Posts tagged ‘gas’

Update on Fisker Karma

I had some fun yesterday, dashing off a quick note about the Fisker Karma electric car and just how bad the electric mileage is if you use the DOE methodology rather than the flawed EPA methodology to calculate an mpg-equivalent.

It was the quickest and shortest column I have ever written on Forbes, so of course it has turned out to be the most read.  It has been sitting on top of the Forbes popularity list since about an hour after I wrote it, and currently has 82,000 reads (I am not a Twitter guy but 26,000 tweets seems good).

I wanted to add this clarification to the article:

Most other publications have focused on the 20 mpg the EPA gives the Karma on its backup gasoline engine (example), but my focus is on just how bad the car is even in all electric mode.    The calculation in the above article only applies to the car running on electric, and the reduction in MPGe I discuss is from applying the more comprehensive DOE methodology for getting an MPG equivilent, not from some sort of averaging with gasoline mode.  Again, see this article if you don’t understand the issue with the EPA methodology.

Press responses from Fisker Automotive highlight the problem here:  electric vehicle makers want to pretend that the electricity to charge the car comes from magic sparkle ponies sprinkling pixie dust rather than burning fossil fuels.  Take this quote, for example:

a Karma driver with a 40-mile commute who starts each day with a full battery charge will only need to visit the gas station about every 1,000 miles and would use just 9 gallons of gasoline per month.

This is true as far as it goes, but glosses over the fact that someone is still pouring fossil fuels into a tank somewhere to make that electricity.  This seems more a car to hide the fact that fossil fuels are being burned than one designed to actually reduce fossil fuel use.  Given the marketing pitch here that relies on the unseen vs. the seen, maybe we should rename it the Fisker Bastiat.

Green Cronyism

I am willing to believe that the initial push into alternative energy subsidies was undertaken with good, honest (though misguided) intentions to change the US energy mix.  But once such a program is begun, it inevitably gets turned into cronyism.

The best example is probably corn ethanol.  A combination of subsidies and mandates have pushed an enormous proportion of our food supply into gas tanks, for little or even negative environmental effect.   Environmentalists and the Left turned against it, but for a few large corporations like ADM, the subsidies have become life and death, and they do anything they have to to get Congress to maintain them.

The best evidence that corn ethanol shifted from a green program to pure cronyism was the imposition of large import tariffs.  The only possible purpose of these tariffs was to enrich farmers and a few manufacturers.  After all, if one really cared any more about getting more ethanol in the fuel supply, one would welcome low cost imports.

Well, the Solyndra debacle has started to make clear that cronyism has taken over solar subsidies as well.  Every day we find yet another high-ranking Obama supporter with his thumb on the scales tilting the DOE funding decision toward Solyndra.

Now we will see the ultimate test:

A group of U.S. solar-panel makers Wednesday called on the federal government to punish Chinese rivals with extra duties for allegedly dumping their products on the U.S. market…

The U.S. makers are asking the Department of Commerce and the International Trade Commission to impose a duty on panels imported from China, a market that totaled $1.6 billion in the first eight months of 2011. SolarWorld accused Chinese manufacturers of selling solar panels at less than half of what the production costs would be in a comparable free-market economy, and is asking for tariffs to make up the difference.

One could argue that this is in direct response to the Solyndra failure.  Solyndra's failure has been blamed on low cost panel manufacturing in China.   Again, if we care just about energy, we should be thrilled about low-cost Chinese solar panels.  If the Chinese government wants to somehow subsidize our consumption of solar panels, great!

Watch this proposal.  Any politician that jumps on this solar tariff bandwagon will be saying "My statements about wanting to see more solar usage is just a bluff, I only really care about subsidizing a few selected businesses."

I Don't Think This is Settled

For those who have read my climate work or seen the video, the key question in climate science revolves around the feedback effects in the climate system to Co2 warming.

Skeptics, like alarmists, generally agree that a doubling of Co2 concentrations might warm the Earth about a degree Celsius, absent any other effects.  But we can imagine all sorts of feedback effects, the most important of which are in water vapor and cloud formation.  Warming that forms more clouds might have negative feedback, as clouds offset some of the warming.  Warming that increases humidity could lead to more warming, as water vapor is a strong greenhouse gas.

The difference, then, between minor warming and catastrophe is in the feedbacks, and most importantly in clouds and water vapor.  All the research the government is funding on whether warming will cause sterility in tree frogs is tangential to this key question.

And this question is far from decided.  I won't get into all the arguments here, but to the extent there is any consensus, it is that man' CO2 is probably causing some warming.  Whether this is a catastrophe or a nuisance depends on feedbacks which are not well understood.

This week there has been a lot of interesting back and forth over a paper by Roy Spencer several months ago arguing that cloud feedback was negative and would serve to limit the total amount of man-made warming.  Just how central this issue is can be seen in the fuss this paper has caused, including editors forced to resign for even daring to publish such heresy, and the speed with which a counter-paper flew through peer review.

I won't get into the depths of this, except to show two charts.  The first is from Dessler in the alarmist camp, the second is the same chart but using a different data series.  I won't explain the axes,  just trust the relationship between these two variables is key to diagnosing the size and direction of feedback.

So we get opposite results (the slope of the regression) simply by using temperature and radiative flux data from to different agencies.  And note how thin the fit is in both -- basically drawing a line through a cloud.  Neither of these likely has an R-squared higher than about .05.

So there you have it, the most important question in climate - really, the only important question associated with anthropogenic global warming.  Settled science, indeed.

One-Program Proof Technocratic Government Does Not Work

Ethanol continues to be one of the dumbest, most costly programs ever engaged in by the Federal government

"Today, about 40 percent of all U.S. corn -- that's 15 percent of global corn production or 5 percent of all global grain -- is diverted into the corn ethanol scam in order to produce the energy equivalent of about 0.6 percent of global oil needs.
Corn prices, now close to $7 per bushel, have more than doubled over the past two years (see chart above). And recent harsh weather, including floods in the Midwest and drought in the South, will likely mean a subpar U.S. corn harvest. That, in turn, will mean yet higher prices for corn, which will translate into higher prices for meat, milk, eggs, cheese and other commodities.
Environmental damage:  check
Fails to meets its goals (of reducing fossil fuel use): check
Raises food prices:  check
Raises gas prices: check
Highly regressive costs that hurt the poor most:  check
Benefits accrue to very a small group of the politically connected:  check

WTF? This is What They Mean by Oil and Gas Subsidies?

When the Left has talked about oil and gas subsidies, I have generally nodded my head and agreed that any such things should be eliminated, just as they should be eliminated for all industries.   They have in the past thrown out huge numbers for such subsidies that seemed high, but I have not really questioned them.  But then I see this chart at Kevin Drum's site

Seriously, nearly half the "subsidy" number is the ability of a company to use LIFO accounting on inventory for their taxes?  Since the proposition is to eliminate these only for oil and gas, what is the logic that somehow LIFO accounting is wrong in Oil and Gas but OK in every other industry?   In fact, at least the first two largest items are both accounting rules that apply to all manufacturing industry.  So, rather than advocating for the elimination of special status for oil and gas, as I thought the argument was, they are in fact arguing that oil and gas going forward be treated in a unique and special way by the tax code, separate from every other manufacturing industry.

