Coyote Blog

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.

Donna Laframboise discusses 18th century transportation issues, and particularly the horse manure problem:

The Superfreakonomics authors draw heavily on the work of Eric Morris, whose urban planning Masters thesis explored the reality of horse-based transportation in 19th-century cities. A user-friendly encapsulation of his research appears in an 8-page article here. (It was published in Access, a U of California transportation publication. The entire issue is available here.)

Morris points out that, by the late 1800s, large urban centers were “drowning in horse manure.” Not only were there no solutions in sight, people were making dire predictions:

In 1894, the Times of London estimated that by 1950 every street in the city would be buried nine feet deep in horse manure. One New York prognosticator of the 1890s concluded that by 1930 the horse droppings would rise to Manhattan’s third-story windows.

The automobile helped solve this growing ecological problem.  Back in 2006, I had considered the same thing with a hypothetical blog post from 1870 which is pretty close to the Times of London article quoted above (which I had never seen):

As the US Population reaches toward the astronomical total of 40 million persons, we are reaching the limits of the number of people this earth can support.    If one were to extrapolate current population growth rates, this country in a hundred years could have over 250 million people in it!  Now of course, that figure is impossible – the farmland of this country couldn’t possibly support even half this number.  But it is interesting to consider the environmental consequences.

Take the issue of transportation.  Currently there are over 11 million horses in this country, the feeding and care of which constitute a significant part of our economy.  A population of 250 million would imply the need for nearly 70 million horses in this country, and this is even before one considers the fact that “horse intensity”, or the average number of horses per family, has been increasing steadily over the last several decades.  It is not unreasonable, therefore, to assume that so many people might need 100 million horses to fulfill all their transportation needs.  There is just no way this admittedly bountiful nation could support 100 million horses.  The disposal of their manure alone would create an environmental problem of unprecedented magnitude.

Or, take the case of illuminant.  As the population grows, the demand for illuminant should grow at least as quickly.  However, whale catches and therefore whale oil supply has leveled off of late, such that many are talking about the “peak whale” phenomena, which refers to the theory that whale oil production may have already passed its peak.  250 million people would use up the entire supply of the world’s whales four or five times over, leaving none for poorer nations of the world

To the last point, my article on how John D. Rockefeller and Standard Oil saved the whales is here.

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.

Corn ethanol

The United States spends about $6 billion a year on federal support for ethanol production through tax credits, tariffs, and other programs. Thanks to this financial assistance, one-sixth of the world’s corn supply is burned in American cars. That is enough corn to feed 350 million people for an entire year.

Government support of rapid growth in biofuel production has contributed to disarray in food production. Indeed, as a result of official policy in the United States and Europe, including aggressive production targets, biofuel consumed more than 6.5 percent of global grain output and 8 percent of the world’s vegetable oil in 2010, up from 2 percent of grain supplies and virtually no vegetable oil in 2004.

From Clive Hamilton

Last month, Americans were shocked at the attempted murder of Arizona Congresswoman Gabrielle Giffords and the killing of six bystanders. The local County Sheriff Clarence Dupnik captured the immediate assessment of many when he linked the attempted murder to the rise of violent anti-government rhetoric and imagery, observing, “The anger, the hatred, the bigotry that goes on in this country is getting to be outrageous.”

When asked if the Congresswoman had any enemies her father replied: “Yeah. The whole Tea Party”. Many, including Giffords herself, had had a premonition that the inflammatory language of radical right-wing activists would sooner or later find real expression.

The same hate-filled rhetoric that created the circumstances in which Gabrielle Giffords was gunned down also stokes ferocious attacks on climate scientists and environmentalists in the United States.

Wow, you know you are in for a load of really stupid crap when someone, at this late date, still is out there blaming the Giffords shooting on political rhetoric.   When someone writes this, you can be sure they are about to attempt to shut someone up, most likely someone the author disagrees with.

The author goes on to relate how nearly every climate scientist (up to and including the serially-wrong Paul Ehrlich) is quaking in their house behind locked doors waiting for some crazed skeptic to gun him or her down in their sleep.  Look, just about every interest group develops a mythology, and this notion of bravely seeking truth in the face of crazed irrational wackos is part of the internal mythology of many interest groups.

I have no doubt that these guys get nasty comments and abusive emails.  But Hamilton is absolutely wrong to imply that climate alarmists are somehow unique in this.  He is not describing an unfortunate aspect of the climate debate perpetrated asymmetrically by one side in that debate, but an unfortunate aspect of all politically charged online debates by nearly every side of every issue.  Seriously, Hamilton has discovered the Internet troll in 2011?  What is next– agriculture, fire, the wheel?

