the headline instead plays into the hands of those who claim that energy taxes will doom the economy. In the long run, taxes are part of the solution, not the problem, and it’s the inability to organize ourselves to price externalities that will really hurt us.

Update: the real story.

Beggaring ourselves through coal mining

Old joke: How do you make a small fortune breeding horses? Start with a large fortune ….

It appears that the same logic applies to coal mining here in the Northern Rockies.

With US coal use in slight decline, exports are the growth market. Metallurgical and steam coal currently export for about $140 and $80 per short ton, respectively. But the public will see almost none of that, because unmanaged quantity and “competitive” auctions that are uncompetitive (just like Montana trust land oil & gas), plus low royalty, rent and bonus rates, result in a tiny slice of revenue accruing to the people (via federal and state governments) who actually own the resource.

For the Powder River Basin, here’s how it pencils out in rough terms:

Item $/ton
Minemouth price $10
Royalty, rents & bonus $2
Social Cost of Carbon (@ $21/tonCo2 medium value) -$55
US domestic SCC (at 15% of global, average of 7% damage share and 23% GDP share) -$8
Net US public benefit < -$6

In other words, the US public loses at least $3 for every $1 of coal revenue earned. The reality is probably worse, because the social cost of carbon estimate is extremely conservative, and other coal externalities are omitted. And of course the global harm is much greater than the US’ narrow interest.

Even if you think of coal mining as a jobs program, at Wyoming productivity, the climate subsidy alone is almost half a million dollars per worker.

This makes it hard to get enthusiastic about the planned expansion of exports.

Shocking stats from the WSJ

The WSJ has an article on the Chinese electric power sector that’s anecdotally interesting. It notes that increasing electricity prices would spur investment, creating a win-win for energy intensity and system reliability. Maybe so, but the supporting graph is an interesting example of statistics that are uninformative because they fail to account for bathtub dynamics. Here it is:

It seems plausible to compare investment and consumption, until you look at the system structure:

This indicates four problems with drawing conclusions from the plot:

  • Investment is not necessarily the same thing as installation of capacity, unless you assume constant price.
  • Consumption is essentially a direct function of stocks of consuming equipment and generating capacity, while investment is a flow. While there’s reason to expect growth rates of stocks and flows to match along a steady state growth path, this only applies in the very long term; in the short run, noise and disequilibrium will destroy any correspondence.
  • The thing we do care about is the match between generating capacity and consuming equipment, but that depends on outflows (retirements of capacity) as well as inflows, so again the stock-flow comparison tells us nothing.
  • There’s an additional level of indirection because we don’t see investment and consumption directly; the graph shows year-on-year changes. But that means that we’re seeing the slopes of investment and consumption, which tell us nothing about their absolute levels. So, it’s possible that investment growth is falling because it was much too high, and that consumption is growing because there’s excess generating capacity.

The best you can say about this graph is that it doesn’t contradict the article; otherwise it’s almost completely uninformative about the true state of the Chinese power system. It would be far better to have a direct comparison of generating and consuming capacity, or perhaps the growth rate of consumption (which is the net flow of consuming equipment) vs. investment in absolute terms.

Gas – a bridge to nowhere?

NPR has a nice piece on the US natural gas boom.

Henry Jacoby, an economist at the Center for Energy and Environmental Policy Research at MIT, says cheap energy will help pump up the economy.

“Overall, this is a great boon to the United States,” he says. “It’s not a bad thing to have this new and available domestic resource.” He says cheap energy can boost the economy, and he notes that natural gas is half as polluting as coal when it’s burned for electricity.

“But we have to keep our eye on the ball long-term,” Jacoby says. He’s concerned about how cheap gas will affect much cleaner sources of energy. Wind and solar power are more expensive than natural gas, and though those prices have been coming down, they’re chasing a moving target that has fallen fast: natural gas.

“It makes the prospects for large-scale expansion of those technologies more chancy,” Jacoby says.

From an environmental perspective, natural gas could help transition our economy from fossil fuels to clean energy. It’s often portrayed as a bridge fuel to help us through the transition, because it’s so much cleaner than coal and it’s abundant. But Jacoby says that bridge could be in trouble if cheap gas kills the incentive to develop renewable industry.

