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Posts from — April 2010

Subsoil Oil and Gas Privatization: Private Wealth for the Common Good (Message for Latin America)

[Editor note: A profile of Guillermo "Billy" Yeatts, an Argentinean and energy expert, author, and free-market philanthropist, is at the end of this post.]

The history of oil and gas production in Latin America has been characterized by a continuing tug of war between the state as owner of the subsurface (Spanish colonial tradition) and private producers in pursuit of profits. Private participation in the industry has been limited to brief periods and restricted to specific phases of oil and gas production.

The typical pattern is that foreign oil and gas companies are allowed into a country to locate and initiate production. Once oil is flowing, governments nationalize the companies’ facilities – with or without compensation – and hand them over to government-owned and operated monopolies.

Whether the oil or gas is produced by private corporations or by a government monopoly, it is almost always the government that receives most of the profits. All too often, the money is used to keep the heads of state in power.

In the United States, by contrast, individuals own and control much of the nation’s subsurface rights to energy and other minerals. The results are starkly different. While the oil and gas industry in the United States expanded quickly, bringing prosperity to many areas that were once underdeveloped or deserted, oil revenues in other countries have propped up corrupt governments with little or no benefits to the general welfare.

State ownership of the subsurface removes incentives for risk-taking, investment, and technological innovation. Farmers and ranchers are pitted against oil development. In Latin America, the prospect of an oil or gas discovery is a farmer’s worst nightmare. They reap no financial benefit from the discovery, but they do suffer land damage and the disruption to their lives from drilling and production operations. Consequently, a landowner’s incentive is to hide any mineral wealth his property might have and to fight any attempt to exploit such wealth.

In the United States, on the other hand, landowners dream of oil being discovered on their property. If they own the mineral rights, they are compensated for the right to explore and receive a royalty for any minerals produced. This more than makes up for the inconvenience of oil and gas operations on their property.

Spread of Oil Nationalism in Latin America

Theories of political and economic nationalism espoused by Latin American intellectuals in 1920s provided the analytical framework for dissatisfaction with the distribution of wealth. Nationalists became convinced that the state had to play a major role in the operation and development of the oil and gas industry. This led to a domino strategy of government confiscations of privately owned energy facilities in both Latin America and the Middle East. [Read more →]

April 30, 2010   4 Comments

The Insull Speech of 1898: Call for Public Utility Regulation of Electricity (The origins of EEI’s support for cap-and-trade in today’s energy/climate bill)

[Editor note: Bradley is currently working on the second volume of his political capitalism trilogy. Book 1, Capitalism at Work: Business, Government, and Energy, came out last year.  Edison to Enron: Energy Markets and Political Strategies (Scrivener Press/John Wiley & Sons) will examine the rise and fall of the father of the modern electricity industry, Samuel Insull. Publication of Book 2 is scheduled for year-end.]

“Several electric utilities, including nuclear power giant Exelon and PG&E, joined more than 170 businesses to punctuate the importance of placing a price on carbon through a complex bill that is facing a political impasse.”

 - Evan Lehmann, “Businesses Push Reid to Abandon Immigration for Climate,”E&E News, April 29, 2010

The Edison Electric Institute has controversially thrown its support behind cap-and-trade legislation sponsored by Sens. John Kerry (D-Mass.), Lindsey Graham (R-S.C.) and Joseph Lieberman (I-Conn.), aka the KGL Bill.

The question may be asked: why would a major business lobby advocate legislation that increases costs and thus electric rates?

The answer is easy: the companies get to pass on the costs to their customers under public-utility regulation. So higher costs from CO2 rationing can be judged ‘reasonable’ by state authorities, and the new federal law can give the utilities a lot of sweeteners to make sure they profit, at least in the short term.

Jim Rogers of Duke Energy, who more than any other person in his industry has championed CO2 pricing, sees advantage. The Ken Lay protégé will go down in history as one of the major rent-seekers of our era–despite the troubled case for climate alarmism, the political problems of any global “solution,” and the negative effects on electricity users.

