Tag: Environment

River Red

Some of you have certainly read about the mishap at the “abandoned” Gold King mine site in Colorado that left Animas River a peculiar shade of orange — here is a before and after picture that I nabbed from Reddit.

The basic story is that EPA is working to reclaim and shore up a historic mine site, and one of its contractors accidentally breached a dam that led to a spill of several million gallons of toxic water into the Animas River.  The High Country News tells us nine things we need to know about the spill.

In the department of self-promotion, I also used to spend time thinking about cleaning up hazardous waste sites, and recently did a Q&A with PERC about the problem of abandoned mines.   If you are interested in law & economics, or some of the knotty problems of environmental policy, consider taking a look.   The abandoned mines problem could use some fresh thinking, that’s for sure.

Climate Change References

Selected References:

Initiative on Global Markets www.igmchicago.org

Jeffrey A. Frankel & Andrew K. Rose “Is Trade Good or Bad for the Environment? Sorting Out the Causality,” The Review of Economics and Statistics 87(1):85-91. (2005)

Michael Greenstone and Adam Looney. “Paying Too Much for Energy? The True Costs of Our Energy Choices.” Daedalus141.2 (2012): 10-30.

Alan Krupnick et al. Toward a New National Energy Policy: Assessing the Options, Resources for the Future (2010)

William Nordhaus, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World. (2013)

Nicholas Stern, The Economics of Climate Change: The Stern Review

World Bank World Development Indicators (2014)



Environmental Econ Updates

Here are some quick hits as we wrap up this term’s ENST 151 and ECON 280 courses:

Will shuttering the Keystone pipeline leave a “billion” barrels of oil from tar sand production in the ground?  That’s a recent assessment out of Berkeley (blog post).

Speaking of not opening Keystone, what’s with all of these tank car explosions?  Tradeoffs, tradeoffs.  Yikes.

In other news, should we take a “wait-and-see” approach to climate change? Not according to this recent Brookings piece.  Tax, baby, tax!

Or cap, baby, cap.  The New York Times shows us how a carbon market works!

And, finally, James Hamilton gives the rundown on resource scarcity and prices for myriad commodities.

Cadillac Desert, Wednesday and Thursday in Briggs 223

I will be showing the PBS Series, Cadillac Desert: The American West and its Disappearing Water, Wednesday and Thursday night in Briggs 223.  The episodes will go off on the hour each night.  Episode summaries are here.

The documentary series is based on Marc Reisner’s epic novel about western water development, and particularly the role of the Bureau of Reclamation and the Army Corps of Engineers in shaping that destiny (NYT review here).  The first episode is about the delivery of water to Los Angeles and how that shaped the development of that urban area.  The second focuses specifically on the Colorado River and how that is divvied up.  The third episode looks at agricultural development in California’s Central Valley.

9 p.m.  Mullholland’s Dream 

10 p.m. An American Nile

11 p.m. The Mercy of Nature

For you homebodies, the YouTube playlist is here.

The Answer is a Carbon Tax. What’s the Question?

GERARD HandA few weeks ago I gave a talk at the weekly Greenfire meeting and the Lawrentian had a very nice summation of its intent and content.   I will point out one area where I think the reporter seems to have misunderstood my intent:

He spent much of the presentation promoting CCS [carbon capture and sequestration] as “the critical enabling technology that would reduce emissions,” and supporting a carbon tax.

I did spend quite a bit of time talking about CCS,  but I don’t think I was promoting it.  My conclusion is this:

I conclude that not only is CCS not likely to be implemented, but that the future of U.S. coal itself is in serious question. The idea that any coal plants equipped with CCS and financed with private sector capital will be built is pretty much unthinkable at this point.

I suppose I could believe the above statement and still think that CCS is a great idea, but I’m not sure that I ever felt strongly enough about it to “promote it.”  Although coal plants have pretty low operating costs, they are extremely capital intensive. The plants we were looking at had about a 40% premium for adding the CCS component. Moreover,the external costs are very high, even with CCS. In many ways I would say the same about mandated fuel efficiency (i.e., the CAFE standards),  where I can see a reasonable case to be made to go that route, but I wouldn’t go that route if I didn’t have to.