Welcome to the political arena.  Alarmist climate scientists expressly went political a number of years ago.  I could put up pages of quotes from climate alarmists like James Hansen urging their brethren that doing scientific research was not enough, that they had to get out there and openly advocate, be a part of the political process.   And politics is messy, especially when you are advocating what is in effect the most expensive single government program every proposed.  You can’t be political when you are on the attack, and then claim you are a scientist immune from political debate when there is a response.

I am but a second-rate player in the climate debate at my site climate-skeptic.com.  I am not going to be one of the names of skeptics most alarmists would rattle off.  And none-the-less I get threatening emails about my climate positions.  In fact one of the reasons I am pretty sure bad behavior on the Internet crosses all political lines is that my top two threatening and irrational email sources are from anti-immigration conservatives and climate alarmists on the left.   But I grew up in a household where my parents worked for a major oil company.  Every time oil prices would rise, some crazed leftist would send us death threats, and several of our friends actually got letter bombs.  So its hard for me to wet my pants over a few anonymous threatening emails with poor grammar.  And unlike Mr. Hamilton, I don’t attempt to tar the many people who disagree with me with the actions of a loony few.

I am sorry for folks on both sides who get such crazed threats.  But what Mr. Hamilton wants is to not have to deal with the specific arguments made by skeptics.  This is the whole history of the climate debate, with alarmists trying one technique after another to avoid engagement.  Skeptics are funded by Exxon — Don’t listen to them, they are just shills!  The science is settled — No need for debate!  Skeptics are violent and helped kill Gabriella Giffords — everything they say is hate speech and must be ignored!

Oh, and here is one more parting shot in his last paragraph

Like those whose opinions they value — shock jocks and television demagogues — climate deniers are disproportionately older, white, male and conservative — those who feel their cultural identity most threatened by the implications of climate change. While the debate is superficially about the science, in truth it is about deep-rooted feelings of cultural identity. This makes deniers immune to argument, and their influence will wane only as they grow old and die.

LOL, its all white male suppression!   I don’t even have the energy to deal with this, except to repeat the obvious:  Capping white male American fossil fuel use at 1990 levels would be costly and reduce economic growth, but could be done.  Capping Indian or Chinese or African fossil fuel use at 1990 levels basically sends them back to the stone age.   So don’t tell me who is shilling for the arrogant white male perspective.

Anyway, his last paragraph is a fantasy, a part of the internal alarmist mythology that gives them a smug feeling of superiority, that skeptics are all crude evolution-denying anti-science old cranks.  And, frankly, some are.  Just as some alarmists are human-hating totalitarian neo-communists.  To some extent, Hamilton’s article is an exercise in self-esteem building among alarmists, making them feel better about themselves by supposed superiority to the incivility he enumerates.  Fine as far as it goes, all groups engage in the same kind of behavior.  But there is a lot of thoughtful work that goes on in the skeptic community that in a non-broken scientific process would be considered productive challenges and/or replications of various studies.   To the extent he is trying to hide this work from view and shut up skeptics in general, tarring those of use who are science-based with actions of the fringe, he is doing a severe disservice to the science he is supposedly defending.

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?

Chinese exceptionalism, or do we just notice it because it is so large.  I clicked through to this chart from a link on Instapundit that said to note how Chinese fertility fell off the map.  When I watched the video though, what I saw was ALL the fertility rates falling at roughly the same pace, at roughly the same point.  The lesson seems to be that fertility tends to drop with increasing mortality, wealth, and technology — which is what many of us have been saying in response to Paul Ehrlich for years.

I am probably over-reading this, but I am sensitive that there is a sort of storyline of Chinese exceptionalism — due to their taking some sort of totalitarian third way — that seems to be admired among certain US socialists and environmentalists and Thomas Friedman.  This hearkens back to all the admiration for the Japanese MITI-managed economy, right before their economy crashed for two decades or so.

China flourishes because it has a culture, never fully suppressed by Mao, whose people take well and quickly to capitalism — much of the development around Southeast Asia in previous decades was led by expat Chinese.  The totalitarianism that is, depressingly, so admired by the US intelligentsia is just going to lead China into the abyss.  Already we can see bubbles emerging due to the state’s forced mispricing of key economic inputs, from capital to oil.  The burden of spending on triumphalist projects like super-bridges and mega-buildings and Olympics and high speed trains is going to start appearing over the next few years.

Here is my prediction:  The Chinese are going to have a bubble burst that will rival any such economic explosion that we have seen in the last century.  I have been looking at the situation and by a number of metrics, the bubble is already huge.  I would bet against China, but the problem (as with all shorts) is timing.  Government officials, if they really dedicate themselves to the task, can extend bubbles for a long time.  Even in the US, which is less authritarian and more transparent, it can be argued that Fannie and Freddie and Barnie Frank and Alan Greenspan helped push off the reckoning by at least 5 years.   Of course, the longer you push it off, the worse it gets.  Which means the Chinese bubble is going to be a doozy.

