Daylight savings time wastes energy

A national policy to conserve energy backfires. Doh!

Quote of the day

From Megan McArdle:

Green jobs have become the ginseng of progressive politics: a sort of broad-spectrum snake oil that cures whatever happens to ail you.

Real environmentalism would encourage people to use less energy, therefore there would likely be fewer jobs in the energy sector.

Smart energy policy would simply raise the cost of fossil fuels via a carbon tax or cap and trade. There should be no subsidies for renewable energy, because energy subsidies encourage people to waste energy.

5 physics lessons for politicians

Foreign Policy lists five physics lessons for politicians and policymakers:

• Terrorism — Making a nuclear bomb is excruciatingly difficult. ... Many people may worry most about the drama of nuclear terrorism, but as 9/11 showed, it’s far easier for terrorists to inflict massive damage with commercially available explosives such as jet fuel or gasoline.
• Energy — The biggest source of clean, cheap energy is energy not used. And conservation doesn’t have to be uncomfortable. Tell people they can turn up their thermostats to any temperature they like, but encourage them to make sure there is some good (and it can be cheap) insulation in the walls of their homes.
• Nuclear Energy — Politicians believe the problem with nuclear waste is technical in nature. The scientists and engineers believe the problem is political. ... Nuclear waste storage really is a solved problem.
• Space — Manned space flight might be a great adventure, but don’t fool yourself into thinking that the presence of humans helps advance science. The greatest scientific achievements of the space program have been the unmanned missions to the planets and the use of remotely controlled instruments to measure the cosmos. All of our greatest space science has come from robots.
• Global Warming — Yes, it is true that the United States is responsible for one fourth of past global warming. However, U.S. emissions are growing relatively slowly today. So why are we so worried? It’s the rapidly growing greenhouse gas emissions of the developing world. China has already surpassed the United States in annual emissions. ... Soon it will far outpace the United States as a contributor to global warming. The rest of the developing world is following. ... If we want to stop global warming, then our focus must be on the developing world. Wealthy countries could start by financing clean coal in China.

A discussion about nuclear energy as a solution to global warming

The German magazine Spiegel Online interviews David Crane, the CEO of NRG Energy about nuclear energy:

SPIEGEL ONLINE: Republican presidential candidate John McCain has proposed building 45 new nuclear reactors by 2030 with a longer term goal of 55 more. His Democratic opponent, Barack Obama, is also in favor of more atomic energy. Is the US experiencing a nuclear power renaissance?

David Crane: It's still in the early stages. Clearly, the defining incident when it comes to the acceptance of nuclear energy in Europe was Chernobyl in 1986. But in this country, it was Three Mile Island near Harrisburg, Pennsylvania, which was seven years earlier than Chernobyl and a much less serious incident. You basically have to be 45 or 50 years old in the US to remember Three Mile Island.

SPIEGEL ONLINE: You mean to say that people are beginning to forget about the dangers of nuclear power?

Crane: There is a perception that the American public is ready for nuclear. It's a combination of things, and one of them is generational change. The overriding concern in this country, just like in Europe, is global warming. The recognition by most pragmatic people is that nuclear is the only advanced technology that exists to replace coal-fired power plants on a significant scale. This has jump-started the renaissance. ...

SPIEGEL ONLINE: What should the energy mix of the future look like?

Crane: Obviously, we Americans are the most wasteful people on Earth. Right now, coal produces 50 percent of our power and nuclear 20 percent in the US. It would be nice over time — by 2050, the year most global warming legislation is aimed at — to have these percentages reversed. Right now, the US consumes 4.5 trillion kilowatt hours of electricity. Maybe you can get that down to 4 trillion, but that would demand a huge push towards conservation, which will be very difficult. If you turn all 240 million cars and light trucks in the US to electric-powered vehicles while boosting the share of nuclear power, the amount of carbon emissions that would be saved overall would be enormous.

SPIEGEL ONLINE: Imagining for a moment that so many new nuclear reactors do go on line, what is to be done with all of the radioactive waste? Even after years of debate on the issue, there is still no solution regarding final disposal.

Crane: A lot of people talk about a final solution, and we do need one. But this solution of on-site waste storage is deemed to be safe for a long time. Global warming is an immediate issue that nuclear energy can help solve. We should solve this issue now and solve the nuclear waste issue over the next 200 years.

Raise the price of gas!

