Al Gore Changes His Mind?

I picked this up at the Daily Dish this morning.  It’s a reference to a post by Shellenberger and Nordhaus at The New Republic on how Al Gore, in a recent missive to president elect Obama, has subtly changed his message regarding climate change and carbon emissions.  The shift is in priority, away from putting a price on carbon to emphasising investment in green technology.  This strikes me as a tactical decision by Gore.  In order to retain relevancy in an uncertain economic environment, he has shifted his rhetoric away from taxation and regulation towards the ever hopeful idea of new technologies.  In this case, he might have been taking notes from the recent federal election in Canada where Dion’s carbon taxing initiative was a political  millstone; it confused voters, was hard to explain and difficult to justify to the public how a new tax was necessary.

The writers at the New Republic have picked up on Al Gore’s shift as it fits their world view and their belief that new technology is necessary and simultaneously the best way to deal with the problems of climate change and carbon emissions.  I am ever hopeful in new technology as well but, historically, new technologies that deal with old problems, well, they tend to develop problems that are unique and troublesome in their own right.  To paraphrase that old expression, technology happens.

Here’s a response and a criticism of that piece over at The Bellows by Ryan Avent.  He suggests that regulation is already happening in a rather awkward and scatter shot way, by various levels and branches of government.  He also criticizes Shellenberger and Nordhaus.  The money quote,

But it should be clear that pricing and investments ought to go hand in hand. Pricing provides information about where and how to invest and incentives to adopt new technologies, while investments in research ease the transition off fossil fuels as carbon prices slowly ramp up over time. That’s the necessary carbon policy. And it’s hard to see how we get to where we need to be without both.

I am fully on board with what Avent is saying here.  There’s not one solution, there are many and they need to be explored simultaneously.  Government investment in technology is problematic in that you have people making decisions about what to do with the dollars involved.  If those people are subject to lobbying, you might get questionable bridge technologies such as ethanol.  Using markets to find what is desired at a societal level removes decision making from potentially flawed individuals in favor of what is going to work in the market.  With a properly designed price environment, the market will find solutions to the problem.

As a matter of political signalling, I find the whole situation to be fascinating.  I have not examined the leanings of these writers, but I am assuming the writers at the New Republic are on the right.  Indicative of this is their fear of regulation, the holy belief in the saving power of technology, and the uncertain embrace of state sponsored spending bailouts and investment that is sweeping governments around the world. 

Alternately, Avent appears to be more left leaning than Shellenberger and Nordhaus, but he’s the one advocating for using the power of markets (historically the domain of the right) and the effective pricing of externalities, in this case carbon emissions.  This just goes to show, when dealing with a complex issue, ideas of left and right are quite useless.  A complex problem requires complex solutions, with contributions from all over the spectrum.

So, did Al Gore change his mind? I don’t think so. It looks like this is case of some writers wanting to say “I told you so!”, when all Gore wants to do is to keep the issue on the front burner before it’s relegated to the dustbin by current economic events.  Avent is more in tune with what is necessary to move forward on climate change and carbon pricing, but Gore has got a message and a speaking tour to maintain.

Shale Gas

Regular readers of this blog will not be surprised that I am revisiting energy!  Check out this article at the globe and mail.  I am going to summarize here because the globe does this annoying thing of charging for articles after a period of time has elapsed. 

If I am beating a dead horse here, I apologize, but it’s a part of economics that fascinates me and it’s entirely predictable.  The usual disclaimers should be included here for ignoring GHGs, climate change and profligate energy use; this is strictly an examination of the market at work in a functional and efficient fashion.  I’ll be talking about market failures soon enough I imagine, but they are much more depressing and insidious, not to mention harder to spot.

Natural gas is a clean burning fossil fuel and is essentially localized to the North American market.  Unlike oil’s shipping infrastructure, moving natural gas around on the oceans is a new thing, and shipping it around is done in the form of liquefied natural gas.  It had appeared that natural gas production in North America was going to be in terminal decline and that we’d have to start relying on liquefied natural gas imports to satisfy energy needs. 

