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Posts from — June 2011

Open-Ended Resourceship

“If resources are not fixed but created, then the nature of the scarcity problem changes dramatically. For the technological means involved in the use of resources determines their creation and therefore the extent of their scarcity. The nature of the scarcity is not outside the process (that is natural), but a condition of it.”

- Tom DeGregori (1987). “Resources Are Not; They Become: An Institutional Theory.” Journal of Economic Issues, p. 1258.

The confounding of physics with economics has plagued a real-world understanding of mineral resource developments. The phenomenon of entropy and the laws of thermodynamics rule in their domain. But there is no economic law analogous to the physical conservation of matter. There is no law of conservation of value; value is continually, routinely created by the market process. And this value creation does not deplete–just the opposite.

This insight reorients the peak-oil debate from pessimism about hypothetical future physical resources to here-and-now concerns over incentives and institutions–or the ability of a free market to create a robust energy future.

Market Entrepreneurship … Mineral ‘Resourceship’

Israel Kirzner in the Austrian-School tradition has emphasized the open-endedness of market entrepreneurship. “Entrepreneurial alertness [is] in principle inexhaustible,” Kirzner has stated, (1) wholly rejecting the notion of a “potential stock of entrepreneurial alertness in a society as some quantity ‘available to be used by society’.” (2) In the vernacular of the oil industry, there are no reservoirs of proved, probable, or speculative quantities for entrepreneurship.

The institutionalist conception of knowledge as the ultimate resource powerfully complements an Austrian theory of resources. Thomas DeGregori has defined resources as “a set of capabilities” (3) and “finite but unbounded” (4). He restated and embellished the “resources are not, they become” thesis of his mentor Erich Zimmermann as follows: [Read more →]

June 30, 2011   3 Comments

Shale Gas and the New York Times: The Challenge from Energy In Depth (A ‘Dewey-Defeats-Truman’ Energy Moment?)

[This factual rebuttal against peak-shale by Chris Tucker and Jeff Eshelman of Energy In Depth (a project of the Independent Petroleum Association of America, or IPAA) is a serious moment in the energy debate. MasterResource reproduces their rebuttal in total and invites comments, particularly from the 'peak oil' community that received the front page article of their dreams (or nightmares, depending on the ultimate outcome of this fact-versus-fact debate).]

“What [the New York Times] isn’t entitled to, at least in our view, is to represent its piece as an original investigation; not when the story was essentially outsourced to a well-known critic of the industry whose predictions on shale’s imminent collapse grow less defensible (and more difficult to find on his website) by the day. Nor do we believe The Times is entitled to mislead its readers on the expertise of those whose “leaked” emails — many written in 2008 and 2009 – are used to form the basis of the story, especially when real-world production numbers from 2010 and 2011 directly contradict those speculative accounts.”

- Chris Tucker and Eric Jeff Eshelman, June 27, 2011

The United States produced more natural gas in 2010 than at any point in the previous 37 years, a stunning reversal of fortune given the country’s supply picture earlier this decade, and one that could not have been possible without the massive volumes of American energy that continue to be generated from shale.

So what happens from here? By now, you’ve likely heard the stories and seen the estimates: with everyone from IEA to EIA to PGC to MIT projecting a future in which shale’s production trajectory continues along an aggressive upward path, delivering literally quadrillions of cubic feet of clean-burning natural gas to generations of consumers not only in the United States, but around the world. It’s a view that’s supported by the preponderance of science and a majority of scientists, not to mention one that’s continuously reinforced by new data.

Over the weekend, The New York Times sought to advance a contrarian view on the subject, and to that view The Times (and reporter Ian Urbina) is more than entitled. What it’s not entitled to, at least in our view, is to represent its piece as an original investigation; not when the story was essentially outsourced to a well-known critic of the industry whose predictions on shale’s imminent collapse grow less defensible (and more difficult to find on his website) by the day. Nor do we believe The Times is entitled to mislead its readers on the expertise of those whose “leaked” emails — many written in 2008 and 2009 – are used to form the basis of the story, especially when real-world production numbers from 2010 and 2011 directly contradict those speculative accounts.

Against that backdrop, we attempt below to pull back the curtain a bit on some of the tricks employed in The Times’ latest front-page assault on responsible natural gas development: [Read more →]

June 29, 2011   3 Comments

Shale Gas Neo-Malthusianism: Poor Journalism at the ‘Newspaper of Record’

“I’m sorry for you—coming to Texas [in 1915] to look for oil. Don’t you know there is no oil in Texas?!”