One thing I do continue to promote is the idea of a tax as a means to reduce energy use, specifically with respect to the otherwise “unpriced” external costs.  This is from a paper I co-authored ten years ago about U.S. fuel efficiency standards:

For a fleet that averages 17 to 20 MPG, the appropriate tax for an external cost of eight to 10-cents per mile would be in the range of $1.36 to $ 2.00 per gallon. This needed increase in the gas tax is the most important implication that can be drawn from the recent criticisms of the CAFE program – current costs of highway injuries and deaths, congestion, and air pollution are enormous and require a dramatic public policy response. Raising the gas tax by $1.36 to $2.00 would induce a sharp reduction in vehicle miles traveled and encourage consumers to demand fuel-economy improvements in new vehicles.

And we weren’t alone.

Not surprisingly, I have pretty much the same views about reducing carbon emissions — a tax on carbon emissions is the way to go.   This is a proposal that has much in the way of potential benefits  and has near-unanimous support across the economics profession. (!)

Although many people think economists are a wacky, impractical bunch, in this case there are some governments paying attention.  In particular, Australia implemented a carbon tax not terribly long ago, and the results are as encouraging as they are predictable.

Australia’s greenhouse gas emissions from the electricity sector are down about 7.6 per cent since the carbon tax was introduced in July 2012…  Emissions from the power sector have been dropping, particularly since the introduction of a $23 a tonne price on carbon in mid-2012, making renewable energy supplies more attractive. Demand for electricity has also been dropping as manufacturing shrinks and energy efficiency efforts take hold.

I guess all of that is a positive, minus the manufacturing shrinking part.  Though, if the value of the manufactured products don’t warrant high enough prices to cover the social costs of carbon, then that displacement is a textbook case of scaling back on overproduction of “bads”.

Abominable, That Is

Gosh it’s hot

The Greenfire Speaker Series has enlisted me to talk a bit about my work.  So it is with this much fanfare that I announce that I will be giving a talk on U.S. electricity, carbon emissions, and global climate change:

Is it Warm in Here?  The Great World Carbon Belch and Why It Is Probably Going to Get Worse

The talk is 8:30 p.m. in Sabin House and I guess everyone is welcome (Greenfire circulated some pretty cool posters).

Here’s a taste here, and the talk will draw heavily on these sources:

Paul S. Fischbeck, David Gerard, and Sean T. McCoy (2012), Sensitivity analysis of the build decision for carbon capture and sequestration projects. Greenhouse Gas Sci Technol, 2: 36–45. Available at http://onlinelibrary.wiley.com/doi/10.1002/ghg.1270/full

M. Granger Morgan et al., (2012) Carbon Capture and Sequestration: Removing the Legal and Regulatory Barriers, Reources for the Future Press. (I have a copy!)

William Nordhaus (2013) The Climate Casino: Risk, Uncertainty, and Economics for a Warming World.  Yale University Press.

Severin Borenstein, (2012) “The Private and Public Economics of Renewable Electricity Generation,” Journal of Economic Perspectives, 26(1):67-92. Available at: http://www.aeaweb.org/articles.php?doi=10.1257/jep.26.1.67

Michael Greenstone and Adam Looney. “Paying Too Much for Energy? The True Costs of Our Energy Choices.” Daedalus 141.2 (2012): 10-30.  Available at: http://web.mit.edu/ceepr/www/publications/workingpapers/2012-002.pdf

BBC News, “At a Glance, The Stern Review,” Available here: http://news.bbc.co.uk/2/hi/business/6098362.stm

Click on the picture for six minutes of relatively carbon-free awesomeness.

‘The Benefits are the Costs’ and Other Links

I’m just going through a backlog of interesting stories to share with my Econ 280 class.  First up, Jonathan Adler points us to a short story on a residential subdivision’s successful legal challenge to the construction of a home windmill.  The residents of a the Forest Hills subdivision just outside of Carson City, Nevada, argued that the proposed windmill would sully their sight-lines and provide interminable noise from the turning of the rotors. This is a solid example of what Shavell would call an ex ante property rule, and you can read all about it in the Las Vegas Sun.  

Speaking of benefits, the fall Journal of Economic Perspectives has another symposium on contingent valuation.  Twenty years ago, Peter Diamond and Jerry Hausman famously asked, “Is Some Number Better than No Number?”   Although Hausman seems to have found some clarity on the issue, I’d say for the profession the question remains unresolved.