In fact, many of these are merely changes to the amortization and depreciation rate for up-front investments.  Typically, politicians of both parties have advocated for the current rules to encourage investment.  Now I suppose we are fine-tuning the rules, so that we encourage investment in the tax code in everything but oil and gas.  I will say this does seem to be consistent with Obama Administration jobs policy, which has been to try to stimulate businesses that are going nowhere and hold back the one business (oil and gas drilling) that is actually trying to grow.  I am fine with stopping the use of the tax code to try to channel private investment in politician-preferred directions.  But changing the decision rule from "using the tax code to encourage all manufacturing investment" to "using the tax code to encourage investment only in the industries we are personally sympathetic to" is just making the interventionism worse.

This is really weak.  Not to mention flawed.  Unless I am missing something, a change from LIFO to FIFO or some other inventory valuation rules will create a one-time change in income (and thus taxes) when the change is made.  LIFO only creates sustained reductions in taxable income, and thus taxes, if your raw materials prices are consistently rising (it actually increases taxes vs. FIFO if input prices are falling).  Given that oil and gas prices are volatile, its hard to see how this does much except extract a one-time tax payment from oil companies at the changeover.

By the way, I am pretty sure I would be all for ending government spending on "ultra-deepwater and unconventional natural gas and other petroleum research," though ironically this is exactly the kind of basic research the Left loves the government to perform.

Obama Administration Wants Jobs Without Employers

At least that is the only conclusion I can draw.   All the talk in this administration about job creation, yet they stand staunchly athwart the only only major industry that is really trying to grow, hire, and invest right now.  Just letting off the brakes the Administration has set on oil and gas drilling would lead to the creation of a ton of jobs, and better jobs than we will get with a new WPA paying workers to dig holes and fill them back in again.

Ethanol Fail

I should have known early reports of the death of ethanol supports in Congress were too good to be true.  Ethanol appears to be the un-killable zombie menace.  It used to be  a Baptists and bootleggers issue but even the Baptists (the environmentalists, in this case) have turned against it.  But still it lives on, probably as long as Iowa is a critical step in the Presidential nomination process.

Thune and Klobuchar's bill takes the tax revenue gained from ending the VEETC (which, again, doesn't help ethanol producers), and dedicates most of the money to other ethanol subsidies, such as tax credits for small ethanol producers and for ethanol blender pumps to be installed at gas stations. The bill, of course, leaves in place the mandate, which is by far the biggest ethanol subsidy.

Lobbyists for the American Coalition for Ethanol and the Renewable Fuels Association applaud the bill -- which tells you just about all you need to know.

 

Global Warming Hype Process

Here is the current global warming hype process as it exists today:

  1. Identify a 2 or 3 sigma weather event.  Since there are 365 days in the year and hundreds of different regions in the world, the laws of probability say that some event in the tail of the normal distribution (local high, local low, local flood, local drought, local snow, local tornado, local hurricane, etc) should be regularly occurring somewhere.
  2. Play weather event all over press, closely linked as often as possible with supposition that this is due to manmade CO2.  If the connection to global warming is too outlandish to make with a straight face (e.g. cold weather) use term "climate change" or "climate disruption" instead of global warming.
  3. Skeptics will point to actual data that this event is not part of a long term trend, e.g. there is no rise in tornado activity correlated with 20th century rise in temperatures so blaming one year of high tornadoes on global warming makes no sense.    Ignore this.
  4. Peer reviewed literature will emerge 6-12 months later demonstrating that the event was not likely due to man-made global warming.  Ignore this as well.  Never, ever go back and revisit failed catastrophic predictions.
  5. Repeat

Last year's Russian heat wave is a classic example.  Here is an example of the hype and the tie to man-made global warming in Time.  And here, 12 months later, is the study saying that weather was just weather:

Reference
Dole, R., Hoerling, M., Perlwitz, J., Eischeid, J., Pegion, P., Zhang, T., Quan, X.-W., Xu, T. and Murray, D. 2011. Was there a basis for anticipating the 2010 Russian heat wave? Geophysical Research Letters38: 10.1029/2010GL046582.

Background
The authors write that "the 2010 summer heat wave in western Russia was extraordinary, with the region experiencing the warmest July since at least 1880 and numerous locations setting all-time maximum temperature records." And as a result, they say that "questions of vital societal interest are whether the 2010 Russian heat wave might have been anticipated, and to what extent human-caused greenhouse gas emissions played a role."

What was learned
The nine U.S. researchers determined that "analysis of forced model simulations indicates that neither human influences nor other slowly evolving ocean boundary conditions contributed substantially to the magnitude of the heat wave." In fact, they say that the model simulations provided "evidence that such an intense event could be produced through natural variability alone." Similarly, on the observation front, they state that "July surface temperatures for the region impacted by the 2010 Russian heat wave show no significant warming trend over the prior 130-year period from 1880-2009," noting, in fact, that "a linear trend calculation yields a total temperature change over the 130 years of -0.1°C." In addition, they indicate that "no significant difference exists between July temperatures over western Russia averaged for the last 65 years (1945-2009) versus the prior 65 years (1880-1944)," and they state that "there is also no clear indication of a trend toward increasing warm extremes." Last of all, they say that although there was a slightly higher variability in temperature in the latter period, the increase was "not statistically significant."

Not sure I find the computer model work comforting one way or the other but the complete lack of any observational trend seems compelling.

Libertarians as Corporate Whores

I am amazed lately as the left has tried to pitch libertarians as corporate whores, taking certain small-government positions because they have been paid off by Koch or Exxon.

I can understand how this charge might bite for Democrats and Republicans whose positions tend to be a hodge-podge of individual liberty and state control (and which seem to morph back and forth depending on which team is in the White House).  When there is no consistent, temporally stable philosophy that drives political positions, then it might be appropriate to look at other factors that might drive a public stance on an issue.  If, for example, I had always supported tight regulation of corporate market share, one might wonder why I defend Google against anti-trust scrutiny and reasonably look for other motives.

But as a libertarian, I consistently support market solutions over government regulation.  On this site I have supported the right of hair threaders and interior designers and real estate agents and casket sellers to ply their trade without government permissions.  I have supported legalization of gambling, marijuana and narcotic sales, and prostitution.

So why is it that I can plow along trying my best to be a consistent advocate of individual liberty, without a hint that I am in the pay of hair threaders or hookers, but as soon as I write on, say, natural gas fracking I am in the pay of the Koch brothers?  This strikes me as the lamest possible argument.

On this blog, think of me as sitting at a roulette table and always betting on black  (yes, the house will eventually win but welcome to the world of being a libertarian in modern statist politics).  Spin after spin I bet black.  Imagine a couple of folks walking up and seeing me place my next bet on black.  Why do you think he did that?  Was it because the last number was a 6?  Or because three of the last five were red?  No guys, it's because I always bet black.

Of nearly all the political groups, libertarians should be the most transparent.  We always side with individual liberty, and searching for other motives for these positions is generally futile.

More Wind Craziness

I still contend that wind is, except in a few niche applications, probably the worst alternate energy source.   Other forms of energy like solar have issues, but there is a lot of reason to believe these a fixable over time with better technology.  Wind is just a plain dog.

One of the biggest problems with wind is the need for backup power.  Because wind's lapses are hard to predict, a lot of fossil fuels have to be burned in spinning, hot backup capacity ready at a moment's notice to take over.  In Germany, the net effect has been very little substitution of fossil fuel burning despite an enormous wind investment

As wind power capacity rises, the lower availability of the wind farms determines the reliability of the system as a whole to an ever increasing extent. Consequently the greater reliability of traditional power stations becomes increasingly eclipsed.

As a result, the relative contribution of wind power to the guaranteed capacity of our supply system up to the year 2020 will fall continuously to around 4% (FIGURE 7). In concrete terms, this means that in 2020, with a forecast wind power capacity of over 48,000MW (Source: dena grid study), 2,000MW of traditional power production can be replaced by these wind farms.