Where did the drive for automatic pass-through of  “reasonable” costs begin? For the electric industry, it began in Chicago in June 1898 in a then-controversial speech by Samuel Insull, the head of Chicago Edison Company and the president of the major trade association of the industry, the National Electric Light Association.

Insull did not want regulation for its own sake. He believed that franchise protection was worth giving authorities control over rates. Insull believed that this quid-pro-quo — exclusive franchises for cost-based rate maximums — would lower interest costs (a huge cost item for public utilities) and thus lower rates. Insull also saw statewide public utility regulation as a better alternative to local politics and to municipalization.

Insull’s political program was ahead of its time. Most of his fellow electric utility heads were opposed when Insull first gave his speech. But he would win them over in the next years, and state-after-state would implement formal cost-of-service regulation for electricity. [Read more →]

April 29, 2010   4 Comments

LADWP vs. Los Angeles: Expensive Renewables Hit the Fan

Just what shape is California in?

Several weeks ago, credit default swaps on state bonds were at 200 basis points. Kazakhstan’s were at 170. At the end of 2009, California’s cost of debt was the treasury rate plus 310. Mexico’s was plus 185. The state is temporarily solvent thanks to a great legislative fix: they took an extra month of state income tax withholding from all state workers’ paychecks, which they get back (without interest) in their next tax refunds.

When it comes to gauging the state of California’s government, however, you can’t do better than follow the conflict between Los Angeles’ municipal electric system – the Department of Water and Power (LADWP) – and the city’s mayor and council.

Municipals are an odd American institution, a significant presence of publicly funded entities in a system that is largely private. Exempt from regulation in most states, municipal utilities are governed by local officials or appointed independent panels. LADWP has the latter. Cities usually get a percentage of the utility’s revenue off the top (the analogue of a corporate utility’s taxes), and some, including Los Angeles, give municipal agencies “free” power.

LADWP is governed about as well or poorly as any other electric system, public or private, and it does give the city $200 million a year. There have been embarrassments – two years ago, for example, it spent $50,000 on “lactation consultants,” hoping to discourage absenteeism by certain employees.

And now renewables and global warming. [Read more →]

April 28, 2010   7 Comments

Power Hungry: The Myths of “Green” Energy and the Real Fuels of the Future—by Robert Bryce (nutrition for energy appetites)

[Editor note: Bryce's Power Hungry, released today, is his second book on energy after Gusher of Lies and fourth book overall.]

In his brand new book Power Hungry, energy journalist and Austin apiarist Robert Bryce marshals many numbers to plainly show how modern culture exacts power from energy to save time, increase wealth, and raise standards of living. Bryce also dispenses common sense to citizens and policy makers for an improved environment, a more productive economy, and a more enlightened civil society.

Inspired by enegy writings of Rockefeller University’s Jesse Ausubel, and the University of Manitoba’s prolific Vaclav Smil, he makes the case for continuing down the path of de-carbonizing our machine fuels—a process begun two hundred years ago when we turned from wood to fossil fuels and huge reservoirs of impounded water. As the world’s population continues to urbanize, people will inevitably demand cleaner, healthier, environmentally sensitive energy choices.

Today, the world uses fossil fuels (oil, gas, and coal) for approximately 86 percent of its energy, getting a lot of bang for its buck. Bryce offers convincing evidence that, over the next several generations, particularly since broad energy transformations require much time and financial investment, relatively cleaner burning natural gas will provide a bridge to pervasive use of nuclear power—“ the only always-on, no-carbon source that can replace significant amounts of coal in our electricity generation portfolio.” And if nuclear ultimately becomes the centerpiece for the electricity sector, which constitutes about 40 percent of our total energy use, this development would accelerate the de-carbonization of the transportation and heating sectors as well.

