Tag: Energy

Economics / Science Hall Colloquium, Monday at 4:30, Wriston Auditorium

Professor Elizabeth J. Wilson from the Humphrey School of Public Policy at the University of Minnesota will be here Monday to talk about the (potential) future of electricity systems.

Professor Wilson is a rather extraordinary interdisciplinary scholar, with a background in environmental science and a Ph.D. in Engineering & Public Policy from Carnegie Mellon University.  She is the recipient of one of the inaugural (2016) Andrew Carnegie Fellowships for her project “Nuclear Futures in a Windy World: A Comparative Analysis Balancing Energy Security, Climate Change, and Economic Development.”  She will spend the 2016-17 academic year in Denmark working on that.

Here is a blurb of her talking about sustainability and interdisciplinary research.

We will see you there.




I’m Sinking in the Quicksand of my Thoughts

The winter 2016 issue of Resources Magazine is out, featuring some germane pieces for my courses on the “real” costs and benefits of federal regulations, and the Impacts of Biofuel Mandates on Food Prices and the Emissions.

The first piece is an interview with Richard Morgenstern on his news study where he retrospectively evaluates the costs and benefits of regulations.  Clearly, Morgenstern has been interested in this area for some time, having published “On the Accuracy of Regulatory Cost Estimates” in the Journal of Policy Analysis  and Management back in 2000, a stalwart in the ECON 444 course.   One of the main takeaways is that this exercise is something that is not regularly done and is surprisingly hard to complete.  The forthcoming study Morgenstern talks about evaluates nine policies.

The second piece, as the title suggests, tries to isolate the impact of biofuel mandates on food prices.  The US Environmental Protection Agency has a Renewable Fuel Standard (RFS) that requires a certain portion of vehicle fuel to contain “renewable” sources.   In practice, this generally means corn ethanol, and as a result the demand for corn is much higher than it would otherwise be (more than 40 percent of US corn is used to produce ethanol).

This is chock full of partial-equilibrium analysis.  The increase in the demand for corn should lead to a movement along the supply curve, and a simultaneous decrease in the supply of other substitutes in production.   Meanwhile, as world income has gone up and many in developing countries are eating diets more dependent on animal protein.   This further increases the demand for cereals for animal feed (for reasons I will let you infer).

Ujjayant Chakravorty has developed a global land use model that isolates the effect of the RFS on food prices and emissions.  Here are the key findings:

[I]f there were no biofuel mandates, food prices would increase—by about 15 percent in 2022 compared to the base year 2007.  When we superimpose the US and EU biofuel mandates, world food prices go up by 32 percent.

Our results highlight the impact of increased meat and dairy consumption on the projected growth of food prices. Put another way, if diets were kept constant, food prices would actually fall over time without energy regulation. Then, with the biofuel mandates, they would rise by only 7 percent in year 2022.

Ironically, the RFS doesn’t do much for global carbon emissions.  Follow this logic:

An important conclusion from our analysis is that under no scenario do we get a major reduction in global carbon emissions. Under the RFS, US emissions fall by about 1 percent; however, that leads to a lowering of global crude oil prices and an increase in oil consumption overseas. Moreover, because of all the new land being farmed, the RFS also causes an increase in carbon emissions. Aggregate global carbon emissions (from both direct burning of fuels and land use changes) increase from 13.4 billion tons of carbon dioxide equivalent to 17.8 billion tons in 2022.

Emphasis mine in both cases.

As a colleague of mine used to say, if you want to grow fuel, grow fuel.  Don’t grow corn and turn it into fuel.

If the topic interests you, check out the symposium on agriculture in the Winter 2014 Journal of Economic Perspectives.

In Which The Atlantic Monthly Sees the Light

The cover of the May Atlantic Monthly states flatly that  “We Will Never Run Out of Oil.”

In its typically exhaustive style, The Atlantic takes a few thousand words to come to this conclusion.