- Wallace Pratt (oil and gas geologist), quoted in “Oil Finding—the Way it Was,” Petroleum 2000 Issue, Oil & Gas Journal, August 1977, p. 144.

The New York Times has published two amazing front-page articles on shale gas (here and here), which raise a number of issues about the prospects for the resource, suggesting that the reserves and profitability are vastly overstated. A careful reading of the articles, however, suggests that it is more smoke than fire.

Two specific issues raised in the article are important: the profitability of shale gas wells and their long-term production profiles. Many ancillary issues are also raised but can be dispensed with.

First, the reports that many landowners were not paid the promised bonuses or made much less than expected: this is hardly unusual when a resource boom occurs. Some companies are overly optimistic, rush in with offers that are intended to line up prospects as quickly as possible, then find that they can’t satisfy them.

The method’s use of water and potential contamination are certainly concerns, and is being addressed by the government. While the industry downplays concerns, and much of the coverage is the usual NIMBY hype, it is quite possible that this will add to long-term costs.

The entire articles are very poorly done, making references and implications that are completely unsupported by any real facts. A Fed official is skeptical? Some wells are described as underperforming?

Skepticism, True and False

That there are skeptics is hardly surprising: there are always skeptics, those who grumble about new technologies, who think that claims are overblown, and downplay the long-term success or applicability of techniques that appear promising. [Read more →]

June 28, 2011   8 Comments

North Carolina Onshore Wind Development: Look Before You Leap (Part II)

[Editor Note: Part I by Mr. Droz examined North Carolina's proposed offshore wind power development.]

As a citizen of North Carolina and someone with a modicum of energy knowledge, I am particularly interested in how the state is going to handle the approval process of its first industrial wind project (now about two-third’s along).

My ongoing investigation has involved speaking and/or corresponding with about two dozen key state agency people. Most were cooperative and helpful and readily acknowledged that this was new to them. I was appreciative of the fact that most also expressed an interest in being more involved with wind energy approval; but it always came back to the fact that North Carolina has no law that mandated their participation or spelled out their wind energy assessment responsibility.

My experience might be helpful to others given the similarities between North Caroline and other states and provinces. Given the growing grassroots scrutiny of industrial wind projects because of their taxpayer/ratepayer dependency and heavy environmental impact, we all need to share our experiences.

“Desert Wind” Project

Desert Wind” is a wind energy project proposed for the Elizabeth City area of northeastern North Carolina (NC). This is the first industrial wind project in the state, and it has been projected to be one of the largest in the United States.

The driving forces behind Desert Wind are the state’s Renewable Energy Standard, lucrative federal/state financial incentives, and very permissive approval conditions. This article is about the last situation.

Throughout the process of approving this industrial complex, and then overseeing its operation, the fundamental questions are: How is the state protecting the rights of its citizens, protecting wildlife, and the environment?

The answer is that (partly due to this being the first such project) that the state was not (and is not) prepared to adequately provide any of these protections.

One would think that when a NC community is approached about hosting such an industrial project, that they should be able to go to some NC agency and would be provided with comprehensive, objective, and balanced information about the pros and cons of such developments. The community could then get accurately educated about this highly technical matter, and then come to their own conclusions as to whether or not it is beneficial for them. Unfortunately, at this time there is no such information available from any NC agency.

In fact the only state agencies that do provide information, are effectively agents of the developer, as their contributions are essentially a repetition of what the developer’s advertisements say. What’s worse is that although these state agencies have no hesitancy to pass on the developer’s claims, not a single agency has taken the initiative to get any of these claims to be legally guaranteed. As a result, communities are entirely on their own regarding getting a balanced assessment. Considering the complexity involved plus the pressure that the developer exerts on the community to expedite things (or else they will go to friendlier confines), almost no meaningful protections are enacted.

Some citizens have the mistaken idea that if the developer is “approved” that this in an indication that a thorough assessment has been conducted. Unfortunately that is not even remotely true. “Approval” of a developer merely means that the existing rules have been met. The deficiency here is that there is no NC wind development approval procedure. Instead they have to pass generic rules that apply to any business — and none of these were designed to address the intricacies of wind energy development. There are many examples, but let’s take just three. [Read more →]

June 27, 2011   7 Comments

New England’s Renewable Energy Mandate: Reality Anyone?

“Onshore wind in New England currently demands between 9-11 cents per KWh, more than twice the wholesale price of natural gas. Offshore wind is even more expensive starting at over 18 cents a KWh. More wind energy in the fuel mix will cause upward pressure on energy prices for the life of the power purchase agreements.”