Postscript: Here is a nice example — admiration from US environmentalists for China gutting their economy to make arbitrary goals

It’s interesting to note the dedication China has displaying in achieving its [energy efficency] target — shutting down entire operations and even executing rolling blackouts. Surely there would have been some amount of embarrassment for the nation on the world’s stage if it had missed its target, but that likely would have been minor. It’s worth noting the difference in political culture: What do you think would have happened if the US had such an energy-reduction target to hit, but a sagging economy got in the way?

I can tell you with some certainty: We would have missed that mark.

Will there never be an end to Americans who take advantage of our uniquely strong speech protections to laud totalitarians?

The Thin Green Line reports that Renault recently fired a number of employees for espionage related to electric vehicles.  The site concludes:

The stakes are high: The French automaker, now partnered with Nissan, is betting its future on the popularity of the electric vehicle. It plans to introduce no fewer than three electric cars in Europe this year: a sedan, a light commercial vehicle, and a city car.

Unless the espionage thwarts its plans, Renault’s gamble is probably a good one. Also last week, the judges of the Detroit auto show gave all their top awards to EVs and hybrids — proof, according the Guardian, that “analysts [are] bet[ting] on rising oil prices and wider acceptance of electric cars.” Nissan’s Leaf took second place to the Chevy Volt.

As I wrote in the comments, electric cars are a huge opportunity – there are tens of billions of dollars of corporate welfare from countries around the world to be captured. When it is the Left that is actively supporting huge transfers of funds from taxpayers to large corporations, that is an unprecedented rent-seeking opportunity that European companies, already well-schooled in how to be successful within a corporate state, are sure to avidly pursue. Not since corn ethanol has there been a similar gold-rush for taxpayer funds.

As can be expected, the media really did a poor job of covering the GM IPO, consistently underestimating the total public cost of the bailout (e.g. no one is mentioning the $45 billion in tax-loss carryforwards GM was allowed to keep, against all precedent).

But the real cost of the handling of the GM bankruptcy is in 1) the terrible precedents it set in hammering secured creditors to the benefit of favored political allies of the Administration and 2) the loss of the opportunity to get billions of dollars in production assets out of the hands of the people who have be sub-optimizing them.

It was this latter issue I have focused the most on, particularly in this post where I argued for letting GM die.  I said in part:

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA.  …

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson’s management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one… for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM’s DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM’s of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM’s DNA has a less than one multiplier, then releasing GM’s assets from GM’s control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe’s productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe’s most productive human and physical assets into organizations with DNA multipliers less than one.

California state treasurer Bill Lockyer is urging public employee pension fund to divest itself of stocks of companies because of their support for a particular state ballot initiative.   Check that again – a sitting state official using his position in power to punish folks during an election campaign for their stand in that election.

… state Treasurer Bill Lockyer, a former attorney general, urged the state’s largest public employee investment funds to divest themselves of Valero and Tesoro stock.

Lockyer sent a letter to the public pension funds, known as CalPERS and CalSTRS, asking them to rid themselves of any stock connected to the refiners Valero and Tesoro. Lockyer charged the companies with attempting to constrain gasoline supplies in California to ensure profits for years to come — and opposing the state’s climate change law as a means to ensure that constraint.

“CalPERS and CalSTRS should not be investing in Texas oil companies that hurt the California economy, no more than they should invest in companies that spend millions of shareholder dollars to undermine California’s environmental laws and the state’s green energy industries and green tech jobs,” Lockyer wrote.

Lockyer, a board member at CalPERS, is expected to ask the board tomorrow to divest Valero and Tesoro holdings during a meeting.”

The Green Hell blog added:

It was also reported to this blog that Gov. Arnold Schwarzenegger, who views the global warming law as his signature accomplishment, kept Chevron out of the Proposition 23 battle by threatening the company with adverse tax measures.

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 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.

A while back in my Forbes column on the incentives faces by government workers, I wrote

People sometimes say that problems involving difficult trade-offs are hard for government bureaucracies to handle. This isn’t true–most of these trade-offs are in fact easy for them to handle, because the outcome is as predetermined as a river’s path through a well-worn valley. The problem is having these trade-offs made well.

Most of the tough decisions in the Gulf involve violating a rule or standard practice for which an agency and its staff have specific accountability for compliance. This is balanced against the opportunity to gain some benefit that is outside of the agency’s responsibility and for which it will not be rewarded or punished. An example would be the administration’s ban, at EPA insistence, of what BP ( BP – news – people ) claims is the most effective oil dispersant because it is potentially toxic. Does this dispersant’s toxicity create more or less harm than the lost opportunity of preventing a lot of oil from entering coastal wetlands? The answer doesn’t matter, because there was only one way the EPA was ever going to rule on this–their employees are easily able to duck blame for any damage from the spill, but they would be right on the firing line if even a single living creature was provably harmed by their allowing the dispersant to be utilized. Fear of blame for consequences of an action outweigh the opportunity costs of inaction every single time.

