Category Archives: energy

Contango!

We are living in interesting times. In July, oil hit $147 a barrel. Five months later, oil prices have dropped by $100 a barrel. Not only that, but now it is profitable for people (if they have a few hundred million or a billion laying around to buy crude at today’s spot price, store it for a year, and lock in a profit by selling it forward. Platt’s explains the scheme:

the forward curve for oil is now providing a huge incentive for market participants to store oil. For example, the one-year spread between December 2008 and December 2009 crude is running about $10, and the combination of financing and storage costs aren’t enough to wipe out that profit incentive to buy oil now, sock it away for 12 months and collect the difference in price.

Apparently it is now profitable to rent supertankers and store the oil in supertankers because of the contango.

Usually the contango gets arbitraged away, but the credit crunch is keeping people on the sidelines, allowing the big boys to make money because they have billions in cash.

Bootleggers, Baptists, and Daylight Savings Time

Bruce Yandle has as brilliant theory about regulation. Here’s his short explanation:

Durable social regulation evolves when it is demand by both of two distinctly different groups. “Baptists” point to the moral high ground and give vital and vocal endorsement of laudable public benefits promised by a desired regulation. Baptists flourish when their moral message forms a visible foundation for political action. “Bootleggers” are much less visible but not less vital. Bootleggers, who expect to profit from the very regulatory restrictions desired by Baptists, grease the political machinery with some of their expected proceeds. They are simply in it for the money.

The story’s name draws on colorful tales of states’ efforts to regulate alcoholic beverages by banning Sunday sales at legal outlets. Baptists fervently endorsed such actions on moral grounds. Bootleggers tolerated the actions gleefully because their effect was to limit competition.

So what does this have to do with Daylight Savings Time? Simple, the reason the Energy Policy Act of 2005 extended Daylight Savings Time to cover more of the year is a classic situation of Bootleggers and Baptists.

In this case, the Baptists were the people who claimed that extending Daylight Savings Time would save energy. There was little empirical support for this change, but it sounded good. Congressman Ed Markey was one of these Baptists claiming the change would save energy.

Who were the Bootleggers–the people in the background that would benefit from the change? Apparently Sporting Goods Manufacturers Association and the National Association of Convenience Stores. Strange but true. For whatever reason they thought they would do better business.

Does the change to extended daylight savings time back up the claims of Mr. Markey and the other environmental proponents of the extension? Of course not. The balance of the evidence now shows that daylight savings times does not save any energy. If anything, it increases energy use. Here’s the summary of studies from Wikipedia:

  • The U.S. Dept. of Transportation (DOT) concluded in 1975 that DST might reduce the country’s electricity usage by 1% during March and April,[7] but the National Bureau of Standards (NBS) reviewed the DOT study in 1976 and found no significant savings.[21]
  • In 2000 when parts of Australia began DST in late winter, overall electricity consumption did not decrease, but the morning peak load and prices increased.[25]
  • In Western Australia during summer 2006–07, DST increased electricity consumption during hotter days and decreased it during cooler days, with consumption rising 0.6% overall.[26]
  • Although a 2007 study estimated that introducing DST to Japan would reduce household lighting energy consumption,[27] a 2007 simulation estimated that DST would increase overall energy use in Osaka residences by 0.13%, with a 0.02% decrease due to less lighting more than outweighed by a 0.15% increase due to extra cooling; neither study examined non-residential energy use.[28] DST’s effect on lighting energy use is noticeable mainly in residences.[7]
  • A 2007 study found that the earlier start to DST that year had little or no effect on electricity consumption in California.[29]
  • A 2007 study estimated that winter daylight saving would prevent a 2% increase in average daily electricity consumption in Great Britain.[30]
  • A 2008 study examined billing data in Indiana before and after it adopted DST in 2006, and concluded that DST increased residential electricity consumption by 1% to 4%, primarily due to extra afternoon cooling.[31]
  • Several studies have suggested that DST increases motor fuel consumption.[7] U.S. gasoline demand grew an extra 1% during the newly introduced DST in March 2007.[32]

What lesson do we learn from the change to extended daylight savings time? 1. Some groups benefit from regulatory changes. 2. When Congress or the President tout easy ways to save energy, they are almost certainly wrong.

Advanced biofuels will still take food out of the mouths of the world’s poor

Environmentalists don’t seem to understand that life involves unavoidable trade-offs.  Nathanael Greene, a Senior Policy Analyst at the Natural Resources Defense Council, recently wrote a post titled, “Europe catches up to the US on biofuels policy” in which he approves of the EU’s decision to “stick to its 10 percent goal for biofuels but require an increase percentage to be advanced biofuels that don’t compete with food production.”

The problem is that you cannot avoid competition between biofuels and food. The EU may state that new alternatives won’t compete with food production, but wishing something doesn’t make it so.

The first place new biofuel crops will be grown is on land that is already in cultivation. Instead of growing corn, for example, farmers will grow switchgrass. Instead of taking corn and turning it into fuel, these policies are just taking land that would have produced corn and re-purposing it to produce fuel.