Natural gas makes this situation a little better, as natural gas turbines can be brought up much faster than, say, an oil or coal-powered plant.  But the duplicate investment is still necesary

Britain's richest energy companies want homeowners to subsidise billions of pounds worth of gas-powered stations that will stand idle for most of the time.

Talks have taken place between the Government, Centrica, owner of British Gas, and other energy companies on incentives to build the power stations needed as back-ups for the wind farms now being built around the country.

It is understood 17 gas-fired plants worth about £10 billion will be needed by 2020.

The Energy Department has been warned that without this massive back-up for the new generation of heavily subsidised giant wind farms, the lights could go out when the wind dies down.

Sam Laidlaw, chief executive of Centrica, said renewables, such as large-scale wind energy, were intermittent and required back-up generation, a role gas was uniquely qualified to fill.

But as power stations that operate only intermittently would not be financially viable, Laidlaw said: 'The building of new gas-fired capacity must be incentivised so that gas can fulfil its role as a bridging fuel.'

Great.  So we have wind power, which is not financially viable so it must be subsidized, that required backup power plants to be constructed, which will not be financially viable so gas plants must be subsidized.

I have an idea, why not have gas plants which are financially viable serving the base load and just get rid of wind and this double subsidy all together?

 

 

Power Imbalance: The Difference Between Liberal and Libertarian Philosophy

My new column is up at Forbes, and it is one of my favorites I have written for a while  (at least it seems so with my current scorpion-induced double vision).  It begins with Krugman's recent statement that the Left understands the Right and libertarian positions better than the Right and libertarians understand the Left.

I first demolish this as a pretentious crock, but then wander to more important topics

But I do understand the leftish position well enough to identify its key mistake.  As I mentioned earlier, we libertarians are similarly concerned with aggregations of power.   We have, at best, a love-hate relationship with large corporations, for example, enjoying the bounties they can bring us but fearing their size and power.

But what the Left ignores is that there is absolutely no power imbalance as large as that between the government and its citizens.    After all, you may get ticked off when Exxon charges you $4.00 a gallon for gas for reasons that aren't transparent to you, but you can always tell Exxon to kiss off and buy from someone else, or ride a bike, or stay home.    Because Exxon does not have armies and police and guns and prisons.

Every single time we give the government the power to right a perceived imbalance, we give the government more power than the private entity we are trying to contain.  In effect, we make things worse.   Because we want the government to counter-act the power of oil companies, Congress now has the power to dump large portions of our food supply into motor fuel, to the benefit of just a few politically connected ethanol companies.

One of the reasons the Left often cannot adequately articulate the libertarian position is that the notion of bottom-up emergent order tends to be difficult for many to understand or accept (this is mildly ironic, since the Left tends to defend the emergent order of Darwinian evolution against the top-down Christian creation vision).

The key to much of libertarian economics is not that libertarians trust private actors, but that libertarians trust natural correction mechanisms in free markets far more than it trusts authoritarian power of the government.   When, for example, large corporations become sloppy and abusive and senescent, markets will eventually bring them down.

In fact, when government is given power, nominally to correct such imbalances, they tend to use it to protect those in power as often as they do to protect the disenfranchised. Government restrictive licensing of hair dressers, interior designers, and morticians; bailouts of GM, Chrysler, and AIG; corporate welfare to GE and ADM; and use of imminent domain to hand private property to favored real estate  developpers -- all are examples of finding government cures for perceived private power imbalances that are worse than the disease.

Isacc Asimov, in a book called Foundation that Paul Krugman recently rated as one of the most influential on his life, related this fable:  Once there was a man and a horse, who were both imperiled by a wolf.  The man approached the horse, and said that if the horse would put its superior speed at his disposal, he could kill the wolf.  And so the horse agreed to take the man's saddle and bridle, and helped the man kill the wolf.  The horse said, "great job, now remove your saddle and we can both be free," and the man said "never!"

I hope the moral of the story is clear.  In trying to deal with the threat of the wolf, the horse gave the man so much power he became an even bigger threat.  So too when we look to government to solve our problems.

Read the whole thing, as they say

Show Us Your Lightsaber Or You Will Be Fined

This year, US oil refiners will pay more than $6 million in fines to the EPA for not using a product that doesn't exist.   Refiners are required to blend at least 6.6 million gallons of cellulosic ethanol this year, or pay a fine to the EPA of $1 per gallon of this target not met.

But here is the funny part - no cellulosic ethanol exists for refiners to buy, even by the EPA's own analysis.  The product simply does not exist in any more than pilot plant / experimental volumes.  But that is not stopping the EPA from imposing the fines, which will get passed on into gasoline prices.

Here is the saddest part, from a defender of the cellulosic mandates:

Next-generation ethanol advocates say that small-scale commercial production of the fuel is just around the corner. When the EPA proposal was released yesterday, one advocate blamed the oil and gas industry for slow progress.

“America’s advanced and cellulosic ethanol industry is rapidly progressing with many technologies proven and biorefinery projects shovel-ready. Yet, advanced biofuel producers continue to sail into a head wind created by tax policy favoring oil and gas,” said Brooke Coleman, executive director of the Advanced Ethanol Council, in a statement.

What in the hell are they talking about?  Their plants get their construction subsidized with public financing, the oil industry is required to buy their product, trade barriers exist to limit foreign competition.  These guys are not fighting a headwind, they are trying to hit a golf ball downwind in a hurricane and they still can't clear the lady's tee.

Labor and Capital Mobility, and the Recovery

I was thinking this weekend that one reason the US recovery may be slow is related to labor and capital mobility.

One substantial avenue to recovery in a recession has always been labor and capital mobility.  The fast labor and capital can be redeployed from losing industries to improving ones, the faster a recovery occurs.  One reasons Japan and certain European countries have had slower recoveries in the past than the US is that our mobility was higher and barriers to entrepreneurship lower.

But it strikes me that two things are going on in the US to endanger this advantage we have always enjoyed

  1. The government push for home ownership has turned out to be a trap.  Not only did it help create the bubble, whose bursting destroyed a lot of real and paper wealth, but it has greatly reduced labor mobility.  Home ownership makes labor mobility much harder even in a good housing market when one can sell his or her home easily.  In a bad market like today, very few feel they can pick up and move.  I might want to give up on the construction industry in Michigan and move to the oil patch of North Dakota, but how can I do that if I own a home that I can't sell?  A number of other actions, most notably the repeated extension of unemployment benefits, contributes to the lack of mobility.
  2. The government seems hell bent on doing everything it can to prevent, even reverse the tide, of capital mobility.  The government shifted tends of billions of capital into auto industry hands that had destroyed value for decades.  It continues to put the brakes on what should be an oil and gas exploration and production boom.  It kills health industries like light bulbs and shifts billions into useless politically powerful hands making ethanol.  The NLRB is preventing major American manufacturers from making factory investments in southern states.

In the late 1970's, the auto industry was in trouble but the oil patch was booming.  The Houston newspapers sold well in Michigan, popular for their help wanted ads.  From space, the Interstate highways between the Detroit and Texas probably looked orange from all the U-haul trailers.

The exact same dynamics could and should be occurring today.  Capital and labor should be shifting from, for example, the failing auto industry to the growing energy sector.  But the government today stands to block this reallocation. It is raising taxes on oil companies and placing barriers to their growth, while giving tax money to the auto industry and using every bit of power it can to sustain it.  Combine this type of barrier to capital flows (and auto/energy is but a couple of examples) with rising barriers to entrepreneurship, and it should be no surprise that growth is abysmal.