We see this again in this video, where school teachers and nurses in California argue that it is better to allow kids to die from their inaction than to take an action (e.g. dispense a life-saving medication)  that might have harmful consequences.

Natural seeps in the Gulf of Mexico release more oil each year than even the most recent oil spill.  Somehow, nature consumes this oil with only a few tar ball showing up on beaches.  Which is why this is not hugely surprising

The oil slick in the Gulf of Mexico appears to be dissolving far more rapidly than anyone expected, a piece of good news that raises tricky new questions about how fast the government should scale back its response to the Deepwater Horizon disaster.

The immense patches of surface oil that covered thousands of square miles of the gulf after the April 20 oil rig explosion are largely gone, though sightings of tar balls and emulsified oil continue here and there.

Reporters flying over the area Sunday spotted only a few patches of sheen and an occasional streak of thicker oil, and radar images taken since then suggest that these few remaining patches are quickly breaking down in the warm surface waters of the gulf.

From the Thin Green Line:

So much for criticism that California’s environmental leadership — notably AB 32 — kills jobs: The state has the most green-collar jobs of any in the nation, and San Francisco leads the Golden State with 42,000 positions. For a city with a population of 809,000, that’s pretty impressive.

I think of my father-in-law when I read something like this.  He was a lifelong environmentalist as well as a PHD physicist and a researcher at MIT’s Lincoln Labs.  While we often disagreed on various issues, he always tried to bring both science and the scientific method to environmental issues.  I wonder what he would think about this bozo.

Not that this quote really deserves further attention, but here are a couple of random thoughts:

• While AB32 has been law for a number of years, the CARB has made only limited progress actually setting up the enabling regulations and carbon trading schemes.  In effect, AB32 is largely un-implemented at this point, making its lack of effect on job growth fairly unsurprising
• Wow, what a surprise — the state with the largest number of workers has the largest number of workers in a particular employment category.  My guess is they have the most car mechanics in the country too, and the most SUV owners.  So what?
• The whole definition of a “Green collar job” is total BS.  Basically it means you work in a job that has been deemed to be in a politically correct energy related field.  But why are solar executives green jobs but hydro plant workers not?
• The implication in the post is that this is some kind of public policy victory, but of course there is no evidence at all of why these jobs exist or are located in California
• Even if these jobs are the result of some kind of California public policy initiative, how much did they cost?  How many jobs were lost when the government shifted resources around by fiat?  In Spain, its been calculated that more than 2 jobs were lost for every green job created.

There used to be a joke in Texas during the 80′s oil bust — “How do you make a million dollars in oil?  Start with $10 million.”  The same likely applies here — “How do you create 42,000 green jobs?  Start with 100,000.”

This is a follow-up to my opinion piece in Forbes the other day.  Remember, this outcome is not somehow preventable by having “our, smarter guys” in charge — it is an inevitable result of the information and incentives of government organizations.

Three days after the BP oil spill in the Gulf of Mexico began on April 20, the Netherlands offered the U.S. government ships equipped to handle a major spill, one much larger than the BP spill that then appeared to be underway. “Our system can handle 400 cubic metres per hour,” Weird Koops, the chairman of Spill Response Group Holland, told Radio Netherlands Worldwide, giving each Dutch ship more cleanup capacity than all the ships that the U.S. was then employing in the Gulf to combat the spill….

In sharp contrast to Dutch preparedness before the fact and the Dutch instinct to dive into action once an emergency becomes apparent, witness the American reaction to the Dutch offer of help. The U.S. government responded with “Thanks but no thanks,” remarked Visser, despite BP’s desire to bring in the Dutch equipment and despite the no-lose nature of the Dutch offer –the Dutch government offered the use of its equipment at no charge. Even after the U.S. refused, the Dutch kept their vessels on standby, hoping the Americans would come round. By May 5, the U.S. had not come round. To the contrary, the U.S. had also turned down offers of help from 12 other governments, most of them with superior expertise and equipment –unlike the U.S., Europe has robust fleets of Oil Spill Response Vessels that sail circles around their make-shift U.S. counterparts.

Why does neither the U.S. government nor U.S. energy companies have on hand the cleanup technology available in Europe? Ironically, the superior European technology runs afoul of U.S. environmental rules. The voracious Dutch vessels, for example, continuously suck up vast quantities of oily water, extract most of the oil and then spit overboard vast quantities of nearly oil-free water. Nearly oil-free isn’t good enough for the U.S. regulators, who have a standard of 15 parts per million — if water isn’t at least 99.9985% pure, it may not be returned to the Gulf of Mexico….

The Americans, overwhelmed by the catastrophic consequences of the BP spill, finally relented and took the Dutch up on their offer — but only partly. Because the U.S. didn’t want Dutch ships working the Gulf, the U.S. airlifted the Dutch equipment to the Gulf and then retrofitted it to U.S. vessels. And rather than have experienced Dutch crews immediately operate the oil-skimming equipment, to appease labour unions the U.S. postponed the clean-up operation to allow U.S. crews to be trained.