From Joel Stein, via Greg Mankiw:

I love $4 gas. It makes me appreciate freedom. I watch as the dollars spin and think, "You, Triceratops, did not get squished by an asteroid in vain. You got squished for a $60 drive to Vegas." ...

If MoveOn and Barack Obama really were going to bravely confront America with hard, necessary truths, they'd tell us how great $4 gas has been for us. With public transit use nationally at a 50-year high, traffic dropped 2.1% in the first four months of this year across the country. That mileage reduction — along with people driving smaller cars, and more slowly, to save gas — could mean that 12,000 fewer people will die in traffic accidents this year, according to a study by professors Michael Morrisey at the University of Alabama at Birmingham and David C. Grabowski at Harvard Medical School. Air pollution has been reduced enough, according to UC Davis economics professor J. Paul Leigh, to prevent 2,200 respiratory-related deaths over the last year. Less eating out and more walking and biking could mean a 10% reduction in obesity, according to Charles Courtemanche, an assistant economics professor at the University of North Carolina at Greensboro. And, apparently, higher gas prices also keep econ professors employed. ...

Cheap gas is unfair. Driving creates huge social costs in the form of traffic, health-damaging pollution and global warming that aren't suffered solely by the person buying the gasoline. Governments usually set up idiotic systems to offset such social costs (emissions trading, ethanol subsidies, taco truck regulations) instead of forcing individuals to pay for their own mess by adding a tax to remedy the imbalance. That kind of tax — the most fair kind, really — is called a Pigovian tax, and its use is why gas costs $8 to $10 a gallon in Europe, where they have fewer road deaths even though they drive like complete idiots. ...

If the U.S. were to slowly jack up gas taxes until we're in the $8 range, life would be better. We'd not only be safer and have reduced greenhouse-gas emissions, we'd probably be happier too. Studies show that the only thing that consistently increases personal happiness is social interaction; high gas prices have led to real estate prices falling faster in suburbs and exurbs than in cities, so we may soon have more content downtown-dwellers. Those same studies show that the thing that makes people least happy is commuting, and telecommuting is way up this year. We could use the tax revenue to fund public transportation. And we'd go back to the days when driving a car was a way to show people what a rich jerk you were. In other words, we would no longer need SUVs for that.

OPEC, not speculators, is responsible for rising oil prices

From Fortune Magazine:

The leaders of OPEC have a long list of culprits for high oil prices: the falling dollar, U.S.-Iranian tensions, and shady speculators.

Here's one they seem to forget: OPEC.

The Organization of Petroleum Exporting Countries consistently claims that supply is not a problem - that there's plenty of oil to meet demand.

But last year, as the price of oil nearly doubled, OPEC was actually cutting production. The cartel produced 1.5% less last year despite adding two countries, Angola and Ecuador, to its ranks. That cutback at a time of growing demand helped drive prices up.

"They made a mistake," says Adam Sieminski, chief energy economist for Deutsche Bank, who thinks OPEC's drop in production last year is the No. 1 reason for today's prices. "The Saudis are responsible for trying to manage the world market. They underestimated demand and they overestimated non-OPEC supply."

A proposed solution to America's energy crisis

As a partial solution to America's dependence on foreign oil, U.S. oilman Boone Pickens proposes to build wind farms throughout the Great Plains. The Economist summarizes the Pickens Plan:

AMERICANS spend $700 billion a year on foreign oil. According to one observer, this is an addiction, a crisis, and a trap. The country must pursue alternative energy sources as fiercely as it once shot for the moon. So far, so much liberal boilerplate. The critic in question, however, is a Republican oilman: T. Boone Pickens. As he puts it, in an Okie drawl: “I’ve been an oilman all my life. But this is one emergency we can’t drill our way out of.” He wants America to make a huge investment in wind-power infrastructure. During this election season, he will personally spend $58m to make the case. ...

A report from the Department of Energy said in May that America could build enough wind farms to provide 20% of the nation’s electricity by 2030. The Pickens plan calls for America to meet this goal by building wind farms throughout the windy corridor that runs up the country from Texas to the Dakotas. It would cost $1 trillion to build them, plus another $200 billion to connect them to places where the power is most needed, which lie inconveniently far away from the corridor.

That is a staggering outlay, but it would free up American natural gas, which now generates 22% of the country’s electricity, to be used for motor vehicles. The idea is that Americans could switch en masse to natural gas vehicles, and the country could stop importing so much oil.