But now,  production of natural gas is expected to rise 30% by 2030, including rising production in the continental US (take note ‘peak oil’ theorists).  This is thanks to shale gas, a natural gas that is trapped within shale rock.  It’s an unconventional reserve previously thought of as being too difficult to tap.  In response to the disruption of natural gas production by Hurricane Katrina, and the resultant high prices, drillers started working on getting at the shale gas.

A few years later, and costs have come down to a level where drillers can make a profit at the current average price levels, let alone the prices seen in 05/06.  Note, natural gas has not correllated with the price of oil in the last year.  This is another example of prices spurring development of technology and previously unusable or unknown resources.  It would be silly to think a similar story will not unfold with oil.

MD

Revisiting Fossil Fuels and Peak Oil

Wealth of oil in Arctic, report says

This link refers to estimates of 112 412 billion barrels of oil that is undiscovered in the Arctic.  The report was issed by the United States Geological Survey, and is an example of why ‘Peak Oil’ is a fringe theory.  Now the question is, should we be drilling for oil in the Arctic?  And on the strategic level, who’s oil is it?  Hence the jockeying for position in the North.  Plenty of smart people, governments and corporations are preparing for the time when the Arctic melts and new resources become accessible for exploitation.  Notice what this means for future expectations of global warming, in that it is being planned for at the highest levels.  Climate change skeptics, please pay attention.

The Carbon Tax and Canada Day

The BC carbon tax goes live today and Canada turns 141.  Both causes for celebration.  Unfortunately the carbon tax is coming in at a time when we are already seeing record high (nominal) prices at the pump.  The price of gasoline is the most widely quoted spot price of a commodity.  Everyone knows what the price of gas is.  I remember the belly aching 3 years ago when it cracked the $1.00/L mark for an extended period.  Wooo boy, now we’re ready to break $1.50/L in BC.  This is making Gordo’s carbon tax harder and harder to stomach for the average person, and the NDP are attempting to portray the carbon tax as a gas tax.  It is a gas tax, but it’s more than that, and the unfortunate timing of high energy prices and the introduction of an important economic lever might be a problem.

On the other hand, high energy prices are having a strong effect on consumer behaviour, exactly what is trying to be accomplished with the carbon tax.  SUV sales in the US are down substantially, while compacts are being snatched up.  Bicycle stores have 3 week wait times for tune ups and bike mechanics have all the work they want.  Locally, our transit provider, for the first time ever, ran out of 3 zone transit passes and had to make a second print run for the month of June.  There is evidence of a drop in gasoline consumption; economically speaking, we are seeing demand destruction in response to higher prices.    People are feeling the pinch and adjusting behaviour.  This is exactly what should be happening, a little bit of pain is causing people to rethink and reorganize their lives.

All of this will make it more difficult to maintain a carbon tax, as people shift their top concern from the environment to the price of energy, which is already underway in Canada.  Over time, consumers will adjust to the higher prices and it will become less and less of a concern.  Prices will eventually come down (if you believe my post on Peak Oil).  It’s at this point where a steadily increasing carbon tax should be well established in order to maintain a small amount of price pain so that the changes in consumption we are seeing today are maintained and encouraged to continue.  If this does not occur, the pendulum will swing back and gas guzzlers will return to the roads.  As prices stabilize in the future, the government and regulators should be on hand to make sure we do not get complacent about energy again.  Keep that tax coming Gordo, we need it now and we’ll need it even more in the future.

Fossil Fuels and ‘Peak Oil’

Peak oil is a funny idea.  Basically, it’s like saying, this time things are different.  This time, faced with a scarce and finite resource that we will run out of, there will be sky high oil prices and bad news for everyone involved in energy consuming countries.  So, what does economics say about this?  High oil prices will spur innovation, encourage substitution away from oil (say, towards nuclear energy, renewables, or even coal), discourage profligate energy use, and high prices will fire up the pursuit of heretofore unknown and/or unrecoverable reserves of oil.  These effects will force the price of oil down towards it’s long run average.  At that time, auto makers will start dusting off plans for the latest and greatest SUV and high cost projects like the tar sands in Alberta will be severely curtailed, possibly even mothballed. 