Via Alex Tabarrok:

New Environmental Protection Agency regulations treat spilled milk like oil, requiring farmers to build extra storage tanks and form emergency spill plans.

Local farming advocates says it’s ridiculous to regulate a liquid with a small percentage of butter fat the same way as the now-infamous BP oil spill.

“It’s just another, unnecessary over-regulation by the government just lacking any common sense,” said Bill Robb, dairy educator for Michigan State University Extension…

The EPA regulations state that “milk typically contains a percentage of animal fat, which is a non-petroleum oil. Thus, containers storing milk are subject to the Oil Spill Prevention, Control and Countermeasure Program rule when they meet the applicability criteria…”

My first column at Forbes.com is up here (and on the opinion home page, which is kind of cool), and extends on some thoughts I have already posted on my blog about why government decisions in multi-agency task forces, such as those running the Gulf cleanup effort, seem to be made in such a stupid manner.

As most scientists know, one of the best tests of a theory is whether it makes correct predictions about future events.  Since I wrote this article several days ago, we have seen this new story which is absolutely consistent with the decision-making paradigm I describe in the article (from Q&O)

Louisiana has been busily building berms about a mile out from the coast to halt the infiltration of oil into its sensitive marshes, wetlands and prime fishing areas. This process was greatly delayed by federal red tape, and now that the state has permits in hand it’s being order to stop because, according to the U.S. Fish and Wildlife Department, it’s doing it wrong:

The federal government is shutting down the dredging that was being done to create protective sand berms in the Gulf of Mexico.

The berms are meant to protect the Louisiana coastline from oil. But the U.S. Fish and Wildlife Department has concerns about the dredging is being done.

Plaquemines Parish President Billy Nungesser, who was one of the most vocal advocates of the dredging plan, has sent a letter to President Barack Obama, pleading for the work to continue.

[...]

Nungesser has asked for the dredging to continue for the next seven days, the amount of time it would take to move the dredging operations two miles and out resume work.

Work is scheduled to halt at midnight Wednesday.

Pat Austin is trying to understand the federal obstruction, but finds that political reasoning is the only thing that makes sense of it all:

I’m trying to see both sides here; I’m trying to understand the “coastal scientists” who contend that the berms will “change tidal patterns” and lead to more long term erosion of the islands, but if the islands are killed off by the oil what difference does it make? To borrow from Greta Perry’s analogy, if my house is on fire, what does it matter what room I try to extinguish first? It’s all doing down.

Read the Forbes article — why exactly this decision was not only possible but inevitable is discussed in detail.

I was thinking today, what must the families of the 11 people killed on the Deepwater Horizon be thinking?  Their losses are never mentioned in any news reports I see.  Its all about getting oil on the ducks.

Sure, I am pissed off about the enormous damage to the Gulf Coast as well.  But I got to thinking, were I the engineer that made the wrong risk/safety decisions here, what would I feel most guilty about?  I was put in that position for years in a refinery, constantly asked, “is this safe” or “can we keep running” or “do we need to shut down” or “is that vibration a problem?”  These are difficult, because in the real-world of engineering, things are not ever perfectly safe.  But never-the-less, if I had made the wrong call here, I think I would be feeling a lot worse about the 11 dead people than a number of dead fish and birds.  Perhaps my priorities are out of whack with the times.

By the way, TJIC has a great post on risk and cost in the real world of engineering.  I agree with his thoughts 100% from my experience as a troubleshooter / engineer in the field making just these decisions.

Look, we all trade off safety in order to save time and expense.

Do you put on your seat belt when moving your car from one point in the driveway to another?

Do you buy the car that costs twice as much, because it’s got a 1% increase in crash survivability?

Did you pay $40k to get industrial fire sprinklers installed in your house?

Do you have a home defibrillation machine?

There is nothing wrong, in the abstract, with trading off safety in order to save time and expense.

The question is whether BP did this to a level that constitutes “gross negligence”.

In the 1970′s, during the Arab oil embargo, oil company presidents were dragged to Washington to defend themselves from charges that they were holding tankers offshore to drive up prices and all kinds of crazy BS.  Since that time, in every oil price spike, oil companies were vilified by the Left for destroying the American economy by driving up oil prices (artificially, I suppose).

Now, however, is seems that this was all wrong.  The fossil fuel price increases and artificial supply shortages needed to cut our CO2 emissions by 50% are enormous.  The Europeans have $9 gas and they are not near these targets, in fact in many countries their fossil fuel use has gone up.  We have been in a substantial economic slowdown, but even at these lower output and consumption levels we are far short of a 50% target.