- Lisa Linowes (below)

Last week, the New England Energy Alliance of Boston released its annual survey of New England energy consumers. Paul Afonso, executive director of the Alliance and a former Massachusetts utility regulator, summed the results:

Overall, the main concern of New Englanders continues to be the economy and pocketbook issues. If voters think any policy – private or public – will bring down the cost of energy, they will support it.

But if this is the case, the survey’s findings reflect a sentiment that’s entirely contrary to New England’s current energy policies. In particular, the region’s renewable energy mandate should receive public scrutiny with public-policy reform in mind.

Background

The six New England states have aggressively pushed for renewable energy development, with particular emphasis on wind power. All but Vermont have adopted a Renewable Portfolio Standard (RPS) mandating that a percentage of the electricity sold retail into the region come from renewables.

RPS obligations for 2010 were about 14% of demand — an amount satisfied through a combination of existing, qualified resources in New England, and renewable energy imported from neighboring New York and Canada (mostly hydro). Reaching 20% by 2020, however, will require new wind capacity–very expensive and unreliable capacity.  Critical adjustments in RPS policies are thus necessary to avoid ballooning energy costs that would severely compromise New England’s economy.

The cautionary tale for New England is provided by California as documented in Robert Peltier’s post yesterday, Energy Policy in California: Turning Gold into Lead.

Wind in New England: Today vs. 2020

New England currently claims 48 wind energy projects totaling 318 megawatts. Maine has the most wind installed at 266 megawatts; Connecticut the least at 0.1 megawatts.

Assuming a generous 30% annual capacity factor, wind in New England produced around 836,000 megawatts hours (MWh) in 2010, substantially below other fuel options, including natural gas that produced over 50 million MWh (that is, 60x that of wind).

New England would need to add 23 million megawatt hours (MWh) of new renewable energy in order to satisfy state mandates by 2020. Since wind energy is the primary resource proposed to be built in the region, and the resource most favored by New England’s ‘ruling class’, future RPS obligations will likely be met by in-region wind power.

But what will this look like? [Read more →]

June 24, 2011   12 Comments

Energy Policy in California: Turning Gold into Lead

Despite the state’s deep economic wounds, California’s Governor Jerry Brown last month signed SB 2X that increased the state’s already ambitious renewable portfolio standard (RPS) goal from 20% to 33% by 2020. Together with the state’s Global Warming Solutions Act of 2006 (AB 32), which requires caps on greenhouse gas emissions starting next year, the new law will push up the price of electricity and further delay the Golden State’s economic recovery by permanently driving away businesses and manufacturing jobs.

Worst-Run State: Kentucky, then ….

Last October, 24/7 Wall St., a financial news and opinion electronic newsletter, ranked the best- and worst-managed states in America. The best-run state was Wyoming, which received high marks in just about every category. Wyoming is also the least-populous state, perhaps hinting at one reason for its success.

The worst state on this list was Kentucky, barely edging out California for last-in-class honors. “While it does not quite rank as the worst state on our list, California stands out as being among the most poorly governed,” the publication wrote. “The most populous state in the union has been mired in debt and political unrest for nearly a decade. It bears the unique honor of being the only state considered economically unstable enough to have its debts, at a record $341 billion, rated at an A- by S&P.”

This year, without the $3.5 billion in federal stimulus funds to cover their losses, California legislators may finally be forced to pragmatically deal with a $19 billion budget deficit, which comes on top of a 2010–2011 carryover deficit of $6.1 billion.

Other Bad Ratings

A low opinion of California’s business climate is not limited to 24/7 Wall St. In its 2010 annual survey of the best and worst states for business, The Chief Executive magazine gave its “booby prize” for worst state to California for the second year in a row. The global consulting firm Bain & Co. found that “California is far worse [for business] than any other state by a very significant margin.” Development Counselors International (specialists in business relocations) surveyed corporate executives in March 2011 and found that 72% responded that California has the “worst business climate” in the entire U.S. [Read more →]

June 23, 2011   3 Comments

Rollins College Profile: Bradley (’77) on Enron, Life, and Real-Deal Capitalism

“Greedy capitalism got the blame for Enron, but Enron was anything but a free-market corporation…. They were gaming the system, using politics for their own interests. That’s not free-market capitalism. That’s political capitalism.”

- Robert L. Bradley, Jr. Quoted in Leigh Brown Perkins, “Energy Surge: Robert Bradley ’77 Profile, Rollins College Magazine, Fall 2009.