His narrative transcends the current climate change debate. He thinks the evidence on either side is equivocal, at best provisional, and, even if it could be proven conclusively that humans were responsible for precipitously warming the earth by producing a surfeit of carbon dioxide, there is little that could be done about the situation now that would be consequential or practical, except embrace imaginative adaptation approaches.

Four “Imperatives”

Bryce organizes his ideas around four interrelated “Imperatives” that serve as a prime motif for human history and explain much contemporary circumstance: power density, energy density, scale and cost. He shows that, although energy is the ability to do work, what people really crave is the ability to control the rate at which work gets done—power. Performing work faster means more time to do something else. This begets an appetitive feedback loop, where more power unleashes more time to produce more power. As the scale of this process increases, costs are reduced, making what power creates more affordable.

In terms of economic efficiency and improved ecosystems, producing the most power in the smallest space at a scale affordable by all is what present and future enterprise should ensure. [Read more →]

April 27, 2010   16 Comments

Population, Consumption, Carbon Emissions, and Human Well-Being in the Age of Industrialization (Part IV – There Are No PAT Answers, or Why Neo-Malthusians Get It Wrong)

Editor’s note. This is the conclusion of a four part series by Indur M. Goklany, in which the Neo-Malthusian view of the adverse effects of industrialization, economic growth and technological change is contrasted with empirical data on the substantial progress in human well-being during the age of industrialization. Having established this, he appropriately warns about predicting the future. For ease of reference, links to the previous three parts are included at the end.

Neo-Malthusians believe that humanity is doomed unless it reins in population, affluence and technological change, and the associated consumption of materials, energy and chemicals. But, as shown in the previous posts and elsewhere, empirical data on virtually every objective indicator of human well-being indicates that the state of humanity has never been better, despite unprecedented levels of population, economic development, and new technologies. In fact, human beings have never been longer lived, healthier, wealthier, more educated, freer, and more equal than they are today.

Why does the Neo-Malthusian worldview fail the reality check?

The fundamental reasons why their projections fail are because they assume that population, affluence and technology — the three terms on the right hand side of the IPAT equation — are independent of each other. Equally importantly, they have misunderstood the nature of each of these terms, and the nature of the misunderstanding is essentially the same, namely, that contrary to their claims, each of these factors instead of making matters progressively worse is, in the long run, necessary for solving whatever problems plague humanity. [Read more →]

April 26, 2010   4 Comments

Gerald North: The Non-Alarmist Alarmist? (A challenge to Texas A&M’s noted climatologist to explain himself on his recent move to Dessler-Left alarmism)

[Editor note: This is Part V of a series of posts on the political activism of climate scientists at Texas A&M.]

“I really enjoyed the ‘fact’ that I saved you from being a ‘climate alarmist’. Frankly, your descriptions of my colleague Andrew Dessler are outrageous. You seem to forget that he spent several hours tutoring you and your student from [Kinkaid] on climate change during a university holiday. As I said to Steve McIntyre after spending hours trying to help him, then being mocked in his blog, ‘No good deed goes unpunished’. I am afraid to say anything more to you via email.”

- Gerald North to Rob Bradley, April 17, 2010 (cc Eric Berger, William Dawson, Andrew Dessler)

Dear Jerry:

I asked for substantive feedback from you to my post(s) and instead got a sarcastic, emotional response. You are clearly annoyed, but open debate about contentious public public policy issues should not be compromised by personal relationships or ‘favors’. And there is nothing wrong about a ‘challenge culture’ and mid-course corrections, either. We are talking about climate science, after all.

I am going to elaborate as best I can and bring in some more of your own quotations for the record.

[North as My Enron Consultant]

Jerry: you are a very interesting and important figure in the climate-change debate–and one whose views future historians of science should note.

Back in 1998, I picked you out of many candidates as a corporate consultant because you seemed to be more open to finding the middle than many of your colleagues. Thinking that Enron was progressive on the climate issue (and they unfortunately were–Ken Lay saw many rent-seeking opportunities with CO2 pricing), you said yes.