This, of course, is what pretty much any off-the-shelf economist has been saying for years, though we didn’t need a series of enormous technologically driven supply shocks to lead us down the path to that conclusion.  Here’s Tim Haab on why Peak Oil doesn’t matter if markets are at all functional.  Here’s a peek at oil futures.

Oh, and by the way, Peak Oil?

We’re Live from the Lincoln Tunnel

In response to our series of posts documenting the advertising campaigns launched to attract FDI to eastern Europe, we received this trenchant (and profanity-laden) correspondence from our friend, “New Jersey Tommy”:

[What the heck], eastern Poland? [Spending all of that money] on advertisements. Those mad men are ripping off the literally poor taxpayers of eastern Poland.

Waitaminute. Huge coal and natural gas reserves. NOW we all understand what “investing in eastern Poland” means: it means supplying fossil fuel energy to hungry and thirsty western Europe. Badda bing.

In possibly related news from the March 1 Wall Street Journal reports that “Germany debates fracking as energy costs rise.”

And, as if you didn’t know already, the internets move quickly.

Taking the Flare Out of US Energy Production?

The Dakotas continue to be in the news for something other than Al Swearengen’s vocabulary, as the hydraulic fracturing boom continues the dramatic expansion of natural gas and oil production.   In fact, the natural gas production has driven domestic prices so low that almost a third of all natural gas is simply burned off, called “flaring,” as the marginal cost of capturing and sending it to market is evidently higher than the market price.  Yes, you read that correctly, almost a third of all natural gas production is literally set on fire rather than captured and sold to consumers. Consequently, the bright lights of North Dakota can now be seen from space.

One of the reasons natural gas production is so abundant is that it is a co-product with the far more valuable shale oil down there, and the Energy Information Agency (EIA) estimates that the US will be the leading oil producer in the world by 2020, producing more than any single country in OPEC. That is hard to believe.

But back to the gas — doesn’t that seem rather silly, all that flaring?  Do economists really believe that this is the “efficient” use of a scarce resource.

Well, no, we don’t.

And one of the main reasons is that the “external” cost of the carbon dioxide remains unpriced.  Economist Ed Dolan discusses the basic economics of flaring and the potential effects of a carbon tax.  

Of course, my guess is that given the discrepancy between U.S. and world natural gas prices (or here), we should be seeing the opening up of more robust export markets some time in the future.  Or, one would expect that we would.

Another possibility is a move to natural gas in the transport sector.

Either way, the brown revolution is upon us.

Energy Revolution, Cont…

For the past two years or so, I have been telling students that the proliferation of natural gas production is one of the most significant stories — and certainly environmental stories — of the past decade.  I give you further proof from the Energy Information Agency website on electricity generation:

[F]or the first time since EIA began collecting the data, generation from natural gas-fired plants is virtually equal to generation from coal-fired plants, with each fuel providing 32% of total generation.

The 32% number for coal is astoundingly low, as within the past decade the conventional wisdom was that coal was likely to provide the majority (>50%) of electricity generation.

The Washington Post included this graph in its blurb on the demise of US coal

This brief from a few months back shows previous data in the right-hand box, and breaks down trends in the share of net generation in the left-hand box.  The accompanying text provides some reasons for the decline:

What does it all mean?  Well, it means a lot.  One of the causes of the switch is the much, much lower price of natural gas over the past several years. The switch from coal to natural gas also significantly reduces carbon emissions per unit of electricity output.

Much more here.


Economics Colloquium, April 23 at 4:30

Dr. Kathleen Spees from The Brattle Group will be on campus Monday to deliver the third Economics Colloquium lecture this year, “Market Design from a Practitioner s Viewpoint:Wholesale Electric Market Design for Resource Adequacy.” 

The lecture is at 4:30 in Steitz 102.

Dr. Spees has broad expertise in technical and policy aspects of electricity markets, including reliability and pricing.  She earned  an MS in electrical and computer science and a Ph.D. in Engineering & Public Policy from Carnegie Mellon.  She completed a BS in mechanical engineering and physics from Iowa State University.