The end of Enron was an unlikely new beginning for Robert Bradley ’77.

After 16 years at the energy giant, the last seven as a public policy analyst and speechwriter for CEO Ken Lay, Bradley found himself stranded when the company imploded in a firestorm of shady dealings. Like most people at Enron, he never saw it coming. “As with most Enron employees, my equity was in company stocks,” he said. “So I not only lost my job, I lost my financial cushion. It was a crisis for me.”

Bradley transformed that crisis into a new career as one of the nation’s leading advocates of free-market energy policy. He founded the Institute for Energy Research, a think tank for market-based sustainability, and its lobbying affiliate, American Energy Alliance, which leads the drive against cap-and-trade (what Bradley calls “cap-and-tax”) energy legislation, as well as a national renewable-energy mandate.

Bradley espouses the view that concerns over global warming are exaggerated and that, in fact, government can significantly increase energy costs and reduce energy reliability without appreciably influencing the climate. Politically popular or not, he is no lightweight. An academic and historian with a Ph.D. in political economy, Bradley is an adjunct scholar for the Cato Institute in Washington, DC, the University of Texas at Austin, and the Institute of Economic Affairs in London. He has written for The New York Times and The Wall Street Journal and blogs on climate issues for masterresource.org and on libertarian politics for politicalcapitalism.org.

He is also the author of six books on energy, including Oil, Gas and Government: The U.S. Experience. He is currently writing the second book in a trilogy titled Political Capitalism, which uses Enron as the canary in the coal mine. “Greedy capitalism got the blame for Enron, but Enron was anything but a free-market corporation,” he said. “They were gaming the system, using politics for their own interests. That’s not free-market capitalism. That’s political capitalism.”

It was government dependence and arrogance that precipitated the Enron bust, Bradley writes in the trilogy’s first book, Capitalism at Work. “Only by manipulating the levers of government was Enron transformed from a $3-billion natural gas company to a $100-billion chimera, one that went from seventh place on the Fortune 500 list to bankruptcy.”

Bradley’s vision for a sustainable energy market focuses on greater reliance on free markets (less government control) and the end of corporate welfare (leaving business to compete without subsidies). For example, he explained, Enron was sounding the climate alarm for years, all while benefiting from wind and solar subsidies and banking on potential emissions trading markets. [Read more →]

June 22, 2011   1 Comment

The Great Resource Debate (Part III: Pessimists get Optimistic!)

[Editor note: The posts in this series are The Great Energy Resource Debate (Part I: Peak Oil was … is here!) and The Great Energy Resource Debate (Part II: Neo-Malthusian Alarmism). Part IV will look at the theoretical case for resource expansionism in light of the preceding posts.]

Julian Simon has commented that the logic of expanding oil supply is a hard case to make–not because it is incorrect but because it flies in the face of the deeply ingrained physical-science concept of fixity and depletion. But there is no question that for too many minerals and for too many long periods of time, supply has been expanding rather than depleting in a business/economic sense. And far too many of us have ‘jumped off a tall building and reported everything was nice and breezy on the way down’ but haven’t hit bottom. Peak minerals might not be in the wrong year or decade but the wrong century.

Even the best have been fooled, including Erich Zimmermann, the institutional economist whose functional theory has brilliant insights for the twin Austrian-school open-ended entrepreneurship theory and Julian Simon human-ingenuity theory. “Oil and natural gas are forging ahead rapidly, but because their total reserves are much smaller than those of coal they are bound to lose in relative importance in the not too distant future,” he said in the second edition of his classic, World Resources and Industries. (1)

The quotations below offer evidence of resource pessimists who changed their mind in regard to mineral energies of oil, natural gas, and coal. (Julian Simon, it will be remembered, left Malthusianism because of incongruent data.) Such is good news: an open mind is a terrible thing to waste! It is a sad thing when thinkers (e.g., the late Matthew Simmons) go from the conclusion to the data rather than the other way around.

Industry Voices

“Periodically ever since I was a small boy, there has been an agitation predicting an oil shortage, and always in succeeding years, the production has been greater than ever before.”

- J. Howard Pew, quoted in August Giebelhaus, Business and Government in the Oil Industry: A Case Study of Sun Oil, 1876-1945 (Greenwich, CT: Jai Press, 1980), p. 118.

“I started out as an ardent conservationist…. I was convinced by much reading in college and at Yale Law School [in the late 1920s/early 1930s] that we were going to run out of petroleum. After spending most of my life fighting a surplus, however, I’ve come to believe it will never run out.”