“In talking over consulting with ENRON with many friends, I decided to do it, only because of the open-minded position ENRON seems to be taking. I decided that I might even have an influence on what course ENRON eventually takes. I am not concerned with one ideological position or another—just the truth. If ENRON makes use of the truth to make a profit, good show. If ENRON wants to twist the truth to the detriment of everyone else, I will drop out—tarnished but wiser.”

- Gerald North (Texas A&M) to Rob Bradley (Enron), March 25, 1998

I think you provide an excellent ‘case study’ to understand:

1) how the climate alarm got out of control, and

2) how/why a good many in your profession got off scientific track (as evidenced by Climategate and the growing recognition of problems with the IPCC reports).

My Major Point: You Have ‘Gone Political’ and ‘Gone Left’ Post-Climategate Despite Your Skepticism About Climate Alarmism–and Climategate Itself

I have a treasure trove of emails from you that are fair and insightful, in retrospect. (And you have stated that you write your emails as if they would be made public–nothing to fear from your own views.) Some of them are very critical of scientists–skeptics and alarmists. Your criticisms of the skeptics are public (I can provide citations); your more ‘private’ views against alarmism should be made public too. [Read more →]

April 25, 2010   10 Comments

Population, Consumption, Carbon Emissions, and Human Well-Being in the Age of Industrialization (Part III — Have Higher US Population, Consumption, and Newer Technologies Reduced Well-Being?)

Editor’s note: In Part III of this four-part series, Indur M. Goklany applies the general analyses of Part I and Part II to the impact of U.S. industrialization on human well-being and environmental improvement.

In my previous post I showed that, notwithstanding the Neo-Malthusian worldview, human well-being has advanced globally since the start of industrialization more than two centuries ago, despite massive increases in population, consumption, affluence, and carbon dioxide emissions. In this post, I will focus on long-term trends in the U.S. for these and other indicators.

Figure 1 shows that despite several-fold increases in the use of metals and synthetic organic chemicals, and emissions of CO2 stoked by increasing populations and affluence, life expectancy, the single best measure of human well-being, increased from 1900 to 2006  for the US.  Figure 1 reiterates this point with respect to materials use.

Part III Figure 1

Figure 1: U.S. metal and chemical use, carbon dioxide emissions, population and affluence compared to life expectancy, 1900–2006.  Metals and chemical use exclude their content in imported goods. Sources: Matos (2009), CDIAC (2009), Maddison (2010), US Bureau of the Census (2010).

These figures indicate that since 1900, U.S. population has quadrupled, affluence has septupled, their product (GDP) has increased 30-fold, synthetic organic chemical use has increased 85-fold, metals use 14-fold, material use 25-fold, and CO2 emissions 8-fold.  Yet life expectancy advanced from 47 to 78 years. [Read more →]

April 24, 2010   10 Comments

Population, Consumption, Carbon Emissions, and Human Well-Being in the Age of Industrialization (Part II — A Reality Check of the Neo-Malthusian Worldview)

Editor’s note: This is the second of a four part series. Part I provided a long-term view of commodity prices, their affordability and the impact on human well-being. Here, Indur M. Goklany looks in more detail at global trends in human well-being in the Age of Industrialization, from 1750 – 2007. (Part III and Part IV are here.)

In the worldview of many environmentalists and Neo-Malthusians, as population and economic development increase so does the consumption of energy, land, water and other natural resources. Originally, Malthusians feared that we would run out of these resources, and natural resource–based products, particularly food, would be in short supply, resulting in famine and a general decrease in human well-being. But as shown in the previous post, instead of becoming scarcer, resources (such as metals and food) actually have become more affordable, and the hunger and famine that had been foretold went AWOL. [I will out of charity, not beat the dead horse of Paul Ehrlich’s failed predictions.] Elsewhere, I have also shown that, at least before the enactment of government policies to boost biofuels, land and water use had, more or less, stabilized in the richer world and, possibly, worldwide (see here and here).