Next up in the news, we have a consortium  of cities and businesses is looking at a $200 million reservoir project to satisfy all its water needs, but it is contemplating paying rice farmers $100 million not to farm instead.

Is this Coasean bargaining inevitable? I wouldn’t bet the farm on it.

Finally, we have Thomas Kinnaman offering the classic economist’s take down of two benefit-cost analyses of shale gas production (i.e., fracking):

The costs of natural gas extraction include, paradoxically, all of the items listed as “benefits” in the two reports discussed above. Natural gas extraction requires labor, capital equipment, pipelines, and raw materials. These economic resources, in a fully employed economy, could have been allocated to other uses. The price paid to secure these resources from these other industries indicates the value of these resources to these other industries (had their value been higher, the market price would have been higher). Thus, the quantity of each economic resource times its market price – in fact 13 the total expenses by the industry as gathered in the surveys – represent the cost of utilizing scarce economic resources to gas extraction.

This block quote is a battle we economists will probably never win.  When I tell my students “jobs” are a cost not a benefit, they look at me as if I suddenly began speaking Swahili.   The paper is from Ecological Economics, and an ungated version is available here.

The Marketplace CAFE

Yes, I made it to the national airwaves this past week, thanks for asking (and thanks to Adrienne Hill for the interview).

The topic was the Corporate Average Fuel Economy (CAFE) standards, which have been controversial for a variety of reasons since their inception in the 1970s. The basic idea is simple enough, though: if the federal government mandates greater fuel efficiency, people will use less gas.  Because the CAFE standards are politically viable and gasoline taxes are not, the CAFE standards have withstood the test of time, including a beefier rule promulgated by the Obama Administration in 2009.

This week’s issue arose because gasoline tax revenue is funneled back to fund highways and mass transit. Ergo, if we use less fuel, there will be less tax revenue for highways and mass transit.  That is the conclusion of a Congressional Budget Office report from last week:

An increase of about 5 cents per gallon in the gasoline tax would be required to make up the shortfall in revenue projected as a result of the proposed CAFE standards.

And, so, man bites dog and consuming less fuel could lead to an increase in gasoline taxes, and the net result could be higher prices at the pump (Of course, federal gas taxes last went up during the pre-industrial era.  A primary reason for CAFE standards is that Congress is unwilling to move the gas tax off its $0.186/gallon level).

The report generated a minor media buzz, including this very short report on National Public Radio’s Marketplace program where I provided some unsurprising insight.

My authority on the subject stems from a paper I co-authored back in the day, “The Economics of CAFE Reconsidered: A Response to CAFE Critics and A Case for Fuel Economy Standards,” where we make a case that the CAFE standards are a reasonable complement to stiffer gasoline taxes (we also argue for much stiffer gasoline taxes).  I also have talked to US News and the Financial Times, among others. And I will talk to you, too, if you ask me about it.

For a very nice recent treatment, you might check this recent paper, “Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives,” in the Review of Environmental Economics and Policy.

For some extremely tasty data, check out Environmental Protection Agency’s Light-Duty Automotive Technology and Fuel Economy Trends.  They’ve been doing this report for years, and I always learn something when I go through the new one.

The BP Spill Revisited

You may recall the Deepwater Horizon spill, that sent some five million barrels of oil into the Gulf of Mexico between April and July of 2010.  At the time, we posted about it extensively, and linked up an  Econbrowser post that estimated that within two weeks the stock market had already dinged BP to the tune of $20 billion:

The adjusted closing price of BP on May 4, 2010 was $51.20 whereas had the oil spill not happened I’ve estimated the price would have been $58.11. This amounts to a net loss of $6.91 per share. BP has 3.13 billion shares outstanding amounting to a net loss in $21.62 billion.

That estimate turned out to be almost exactly what BP seems to have committed to its oil spill trust fund:

BP, in agreement with the US government, set up a $20-billion trust to provide confidence that funds would be available. The trust fund was established to satisfy claims adjudicated by the Gulf Coast Claims Facility (GCCF), final judgments in litigation and litigation settlements, state and local response costs and claims, and natural resource damages and related costs.