From PickensPlan.com:

CNN Money's take on oil speculation

CNN Money on oil speculation:

There's no question money from investment banks, pension funds, hedge funds and others that don't ultimately use oil has been pouring into oil markets over the last few years.

But whether they are chasing a trend — and actually helping keep prices lower by adding liquidity — or driving up prices in their own right is a matter of debate. So far, most experts say speculators are not to blame for the high prices, but many of them agree that the system is very opaque.

The New Yorker: Speculators not causing high oil prices

The New Yorker defends financial speculators from politicians' attacks, saying they are not responsible for the high price of oil:

When bad things happen, it’s always nice to have a scapegoat. So, with Americans furious about soaring oil prices, Congress has gone in search of someone to blame. There are a number of usual suspects to choose from, depending on your politics—OPEC, greedy oil companies, lily-livered environmentalists opposed to oil drilling—but now Congress has seized on another set of villains: commodity speculators. ...

Congress is not, though, just attacking illegal market manipulation; it’s also taking aim at perfectly legal speculation, namely the buying and selling of futures contracts, which are effectively bets that oil prices will go up (or down). Futures contracts can be used by oil sellers (like OPEC) or oil buyers (like the airlines) to hedge their risks by agreeing to sell or buy oil in the future at a set price. Speculators, by contrast, mostly use futures contracts to gamble on oil prices, and have no interest in buying or selling real barrels of oil. These gambles can be tremendously lucrative, but they don’t directly determine the real (or “spot”) price of oil. That’s set by the people who are buying and selling actual barrels of petroleum. Although speculators could directly distort oil prices by turning their futures contracts into oil and then taking it off the market to drive up prices, a look at oil inventories shows no sign that this is happening.

If speculators aren’t at fault, why have oil prices spiked so high? Fundamental reasons aren’t hard to find. Between 2000 and 2007, world demand for petroleum rose by nearly nine million barrels a day, but OPEC has been consistently unable, or unwilling, to significantly increase supply, and production by non-OPEC members has risen by just four million barrels a day. The prospect of military action against Iran, which would disrupt global supply, seems greater than it did a few years ago. And the plunging value of the dollar has meant that the cost of oil has jumped more in the U.S. in the past year than it has in countries with healthier currencies. ...

But there’s also something else at work, which the oil guru Daniel Yergin calls a “shortage psychology.” The price of oil—more than that of many other commodities—isn’t based solely on current supply and demand. It’s also based on people’s expectations about future supply and demand, because those expectations determine whether it makes sense for oil producers to sell their oil now or leave it in the ground and sell it later. ...

The difficulty for Congress, of course, is that none of the problems that have driven up the price of oil lend themselves to a quick fix, and most, like the boom in global demand and the inaccessibility of certain oil fields, aren’t under our control at all. That’s what makes speculators a perfect target: by going after them, Congress can demonstrate to voters that it understands their pain, and at the same time avoid doing anything that might require real sacrifice from Americans.

Hat tip to Greg Mankiw.

More on why speculators aren't causing rising oil prices

More from economist Paul Krugman on why speculators aren't causing rising oil prices. Joe Lieberman, my good friend, are you listening?

First of all, I don’t have a political dog in this fight. I’m happy to believe that crazy speculation distorts markets. And I do think it’s likely that oil prices will come down, for a while, once consumers have a chance to respond more fully to high prices by changing their driving habits, switching to smaller cars, etc..

But the mysticism over how speculation is supposed to drive prices drives me crazy, professionally.

So here’s my latest attempt to talk it through.

Imagine that Joe Shmoe and Harriet Who, neither of whom has any direct involvement in the production of oil, make a bet: Joe says oil is going to $150, Harriet says it won’t. What direct effect does this have on the spot price of oil — the actual price people pay to have a barrel of black gunk delivered?

The answer, surely, is none. Who cares what bets people not involved in buying or selling the stuff make? And if there are 10 million Joe Shmoes, it still doesn’t make any difference.

Well, a futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. And that’s true no matter how many Joe Shmoes there are, that is, no matter how big the positions are.

Any effect on the spot market has to be indirect: someone who actually has oil to sell decides to sell a futures contract to Joe Shmoe, and holds oil off the market so he can honor that contract when it comes due; this is worth doing if the futures price is sufficiently above the current price to more than make up for the storage and interest costs.

As I’ve tried to point out, there just isn’t any evidence from the inventory data that this is happening.