- J. Howard Marshall II, Done in Oil (College Station: Texas A&M University Press, 1994), p. 264. [Read more →]

June 21, 2011   3 Comments

Appreciating the Master Resource (Part II: Energy Foes Agree!)

[Editor note: Part I in this two-part series examined quotations on the primacy of energy for human betterment from friends of conventional energy and from neutral analysts.]

“When energy is scarce or expensive, people can suffer material deprivation and economic hardship.”

-  John Holdren, 1991 (full citation below)

“A reliable and affordable supply of energy is absolutely critical to maintaining and expanding economic prosperity where such prosperity already exists and to creating it where it does not.”

-  John Holdren, 2000 (full citation below)

Free-market energy proponents gain the high ground when they stress the utilitarian nature of affordable, plentiful, reliable energy. Energy statists must play defense when their opponents stress the need to keep energy affordable for the less financially able and those billion-plus world citizens who do not have access to modern forms of energy.

Increased energy affordability is not bad but good. Yet cheap energy is the enemy to the other side (although the Obama greens will not publicly admit it). Julian Simon noticed as much when he wrote during the BTU tax debate in 1993, titled The Cheaper the Energy the Better:

Some people simply believe that it is ipso facto a good thing to use less energy and have less economic growth. As Paul Ehrlich put it, “Giving society cheap abundant energy is . . . like giving an idiot child a machine gun.” Other backers of the [BTU tax] bill seek not only to preserve the supply of energy but also to return to a “simpler life” (for others, of course, not for themselves) because it will make us better human beings. As Amory Lovins puts it, “If nuclear power were clean, safe, economic, assured of ample fuel . . . it would still be unattractive.”

This presents a quandary for the energy interventionists (aka forced energy transformationists) given that prominent voices in moments of candor have  expounded on the importance of affordable, plentiful, reliable energy for humankind.

The following sampling of quotations documents this point. We start with John Holdren,  President Obama’s science advisor, and continue with Paul Ehrlich, Amory Lovins, and some prominent left-of-center environmental and energy/environmental groups. [Read more →]

June 20, 2011   2 Comments

Appreciating the Master Resource (Part I: Energy Friends)

Energy is ubiquitous to modern industrial life. It is the fourth factor of production in addition to the textbook triad of land, labor, and capital. Julian Simon coined the term master resource to describe the resource of resources, energy.

Energy as been recognized as a unique driver of economic activity and human betterment for almost two centuries–about as long as carbon-based energies came to be recognized as a sea change from the inherently dilute, unreliable renewable energies of before. The Industrial Revolution was enabled by coal, the energy required by the new machinery, as W. S. Jevons so brilliantly saw in his day.

The quotations below, some classic, resonate as well or better today than ever before. They are as ‘right” as the peak-oil quotations (compiled here and here) have been wrong. Interestingly, even the foes of plentiful, affordable energy (oil, gas, and coal, if not hydro and nuclear) have also recognized the primary role of energy in modern life as will be documented in Part II.

19th Century Recognition

“Energy will do anything that can be done in the world.”

- Johann Wolfgang von Goethe (1749–1832), quoted in Vaclav Smil, Energy: A Beginner’s Guide (Oxford: One World, 2006), epigraph.

“Coal, in truth, stands not beside but entirely above all other commodities. It is the material energy of the country—the universal aid—the factor in everything we do. With coal almost any feat is possible or easy; without it we are thrown back in the laborious poverty of early times.”

- William Stanley Jevons, The Coal Question (London: Macmillan, 1865), p. viii.

“Coal is everything to us. Without coal, our factories will become idle, our foundries and workshops be still as the grave; the locomotive will rues in the shed, and the rail be buried in the weeds. Our streets will be dark, our houses uninhabitable. Our rivers will forget the paddlewheel, and we shall again be separated by days from France, by months for the United States. The post will lengthen its periods and protract its dates. A thousand special arts and manufacturers, one by one, then in a crowd, will fly the empty soil, as boon companies are said to disappear when the cask is dry. We shall miss our grand dependence, as a man misses his companion, his fortune, or a limb, every hour and at every turn reminded of the irreparable loss. Wise England will then be the silly virgin without the oil in her lamp.”

- Anonymous, The Times, April 19, 1866, p. 10; reprinted in Sandra Peart, ed., W. S. Jevons: Critical Responses, 4 vol. (New York: Routledge, 2003), vol. 4, p. 196. [Read more →]

June 17, 2011   2 Comments