In 2011, BP contributed a total of $10.1 billion to the fund, including our second year commitment of $5 billion to the trust and the cash settlements received from MOEX USA Corporation (MOEX), Weatherford US., LP (Weatherford), and Anadarko Petroleum Company (Anadarko). This brings the total amount contributed to the trust to $15.1 billion. The remaining committed contributions totalling $4.9 billion are scheduled to be made in 2012 which includes the $250 million settlement with Cameron. The trust disbursed $3.7 billion in 2011 and the total paid out since its establishment amounted to $6.7 billion by the end of 2011.

However, the stock price did not stop at $50, but continued a free fall down to about $35, a price so low that there was speculation that BP stock was undervalued and ripe for takeover. Continue reading The BP Spill Revisited

The New EPA Carbon Rule and New Coal-Fired Power Plants

This past week the EPA finally proposed a rule that would limit carbon emissions from new electricity generation.  The rule is the second of a double whammy for coal producers, who are already under intense competitive pressures from the rapid expansion and steep price decreases from domestic natural gas.

According the the Washington Post:

The proposed rule … will require any new power plant to emit no more than 1,000 pounds of carbon dioxide per megawatt hour of electricity produced. The average U.S. natural gas plant, which emits 800 to 850 pounds of CO2 per megawatt hour, meets that standard; coal plants emit an average of 1,768 pounds of carbon dioxide per megawatt hour.

What this effectively means is that any new coal plant construction would have to be built with carbon capture and sequestration technology, or CCS, (see here for details), making it extremely unlikely that the private sector will finance new coal-fired electricity production any time soon.

What will be the effect of this policy on new plant construction? I recently co-authored a paper* that looked at the new electricity plant construction decision as a function of natural gas and carbon prices, including an analysis of what would happen if there was a requirement that new coal plants have carbon capture technology, and we conclude that building CCS plants with private money is very unlikely.  Here is some background of our analysis from our abstract:

Our objective is to assess the commercial viability of CCS given pervasive future uncertainties, particularly uncertainties about future natural gas and CO2 prices. Using data from the Integrated Environmental Control Model (IECM), we develop an interactive Excel-based spreadsheet tool to compare levelized-average costs of four different new-construction 500 MW power plants: natural gas combined cycle (NGCC) with CCS, NCGG without CCS, supercritical coal with CCS, and supercritical coal without CCS. With low natural gas prices, the NGCC without the sequestration option is the dominant technology. Overall, CCS projects for either natural gas or coal projects are unlikely to be the lowest-cost option for CO2 prices less than $50 per ton.

Continue reading The New EPA Carbon Rule and New Coal-Fired Power Plants

Sustainable Energy without the Hot Air

Sustainable Energy - without the hot airEsteemed alumnus Thomas Baer has been making the rounds on campus, visiting the I&E class and delivering a nice Science Hall Colloquium earlier today (here’s his bio).  Dr. Baer gave a rundown of his perspective on renewable energy technologies, particularly solar energy, and even more particularly solar energy made with silicon.

I’ll spare you the details of the role of photonics (since I didn’t quite understand those details), but I will second his recommendation of David MacKay’s excellent Sustainable Energy Without the Hot Air. I bought several copies of this and generally loan them out to anyone interested in energy policy.  Indeed, I was working with another colleague on developing a course around the book prior to moving to Lawrence a couple of years back.

If you haven’t borrowed my book already, you can download a copy here.

The True Costs of Electricity

In Econ 100 this week we talked about external costs (and benefits) and the equivalence of carrots (prices) and quantities (sticks) in terms of the possible “optimal” equilibrium outcomes.  The elephant in the room in these types of discussions is the measurement of the so-called external costs.  As if on cue,  environmental economics superstar and sometime Presidential advisor Michael Greenstone and his co-author Michael Looney have upped a paper with their estimates of these costs associated with electricity and energy.

Here’s their money chart.

The glaring purple associated with coal shows that the principal external costs are not from greenhouse gases, but from conventional criteria pollutants (e.g., NOx, PM). The external costs of coal, even new “clean coal,” are estimated to be higher than the actual operating costs.  Yikes.

It’s worth noting that both solar and wind have non-trivial carbon footprints, because the variability of supply requires ample natural gas plants to cover supply on days when the wind doesn’t blow and the sun doesn’t shine.  Certainly, developing battery storage technologies may well turn out to be the biggest environmental challenge of this next half century.