“You’d better be thinking about a landing of the bridge at the other end. If there’s no landing at the other end, it’s just a bridge to nowhere,” he says.

(For those who don’t know, Jake Jacoby is not a warm-fuzzy greenie; he’s a hard line economist who leads a big general equilibrium modeling project, but also takes climate science seriously).

For me, the key takeaways are:

  • Gas beats coal, and may have other useful roles to play. For example, gas backup might be a low-capital-cost complement to variable renewables, with minor emissions consequences.
  • It’s better to have more resources than less.
  • Whether the opportunity of greater resources translates into a benefit depends on whether the price of gas accounts for full costs.

The last item is a problem. In the US, the price of greenhouse emissions from gas (or anything else) is approximately zero. The effective prices of other environmental consequences – air quality, pollution from fracking, etc. – are also low. Depletion rents for gas are probably also too low, because the abundance of gas is overhyped, and public resources were suboptimally over-allocated decades ago. Low depletion rents encourage a painful boom/bust of gas supply.

Not only physical assets are mispriced. Another part of the story is learning-by-doing, deliberate R&D, and economies of scale – positive feedbacks that grow the market for low-emissions technologies. Firms producing new tech like PV or wind turbines are only able to appropriate part of the profits of their innovations. The rest spills over to benefit society more generally. Too-cheap gas undercuts these reinforcing mechanisms, so gas substitutes aren’t available when scarcity inevitably returns, hence the “bridge to nowhere” dynamic.

Long-term renewable deployment in the U.S. is going to depend primarily on policy. Is there enough concern about environmental consequences to put in place incentives for renewable energy?

Trevor Houser, energy analyst, Rhodium Group

They key is, what kind of policy? Currently, we rely primarily on performance standards and subsidies. These aren’t getting the job done, for structural reasons. For example, subsidies are self-extinguishing, because they get too expensive to sustain when the target gets too big (think solar feed-in-tariffs in Europe). They’re also politically vulnerable to apparently-cheap alternatives:

“If those prices hang around for another three or four years, then I think you’ll definitely see reduced political will for renewable energy deployment, ” Houser says

The basic problem is that the mindset of subsidizing or requiring “good” technologies makes them feel like luxuries for rich altruists, even though the apparently-cheap alternatives may be merely penny-wise and pound-foolish. The essential alternative is to price the bads, with the logic that people who want to use technologies that harm others ought to at least pay for the privilege. If we can’t manage to do that, I don’t think there’s much hope of getting gas or climate policy right.

The static reserve life index rears its ugly head in the State of the Union

The President said, in the State of the Union Address,

We have a supply of natural gas that can last America nearly one hundred years, and my Administration will take every possible action to safely develop this energy.

The 100 year figure presumably comes straight from EIA:

According to the EIA Annual Energy Outlook 2011, the United States possesses 2,543 trillion cubic feet (Tcf) of potential natural gas resources. Natural gas from shale resources, considered uneconomical just a few years ago, accounts for 862 Tcf of this resource estimate. At the 2010 rate of U.S. consumption (about 24.1 Tcf per year), 2,543 Tcf of natural gas is enough to supply over 100 years of use.

100 years is the static reserve life index (SRLI). It’s well known that the SRLI is a misleading metric (this figured prominently in Limits to Growth, for example). Exponential growth in consumption violates the basic assumption of the SRLI, which is that consumption remains constant. Even a small amount of growth greatly erodes the actual lifetime of a resource:

Growth at 3% per year reduces the SRLI of gas from 100 years to a realized lifetime of 45 years, which is not nearly so comfortable. This ought to be intuitive even if you can’t integrate exponentials in your head, because gas consumption would have to roughly double to replace coal (and that doubling would have to happen quickly to meet job claims), so clearly “100 years at current rates” isn’t going to happen.

Update: EIA just lowered shale gas resource estimates by nearly half, taking another big bite out of the SRLI:

In the AEO2012 Reference case, the estimated unproved technically recoverable resource (TRR) of shale gas for the United States is 482 trillion cubic feet, substantially below the estimate of 827 trillion cubic feet in AEO2011.