She will also give a talk to the ENST 151 class at 11:10, “Introduction to the Electric Power Industry.”   Please see Professor Gerard if you are interested in attending.

The abstract for the Economic Colloquium is below the fold:

Continue reading Economics Colloquium, April 23 at 4:30

Daylight… Savings?

These days we don’t set back clocks very much any more, but instead our cell phones tell us that it must be the end of daylight saving time (although our cell phones do set us back quite a bit).

Dali clocks
Dali: The Persistence of Memory

The idea of daylight saving is famously attributed to Benjamin Franklin, but it was first introduced only about a hundred years ago. It has been policy in most of the US for about 50 years.

But does it really save energy? Surprisingly little research seems to have been done about that question. A 2008 NBER working paper considers the issue, taking advantage of a “natural experiment” in Indiana, where some counties used DST while others did not until 2006, when DST was sanctioned for all of the state. (Since it is often not possible to create lab experiments to resolve empirical questions in economics, we must rely on so-called “natural experiments” and a mysterious practice called “econometrics.”) Here is what the authors, Matthew J. Kotchen and Laura E. Grant, find:

The history of DST has been long and controversial. Throughout its implementation during World Wars I and II, the oil embargo of the 1970s, more consistent practice today, and recent extensions, the primary rationale for DST has always been the promotion of energy conservation. Nevertheless, there is surprisingly little evidence that DST actually saves energy. This paper takes advantage of a unique natural experiment in the state of Indiana to provide the first empirical estimates of DST effects on electricity consumption in the United States since the mid-1970s. The results are also the first-ever empirical estimates of DST’s overall effect.

Our main finding is that—contrary to the policy’s intent—DST results is an overall increase in residential electricity demand. Estimates of the overall increase in consumption are approximately 1 percent and highly statistically significant. We also find that the effect is not constant throughout the DST period: there is some evidence for an increase in electricity demand at the spring transition into DST, but the real increases come in the fall when DST appears to increase consumption between 2 and 4 percent. These findings are generally consistent with simulation results that point to a tradeoff between reducing demand for lighting and increasing demand for heating and cooling. According to the dates of DST practice prior to 2007, we estimate a cost to Indiana households of $9 million per year in increased electricity bills. Estimates of the social costs due to increased pollution emissions range from $1.7 to $5.5 million per year.

Addendum: Watch your step!

No Nukes is Good Nukes? Or, No Nukes is Bad Air?

The first Economics Colloquium is November 9 at 4:30 in Steitz 102.   Here are the details:

Paul Fischbeck

No Nukes is Good Nukes? Or, No Nukes is Bad Air?

Paul S. Fischbeck

Carnegie Mellon University

What if the U.S. phased out its nuclear power plants?   Where would the power come from? Would the reliability of the electricity system suffer? What about the effects on emissions of carbon dioxide and criteria pollutants?

Paul Fischbeck provides his approach to addressing these questions, along with some provocative results, in the inaugural lecture of a new Economics Colloquium series. He is professor in both the Departments of Engineering & Public Policy and Social & Decision Sciences at Carnegie Mellon, and an expert on quantitative risk assessment and the treatment of uncertainty.


Wednesday, November 9

Steitz Hall 102

4:30 p.m.

Less than Peak Perfomance

Following an earlier post on Daniel Yergin’s piece in the Wall Street Journal (promoting his new book), I came across James Hamilton‘s response to Yergin’s basic argument.  I use Hamilton as a primary source for teaching the resources piece of my Environmental Economics class, and he is an important player in the public debate.

Next up, we have a Michael Gilberson post that provides an overview of the issues and going through Hamilton’s critique of Yergin.  I find his response particularly useful because he gets at why peak oil might be an issue worth worrying about, and also has a section devoted to “supply and demand: boring and relevant.”  He prefaces his supply and demand discussion with this:

Hamilton draws attention to the slow rate of the supply response relative to demand growth. He is right, this is where the action is with respect to understanding recent oil market developments … and nothing about what he said depends upon whether the peak in world oil production did happen in 2005 or 2007, or will happen in 2011, or won’t happen until 2100 … and framing remarks as about peak oil distracts attention from the real issues.