The results are probably worth quoting at length (after the break):    Continue reading The True Costs of Electricity

Born in the Corn

Our Econ 280 class just got through a spirited debate on ethanol policy (tough luck to the guy that drew “pro-ethanol”), that featured this piece from Hahn and Cecot.  Certainly, the class seemed sympathetic to this change of heart from super-environmentalist, Al Gore:

“It is not a good policy to have these massive subsidies for first-generation ethanol,” Gore said at a green energy conference in Athens, Greece, according to Reuters. First generation refers to the most basic, energy-intensive process of converting corn to ethanol for use as a motor vehicle fuel additive.

On reflection, Gore said the energy conversion ratios — how much energy is produced in the process — “are at best very small.” “One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee,” he said, “and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president.”


If Hahn and Cecot’s benefit-cost analysis didn’t convince you, perhaps this bit of visual evidence will be persuasive (c/o Knowledge Problem).  The first map is the votes on an amendment to an appropriations bill proposal to prevent EPA from encouraging sale of gasoline with higher ethanol content.  The red represents votes opposing the amendment (pro-ethanol) and the blue represents the votes for the amendment.

The Knowledge Problem piece also points us to where the ethanol production comes from.   My “ocular” regression seems to indicate a rather robust relationship between the production and the votes.


For more political geography, check out this post on climate legislation.

And if you think the politics is predictable, try out the economics.  What happens when the demand for corn ethanol increases?  One would suspect the price of corn increases, leading to more corn and a reduction in the supply of, say, soybeans.

Global Climate Change, Political Climate Don’t

As I sift through material for my environmental economics course (Econ 280) this winter, I have found some very interesting material on the political economy of climate change.  Ryan Liazza in the New Yorker walks through the process by which an idea becomes a bill becomes a law — or, in this case, doesn’t become a law.  It is difficult to understand environmental economics and policy without knowledge of these tortured dealings, the underlying institutional rules, and that pesky electorate.

Over at the Economix blog, David Leonhardt has been doing yeoman’s work, provides another perspective on the political economics of climate change legislation,  looks at what EPA could reasonably do to curb CO2 emission without such enabling legislation, and has a couple of pieces (one here, one here) on so-called clean energy.

I will also use this paper on “carbon geography” to illustrate how economists go about these political economics questions.  I don’t think we as economists ever expected serious climate legislation, certainly nothing approaching the types of reductions needed to stabilize atmospheric concentrations.

Climate Change Updates

As far as I know, the climate is still changing, so nothing to update there.  According to economists Matthew Kahn and Matthew Kotchen, however, we don’t seem to care as much about it (if “googling” is a good proxy for “caring”, that is).  Ed Glaeser discusses this and some more of Kahn’s research in today’s NYT Economix blog post.  One of the provocative points is the claim that climate change is a done deal, and that the big coming challenge is to adapt.

One person swimming against the apathy tide is the self-proclaimed skeptical environmentalist, Bjørn Lomborg.  For years, Lomborg has been publishing pieces questioning the scale and scope of environmental problems.  He has now reversed course and is calling for massive investments to tackle the problem.  From my quick read, the tackling seems to be on the emissions side, as opposed to adaptation.

Anyone who has sat through my carbon capture and sequestration talk certainly knows I’m with the adaptation folks on this one.  I simply am not convinced that the world can cut emissions enough to stabilize atmospheric concentrations, even under the most wildly-optimistic scenarios.

For a bit more meat on the climate change discussion, check out a recent symposium in the Journal of Economic Perspectives.  Here’s a table of estimated net benefits across 13 studies.

Notice the overall impacts in terms of GDP per year seem to be on the order of -1% per year, though the estimate from the review author’s article (Richard Tol) shows net gains.  You might also take note as to which countries are likely to win and lose in these estimates, and take that into account next time countries sit down to hammer out an agreement.

Should be an interesting century.

Windy Wednesday

Robert Bryce gets on his soapbox and Slate.com and takes his shots at wind energy.   He argues that wind is unreliable, and that the opportunity costs of installing wind generation displace other infrastructure investments.  He cites the situation in the Lone Star State, which has been at the fore of installing wind power:

On Aug. 4, at about 5 p.m., electricity demand in Texas hit a record: 63,594 megawatts. But according to the state’s grid operator, the Electric Reliability Council of Texas, the state’s wind turbines provided only about 500 megawatts of power when demand was peaking and the value of electricity was at its highest.