Today, Neo-Malthusians focus more on pollution, environment, and climate change, consumed by the notion that the by-products of all the production and consumption that underlies humanity’s economic activity would overwhelm the earth’s assimilative and regenerative capacities. This view is captured in the identity, I = PAT, where I is a measure of impact (usually, environmental impact); P is the population; A stands for affluence, and is measured by per capita production or per capita consumption and often proxied by the gross domestic product (GDP) per capita; and T, denoting technology, is a measure of the impact per unit of production or consumption. Notably, the product of P and A is the GDP, that is, consumption. Therefore, under the IPAT formulation: (a) T is the ratio of impact to GDP, which I will call “impact intensity,” and (b) the impact should grow in proportion to GDP.

As noted here:

The IPAT identity has been remarkably influential. It has intuitive appeal because of its apparent simplicity and seeming ability to explain how population, consumption or affluence, and technology can affect human and environmental well-being. It serves, for example, as the “master equation” for the field of industrial ecology (e.g., Graedel and Allenby 1995). One of its versions underpins the Intergovernmental Panel on Climate Change’s emission scenarios … (IPCC 2000, pp. 83–84)…

Despite recognizing that “benign” technology could reduce some impacts, many Neo-Malthusians argue, to quote Jared Diamond (2005, p.504), it is a mistake to believe that “[t]echnology will solve our problems.” In fact, goes this argument, “All of our current problems are unintended negative consequences of our existing technology. The rapid advances in technology during the 20th century have been creating difficult new problems faster than they have been solving old problems…” Diamond (2005, pp. 505). Ehrlich and co-workers argue that for most important activities, new technology would bring diminishing returns because as the best resources are used up (e.g. minerals, fossil fuels and farm land), society would increasingly have to turn to marginal or less desirable resources to satisfy demand which would increase energy use and pollution (Ehrlich and Holdren 1971; Ehrlich et al. 1999).

According to the IPAT identity, if all else remains the same, an increase in population, affluence or technology would each act as multipliers for environmental impact (e.g., Ehrlich and Holdren 1971; Ehrlich 2008). And as that impact increases, human well-being would necessarily deteriorate. The IPAT identity has been used to support the contention that the human enterprise as currently constituted is unsustainable in the long run, unless the population (P) shrinks, we diminish, if not reverse, “overconsumption” or economic development (A) (particularly in the United States), and apply the precautionary principle to new technologies, which in their view essentially embodies a presumption against further technological change unless the technology involved is proven safe and clean in all respects (Ehrlich and Holdren 1971; Ehrlich and Ehrlich 1991; Myers 1997; Raffensperger and Tickner 1999).

But do empirical data support the notion that increasing population and consumption coupled with technological change reduces human well-being? [Read more →]

April 23, 2010   14 Comments

Population, Consumption, Carbon Emissions, and Human Well-Being in the Age of Industrialization (Part I — Revisiting the Julian Simon-Paul Ehrlich Bet)

Editor’s note: As the United States commemorates the 40th anniversary of Earth Day we can expect to hear various commentators bemoan the growth in population, consumption, and carbon emissions driven by fossil-fueled technologies. We will be told that this is unsustainable, that we are running out of resources, that prices are inevitably headed up, and, worse, that such consumption reduces both environmental and human well-being. In this worldview, industrialization and economic development are the inventions of the Devil; de-industrialization and de-development will be our savior.

In this series of posts, Indur M. Goklany will compare the above Neo-Malthusian view of industrialization, economic growth, and technological change against empirical data on human well-being from the age of industrialization. First, he will revisit the bet made in 1980 by Julian Simon and Paul Ehrlich on the direction of commodity prices, and examine long-term trends in the prices and affordability of various commodities, specifically, metals and food, going back to at least 1900. Parts II and III will compare long-term trends in population, consumption, economic development, and carbon emissions against trends in human well-being for the world and the United States, respectively. Part IV will provide an explanation as to why the empirical data is at odds with the Neo-Malthusian worldview.