There only difference is that advanced biofuel crops should be more efficient. But advanced biofuel conversion technology needs to first make it out of the lab out of the lab and into commercial-scale production. If biofuels could be made from organic waste, then advanced biofuel wouldn’t compete with food, but that’s the only scenario.

The point remains–our biofuel policies are taking food out of the mouths of the world’s poor. That is the unavoidable outcome our mandating the use of food for fuel. As the UN special rapporteur has stated, biofuels are “a crime against humanity.”

If the human toll of increasing food prices wasn’t enough, the environmental costs are significant. Today’s biofuel production releases more greenhouse gases than petroleum production and we are turning miles and miles of jungle into biofuel plantations.

Don’t Trust T. Boone Pickens

You will be seeing and hearing a lot from T. Boone Pickens over the next few months. His publicity blitz have been very impressive as Nancy Pelosi even invited him to talk to the Democrat Caucus even though he financed the Swift Boat group in 2004.

As beguiling as Pickens energy plan is, it is disingenuous. His energy plan will not get us off of foreign oil. If you read the plan, it is obivous that Pickens is not serious. He is obviously not serious because his answer for getting of foreign oil is–wait for it–to use wind power. This non-sequitur is the cornerstone of Pickens’ plan. Just read this page from his website.

If you don’t want to read Pickens’ plan, here’s a condensed version. Foreign oil is bad. The wind blows a lot in America. We can produce electricity from wind. Cars can run on natural gas. Wind power can displace natural gas used for electrical generation. That’s his argument, but just doesn’t work.

Oil and electricity have very little to do with each other

Pickens states that we use a lot of foreign oil and then notes that “The United States is the Saudi Arabia of wind power.” That’s fine and good, but oil and electricity have very little to do with each other. In 2006, only 2% of the electricity in America was generated using oil. Two percent. Eliminating that 2% isn’t going to “get us off foreign oil.”

Wind does not produce electricity in the way we use electricity

We want on-demand electricity. We don’t just want electricity when the wind is blowing the right speed (wind turbines only produce electricity when the wind is blowing hard enough, but not too hard). We want some electricity all the time–to run our computers, refrigerators, etc. We also want to have more electricity at times of high energy use–such as the afternoon when we want to run our conditioners more.

But even in the best locations, wind only produces electricity 35% of the time. People don’t want electricity just 35% of the time.

Wind power can only displace a very small amount of natural gas

When new wind farms are built, we have to have natural gas-powered electricial generation for when the wind doesn’t blow. Natural gas turbines can quickly spin up, making them ideal to use when the wind quickly changes. But as a result, wind can only displace a very small amount of natural gas. In fact, as there is more wind production, we need more and more natural gas-fired turbines to make up for the slack when there isn’t more wind. This does not free up natural gas to power our cars.

Pickens has large investments in natural gas

Unsurprisingly, Pickens has large investments in natural gas. By increasing the amount of wind generation only makes natural gas more valuable, increasing the value of his holdings. Becuase the subsidies are so lucrative for wind prouction, Pickens will also make money from his wind turbines (even though he thinks they are ugly and so he doesn’t have any on his ranch).

I have little respect for Obama

Here something he said yesterday about energy:

Like George Bush and Dick Cheney before him, [John McCain] sees more drilling as the answer to all of our energy problems, and like them, he’s found a receptive audience in the very same oil companies that have blocked our progress for so long.

I could respect Barack Obama if he complained about oil companies with an argument that makes sense. How exactly have oil companies “blocked out progress for so long”? Have they sold gasoline that was too cheap so other sources of oil didn’t develop? Did they sell a product that was so beguiling that people bought trillions of dollars worth of it?

What exactly are these nefarious oil companies doing?

The greenest car is the one that’s already on the road…

A couple days ago I wrote a post about green buildings arguing that tearing down an existing building and building a new “green” building doesn’t necessarily save energy. One of the reasons is because constructing a new building takes a lot of energy, regardless of the construction materials used. This is also true with cars.

I read on the Wired blog yesterday about Ryan Mickle. A couple years ago, Mickle bought a Range Rover Sport. Now he lives in San Francisco and regrets his decision because he believes the SUV is environmentally irresponsible. He writes:

One Fewer SUV.

Since I moved back to San Francisco, I don’t need a car, so I want to take this SUV off the road for good. If I sold it, it’d just keep polluting with someone else behind the wheel. So I’m leaving what to do with it to everyone to help me decide.

Send me your ideas.

Should we blow it up? Drive it off a cliff? Convert it to a biodiesel or plug-in hybrid and give it to an organization that can use it to do something great? I’d expect that the best ideas will both be environmentally conscious and attention getting.

If Mickle is truly concerned about being environmentally conscious, he has a real problem. He says he wants to take the SUV off the road for good, but that’s almost certainly the most environmentally irresponsible thing to do.

