Economics – Page 116 – a sibilant intake of breath

The structure of consumer spending

This graphic, provided by the New York Times, is quite interesting on two levels. To start with, it displays some interesting information about the structure of consumer spending. In addition, it provides an excellent example of data being displayed in a concise, comprehensible, attractive, and accessible way.

The first thing that is interesting is the breakdown between spending areas:

Housing: 42%
Transportation: 18%
Food and beverages: 15%
Health care: 6%
Education and communication: 6%
Recreation: 6%
Apparel: 4%
Miscellaneous: 3%

Also interesting are the single biggest spending items:

“Owner’s equivalent rent:” 23.9%
Rent: 5.8%
Gasoline: 5.2%
New cars and trucks: 4.6%
Full service restaurant meals: 3.0%
Electricity: 2.8%
Hotels and vacation homes: 2.4%
Car insurance: 2.0%
Used cars and trucks: 1.8%
Cable: 1.2%

Beer spending is a paltry 0.3% – only three times what is spent on butter or ice cream.

Greenpeace on carbon capture and storage

On Monday, Greenpeace released a report entitled: False Hope: Why carbon capture and storage won’t save the climate (PDF). The points made are fairly familiar, though it is good to see them considered in combination:

CCS cannot deliver in time to avoid dangerous climate change.
CCS wastes energy and resources
Storing carbon underground is risky
CCS is expensive and undermines real solutions to climate change
CCS and liability: risky business
The alternative to CCS: renewables and energy efficiency

Joseph Romm probably has the most sensible overall view of CCS. He argues that it can serve as one of the fourteen ‘wedges’ that are required to stabilize global concentrations of greenhouse gasses, acknowledging that even that role will require pumping infrastructure equivalent to all that presently being used to extract oil. Think about the total expenditures of the world’s oil companies on equipment, construction, and labour and you begin to appreciate the costs that are likely to be associated with widespread use of CCS. That being said, it is only fair to say that the cost projections are approximations based on huge assumptions. It is like being in the era of the Wright brothers and trying to project what the finances of a major airline will resemble, in terms of thinks like capital use and equipment life cycles.

CCS needs to be thought about in the context of an overall strategic push to stabilize greenhouse gas levels. It is possible that it will have a modest effect at an acceptable cost. It is also possible that it will be unfeasible at a commercial scale, or simply too costly. The most dangerous possibility is that the very idea of CCS gives people the false sense that the problem can be solved, particularly that we can keep burning coal while waiting for a low-cost technological solution to magically appear. As one strategy among many, CCS might have a future. One future that CCS cannot permit is one where the nature of the world’s energy use remains similar to today, with the awkward greenhouse gasses simply swept under the rug.

One more reason to support American gas taxes

One reason for which cutting gasoline taxes in the United States is especially unjustifiable is that the taxes don’t go into general revenue. Rather, they go into a Highway Trust Fund that pays for road construction and maintenance. Not only would cutting gasoline taxes encoruage people to use fuel inefficiently at a time of ever-greater scarcity: it would also shift the burden of paying for roads from those who use them most heavily towards the population as a whole.

The Fischer-Tropsch process

Those hoping to understand energy politics in the coming decades would be well advised to read up on the Fischer-Tropsch process. This chemical process uses catalysts to convert carbon monoxide and hydrogen into liquid hydrocarbons. Basically, it allows you to make gasoline using any of a large number of inputs as a feedstock. If the input you use is coal, this process is environmentally disastrous. It combines all the carbon emissions associated with coal burnings with extra energy use for synthetic fuel manufacture, not to mention the ecological and human health effects of coal mining. If the feedstock is biomass, it is possible that it could be a relatively benign way to produce liquid fuels for transport.

The process was developed in Germany during the interwar period and used to produce synthetic fuels during WWII. The fact that it can reduce military dependence on imported fuel is appealing to any state that wants to retain or enhance its military capacity, but feels threatened by the need to import hydrocarbons. The US Air Force has shown considerable interest for precisely that reason, though they are hoping to convert domestic coal or natural gas into jet fuel – an approach that has no environmental benefits. By contrast, biomass-to-liquids offers the possibility of carbon neutral fuels. All the carbon emitted by the fuel was absorbed quite recently by the plants from which it was made.

Such fuels are extremely unlikely to ever be as cheap as gasoline and kerosene – even with today’s oil prices. The fact that there are parts of the world where you can just make a hole in the ground and watch oil spray out ensures that. That said, Fisher-Tropsch-generated fuels could play an important part in a low-carbon future, provided three conditions are met: (a) the fuels are produced from biomass, not coal or natural gas (b) the energy used in the production process comes from sustainable low-carbon sources and (c) the process of growing the biomass is not unacceptably harmful in other ways. If land is redirected towards growing biomass in a way that encourages deforestation or starves the poor, we will not be able to legitimately claim that synthetic fuels are a solution.