Put another way, only about 5 percent of the state’s installed wind capacity was available when Texans needed it most. Texans may brag about the size of their wind sector, but for all of that hot air, the wind business could only provide about 0.8 percent of the state’s electricity needs when demand was peaking.

Certainly, because wind power only works when the wind blows, building wind capacity doesn’t reduce the need for other base load capacity.

And the wind capacity isn’t cheap, either.  Professor Michael Giberson over at Knowledge Problem has tracked the incidence of negative prices paid for wind.

Negative prices? Wha? Isn’t that the definition of cheap?

Not exactly. I’ll let him tell you:

This seems a little crazy. During these negative price periods, suppliers are paying ERCOT to take their power. Consumers (at least at the wholesale level) are getting paid for using power, and the more power consumers use the more they get paid. These prices are a big anti-conservation incentive. You could, as a correspondent put it to me, build a giant toaster in West Texas and be paid by generators to operate it.

The giant toaster metaphor will be with me for a long time.

The logic is at the margin, of course.  If I pay (subsidize) a farmer $10 for every bushel he sells, we would expect him to be willing to pay, say, $5 to take it off his hands — a that is, he takes a price of -$5.  In 2008 in Texas, power prices were negative 20% of the time, indicating the power of prices to motivate behavior.  Indeed, producers were willing to pay up to about $3.50 per megawatt hour before shutting down.

But all hope isn’t lost.  This morning on NPR they talk about dealing with the “intermittency” problem (that is, the wind doesn’t necessarily blow when we need the power) with battery storage.  That is crucial.  If the wind blows a lot in March, but we use the energy in August, then it would be nice to be able to store what we have and use it when we need it.  An important question, then, is should we install this wind capacity before we crack the storage problem? Right now, the talk is of storing power for a couple of hours, not a couple of days or weeks, so, as we have seen in Texas, the baseload problem will remain acute even as renewable capacity rises.

I imagine this blog post will be recycled as more solar and wind generation come online.

Bad Day for Environmental Economics, And the Environment

Almost unnoticed, this week marks a terrible week for advocates of market solutions to environmental problems, including various cap-and-trade systems. The Wall Street Journal reports that new federal air pollution rules have resulted in the tanking of the sulfur dioxide market, rendering extant permits worthless.

Often referred to as “the grand policy experiment,” (also here), the SO2 market was considered a success, and thought of as a model for potential global system to reduce greenhouse gases.  As with so many cases in economics, a credible commitment matters.  The Journal sums it up nicely:

The market’s collapse shows how vulnerable market-based approaches to reducing air pollution are to government actions. That could scare off investors, who won’t commit to a market where the rules can change at any minute.


One of the great benefits of using market instruments to address environmental problems is that they can substantial lower the costs.  The law of demand says that as price goes up, people buy less.  As a result of the collapses of this market, we will likely pay more to get less in terms of environmental quality.  This may well undermine efforts to implement market solutions elsewhere.  If investors are convinced the regulatory environment is unstable or uncertain, they are unlikely to make large capital investments, and are more likely to take stopgap measures.

Out with the Old, In with the Older

Here are a few links for you as we bid farewell to the 2010 Lawrence economics graduates and brace ourselves for the alumni revelers descending upon campus for Reunion Weekend. As Neil Young might say, economics never sleeps.*

As you have probably noticed, we have more than a passing interest in the oil spill around here.  One of the interests has to do with the liability versus regulation question, and on that front, Resources for the Future (RFF) has background information on oil spill liability law. Mark Cohen at RFF did some of the seminal work on the enforcement of environmental laws, focusing on oil spills, so this is definitely a good place to look.

Another piece has to do with the long-term corporate viability of BP itself – is this spill just a speed bump on the route to long-run profitability? Or will the company be taken over? Or will it go into bankruptcy and attempt to expunge its environmental liability? Or maybe it will agree to a takeover and then go into bankruptcy and expunge its liability and then be taken over (Can they do that? See above).  New York Times writer Andrew Sorkin explores these issues. The current stock price is down to $31 from a 52-week high of $63.  That means that more than half of the company’s “worth” has been wiped out. Ouch.