A lot of energy goes into manufacturing a car. There are the obvious energy expenditures such as the power required to produce and transport the raw materials and the assemble and transport the car to a dealership. But there are unseen energy costs such as the energy that was required in the research and development of the car and the energy component of the administrative overhead for the auto company. All of this energy use adds up.

Mickle doesn’t want this car on the road because it only gets 13 mpg. That’s true, but throwing it away is wasting most of the energy that was used to manufacture the car. This is the point of reusing something–we reuse something because it is cheaper (or requires less energy) to reuse something rather than throw it away. A car is definintely not a single-use product.

It would be more environmentally conscious to give this car to someone who is going to buy a new car than destroying it. It might seem counter-intuitive, but people who want to “be green” need to think about all of the costs and benefits of their actions, not just one aspect (such as a car’s fuel economy).

Environmentalists are a bit hyperbolic

The LA Times reports an amazing quote that is all too common from environmentalists. Here it is:

“Growing coal use threatens nothing less than the end of civilization as we know it,” said Henry Henderson, the Chicago-based Midwest director of the Natural Resources Defense Council.”

I’m sorry, there is no reason to believe that burning coal will end civilization as we know it. The worst case scenario is a hotter world with higher seas. That will not end civilization. What will end civilization as we know it is less energy. But that’s what exactly what environmentalists want.

Paul Krugman and libertarian economist agree–speculation isn’t the cause the high oil prices

High oil prices has caused some strange alliances. Both Republican and Democrats seem to agree that speculators are to blame for the high oil prices. John McCain for example recently said, “While a few reckless speculators are counting their paper profits, most Americans are coming up on the short end — using more and more of their hard-earned paychecks to buy gas.” Barack Obama, not to be outdone by McCain’s, has called for “abuses in oil speculation.”

But more interestingly Paul Krugman, who is much more sympathetic to the Democrats, and libertarian economists believe that speculation isn’t to blame. Krugman writes:

O.K., let’s talk about the reality.

Is speculation playing a role in high oil prices? It’s not out of the question. Economists were right to scoff at Mr. Masters — buying a futures contract doesn’t directly reduce the supply of oil to consumers — but under some circumstances, speculation in the oil futures market can indirectly raise prices, encouraging producers and other players to hoard oil rather than making it available for use.

What about those who argue that speculative excess is the only way to explain the speed with which oil prices have risen? Well, I have two words for them: iron ore.

You see, iron ore isn’t traded on a global exchange; its price is set in direct deals between producers and consumers. So there’s no easy way to speculate on ore prices. Yet the price of iron ore, like that of oil, has surged over the past year. In particular, the price Chinese steel makers pay to Australian mines has just jumped 96 percent. This suggests that growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included.

Libertarian economist Robert Murphy reaches the same conclusion. He writes:

  • Record-high oil prices demand a target, and some politicians are increasingly pointing the finger at speculators in the commodities futures markets. But high oil prices are due to restricted supply, booming demand, and a weakening dollar.
  • There is no hard evidence that speculators are responsible for high oil prices. If the price of oil truly were above the level that the fundamentals could support, we would see growing inventories of crude. But inventory levels show no such pattern.
  • Speculators provide a vital function. By buying when prices are low and selling when prices are high, they actually make oil prices less volatile. Large investment funds provide liquidity to the commodities futures markets, and allow producers and consumers to concentrate on their core businesses.

It’s a weird world when libertarians and Krugman agree. Stranger still when the Republicans and Democrats agree. But when Republicans and Democrats agree, you know that it must be politically expedient. Too bad that politicially expediency doesn’t help the people.

How to fight global warming more efficiently than using cap-and-trade

Bjorn Lomborg writes in the Washington Post today:

Sen. Barbara Boxer (D-Calif.), a co-sponsor of the bill, has called it “the world’s most far-reaching program to fight global warming.” It is indeed policy on a grand scale. It would slow American economic growth by trillions of dollars over the next half-century. But in terms of temperature, the result will be negligible if China and India don’t also commit to reducing their emissions, and it will be only slightly more significant if they do. By itself, Lieberman-Warner would postpone the temperature increase projected for 2050 by about two years.

Politicians favor the cap-and-trade system because it is an indirect tax that disguises the true costs of reducing carbon emissions. It also gives lawmakers an opportunity to control the number and distribution of emissions allowances, and the flow of billions of dollars of subsidies and sweeteners.

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Many people believe that everyone has a moral obligation to ask how we can best combat climate change. Attempts to curb carbon emissions along the lines of the bill now pending are a poor answer compared with other options.

Consider that today, solar panels are one-tenth as efficient as the cheapest fossil fuels. Only the very wealthy can afford them. Many “green” approaches do little more than make rich people feel they are helping the planet. We can’t avoid climate change by forcing a few more inefficient solar panels onto rooftops.

The answer is to dramatically increase research and development so that solar panels become cheaper than fossil fuels sooner rather than later. Imagine if solar panels became cheaper than fossil fuels by 2050: We would have solved the problem of global warming, because switching to the environmentally friendly option wouldn’t be the preserve of rich Westerners.