NIN’s The Slip available for download

Following in the footsteps of Radiohead, Nine Inch Nails is giving listeners the option of downloading their latest album for free. Their approach differs from that of Radiohead in two ways: whereas Radiohead asked people to pay whatever they felt was fair, NIN is just sending the files for free. Also, while Radiohead offered their music in the form of DRM-free MP3 files, NIN is offering the choice of “high-quality MP3, FLAC or M4A lossless at CD quality and even higher-than-CD quality 24/96 WAVE.”

Like this blog, the album is available under a Creative Commons attribution non-commercial share alike license.

Collier on biofuels

Paul Collier’s comment on this Financial Times article is one of the best examples I have seen of the value of letting members of the public contribute in that way. As is generally the case with him, the comment is engaging and very candid. He argues that the most important way to keep the poor from suffering because of the drive towards biofuels is to encourage more large-scale industrial agriculture in the developing world:

We laud the production style of the peasant: environmentally sustainable and human in scale. In respect of manufacturing and services we grew out of this fantasy years ago, but in agriculture it continues to contaminate our policies. In Europe and Japan huge public resources have been devoted to propping up small farms. The best that can be said for these policies is that we can afford them. In Africa, which cannot afford them, development agencies have oriented their entire efforts on agricultural development to peasant style production. As a result, Africa has less large-scale commercial agriculture than it had fifty years ago. Unfortunately, peasant farming is generally not well-suited to innovation and investment: the result has been that African agriculture has fallen further and further behind the advancing productivity frontier of the globalized commercial model.

It is definitely a comment at odds with the new fashion for the local within environmentalism. That being said, there is a strong argument to be made that the rich world is going to press on with biofuels regardless of how much suffering it creates in the poor world. If that is taken as true, an unfashionable but effective counter-strategy might be the most suitable response.

Building an anti-power plant

You often see glib statements like “The world will need 35% more energy by 2020.” Often, these seem to be based on an approach little more sophisticated than looking at the trend in energy growth over the last few years and extending it out another twelve. Thought about more intelligently, we see that there isn’t some mythical quantity of energy that will be demanded: people will simply make choices in the face of the incentives that are presented to them and their own desires. If those choices and incentives favour a lower energy mode of living, it is entirely possible that we could cut total energy use at the same time as the population and standards of living continue to rise.

Thought about that way, there are many ways in which we can change what the quantity of energy demanded will be. People don’t want X Joules to keep their houses warm and Y Joules to transport groceries. They want warm homes and convenience. These things can be done at a much lesser energy cost than is the case today. Critically, reducing demand for some quantity of energy – say the 1000 MW or so a new nuclear plant could provide – may well be cheaper than actually building the plant. Making buildings, vehicles, and factories more efficient can go a long way towards that. So too can cutting back on terrifically wasteful uses of energy. One critical route to achieving this is to change the incentives for energy producers. As long as their profits rise when they sell more and fall when they help people cut back, they will be a perverse force pushing for less sustainable lifestyles. Regulation can be re-crafted to ensure that halving a home’s energy use is a boon for the owner, the utility, and for the planet.

Thoughtlessly accepting that energy demand must continue growing shows both a lack of adequate concern about climate change and a lack of imagination. Building anti-power plants instead would mean keeping the landscape and air clearer, keeping carbon safely in the ground, and working towards a future where one’s energy use and one’s quality of life aren’t slavishly locked together.

Standardizing cell phone chargers

Forgetting my cell phone charger in Toronto has already resulted in a week of weak connectivity. It need not be so. While it must be a gold mine for cell phone shops and manufacturers, the absurd proliferation of charger types is clearly an anti-competitive practice.

A government keen to protect consumers and boost overall economic efficiency would do the following:

Require that all cellular phones be rechargeable using a standard connector.
Ideally, that connector should be mini-USB (second from the left), capable of transferring both power and data.
Require that adapters be sold for all phones made in the past five years, and that the cost of the adapters equal just the cost of shipping and manufacture.

As long as any charger could be plugged into any phone and provide power, firms would be free to compete in designing and building chargers that connect to electrical outlets, car cigarette lighters, or whatever other source of power seems fitting.

The intervention in the market is justified for the same reason as with all standards: it produces societal welfare without adverse effects. It replaces self-serving confusion generated by private firms with an ordered approach that makes sense for everyone. It is not as though there is any major innovation which can occur with cell phone chargers. At root, they are just plastic-wrapped wires that run from a socket to a circuit board. Having fewer types – and making them go obsolete less frequently – would also reduce the usage of energy and materials in manufacturing, as well as the number of (potentially toxic) plastic trinkets populating landfills worldwide. A standard would allow people to share chargers, as well as permit buses and trains to have universal charging stations available.

Something similar could be done for laptop computers. Cell phones and laptops are both ubiquitous elements of modern life and commerce. Just think how many productive hours are needlessly lost because each manufacturer wants to ensure that last year’s charger cannot be sold to someone buying this year’s phone.