This is what happens in a corporate state.  Past winners retain huge amounts of power in the government long after their companies have become senescent in the marketplace.  Politicians argue for the power to pick winners and losers in the economy but generally use it only to protect current competitors and stand in the way of progress.

Gasland Fraud

The movie Gasland last year attempted to document the dangers of fracking in natural gas fields.  The accusation is that the procedures opens up paths in rock for gas and fracking chemicals to contaminate drinking water, even through thousands of feet of impermeable rock.  I don't know much about the topic, but I was suspicious the movie was yet another example of environmentalists opposing any sort of energy source.

The most memorable part of the film was when the move makers showed how tap water in one town, I suppose near some recent fracking activity, actually could be lit on fire due to the methane in it.  Wow, this looked compelling.  Somehow gas was getting in the water system -- must be the fracking, no?

Well, it turns out tap water in this area has had problems with methane since at least 1936, over a half century before fracking ever came into use.  Reports from the 70's from state agencies discussed the problem.

Well, of course the director of the movie would be embarrassed and would look into it, right.  Hah, just kidding.  Just as Erin Brokovitch didn't want to hear about scientific studies disproving her so-called cancer clusters, the director actually knew about this history and ignored it.  Specifically, he said the historic information about methane in the water was "not relevant."

Phelim McAleer has the whole story, including a video the Gasland director is working hard through legal channels to suppress.

World's Most Dangerous Lizard

It could kill thousands of jobs.

For years I have resisted the meme that environmentalists were anti-energy and anti-industrialists. However, the current strong and growing environmental opposition to natural gas production in the US, probably the cleanest, sanest source of energy that we have, is quickly changing my opinion.  Texas and New Mexico residents fear that the dune sagebrush lizard will get endangered species status specifically as a lever to reduce oil production.

Oil and Speculators

My new column is up at Forbes, and discusses the absurdity of blaming sustained higher oil and gas prices on speculators.

Is there a crime in the current oil prices?  Yes, but it’s not one of speculation.  Prices are a form of communication.  Higher prices tell consumers to use less oil, and producers to go find more.  The real crime today is that while the signal is flashing today to oil companies to go find more crude, the Obama administration has bent over backwards to make such efforts all but impossible.  In fact, the Obama Administration desperately tried and failed to increase oil and gas prices via cap and trade last year.  President Obama is not really against higher oil prices, he just wants them driven higher by the state, not by the markets.

The Silly Oil Speculation Meme

Apparently, the leftish-progressive talking point du jour is that oil speculators  (and wouldn't you know it, those apparently include new libertarian uber-villains the Koch brothers) are artificially raising prices above what a "natural" market clearing price would be.

I have always presumed this to be possible for short periods of time - probably hours, perhaps days.  But if, for any longer period of time, market prices (I am talking here about prices for current oil and immediate delivery, not futures prices) stay above the market clearing price one would normally expect from current supply and demand, then oil has to be building up somewhere.  People would be bending over backwards to sell oil into the market, and customers would be using less.

If futures speculation has somehow unanaturally driven up current prices, where is the oil building up?  I understand the price can go up for future oil, because in futures the inventory is just paper.  But the argument is that futures trading is driving up current oil prices.  When the Hunt brothers tried to corner the silver market, they had to buy and buy and keep buying to sop up the inventory.

Sure, some folks may be storing oil on speculation (and by the way most oil companies are inventorying oil and gasoline this time of year in the annual build up between heating oil season and summer driving season) -- but storing physical oil is really expensive.  And the total capacity to do so incrementally is trivial compared to world daily demand.  A few tanker loads sitting offshore is not going to mean squat (total world crude inventory is something like 350 million barrels at any one time, so adding a million barrels into storage only increases inventory by 0.3% or about.   Another way to look at it is that storing a million barrels of oil represents about 17 minutes of daily demand.   If the price is really being held above the market clearing price, then we are talking about the necessity of buying millions of barrels of oil each and every day and storing them, and to keep doing so day after day after day to keep the price up.  And then once you stop, the price is just going to crash before you can sell it because of the very fact that word got out you are selling it.

I dealt with this in a lot more depth here.  I want to repost it in full.  It's a bit dated (different prices) but still relevant.  Note in particular the irony of my friends point #5 -- this was a real view held by many on the progressive Left.  Ironic, huh?

I had an odd and slightly depressing conversation with a friend the other night.  He is quite intelligent and well-educated, and in business is probably substantially more successful, at least financially, than I.

Somehow we got in a discussion of oil markets, and he seemed to find my position suggesting that oil prices are generally set by supply and demand laughable, so much so he eventually gave up with me as one might give up and change the subject on someone who insists the Apollo moon landings were faked. I found the conversation odd, like having a discussion with a fellow
chemistry PHD and suddenly having them start defending the phlogiston
theory of combustion. His core position, as best I could follow, was this:

  1. Limitations on supply in the US, specifically limitations on new oil field development and refinery construction, are engineered by oil companies attempting to keep prices high.
  2. Oil prices are set at the whim of oil traders in London and New York, who are controlled by US oil companies.  The natural price of oil today should be $30 or $40, but oil traders keep it up at $60.  While players upstream and downstream may have limited market shares, these traders act as a choke point that controls the whole market.  All commodity markets are manipulated, or at least manipulatable, in this manner
  3. Oil supply and demand is nearly perfectly inelastic.
  4. If there really was a supply and demand reason for oil prices to shoot up to $60, then why aren’t we seeing any shortages?
  5. Oil prices only rise when Texas Republicans are in office.  They will fall back to $30 as soon as there is a Democratic president.  On the day oil executives were called to testify in front of the Democratic Congress recently, oil prices fell from $60 to $45 on that day, and then went right back up.

Ignoring the Laws of Economics (Price caps and floors)

While everyone (mostly) knows that we are suspending disbelief when the James Bond villain seems to be violating the laws of physics, there is a large cadre of folks that do believe that our economic overlords can suspend the laws of supply and demand.   As it turns out, these laws cannot be suspended, but they can certainly be ignored.  Individuals who ignore supply and demand in their investment and economic decision making are generally called "bankrupt," at least eventually, so we don’t always hear their stories (the Hunt brothers attempt to corner the silver market is probably the best example I can think of).  However, the US government has provided us with countless examples of actions that ignore economic reality.

The most typical example is in placing price caps.  The most visible example was probably the 1970′s era caps on oil, gasoline, and natural gas prices and later "windfall profit" taxes.  The result was gasoline lines and outright shortages.  With prices suppressed below the market clearing price, demand was higher and supply was lower than they would be in balance.

The my friend raised is different, one where price floors are imposed by industry participants or the government or more likely both working in concert.   The crux of my argument was not that government would shy away from protecting an industry by limiting supply, because they do this all the time. The real problem with the example at hand is that, by the laws of supply and demand, a price floor above the market clearing price should yield a supply glut.  As it turns out, supply guts associated with cartel actions to keep prices high tend to require significant, very visible, and often expensive actions to mitigate.  Consider two examples:

Realtors and their trade group have worked for years to maintain a tight cartel, demanding a 6% or higher agency fee that appears to be increasingly above the market clearing price.  The result of maintaining this price floor has been a huge glut of real estate agents.  The US is swimming in agents.  In an attempt to manage this supply down, realtors have convinced most state governments to institute onerous licensing requirements, with arcane tests written and administered by… the realtor’s trade group.  The tests are hard not because realtors really need to know this stuff, but because they are trying to keep the supply down.   And still the supply is in glut.  Outsiders who try to discount or sell their own home without a realtor (ie, bring even more cheap capacity into the system) are punished ruthlessly with blackballs.  I have moved many times and have had realtors show me over 300 houses — and you know how many For Sale By Owner homes I have been shown?  Zero.  A HUGE amount of effort is expended by the real estate industry to try to keep supply in check, a supply glut caused by holding rates artificially high.