The substitution effect is a powerful force in economics and important for understanding broad trends.  When prices rise, economic agents will often substitute a similar item for the higher priced one.  As an example, if all of a sudden donuts became very expensive, I might buy a cookie instead of a donut the next time I want a sweet snack; I am substituting a similar item for my normal preference in response to a change in price.  In terms of energy, oil also has various substitutes.  South Africa has produced synthetic gasoline and oil from coal for years.  This process is economically viable at $US35 a barrel.  If oil prices sustain their recent highs, or go even higher, then companies will start planning or expanding projects to produce unconventional oil.  The tar sands in Alberta is one such project.  You can also produce synthetic oil and gasoline from biomass and natural gas.  The substitution effect will ensure that during periods of high prices, other, cheaper sources of energy will be exploited.  This will enforce a ceiling on the price of oil, though in the short term it might not be apparent.

Peak oil theorists are concerned about the amount of oil left in the ground, fearful that it is rapidly running out.  If you examine the aggregate of fossil fuel supplies, which includes coal, oil and natural gas, running out of them won’t be a problem in our lifetime, or your grandchildren’s lifetime.  Fossil fuel enegy reserves were estimated in 2000 to last for 131 years, and as a resource it is estimated to last 786 years.  For clarity, reserves are what is available for use, whereas a resource is what is estimated to be occuring geologically.  As reserves are depleted, more of the resource is brought into production to replace consumed reserves.

I can’t predict the time line of energy use and prices, but once everyone is used to the idea of high priced oil, and the structural economic changes described above are afoot, then the price of oil will be on it’s way back to the long run average real price, which has been about US$30 a barrel since 1970 (real means that the price is adjusted for the effects of inflation, as opposed to the nominal price which is what the posted price is).  If you include all the data prior to 1970, the average real price of oil drops to about US$21 a barrel. 

This process has been observed in the recent past, with the nadir of oil prices in the 1990’s.  The headline from The Economist for March 4th, 1999, is Drowning In Oil.  Interestingly enough, if you had purchased shares in Encana (a Canadian energy company) at that precise moment, by today you would have achieved compounded annual returns of 30%, or an absolute increase of 11 times, not including dividends.  So, in 9 years we’ve gone from having way too much of the stuff, to ‘Peak Oil’.  Things will swing back, they have in the past, and they will again.

These ideas ignore the environmental issues with fossil fuel use.  Moving away from fossil fuel dependency is a noble and imperative goal, but it should not be spurred on by fanciful talk of a looming oil/energy shortage.  I’ve cribbed heavily here from Mark Jaccard’s book, Sustainable Fossil Fuels, an excellent book, and taken items from a few other sources.

 

 

Back in town, new post soon

Made it back from Haida Gwaii yesterday after a week of guiding.  It was very cold and very wet and was the worst fishing I had ever seen up there.  Among the guides, there were long faces all round.  I pretended like it would be old times and that worked to my advantage for a couple of days, but then I came crashing back to earth.  However, summing up the week, doing the rock star tour was awesome; it was great to catch up with old friends, make a little cash, and do some fishing.

This piece by Andrew Baxter has got me fired up to write a new post that will be about ‘peak oil’ and energy.  Basically, it will be a long time before we run out of fossil fuels on this planet, regardless of what has been happening in the last few years with the price of oil.  But doom and gloom sells no?  The reality is that there is a bountiful deposit of energy on this planet, and no matter what we do in our lifetimes it will not run out.  More to follow.

It’s going to be a busy summer for me with various trips planned in and around about 4 more weeks of guiding, so I’ll post when I can!  Still working on the name…