I cringed when I saw the awful infographics in a recent GreenBiz report, highlighted in a Climate Progress post. A site that (rightly) criticizes the scientific illiteracy of the GOP field shouldn’t be gushing over chartjunk that would make USA Today blush. Climate Progress dumped my mildly critical comment into eternal moderation queue purgatory, so I have to rant about this a bit.

Here’s one of the graphics, with my overlay of the data plotted correctly (in green):

“What We Found: The energy consumed per dollar of gross domestic product grew slightly in 2010, the first increase after steady declines for more than half a century.”

Notice that:

  • No, there really wasn’t a great cosmic coincidence that caused energy intensity to progress at a uniform rate from 1950-1970 and 1980-2009, despite the impression given by the arrangements of points on the wire.
  • The baseline of the original was apparently some arbitrary nonzero value.
  • The original graphic vastly overstates the importance of the last two data points by using a nonuniform time axis.

The issues are not merely aesthetic; the bad graphics contribute to distorted interpretations of reality, as the caption above indicates. From another graphic (note the short horizon and nonzero baseline), CP extracts the headline, “US carbon intensity is flat lining.”

From any reasonably long sample of the data it should be clear that the 2009-2011 “flat lining” is just a blip, having little to do with the long term emission trends we need to modify to achieve deep emissions reductions.

The other graphics in the article are each equally horrific in their own special way.

My advice to analysts is simple. If you want to communicate information, find someone numerate who’s read Tufte to make your plots. If you must have a pretty picture for eye candy, use it as a light background to an accurate plot. If you want pretty pictures to persuade people without informing them, skip the data and use a picture of a puppy. Here, you can even use my puppy:

Are environmental regulations the real constraint on US energy output?

When times are tough, there are always calls to unravel environmental regulations and drill, baby, drill. I’m first in line to say that a lot of environmental regulation needs a paradigm shift, but this strikes me as a foolish hair-of-the-dog-that-bit-ya idea. Our current problems don’t come from regulation, and won’t be solved by deregulation.

On average, there’s no material deprivation in the US. We consume more petroleum per capita than any other large nation. Our problems are largely distributional – inequitable income distribution and, recently, high unemployment, which causes disproportionate harm to a few. Why solve a distributional problem by skewing environmental policy? This smacks of an attempt to grow out of our problems, which is surely doomed to the extent that growth relies on intensifying material throughput.

Consider the system:

The underlying mental model behind calls for deregulation sounds like the following: environmental regulations create compliance costs that drive up the total cost of resource extraction, depressing the production rate and depriving the people of needed $$$ and happiness. Certainly that causal path exists. But it’s not the only thing going on.

Those regulations were created for a reason. They reduce environmental impacts, and therefore reduce the unpaid social costs that occur as side effects of oil production and consumption, and therefore improve welfare. These effects are nontrivial, unless you’re a GOP presidential candidate. One could wish for more efficient regulations, but absent that, wishing for less regulation is tantamount to wishing for more environmental consequences and social costs, and hoping that more $$$ will offset that.

Even the basic open-loop rationale for deregulation makes little sense. Resource policy is already loose, so there’s no quantity constraint on production. With the exception of ANWR and some offshore areas, most interesting areas are already leased. Montana certainly doesn’t exercise any foresight in the management of  its trust lands. Environmental regulations have hardly become more stringent in the last decade or so. Since oil production in 1999 was higher than it is today, with oil prices well below $20/bbl, so compliance costs must be less than that. So, with oil at $100/bbl, we’d expect an explosion of supply, if regulatory costs were the only constraint. In fact, there’s barely an upward blip, so there must be something else at work…

The real problem is that there’s feedback in the system. For example, there’s balancing loop B1: as you extract more stuff, the remaining resource (oil in the ground) dwindles, and the physical costs of extraction – capital, labor, energy – go up. Technology can stave off that trend for some time, but prices and production trends make it clear that B1 is now dominant. This means that there’s a rather stark better-before-worse tradeoff: if we extract oil more quickly now, to hoist ourselves out of the financial crisis, we’ll have less later. But it seems likely that we’ll be even more desperate later – either to have that oil in an even pricier world market, or to keep it in the ground due to climate concerns. Consider what would have happened if we’d had no environmental constraints on oil production for the last three or four decades. Would the US now have more or less oil to rely on? Would we be happy that we pumped up all that black gold at under $20/bbl? Even the Hotelling rule is telling us that we should leave oil in the ground, as long as prices are rising faster than the interest rate (not hard, at current rates).