A second example of price floors is in agriculture.  The US Government, for whatever political reasons, maintains price floors in a number of crops.  The result, of course, has been a supply glut in these commodities.  Sopping up this supply glut costs the US taxpayer billions.  In some cases the government pays to keep fields fallow, in others the government buys up extra commodities and either stores them (cheese) or gives them away overseas.  In cases like sugar, the government puts up huge tarriff barriers to imports, otherwise the market would be glutted with overseas suppliers attracted by the artificially high prices.  In fact, most of the current subsidy programs for ethanol, which makes almost zero environmental or energy policy sense, can be thought of as another government program to sop up excess farm commodity supply so the price floor can be maintained.

I guess my point from these examples is not that producers haven’t tried to impose price floors above the market clearing price, because they have.  And it is not even that these floors are not sustainable, because they can be if the government steps in to help with their coercive power and our tax money to back them.  My point is, though, that the laws of supply and demand are not suspended in these cases.  Price floors above the market clearing price lead to supply gluts, which require very extensive, highly visible, and often expensive efforts to manage.  As we turn now to oil markets, we’ll try to see if there is evidence of such actions taking place.

The reasons behind US oil production and refining capacity constraints

As to his first point, that oil companies are conspiring with the government to artificially limit oil production and refining capacity, this certainly would not be unprecedented in industry, as discussed above.  However, any historical study of these issues in the oil industry would make it really hard to reach this conclusion here.  There is a pretty clear documented record of oil companies pushing to explore more areas (ANWR, offshore) that are kept off-limits due to environmental pressures.  While we have trouble imagining the last 30 years without Alaskan oil, the US oil companies had to beg Congress to let them build the pipeline, and the issue was touch and go for a number of years.  The same story holds in refining, where environmental pressure and NIMBY concerns have prevented any new refinery construction since the 1970′s (though after years and years, we may be close in Arizona).  I know people are willing to credit oil companies with just about unlimited levels of Machiavellianism, but it would truly be a PR coup of unprecedented proportions to have maintained such a strong public stance to allow more capacity in the US while at the same time working in the back room for just the opposite.

The real reason this assertion is not credible is that capacity limitations in the US have very clearly worked against the interests of US oil companies.  In production, US companies produce on much better terms from domestic fields than they do when negotiating with totalitarian regimes overseas, and they don’t have to deal with instability issues (e.g. kidnapping in Nigeria) and expropriation concerns.  In refining, US companies have seen their market shares in refined products fall since the 1970s.  This is because when we stopped allowing refinery construction in this country, producing countries like Saudi Arabia went on a building boom.  Today, instead of importing our gasoline as crude to be refined in US refineries, we import gas directly from foreign refineries.  If the government is secretly helping oil companies maintain a refining capacity shortage in this country, someone forgot to tell them they need to raise import duties to keep foreign suppliers from taking their place.

What Oil Traders can and cannot do

As to the power of traders, I certainly believe that if the traders could move oil prices for sustained periods as much as 50% above or below the market clearing price, they would do so if it profited them.  I also think that speculative actions, and even speculative bubbles, can push commodity prices to short-term extremes that are difficult to explain by market fundamentals.  Futures contracts and options, with their built in leverage, allow even smaller players to take market-moving positions.  The question on the table, though, is whether oil traders can maintain oil prices 50% over the market clearing prices for years at a time.  I think not.

What is often forgotten is that companies like Exxon and Shell control something like 4-5% each of world production (and that number is over-stated, since much of their production is as operator for state-owned oil companies who have the real control over production rates).  As a point of comparison, this is roughly the same market Toshiba has in the US computer market and well below Acer’s.  As a result, there is not one player, or even several working in tandem, who hold any real power in crude markets.  Unless one posits, as my friend does, that NY and London traders somehow sit astride a choke point in the world markets.

But here is the real problem with saying that these traders have kept oil prices 50% above the market clearing price for the last 2-3 years:  What do they do with the supply glut?  We know from economics, as well as the historic examples reviewed above, that price floors above the clearing price should result in a supply glut.  Where is all the oil?

Return to the example of when the Hunt’s tried to corner the silver market.  Over six months, they managed to drive the price from the single digits to almost $50 an ounce.  Leverage in futures markets allowed them to control a huge chunk of the available world supply.  But to profit from it (beyond a paper profit) the Hunts either had to take delivery (which they were financially unable to do, as they were already operating form leveraged positions) or find a buyer who accepted $50 as the new "right" price for silver, which they could not.  No one wanted to buy at $50, particularly from the Hunts, since they knew the moment the Hunt’s started selling, the price would crash.  As new supplies poured onto the market at the higher prices, the only way the Hunt’s could keep the price up was to pour hundreds of millions of dollars in to buy up this excess supply.  Eventually, of course, they went bankrupt.  But remember the takeaway:  They only could maintain the artificially higher commodity price as long as they kept buying excess capacity, a leveraged Ponzi game that eventually collapsed.

So how do oil traders’ supposedly pull off this feat of keeping oil prices elevated about the market clearing price?  Well, there is only one way:  It has to be stored, either in tanks or in the ground.  The option of storing the extra supplies in tanks is absurd, especially over a period of years – after all, at its peak, $60 of silver would sit on the tip of my finger, but $60 of oil won’t fit in the trunk of my car.  The world oil storage capacity is orders of magnitude too low.  So the only real option is to store it in the ground, ie don’t allow it to get produced.

How do traders pull this off?  I have no idea.  Despite people’s image, the oil producer’s market is incredibly fragmented.  The biggest companies in the world have less than 5%, and it rapidly steps down from there. It is actually even more fragmented than that, because most oil production is co-owned by royalty holders who get a percentage of the production.  These royalty holders are a very fragmented and independent group, and will complain at the first sign of their operator not producing fast and hard enough when prices are high.  To keep the extra oil off the market, you would have to send signals to a LOT of people.  And it has to be a strong and clear signal, because price is already sending the opposite signal.  The main purpose of price is in its communication value — a $60 price tells producers a lot about what and how much oil should be produced (and by the way tells consumers how careful to be with its use).  To override this signal, with thousands of producers, to achieve exactly the opposite effect being signaled with price, without a single person breaking the pack, is impossible.  Remember our examples and the economics – a sustained effort to keep prices substantially above market clearing prices has to result in visible and extensive efforts to manage excess supply.

Also, the other point that is often forgotten is that private exchanges can only survive when both Sellers AND buyers perceive them to be fair.  Buyers are quickly going to find alternatives to exchanges that are perceived to allow sellers to manipulate oil prices 50% above the market price for years at a time.  Remember, we think of oil sellers as Machiavellian, but oil buyers are big boys too, and are not unsophisticated dupes.  In fact, it was the private silver exchanges, in response to just such pressure, that changed their exchange rules to stop the Hunt family from continuing to try to corner the market.  They knew they needed to maintain the perception of fairness for both sellers and buyers.