But now the EPA says it has a computer model (stop me if you have heard that one before in the global warming debate) that says that proposed efforts to cut CO2 emissions by 50% in the next 20 years will have a negligible impact on the US economy over the next 20 years.

But there’s another reason it was disappointing that Obama didn’t mention carbon pricing: his own EPA had handed him a perfect excuse just one day before. In a detailed analysis of John Kerry’s American Power Act, the EPA provided estimates of how it would affect carbon emissions and how much it would cost the average American. The results were remarkably reassuring.

On the emissions front, the APA would have a dramatic effect: US emissions would be cut nearly in half by 2030 compared to doing nothing. That’s an enormous impact.

But how much would it cost? The answer is: almost nothing. According to EPA’s models, if we do nothing, consumption of goods and services in the United States will increase 74.1% by 2030. If APA is passed, consumption will increase 73.4%.That’s it. We can cut carbon emissions nearly in half, and the net cost will be a decrease in consumption of 0.7% in 2030. EPA figures this comes to an average annual cost of $146 per household. That’s 40 cents a day per family.

And everyone on the Left is credulously lining up to say that this sounds about right to them.    Well, now you tell us.   And if this is true, why have you been hammering on the oil companies for 40 years if oil price increases are virtually irrelevant to the economy.

Look, the is is utter BS.  I have a wild optimism about the power of free minds to innovate and handle about anything if they are allowed, but even so there is no way that an energy price increase (or artificial shortage, take you pick of mechanisms) large enough to cut output by 50% in 20 years will have a negligible impact on the economy.  No way.

Update: I am skimming the EPA power point presentation.  I am looking at one chart that shows a shows coal with CO2 capture around 5% of US energy production about 12% of electricity production by 2030.  Absolutely no freaking way.  They are on drugs.  CO2 capture is never going to happen except when exorbitantly subsidized by the government.

And they show natural gas going way down.  Why?  Replacing coal-produced electricity with natural gas produced electricity is probably the most effective single CO2 reduction step that exists after certain conservation approaches.  But despite huge availability in the US, they show gas consumption going down by half.  If so, those are some pretty screwed up incentives in the bill.

Update #2: I found the price chart.  Apparently they project they will get all this fossil fuel reduction with an increase of electricity prices from 11 cents per Kwh in 2030 without the law to 14 cents with the law.  Gasoline prices with the law will be increased by about 25 cents a gallon in 2030 by the law.  So we are going to get a government imposed 50% reduction in CO2 output in 20 years with a price increase that is within the natural variation over a couple of months in the gasoline market?  Yeah, right.  We all will be riding unicorns to work instead.

Bruce McQuain tells some stories of bureaucratic frustration in the Gulf, as local governors trying to protect their state from the spill fights against a myriad of mindless bureaucracies.

The governor said the problem is there’s still no single person giving a “yes” or “no.” While the Gulf Coast governors have developed plans with the Coast Guard’s command center in the Gulf, things begin to shift when other agencies start weighing in, like the Environmental Protection Agency and the U.S. Fish and Wildlife Service. “It’s like this huge committee down there,” Riley said, “and every decision that we try to implement, any one person on that committee has absolute veto power.”

I would state the problem differently.  In the Federal bureaucracy, seemingly everyone has the power to say “no,” and absolutely no one is willing to risk their career or even a minor bureaucratic sanction to over-rule when someone else in the room says “no.”  I have seen it a hundred times in my business — we will be close to doing something for the public, building a new shower building in a campground for example, and some government employee in the room will say that their sister’s gynecologist’s barber’s housekeeper once overheard a conversation in a bar that some guy who may have visited a university once said he had heard a rumor that there might have been a Native American settlement somewhere within 100 miles of that spot 10,000 years ago — and suddenly the work on the shower has to stop for 6 months while we all run around calling in archeologists and taking this concern seriously.

The problem  in a government discussion, particularly a multi-agency discussion, is that EVERYONE can say “no,” and worse, since their incentives are loaded towards risk avoidance (they get punished for violating procedure, but never punished for missing an opportunity), they have a tendency to say “no” a lot, in fact to say “no” by default.  In the Gulf you have a thousand federal employees from 20 agencies whose entire incentive system, whose entire career, whose every lesson from every bureaucratic battle in a sort of long-term aversion therapy, prompts them to say “no” by reflex.

What is missing is someone who can say “yes,” and make it stick against all the no’s.  That does not have to be Obama — but it probably does have to be someone very senior who knows (and who everyone else knows) is backed to the hilt by the President and has an incentive system where the only measure of success is more or less oil damage, and thus for whom aggrieved bureaucrats (even senior ones) and petty procedure are irrelevant.  It does not appear such a person has been appointed.