Considering the future of oil

People frequently mention how, in the 17th and 18th century, lobster was so abundant in the eastern United States that it was used as a staple food for orphans, servants, and prisoners. Supposedly, Massachusetts passed a law restricting it to being served at most twice a week.

In the era of lobster scarcity, this seems incredible to us. The same basic ideas can be usefully applied to petroleum. There is a good case to be made that petroleum prices will continue to rise dramatically in the medium to long term on the basis of growing demand and flat or declining production. If that proves true, oil will be the new lobster. Where prior cheapness made it the fuel of choice in all kinds of applications, cost will gradually squeeze it out from everywhere something cheaper can do the trick. I am mostly talking about liquid petroleum here, but a similar market dynamic is likely to arise with natural gas (though it is tougher to export overseas), or even coal.

People used to grind up lobster to use as fertilizer for gardens. The oil equivalent is probably using petroleum to generate constant baseload electricity for the grid. Oil costs more to transport, burns less efficiently, and is much more import-dependent than natural gas. Oil for electricity is one of those uses that people generally switch from as soon as a viable opportunity arises. Barring some isolated communities and autocratic petro-states, I doubt anyone will be generating electricity from the grid using oil in a few decades’ time.

Moving up the value chain, there are two big ways in which oil is used: as a high-density source of energy and as a feedstock for industrial processes. In both cases, higher prices will start to produce substitution in areas where alternatives are possible. Electric lawnmowers are quieter and a whole lot less toxin-spewing than their gasoline counterparts; similarly, plug-in hybrids and all-electric vehicles are the best option for those city-dwellers who continue to demand a private vehicle.

Where only oil will do

At the top of the value chain are applications where nothing but oil will do. A fancy restaurant cannot serve a heap of flavoured tofu and call it lobster, though frozen dinner companies do something similar all the time. The essential uses for oil will ultimately relate to the two fundamental properties described above: energy density and chemical makeup.

The foremost essential market for the first remains aircraft. Ground transportation to migrate towards electric. Hopefully, someone will also be able to come up with a biofuel that solves more problems than it creates. Ships can return to coal or sails, or even be outfit with marine nuclear reactors. Planes – for the foreseeable future – will need to continue burning mostly kerosene.

The chemistry of oil makes it the basis for most of our plastics, but it is difficult for a non-expert like me to determine the degree to which that is the result of its historically low price. Certainly, permanently higher prices for oil will lead to some changes in the plastics industry. If prices rise, people will use less and will substitute less costly materials. Where possible, people will also make plastics from things other than oil. It seems likely, however, that there will be at least a few industrial processes where only oil will do.

Broader impacts

When it comes to prices for refined petroleum fuels, the world is broadly divided into three groups of states. There are those where oil has long been relatively expensive, such as in Western Europe. There are those where oil has been moderately subsidized, creating a mild culture of entitlement, such as the United States. Finally, there are those where subsidies are extreme. Gasoline in many European states is well above $2.00 a litre; in the United States, it remains around $1.00; in Iran, it is $0.09 and in Venezuela just $0.05.

In many countries within the third group, subsidies are already a huge expense. Iran may produce a lot of oil, but it refines relatively little into gasoline. As such, it needs to import gasoline in order to provide it to its citizens for pennies. A good number of them will then be tempted to re-export it and pocket the difference. That temptation can only grow in a world of ever-more-expensive oil. Governments then find themselves in the awkward position of having to either cut a popular and stabilizing policy or somehow finance a growing drain on the public purse.

While it is extremely difficult to predict what the overall effects of continually rising oil prices would be, two conclusions do seem highly probable. Firstly, uses of oil that produce little value or which could easily switch to another fuel will be priced out of the oil-buying market by high margin options with few substitutes. Secondly, more stress will develop in relation to wildly different prices for refined fuels, especially when it comes to states like Iran that subsidize domestic consumption heavily.

[Update: 8 March 2010]. BuryCoal.com is a site dedicated to making the case for leaving coal, along with unconventional oil and gas, underground.

Oil prices and American politics

Robert Rapier, a petroleum engineer and blogger, recently posted an ‘Open Letter to Our Next President.’ He has recently been doing a good job of showing why ideas like a summer gas tax holiday or suing OPEC for the right to buy oil at the price we want are wrong-headed popularity stunts. He has also been doing a good job of highlighting the degree to which current petroleum prices are largely the product of long-term trends. If more and more people want ever-more oil, at the same time as existing fields are producing flat or declining yields and new discoveries are not keeping pace, prices are certain to keep rising.

The question is whether one of those four pillars will be eroded. It is possible we will finally get a handle on per-capita oil demand, and start along the long road to renewable energy use. It is also possible that economic conditions will reduce the growth in world demand for oil as people in India and China are forced to grow richer more slowly than at present. It is possible that new technology will significantly increase yields from existing oil fields for some period of time. Finally, it is possible that big new finds will keep the (planet destroying) party going a bit longer for everybody.

It is time to start thinking much more seriously about the possibility than none of those ‘outs’ will materialize.