Supply and Demand Elasticity

From here, the discussion started becoming, if possible, less grounded in economic reality.  In response to the supply/demand matching issues I raised, he asserted that oil demand and supply are nearly perfectly inelastic.  Well, if both supply and demand are unaffected by price, then I would certainly accept that oil is a very, very different kind of commodity.  But in fact, neither assertion is true, as shown by example here and here. In particular, supply is quite elastic.  As I have written before, there is a very wide range of investments one can make even in an old existing field to stimulate production as prices rise.  And many, many operators are doing so, as evidenced by rig counts, sales at oil field services companies, and even by spam investment pitches arriving in my in box.

I found the statement "if oil prices really belong this high, why have we not seen any shortages" to be particularly depressing.  Can anyone who sat in at least one lecture in economics 101 answer this query?  Of course, the answer is, that we have not seen shortages precisely because prices have risen, fulfilling their supply-demand matching utility, and in the process demonstrating that both supply and demand curves for oil do indeed have a slope.  In fact, shortages (e.g. gas lines or gas stations without gas at all) are typically a result of government-induced breakdowns of the pricing mechanism.  In the 1970′s, oil price controls combined with silly government interventions (such as gas distribution rules**) resulted in awful shortages and long gas lines.  More recently, fear of "price-gouging" legislation in the Katrina aftermath prevented prices from rising as much as they needed to, leading to shortages and inefficient distribution.

Manipulating Oil Prices for Political Benefit

As to manipulating oil or gas prices timed with political events (say an election or Congressional hearings), well, that is a challenge that comes up all the time.  It is possible nearly always to make this claim because there is nearly always a political event going on, so natural volatility in oil markets can always be tied to some concurrent "event."  In this specific case, the drop from $60 to $35 just for a Congressional hearing is not even coincidence, it is urban legend.  No such drop has occurred since prices hit 60, though prices did drop briefly to 50.  (I am no expert, but in this case the pricing pattern seen is fairly common for a commodity that has seen a runup, and then experiences some see-sawing as prices find their level.)

This does not mean that Congressional hearings did not have a hand in helping to drive oil price futures.  Futures traders are constantly checking a variety of tarot cards, and indications of government regulatory activity or legislation is certainly part of it.  While I guess traders purposely driving down oil prices ahead of the hearing to make oil companies look better is one possible explanation;  a more plausible one (short of coincidence, since Congress has hearings on oil and energy about every other month) is that traders might have been anticipating some regulatory outcome in advance of the hearing, that became more less likely once the hearings actually occurred.  *Shrug*  Readers are welcome to make large short bets in advance of future Congressional energy hearings if they really think the former is what is occurring.

As to a relationship between oil prices and the occupant of the White House, that is just political hubris.  As we can see, real oil prices rose during Nixon, fell during Ford, rose during Carter, fell precipitously during Reagan, were flat end to end for Bush 1 (though with a rise in the middle) and flat end to end for Clinton.  I can’t see a pattern.

If Oil Companies Arbitrarily Set Prices, Why Aren’t They Making More Money?

A couple of final thoughts.  First, in these heady days of "windfall" profits, Exxon-Mobil is making a profit margin of about 9% – 10% of sales, which is a pretty average to low industrial profit margin.  So if they really have the power to manipulate oil prices at whim, why aren’t they making more money?  In fact, for the two decades from 1983 to 2002, real oil prices languished at levels that put many smaller oil operators out of business and led to years of layoffs and down sizings at oil companies.  Profit margins even for the larges players was 6-8% of sales, below the average for industrial companies.  In fact, here is the profitability, as a percent of sales, for Exxon-Mobil over the last 5 years:

2006:  10.5%

2005:  9.7%

2004:  8.5%

2003:  8.5%

2002:  5.4%

2001:  7.1%

Before 2001, going back to the early 80′s, Exxon’s profits were a dog.  Over the last five years, the best five years they have had in decades, their return on average assets has been 14.58%, which is probably less than most public utility commissions allow their regulated utilities.  So who had their hand on the pricing throttle through those years, because they sure weren’t doing a very good job!  But if you really want to take these profits away (and in the process nuke all the investment incentives in the industry) you could get yourself a 15 to 20 cent decrease in gas prices.  Don’t spend it all in one place.

** One of the odder and forgotten pieces of legislation during and after the 1972 oil embargo was the law that divided the country into zones (I don’t remember how, by counties perhaps).  It then said that an oil company had to deliver the same proportion of gas to each zone as it did in the prior year  (yes, someone clearly took this right out of directive 10-289).  It seemed that every Representative somehow suspected that oil companies in some other district would mysteriously be hoarding gas to their district’s detriment.  Whatever the reason, the law ignored the fact that use patterns were always changing, but were particularly different during this shortage.  Everyone canceled plans for that long-distance drive to Yellowstone.  The rural interstate gas stations saw demand fall way off.  However, the law forced oil companies to send just as much gas to these stations (proportionally) as they had the prior year.  The result was that rural interstates were awash in gas, while cities had run dry.  Thanks again Congress.

Gas Prices

I find it sort of hilarious that it is Conservatives that are demagoguing gas prices and Liberals who are trying to explain that they really are not that high.  Yet another example of the Coke and Pepsi parties swapping political positions based on whose team is in the White House.

But I thought this graph was interesting, and supports a point I have made for years (Via Flowing Data)

I have worked in oil fields drilling miles below the surface and on offshore platforms in mile-deep water.  I have seen the Alaska pipeline under construction and worked in a 400 thousand barrel a day refinery.  And I can say with confidence that no other product on this list even is in the same order of magnitude as gasoline in terms of the capital investment, effort, and technology that does into delivering a gallon of gas.  The ability to deliver gas for even $4.00 a gallon is almost unbelievable.   Yet no other industry on this list or any other list gets 1/100th the grief oil companies do for being rapacious, greedy, and detrimental to society.

Don't Say I Didn't Warn You About Wind Power

From the printed version of the Daily Telegraph (does not appear to be online, but scan here).

The days of permanently available electricity may be coming to an end, the head of the power network said yesterday.

Families would have to get used to only using power when it was available, rather than constantly, said Steve Holliday, chief executive of National Grid.  Mr Holliday was challenged over how the country would "keep the lights on" when it relied more on wind turbines as supplies of gas dwindled.  Electricity provided by wind farms will increase six-fold by 2020 but critics complain they only generate on windy days.

Mr. Holliday told Radio 4's Today programme that people would have to " change their behaviour".

Peak IP

Human ingenuity keeps finding more oil and gas but we are close to running out of IP addresses, at least in the old IPv4 system, which all of your are probably using right now.  This does not mean the world will shut down - already, for example, all the computers in your home probably share a single IP address to the outside world, and for many of you that IP address is dynamically assigned by your Internet provider to further save addresses.  Many web sites on the same server will share an IP address (which is actually a good reason not to used shared hosting, because if one of the other accounts on your server is a bad actor, your IP address can effectively get banned from sites and networks trying to ban that other person on your server).

However, a new system is in place, but as with many standards transitions the details are tricky.  It will be interesting to see how this mostly free-market transition goes in comparison to government enforced transitions (e.g. television broadcast standards).

The following will probably just demonstrate my total ignorance of networking protocols, but I am not sure why IPv6 couldn't be written in a way that the extra bytes would just be ignored by IPv4 systems.  It could be assumed that all IPv4 addresses of the form www.xxx.yyy.zzz map to www.xxx.yyy.zzz.000.000 in IPv6, but this may be wildly simplifying what is going on.