Postscript: By the way, I don’t want folks to fall into the trap of thinking that these government folks are necessarily bad people.  I think that is a mistake both conservatives and liberals make — conservatives vilify government employees, while liberals want to believe that government would work right if we just had the right people in it.   I work with a lot of very bright, very good people in government.  The problem is that their incentives and information are awful.  How would you behave if for 20 years your main feedback was to be criticized for violating minor procedures or trying new things?  How would you have any understanding of business if you grew up in the bizarro world of government budgeting and accounting?   This is the problem with government – not that it is full of bad stupid people, but it takes good smart people and incentivizes them do counter-productive things.

Update: Here is a great example, from Kevin Drum, who is a smart guy but can’t do anything but dither in a decision among multiple risks:

It’s pretty hard to take the other side of this argument [ie defending the Coast Guard's decision to hold up the GUlf cleanup barges for minor rules violations]. But I wonder. We are, after all, talking about barges that are sucking up oil, and the last time I checked oil was pretty damn flammable. Everyone wants the cleanup operation to proceed with breakneck speed, but that’s exactly when people get tired and sloppy. And I wonder what everyone would think of the Coast Guard’s ridiculous rules if they waived them and then some boat went up in a huge fireball because a spark caught somewhere and no one had a fire extinguisher handy?

I will say again – I have been in many rooms of bureaucrats, both federal and private, and they all think this way.  These rooms are full of Kevin Drum’s wondering out loud, “I don’t know, what happens if…”  This is such a common phrase in these meetings I wish I had a dollar for every time I heard it.  Then everyone in the room defers to this hypothetical risk.   Bureaucrats are always more worried about sins of commission  (e.g. knowingly allowing a barge to go out without enough fire extinguishers in violation of guidelines) than the sin of omission (e.g. delay will allow the spill to get worse).  Even when the omission is 100% certainty and the danger from the act of commission is vaguely hypothetical.  It takes a leader to say “send the damn barges out now.”

Bruce McQuain has this take from Obama’s oil spill speech last night:

The rest of the speech was an exercise in what Obama does best – selling smoke. He begins it with a false premise:

But a larger lesson is that no matter how much we improve our regulation of the industry, drilling for oil these days entails greater risk. After all, oil is a finite resource. We consume more than 20% of the world’s oil, but have less than 2% of the world’s oil reserves. And that’s part of the reason oil companies are drilling a mile beneath the surface of the ocean – because we’re running out of places to drill on land and in shallow water.

Of course his claim about drilling in deeper water because we’re running out of places to drill in shallow water is false. 97% of the shallow water on the Outer Continental Shelf -97%- has been placed off limits by government. The oil companies are forced into deeper water not by the lack of oil, but by government refusing to allow them to drill there.

As an aside, Daniel Foster makes a great point:

There’s an added layer of irony here as well. As Planet Gore contributor Chris Horner rehearses at length in his book Power Grab, the prime architect of the cap-and-trade idea was — you guessed it — former BP CEO Lord John Browne. So there is a special kind of cognitive dissonance going on in the juxtaposition of BP bullying and carbon tax cheerleading.

Update, via Planet Gore:

So you have a Nobel winner who knows nothing about oil running the Energy Department and you have an environmental lawyer who knows nothing about drilling as the head of MMS, the oil-drilling regulatory body.

So, choosing key people in the Energy department and MMS based on their knowledge of about 2% of the energy world (wind and solar) is a problem?

As y’all know, I am not a member of either the Coke or Pepsi party, so I find all the partisan mudslinging on the political blogs to be just kind of funny.  Particularly when both sides are piously accusing the other of exactly the same behavior, while maintaining that they are immune from said behavior  (or only engaging in it because the other guy started it).

I really don’t understand political strategy.  I admit this.  Take global warming.  I really thought the CRU email thing was a minor distraction.  After all, the there were so many fundamental flaws in the science and scientific process that a lot of the CRU stuff was old news to those who have paid attention.  But I was wrong.  There was something about the scandal that was more compact and easy to tell, it fit into a box or storyline familiar to both the media that had to report it and the public that had to consume it.  I understood the whole scandal and its impact so poorly that I have done little blogging at my climate site lately, as I still can’t get excited blogging about commissions and investigations into the scandal that seem to obsess the skeptic community currently.

So I won’t say that this strategy by Kevin Drum is wrong, I will just say I don’t understand it:

On Twitter, here was my insta-reaction to Obama’s oil spill address from the Oval Office:

What a terrible speech.

Unfair? Maybe! I mean, compared to Sarah Palin’s (literally) incomprehensible burbling on Bill O’Reilly’s show afterward it was a model of straight talk and reassurance. But that’s a pretty low bar.

What’s the deal with Sarah Palin?  I swear she gets more pub from her enemies than her supporters.  How does it somehow help a sitting President — who was supposedly elected because he was the most competent person of all time — to be compared, however favorably, to a woman with limited political experience who holds no office?  Granted the Republicans really have no one of distinction leading them right now, and Palin is about the only Republican in years with any modicum of charisma.  But since when have losing VP candidates been the standard against which Presidents are measured?