So, things aren’t going that well over in the old economy.  How about the new economy? If there is anyone with a worse public image than BP right now, it might just be a mysterious cabal that is putting the architecture in place to unleash a malicious computer virus on the world’s computers. Well, we really don’t know who is behind it or why. Mark Bowden at The Atlantic has a fascinating article on the Conficker virus. This case may well fit into William Baumol’s famous definition of entrepreneurship (cited here) that includes “destructive entrepreneurship.” I guess we’ll have to wait and find out.

On a happier innovation front, the most recent EconTalk discusses the fashion industry, where “there is limited protection for innovative designs and as a result, copying is rampant. Despite the ease of copying, innovation is quite strong in the industry and there is a great deal of competition.” Schumpeter was a famously natty fellow.  I wonder what the fashion world thinks of creative destruction?

I imagine without class in session, the summer blogging will slow to a crawl. If you come across anything interesting, feel free to send it my way.

*Then again, probably not.

An Extended Post on the Benefits and Costs of Oil and Gas Drilling

If there is any upside to the epic oil spill down in the Gulf (and heading this way), it is that it provided a learning opportunity for my courses in Political Economy of Regulation (Econ 240) and Environmental Economics (Econ 280).  I’ll start with the benefit-cost analysis (I actually started this yesterday and have touched on it here and here), and I will try to get to the regulations next week.

The Environmental Economics class looked at the benefit-cost analysis of offshore drilling described in the Draft Proposed Outer Continental Shelf (OCS) Oil and Gas Leasing Program 2010–2015. The document covered areas in Alaska, California, and the Gulf. The students looked at the benefits and costs of expanding offshore production, including the quantification of the environmental (external) costs.

The results deviated little from the extant program from 2007-2012 (see table), where the quantified benefits were far higher than production and external costs. Most of the benefits manifest themselves in the difference between oil and gas prices and the production costs (net economic value in the table). The producers take a chunk of profit and the federal government takes a 12.5% gross production royalty that it redistributes to the states.


The net benefits calculation is the consumer surplus and producer profits less the environmental costs. As can be seen in the table, the values are dominated by producer profits (roughly equivalent to “net economic value”). The analysis assumes $46/b oil prices, $7 / McF natural gas prices, and a 7% real discount rate.

Continue reading An Extended Post on the Benefits and Costs of Oil and Gas Drilling

Take Stock in BP?

Here’s a provocative thought:

BP_wilts_smBP’s stock, which traded at a 52-week high of $62.38 on Jan. 19, 2010, closed on June 1 at $36.52 a share, down 15% on the day. The post-spill sell-off has wiped out some $68 billion of BP’s market value, knocking it down to $114 billion. With the stock now in the cellar, some speculation even has it that BP may attract a buyer.

There are a couple of things going on here.

First, the stock price reflects the value that “the market” places on a company.  One technique for evaluating the effect of some major event on a company’s value is to do an “event study.”  The idea is to try to use other factors (e.g., larger market trends, stock prices of other firms in the industry) to get at how important the event was. A spill like this could damage a company’s reputation, expose it to liability payouts, or make it susceptible to heavy fines.

Ben Fissel at Econbrowser put one of these together shortly after the spill.

When an event, such as this oil spill, impacts a company it will also impact its long run profitability. The divergence of the stock price from what we would have expected had the event never happened is a measure of the net present value of the cost incurred by the oil spill.

He finds big impacts.  The red line in the picture is his estimate of the time series of BP’s stock price without the spill, and the black line is the actual price.  Seems like a big effect.

At the time he did the study, the stock price had been between $50 and $60 for the previous three months.  As the AOL article shows, the price is now down closer to $35. Overall, the market’s valuation of BP has gone from more than $180 billion to about $114 billion.  Does that seem reasonable?

That is, in fact, the second point, that doesn’t seem all that reasonable, which is why BP’s stock is now so low that it might be attracting a buyer.  In other words, at current prices smart money might find BP stock such a bargain that it will swoop in and buy the company, liability exposure be damned. Does that seem reasonable?

I completely buy this logic.  Given that BP is the world’s largest oil producer, it is hard to believe that the long-term profitability of the company has really fallen 40% due to the oil spill. The linked article provides some reasons why a merger might be implausible, but on the fundamentals, this may well be an overreaction.

Further food for thought, what will happen to oil prices if there are significant steps taken to reduce offshore drilling and who stands to win and lose from those price changes?