The reason I bring this us is because I have always thought the way black and white TV was transitioned to color was particularly clever.  They could have broadcast color with three signals of Red, Green, and Blue levels, and then black and white TVs would have to be thrown out - they wouldn't show anything meaningful with that signal.  Instead, though, they mapped color with a three part system of an absolute brightness signal for each pixel, plus two color signals.  If you are familiar with Photoshop, when you choose a color, you can enter the color as three numbers R-G-B for the intensity of each color or as Hue-Saturation-Brightness.  While not the same as the TV system, it is similar in that it has a pixel brightness component, plus to color components.  (my memory is that in the TV system, it is brightness plus two colors and the third color -- blue, I think -- is arrived at by subtraction from the total brightness minus the two other colors.)

Here is the trick - the signal which was just the pixel brightness component is essentially identical to the old black and white TV signal -- after all, a black and white signal is just the relative brightness of each pixel.  So they took a black and white signal and then added bandwidth so that there was more information if one had a color set.  Both technologies, old and new, worked from the same signal.

I suppose the problem with this is that I am thinking of routers like telephones.   Most folks know that if we dial more than 10 digits, the extras are just ignored.  My guess is that routers are more finicky and precise than this, and they can't just ignore the fact the IP address they are getting are too long.  But I still would imagine there could be a simple hardware hack to cheaply strip off the last part of a longer IP address so that older IPv4 infrastructure could still work in an IPv6 world.  Or is this hopelessly misinformed and naive?

Phoenix / Valley Metro Light Rail Report Card: F

Folks who read this site know I have been critical of Phoenix light rail since well before it was opened.  So often, folks just willfully misinterpret my criticisms.   The actual rail line and its service is pretty nice, and the facilities are quite attractive (lets see what they look like in 10 years though).  If Santa Claus had just delivered the Phoenix light rail system for free to Phoenix, I would be thrilled with it.   But Santa unfortunately was not involved, and instead the rail line was paid for by area residents, and it cost them over $75,000 per daily roundtrip rider to build, plus annual operating deficits infinitely into the future.   I would be thrilled if an Aston Martin Vanquish showed up in my garage tomorrow, but I am not going to fork over a quarter of a million bucks for one.  Ditto the light rail system.

Anyway, the 2009 FTA transit database is out, and Randal O'Toole has helpfully summarized it in spreadsheet form, which you can download here.  You can peruse your own local system.  Probably the hardest thing to figure out are the mode codes, which are deciphered here.  Since 2009 was the first full year of operation for Phoenix light rail, we can finally look at data for Phoenix on an apples to oranges apples basis with other transit systems  (it is really, really hard to squeeze useful information out of the data Valley Metro posts on their site).

I am just going to highlight two numbers for Phoenix light rail (TRS_ID 9209 in the data).

  • The public subsidy per individual trip (that is one person boarding and riding one way) is $32.73!!   No one would pay this amount if it were the fare.   This equates to a public subsidy (beyond the fares paid) of $3.82 per passenger mile.  Remember, this is not a hostile analysis, but based on the numbers Valley Metro itself submits to the FTA.   Note the IRS reimbursement rate for the total cost (capital and incremental expense) of driving a car is 50 cents per mile, which drops even lower per passenger mile when the car has more than one person in it.  The average occupancy of a car is something like 1.5, which would make the cost per passenger mile of the average car to be about 33 cents per mile.  Ignoring the passenger fares, the public subsidy alone for light rail in Phoenix is 11.6 times larger [note: and yes, this includes the gas tax, so it includes a lot of the maintenance of the road infrastructure.  To include full cost of maintaining and building highways, it might have to be a few cents higher, but its not going to come anywhere in the ballpark of the light rail number].
  • But we are paying more for rail to save the environment, right?  Well, the BTUs expended per passenger mile for Phoenix light rail was 4402.  This compares to the average for passenger cars as determined by the DOE at 3437 BTU/PM.  So the train actually uses 28% more energy to move one rider one mile than does the average car.

Years before the light rail system was completed, I made my light rail bet:  That with the capital cost, I could easily buy a Prius for every daily rider, and still save money.  And for less than the annual operating subsidy, I could give all the new Prius owners free gas each year.  Already my bet has proved more than correct.  But now we know that under my Prius plan, we also would have saved energy, since the Prius uses less than 1700 BTU/pm, less than a third of what Phoenix light rail consumes.

Nissan Leaf EPA Rating Hugely Flawed

Update: True MPGe is closer to 36, see below.  The 36 actually comes from the government's own research and rule-making, which they have chosen to ignore.

The EPA has done the fuel economy rating for the all-electric Nissan Leaf.  I see two major problems with it, but first, here is the window sticker, from this article

Problem #1:  Greenhouse gas estimate is a total crock.  Zero?

The Greenhouse gas rating, in the bottom right corner, is that the car produces ZERO greenhouse gasses.  While I suppose this is technically true, it is wildly misleading.  In almost every case, the production of the electricity to charge the car does create greenhouse gasses.  One might argue the answer is zero in the Pacific Northwest where most power is hydro, but even in heavy hydro/nuclear areas, the incremental marginal demand is typically picked up by natural gas turbines.  And in the Midwest, the Leaf will basically be coal powered, and studies have shown it to create potentially more CO2 than burning gasoline.  I understand that this metric is hard, because it depends on where you are and even what time of day you charge the car, but the EPA in all this complexity chose to use the one number - zero - that is least likely to be the correct answer.

Problems #2:  Apples and oranges comparison of electricity and gasoline.

To understand the problem, look at the methodology:

So, how does the EPA calculate mpg for an electric car? Nissan's presser says the EPA uses a formula where 33.7 kWhs are equivalent to one gallon of gasoline energy

To get 33.7 kWhs to one gallon, they have basically done a conversion through BTUs -- ie 1 KWh = 3412 BTU and one gallon of gasoline releases 115,000 BTU of energy in combustion.

Am I the only one that sees the problem?  They are comparing apples and oranges.  The gasoline number is a potential energy number -- which given inefficiencies (not to mention the second law of thermodynamics) we can never fully capture as useful work out of the fuel.  They are measuring the potential energy in the gasoline before we start to try to convert it to a useful form.  However, with electricity, they are measuring the energy after we have already done much of this conversion and suffered most of the losses.

They are therefore giving the electric vehicle a huge break.  When we measure mpg on a traditional car, the efficiency takes a hit due to conversion efficiencies and heat losses in combustion.  The same thing happens when we generate electricity, but the electric car in this measurement is not being saddled with these losses while the traditional car does have to bear these costs.  Measuring how efficient the Leaf is at using electricity from an electric outlet is roughly equivalent to measuring how efficient my car is at using the energy in the drive shaft.

An apples to apples comparison would compare the traditional car's MPG with the Leaf's miles per gallon of gasoline (or gasoline equivalent) that would have to be burned to generate the electricity it uses.  Even if a power plant were operating at 50% efficiency (which I think is actually high and ignores transmission losses) this reduces the Leaf's MPG down to 50, which is good but in line with several very efficient traditional cars.

Update: I have new numbers, which in part help respond to the first commenter.   The short answer to his comment is that there is a big difference between handwaving away10% you missed and handwaving away 70%.  I agree that the EPA numbers for the Leaf are valid "tank-to-wheel" numbers (meaning how efficiently does the car use the energy in its tank).  The question is, whether tank-to-wheel has any meaning at all.  My article above is basically an argument for why it is not valid.  Here is an extreme example -- what if we ran cars off of replaceable flywheels that were spun up by third parties and then put in our cars already energized.  These would be highly efficient on a tank to wheel basis, as we just need to transmit what is already mechanical energy to the wheels.  But does ignoring the energy costs and inefficiencies in spinning these things up offline really make sense?