This series of posts draws liberally from: Goklany IM (2009), Have increases in population, affluence and technology worsened human and environmental well-being? Electronic Journal of Sustainable Development, vol. 1, no.3.

Based on the run-up in global commodity prices over the last decade, some observers speculate that Julian Simon lucked out in winning his famous bet with Paul Ehrlich. Paul Kedrosky, for instance, notes that had the bet been made in subsequent years, Simon would, more likely than not, have lost. And, indeed, there is an element of truth to that, but that would not vitiate Simon’s larger point, namely, that human ingenuity left to itself would probably reduce the the price of goods and, more importantly, advance the state of humanity.

In my opinion, the direction of commodity prices in the bet itself served as a surrogate for the fundamental difference between the worldviews of the two protagonists, namely, whether human well-being would advance over time considering increases in population, and economic and technological development. In fact, some Neo-Malthusians opine that present day populations are already too large, while others of the same ilk believe that continued economic and technological development is unsustainable (see, e.g., here).

But before getting into the larger and more important issues, let me first address the bet itself. Recall that the bet was made in 1980, and the late 1970s and 1980 had seen a spectacular increase in commodity price following the second oil shock. But what goes up is also likely to come down. Statisticians call this the regression to the mean. And Simon, being an economist and an entrepreneur at heart, took a calculated risk and “gambled” on that.

And, indeed, commodity prices reverted to trend and prices turned down during the 1980s. So fortune favors the prepared, and Simon was the better prepared and, perhaps, the wiser of the two protagonists. But he was also lucky, because 10 years is but a brief moment in the context of history. The appropriate period to determine whether Simon or Ehrlich’s worldview is better aligned with historical reality is to look at the matter over many decades, if not generations. [Read more →]

April 22, 2010   3 Comments

Urban Rail Transit: On the Wrong Track

In 2006, Nashville began operating the Music City Star, a commuter train between Lebanon and Nashville. Transit officials brag that this is “the most cost-effective commuter train in the country” because they spent only $41 million to begin service.

To be cost-effective, however, you need more than just a train: that train needs to produce something. The Music City Star carries only about 250 commuters on round trips each day, riders who could easily have been accommodated in a few buses costing less than $3 million. In fact, it would have been less expensive to give each of those commuters a new Toyota Prius every year for the next 30 years than to operate the train.

Since 1970, American cities have spent about $100 billion building new rail transit lines, and virtually all of it has been wasted. Rail transit was rendered obsolete in the 1920s by the development of reliable buses that could go on any streets open to automobile traffic. Since the cost of the streets was shared with autos and trucks, the capital and maintenance requirements for buses are far lower than for rails.

After 1920, some 700 American cities with streetcar or other rail transit systems converted those mostly private systems to buses. By 1970, only eight urban areas still had some form of rail transit. Today, rail transit can be found in more than 30 urban areas, and the number is growing. This turnaround is largely due to perverse incentives in federal transportation funding that rewards transit agencies for selecting high-cost transit solutions when low-cost solutions–usually buses–would work better.

Predictably, the rail construction boom has generated a huge lobby for more federal funding for rail transit. The American Public Transportation Association, whose members include numerous construction and engineering firms, has a $20 million annual budget, which is several times greater than the annual budgets of all of the various highway groups in Washington combined. Most contractors that can build highways can make even more profits building rail lines, so they have no interest in opposing rail.

One of the big arguments for building rail transit is that it will save energy. But, as I found two years ago in a Cato report, the energy saved by using steel wheels instead of rubber tires is offset by three energy costs. [Read more →]

April 21, 2010   5 Comments