Indeed.  For those of you who attended the LSB session on petroleum last year certainly know that people with money in the energy industry pay very close attention to supply and demand fundamentals.

Unstandard Oil

Because it's there?

Many of you have probably heard of “peak oil,” the idea that world oil production either has peaked or will soon peak, and it’s all downhill from there.  The implications of this could be that the world economy is crippled by high prices and short supply, or the world economy is not crippled by high prices and short supply.  In either case, most folks I talk with seem to believe we will soon be facing resource constraints.

Well, Daniel Yergin, author of the cinder-block-sized epic The Prize (now in documentary form) is back with his take on peak oil.  The condensed version of his argument — puh-leeze.

In his piece, Yergin goes over the basic storyline of so-called “cornucopian”  economists, such as the late Julian Simon, who claim that human ingenuity is likely to overcome any “natural” resource constraints.  Here’s Yergin on the premiere peak oiler, M. King Hubbert:

Hubbert insisted that price didn’t matter. Economics—the forces of supply and demand—were, he maintained, irrelevant to the finite physical cache of oil in the earth. But why would price—with all the messages that it sends to people about allocating resources and developing new technologies—apply in so many other realms but not in oil and gas production? Activity goes up when prices go up; activity goes down when prices go down. Higher prices stimulate innovation and encourage people to figure out ingenious new ways to increase supply.


New technologies and approaches continue to unlock new resources. Ghana is on its way to significant oil production, and just a few days ago, a major new discovery was announced off the coast of French Guiana, north of Brazil.

As proof for peak oil, its advocates argue that the discovery rate for new oil fields is declining. But this obscures a crucial point: Most of the world’s supply is the result not of discoveries but of additions and extensions in existing fields.

In addition to the WSJ piece, Yergin is back in print with The Quest: Energy, Security and the Remaking of the Modern World. If you are interested in third-party opinions, Steven Hayward has a column in the WSJ, and Steven Levine reviews the book for Foreign Policy.

More ‘Gas’ than You Can Handle

The always-on- the-lookout-for supply & demand examples duo at are shaking their heads at the continuing disconnect between how politicians talk about prices and how the price system actually works. Today’s contribution is gasoline prices.

Here’s a taste:

Increasing taxes on oil companies will not lower gas prices, so Democrats are hoping that voters see it as unfair that oil companies are making so much money and receiving tax breaks (economists don’t have much to say about equity arguments — there is no economic theory to explain differences in your “fairness” and my “fairness”).

And this:

Expanding domestic production of oil and gas will not reduce gas prices significantly

“The proposal would end a series of tax advantages for the five companies and produce about $21 billion over 10 years, Democrats say.”

Let’s do the math. Suppose the five major oil companies are able to take the entire $21 billion in higher taxes over 10 years and pass it along to consumers in the form of higher gas prices. U.S. consumption is about 132 billion gallons per year (source: EIA). Dividing $2.1 billion per year by 132 billion gallons gives a price increase of about $0.16 per gallon. A fairly typical driver (12k miles, 20 mpg) would pay about $96 more each year as a result. You can determine for yourself if this is a price increase that politicians should worry about…

Those back-of-the-envelope calculations can be so refreshing!

Where are Oil Prices Headed?

Saturday marked another wowza LSB event, with our star-studded panel presenting some great information on the “buy side” of the market.  Dean DuMonthier ’88 gave a riveting characterization of the oil market, and seemed very bullish indeed.   Interestingly, the discussion centered around a $125 price for oil, whereas there seems to be a leak in the bottom of the barrel with prices falling back to $100 this past week.

One of the key areas of interest is the ratio of oil to natural gas prices relative to the British Thermal Unit (BTU) equivalent of about 8.  That is, where the price of oil has about eight times the energy content of a unit of natural gas, and therefore the price of oil should trade at around eight times the price of natural gas (I’ve also seen this ratio at 6).  Why is that?  Because oil and natural gas are imperfect substitutes, there is money on the table on both the supply and demand side if there is an imbalance.