We can go to the government itself to solve this.  In this rule-making document, the DOE defines some key numbers we need here.

They define petroleum refining and distribution efficiency as .83, meaning it takes 1 gallon of gas out of the well to get .83 in your tank.

For electricity, they define two numbers that must be multiplied together.  The fossil fuel electrical generation efficiency is .328 and the transmission efficiency is .924, for a net of .303.

Note the big freaking difference between .83 and .303, which is why to call it all handwaving is disingenuous.  Sure, we often handwave away the fossil fuel cost of getting gas in our cars, but the fossil fuel cost of getting electricity in the batteries is four times higher.   The government even does the math, multiplying the 33.7 Kwh/gal used above by .303 and dividing by .83 to get an apples to apples well to wheels mpge number for electric vehicles of 12.3 Kwh/gal.

So a total apples to apples comparison factor already exists, and the government chose not to use it for the window stickers.  This is probably because it would have given the Nissan Leaf an mpge of 36, not bad but fairly pedestrian for such an overhyped technology.  And at some level the Leaf is irrelevant.  This entire process has likely been tilted to make the Government Motors Volt look better.

Perfect the Enemy of the Good

For years, my observation has been that the perfect has been the enemy of the good in energy policy.   Now, I don't support the feds making energy policy at all, but given that they do, too often the government has ignored the 80/20 solution that would get most of the desired benefits for a fraction of the cost of alternatives being considered.

For example, in California, the state could have made a ton more progress reducing vehicle emissions had they  accepted a low emissions standard decades ago that allowed for things like compressed natural gas (CNG) as a vehicle fuel.  However, environmentalists insisted on zero emissions, and thus only electric vehicles passed muster, and the technology simply has not been there  (not to mention that at the margin, new electric vehicles in the state would at best be powered by natural gas and at worst by Arizona and Nevada coal plants, making the very concept of "zero-emissions" crazy).

I am thinking of this by looking at this chart from the EIA of CO2 emissions per BTU for various fuels (pounds per million BTU):

Coal (anthracite) 227
Coal (bituminous) 205
Coal (lignite) 215
Coal (subbituminous) 213
Diesel fuel & heating oil 161
Gasoline 156
Propane 139
Natural gas 117

Looking at this, and given the huge amounts of natural gas in this country, one might reasonably expect that a logical policy suggestion would be to try to provide incentives to substitute natural gas for coal and diesel fuel.  The technology exists right now, today, to produce electricity with gas and to power large vehicles with CNG  (and focusing on truck fleets eases the distribution issues with CNG).

But of course absolutely no one in the global warming movement is suggesting this (except for T. Boone Pickens, and he is involved in climate bills as a rent-seeker, not as an advocate).  You see, we want "renewable" energy, and natural gas does not fit.  Though for some reason ethanol does, despite the fact that ethanol probably creates more CO2 than it reduces.

No point here really, since I am not advocating any sort of energy policy.  But it reinforced to me why no one should claim as a justification for energy policy that somehow the system will be more efficient if a few smart people design it top-down, when one of the most obvious 80/20 solutions to Co2 reduction is not even considered.

The 1099 Landmine

The Senate will take a vote today to repeal the hugely onerous 1099 provision from the Obamacare legislation.   Good news, though Obama is opposed to the repeal as he feels (probably correctly) that it will open the floodgates to further repeals and amendments.  Which is pretty disingenuous, as one of the soothing memes he handed out when the legislation was being rushed through Congress was that there was plenty of time to amend and fix its rough edges.  How he needs to decide if he was lying about that, as Congress addresses a rough edge that had nothing to do with health care but created a huge and largely useless burden on businesses.  I know that this provision would really kneecap my business.

Meanwhile, small businesses are staring in horror toward 2013, when the 1099 mandate will hit more than 30 million of them. Currently businesses only have to tell the IRS the value of services they purchase from vendors and the like. Under the new rules, they'll have to report the value of goods and merchandise they purchase as well, adding vast accounting and paperwork costs.

Think about a midsized trucking company. The back office would have to collect hundreds of thousands of receipts from every gas station where its drivers filled up and figure out where it spent more than $600 that year. Then it would also need to match those payments to the stations' corporate parents.

Most Democrats now claim they were blindsided and didn't understand the implications of the 1099 provision"”which is typical of the slapdash, destructive way the bill was written and passed. As the critics claimed, most Members had no idea what they were voting on.

Democrats are trying to water down this repeal:

Yesterday the White House endorsed a competing proposal from Florida Democrat Bill Nelson that would increase the 1099 threshold to $5,000 and exempt businesses with fewer than 25 workers. Yet this is little more than a rearguard action in favor of the status quo; the Nelson amendment leaves the basic architecture unchanged while making the problem more complex.

Businesses would still have to track all purchases, not knowing in advance which contractors will exceed $5,000 at the end of the year. It also creates a marginal barrier to job creation"”for a smaller firm, hiring a 26th employee would be extremely costly. The Nelson amendment also includes new taxes on domestic oil production, as every Democratic bill now seems to do.

This analysis is dead on -- our company generally cannot predict exactly how much we will purchase from a specific vendor in a year, so we would still have to collect tax ID's from every single vendor, not knowing which would cross the hurdle.

All My Business Problems Diagnosed

As explained by Steven Pearlstein, who presumably has created so much economic value in his lifetime that he can cast stones from the high ground

And some of it, to be quite frank, Robert, is an appalling lack of imagination and guts on the part of these same CEOs who are complaining and pointing the finger at every else. You know, these guys are very good at cutting. They're very good at blaming others. They're a little less good at coming up with creative new products and services, and they've got a little flabby in that regard in the last few years where the focus has been on surviving and cutting, as it should had been. But they're not the gutsiest group of people in the world.

And by the way, they get into this group think which you - you know, the fact that they all say it, it's sort of like a notion that starts in the country club locker room, and everyone is nodding, and then the one passes it on to the other. And now, you know, this similarity of the comments betrays this sort of group think that is almost self-fulfilling at this point.

Mr. Pearlstein is absolutely right.  As CEO of my company, I am out of creativity.  I will give you an example.  The new health care law appears (the implementation is still hazy) to impose a $2000 penalty per employee for not having a corporate health care plan (all my employees are retired, so they already have health care plans, but that does not affect the penalty).  With a bit over 400 employees, that makes the penalty something north of $800,000 a year.  This is larger than my annual net income.  And Mr. Pearlstein is correct -- I am absolutely at a loss as to how to deal with this, which just proves his point that all we CEO's have an appalling lack of creativity.

Mr. Pearlstein seems to be holding an image of the Fortune 25 in his head, but in fact most job creation is by smaller companies.  I wrote a while back on Forbes.com why CEO's of smaller companies have be having their creativity diverted.

Postscript: On January 10, 2008, our company actually, shockingly, had a creative idea.  Instead of refueling our boats at a lake in Ventura County, CA using zillions of 5 gallon gas carriers, lets put in a small double wall gas tank.  It would save a ton of useless labor, it would greatly reduce fuel spills on the lake (the nozzle, unlike the 5 gallon cans, has overflow protection), it would save lots of trips into town to fill gas tanks -- a winner all the way around.  Granted this was a pretty small idea, but sometimes success in small business is a lot of bunts and singles.

After hundreds of manhours of effort, numerous checks written to the County and the state, and I don't know how many forms filled out, on July 1, 2010, exactly 901 days after we got the creative idea, Ventura County gave us the last permit we needed to go forward.