Progressive green web site the Thin Green Line takes on subsidies for petroleum products, saying that reducing such subsidies could immediately have a major impact on CO2 production.  Fine with me, I am no fan of subsidies by governments of any private activities, though I don’t live in fear of CO2.

However, the author, trying I guess to buff his progressive credentials in a sort of typical knee-jerk for green writers, tries to imply all this largess is somehow flowing to large oil companies, and the implication is that western nations like the US are subsidizing folks like Exxon and BP:

The timing couldn’t be better: With BP’s oil continuing to pollute the Gulf Coast, the question of how much our alliance with the oil industry really costs us is at the front of the everybody’s mind.

The International Energy Agency released an early draft of a report documenting, for the first time ever, how much the fossil fuel industries get in subsidies each year (H/T Grist). The timing is, of course, coincidental: The IEA‘s work stems from an agreement made at this years G20 conference that subsidies of fossil fuel industries should be phased out as part of international efforts to reduce carbon emissions.

So — drum roll, please! — how much money are the energy giants taking in? $550 billion a year.

But the author is, I believe, misunderstanding the study and the underlying economics (no surprise there from a green progressive writer).  This is from a study of 37 developing, not rich, nations.  There is no way these guys are paying $550 billion in cash into private oil company pockets.  In fact, most of these countries barely let the private oil companies even play, or force them into some marginal operator role subservient to their state oil company.

If these countries are subsidizing producers at all, the vast majority who are getting such largesse are large state-run companies, not western private oil companies.

However, my guess (and I have not seen the report yet) is that what they mean by most of these subsidies is actually selling fossil fuels to their citizens at below-market prices.  These subsidies are not transfers of state dollars to oil companies at all, but below-market pricing of oil products to consumers by state-run oil monopolies.   The people getting subsidized here are poorer consumers, not private oil companies.  Countries like China, Iran, Iraq and even Venezuela (run by progressive heart throb Hugo Chavez) sell petroleum products way below market prices to their citizens.  I am fairly certain this is the half trillion dollar subsidy the report refers to.

So we have the ultimate irony of a “progressive” lamenting government-subsidized energy for poorer people in developing nations.  Wow, I never thought I would say this, but if this is the progressive position, I agree with it.  The whole situation does highlight the difficult tension between development and CO2 reduction programs, and reinforces my argument that aggressive worldwide CO2 abatement will mainly hurt the poor.

Conservatives, nominally supporters of smaller government and free markets, are yet again torpedoing these principles in the name of short term political expediency.  In order to score a few fleeting points against Obama, they are calling him out over the BP oil spill, saying that this is his Katrina, a massive failure both in regulation and response.

That’s stupid.  One can certainly raise some questions about the government — why have they been collecting an oil spill cleanup tax but not any oil spill cleanup capability or equipment, why are we driving oil companies out of easy oil in shallow waters to crazy-hard oil in deep waters.  But this is not Obama’s fault nor the government’s fault.  This is BP’s fault.  They screwed up and started the spill, and it was they that had no contingency plan for such a disaster.  And its going to cost them a staggering amount of money, as it should.

After all, what are the feds going to do?  They certainly can’t be expected to maintain the expertise to deal with this kind of thing, particularly in cutting-edge deep water.  Which is why Obama has had to resort mostly to joggling BP’s elbow demanding that hey hurry.

We have the incredible sight of Conservatives, rightly, saying that more regulation could not have prevented the financial crisis because regulators are any better than industry participants in spotting problems when entering uncharted territory.  But here we have exactly the same situation and Conservatives are hammering on Obama for not being authoritarian enough or regulating enough.

Postscript: One of the few things the Obama administration has done is demand BP stop using a certain oil dispersant chemical because it is toxic.  Duh.  So is all the oil.  Which is probably why BP ignored him.  Government is terrible with this type of decision.  We have something really bad happening that we can’t control.  But we can make it less bad by doing X, but X has some downsides as well.   In the heat of battle, when discretion is required, government will choose the sin of omission (letting more oil reach the shore) over the sin of commission (using a toxic dispersant), even if this decision is irrational.  In their incentive system, the sin of commission is impossible to sluff off on someone else.  The sin of omission can always be blamed on BP, or Bush, or whoever.  This is one reason why government bureaucratic rules are often so detailed and prescriptive — given these incentives, certain decisions will never be made in the heat of battle by bureaucrats unless their actions are guided by detailed rules, which then give them cover.

Postscript #2: I think the media has tended to underestimate the difficulty here.  5000 feet of water is really deep and complicated to work in, orders of magnitude harder than shallow water, which in turn is orders of magnitude harder than on land.  In a way, its actually kind of amazing that BP has sealed this thing, given that the Soviets, in much less difficult leaks, reportedly had to resort to nukes to seal the well.