Another loop is just gaining traction: B2. As the stock of oil in the ground is depleted, marginal production occurs in increasingly desperate and devastating circumstances. Either you pursue smaller, more remote fields, meaning more drilling and infrastructure disturbance in sensitive areas, or you pursue unconventional resources, like tar sands and shale gas, with resource-intensive methods and unknown hazards. A regulatory rollback would accelerate production via the most destructive extraction methods, right at the time that the physics of extraction is already shifting the balance of private benefits ($$$) and social costs unfavorably. Loop B2 also operates inequitably, much like unemployment. Not everyone is harmed by oil and gas development; the impacts fall disproportionately on the neighbors of projects, who may not even benefit due to severance of surface and mineral rights. This weakens the argument for deregulation even further.

Rather than pretending we can turn the clock back to 1970, we should be thinking carefully about our exit strategy for scarce and climate-constrained resources. There must be lots of things we can do to solve the distributional problems of the current crisis without socializing the costs and privatizing the gains of fossil fuel exploitation more than we already do.

Greater petroleum independence for the US?

The NYT enthuses about the prospects for new oil production in the Americas:

New Fields May Propel Americas to Top of Oil Companies’ Lists

Still, the new oil exploits in the Americas suggest that technology may be trumping geology, especially in the region’s two largest economies, the United States and Brazil. The rock formations in Texas and North Dakota were thought to be largely fruitless propositions before contentious exploration methods involving horizontal drilling and hydraulic fracturing — the blasting of water, chemicals and sand through rock to free oil inside, known as fracking — gained momentum.

While the contamination of water supplies by fracking is a matter of fierce environmental debate, the technology is already reversing long-declining oil production in the United States, with overall output from locations where oil is contained in shale and other rocks projected to exceed two million barrels a day by 2020, according to some estimates. The United States already produces about half of its own oil needs, so the increase could help it further peel away dependence on foreign oil.

Setting aside the big developments in Brazil and Canada, what does technology trumping geology, “reversing long-declining oil production in the United States” look like? Here’s the latest from EIA:

Somehow it’s not such a compelling story in pictures.

Energy unprincipled

I’ve been browsing the ALEC model legislation on ALECexposed, some of which infiltrated the Montana legislature. It’s discouragingly predictable stuff, but not without a bit of amusement. Take the ALEC Energy Principles:

Mission: To define a comprehensive strategy for energy security, production, and distribution in the states consistent with the Jeffersonian principles of free markets and federalism.

Except when authoritarian government is needed to stuff big infrastructure projects down the throats of unwilling private property owners:

Reliable electricity supply depends upon significant improvement of the transmission grid. Interstate and intrastate transmission siting authority and procedures must be addressed to facilitate the construction of needed new infrastructure.

Like free markets, federalism apparently has its limits:

Such plan shall only be approved by the commission if the expense of implementing such a plan is borne by the federal government.

Go ahead, shut down the EPA

Companies self-regulate just fine, without any rule of law, like they do in Nigeria:

Some of the results are “horrifying” and “unprecedented,” Brown says. The wells serving at least 10 Ogoni communities, for instance, have unsafe levels of hydrocarbons; one well had levels of benzene, a known carcinogen, that were 900 times greater than those deemed safe by the World Health Organization. In some areas, the researchers measured 8 centimeters of oil floating on top of groundwater and oil-soaked soils 5 meters deep. “Areas which appear unaffected at the surface are in reality severely contaminated underground,” the report concluded. In one bit of good news, the researchers concluded that spilled oil had not tainted local fish, a major source of protein, although it had ruined numerous fish farms.