With natural gas prices just under $5 and oil prices north of $100, that ratio is better than 20 rather than 8.  So, the question is, is that an anomaly that market forces will correct — that is, with rising natural gas prices and/or falling oil prices?  Or, is this a paradigm shift?  I sat in a group with Guy Scott ’88, and he gave us compelling cases on both sides (despite what Timothy Siegel at Forbes seems to think).

For another complementary perspective, check out James Hamilton’s discussion at Econbrowser.

Now, for those of you who are Discovering Kirzner, you might ask yourselves, which is more important to these guys — the price theory fundamentals, or some element of “discovery” and arbitrage?

For those of you not Discovering Kirzner, I hope the panel impressed upon you the ubiquity of a relatively straightforward applications of competitive markets a la Landsburg Chapter 7.

If any of the panelists happen to be reading this, thanks for coming.  It is really great to have you back on campus.  And it is great to see you bring your professionalism to our co-cirricular events.  We hope to see you again soon.

Here Comes the Sun — Thursday at 4:30

A message from our resident fluvial geomorphologist, Jeff Clark:

I know a number of you are interested in renewable energy and solar power in particular. Heck we even have our own array. Why not come and learn more about large scale solar power from an industry insider?

Why not, indeed?

Mark Culpepper, Chief Technology Officer, SunEdison will be on campus Thursday to give us “An Insider’s View of the Solar Power Industry.”  You can find us at 4:30 over in Thomas Steitz Science Hall 202.

Mr. Culpepper has a background is telecommunications and IT security, and is working on distributed generation issues for SunEdison.

This is certainly a hot topic.

Blackout is Another Word for “Shortage”

No doubt you have heard (okay, perhaps I have some doubts) about the blackouts rolling across Texas this past week.  Blackouts occur, of course, because the quantity of power demanded at a point in time exceeds the quantity of power supplied, leaving some folks literally in the dark.   And out in the cold.

So, the key question is why power supply was insufficient.  Michael Gilberson of Texas A&M provides a preliminary analysis of why Texas power producers failed to meet demand.   The first reason is that it was very cold, so the demand for power increased.  The cold also caused the power to decrease (!) as power plants themselves suffered outages due to frozen pipes at large coal-fired plants (didn’t their mothers ever tell them to leave the water dripping?).

Actually, that isn’t really the first reason.  The real reason is likely Texas’ famous electricity isolationism; that is, the state deliberately lacks to infrastructure to export or to import electricity.  Why would they pursue such a policy?  To avoid federal (i.e., inter-state) regulation.

Here’s another explanation along the same line.

That electricity markets tend to be very complicated to understand, but supply and demand fundamentals are not.

Energy Independence: At What Cost?

Don Boudreaux at Cafe Hayek argues persuasively that energy independence and comparative advantage are not likely to be compatible for the U.S.  If we wish to specialize in energy production, it will be more expensive in terms of economic welfare than importation; thus, we must either accept a lower standard of living or import something else.  What makes energy so special that we should not trade for it?  Should we instead import more food, pharmaceuticals, or technology, for example.  In short, the doctrine of comparative advantage suggests that we specialize in things that we are particularly adept at producing and trade for other goods and services.

In his classroom talk in April, Yoram Bauman posed two questions

1.  Are you fearful that we will run out of energy (especially from carbon based sources)?

2.  Are you fearful that we will not run out of energy from carbon-based sources?

Higher prices can ensure that the first won’t happen but not the second.  Concerns raised by positive answers to the second question won’t be addressed until we have a price for carbon-based energy that is higher than for clean fuels.  Certainly, energy independence (i.e., no importation of carbon-based fuels) will lead to higher prices, but it also would be a very expensive way to achieve the result as the domestic price would have to rise enough to clear the domestic market.  It’s not clear, however, that this would be a price that internalizes the greenhouse gas effect.