And here’s one more fact: by and large, futures prices over the period of the big price runup have been slightly below spot prices. The figure below shows monthly data from the EIA; as the spot price shot up, the futures price (that’s contract 4, the furthest out) actually lagged a bit behind. In other words, there hasn’t been any incentive to hoard.

Cap and trade, energy prices, and the environment

This comes from an interview about the economy in Fortune.

Fortune: You've been an enthusiastic supporter of climate-change legislation that would have the effect of essentially putting a penalty price on the use of fossil fuel in order to encourage clean energy. Should consumers and businesses be prepared to pay higher prices for electricity and gasoline? Is that pain inevitably in our future?

McCain: I have a fundamental difference with the opponents of cap and trade. History shows me that every time there's been technological advances, it has been beneficial to the economy and the American people. Every time we invent a quicker, a more advanced technology chip, then it's been an increase in productivity of economic benefit. I believe that green technologies — whether it be nuclear power, whether it be wind, solar or tide — can be beneficial to our economy and increase productivity, and improve the lives of American citizens in every aspect. And I'm sorry for the long answer. But the fundamental philosophical difference I have with the opponents of cap and trade is that they believe it will require greater sacrifice on the part of American citizens. I think innovation and advanced technology is beneficial to the lives of American citizens and to our economy. And I know that there's strong disagreement with that.

Barack Obama also supports cap and trade.

Why speculators are not to blame for high oil prices

This was a follow up by Princeton economist Paul Krugman to his original oil non-bubble article.

If the price is above the level at which the demand from end-users is equal to production, there’s an excess supply — and that supply has to be going into inventories. End of story. If oil isn’t building up in inventories, there can’t be a bubble in the spot price.

Now it’s true that oil supply responds very little to price, and that empirical estimates of the short-run price elasticity of demand, like this one, suggest that it’s low — say -.06. But even so, the math of a sustained, large bubble quickly becomes daunting. Say the demand elasticity is -.06, and that you believe that the current price is 40% above the level at which end-use demand equals supply. Then you have to believe that 2 million barrels a day is disappearing into secret hoards somewhere — secret, because it’s not showing up in the OECD inventory data. That’s a lot of oil. And bear in mind that people have been claiming that there’s an oil bubble for years.

You liar, Krugman! We all know Big Oil is hiding it with the UFOs in Area 51.

Japan: The model of energy efficiency

The International Herald Tribune reports that Japan is a model of efficient energy use:

Now, with oil prices hitting dizzying levels and the world struggling to deal with global warming, Japan hopes to use its conservation record to assume a rare leadership role on a pressing global issue. It will showcase its efforts to export its conservation ethic - and its expensive power-saving technology - at the summit meeting of the Group of 8 industrial leaders that Japan is playing host to, starting Monday.

"Superior technology and a national spirit of avoiding waste give Japan the world's most energy-efficient structure," Prime Minister Yasuo Fukuda said in a recent speech outlining his agenda for the summit meeting. Japan, he said, "wants to contribute to the world." ...

Japan, by many measures, is the most energy-frugal country among the world's developed nations. After the energy crises of the 1970s, the country forced itself to conserve with government-mandated energy-efficiency targets and steep taxes on petroleum. Energy experts also credit a national consensus on the need to consume less.

It is also the only industrial country that sustained government investment in energy research even after oil prices fell.

"Japan taught itself decades ago how to compete with gasoline at $4 per gallon," said Hisakazu Tsujimoto of the Energy Conservation Center, a government research institute that promotes energy efficiency. "It will fare better than other countries in the new era of high energy costs."

According to the International Energy Agency, based in Paris, Japan consumed half as much energy per dollar worth of economic activity as the European Union or the United States, and one-eighth as much as China and India in 2005. While the country is known for its green products like hybrid cars, most of its efficiency gains have come in less eye-catching areas, for example, by cutting energy use in manufacturing.

Corporate Japan has managed to keep its overall annual energy consumption unchanged at the equivalent of about 200 million tons of oil since the early 1970s, according to Economy Ministry data. It was able to maintain that level even during the country's boom years of the 1970s and 1980s, as the economy doubled, when adjusted for inflation, to $5 trillion.

The flaws in blaming oil "speculators"

From CNBC, Vince Farrell defends commodity futures traders from the politicians' attacks:

I would like one of our fine, financially knowledgeable, market savvy politicians to define "oil speculator" for me. I know, there is no politician that fits the aforementioned description, but I would like someone to tell me who "they" are. I suppose Morgan Stanley would qualify since they are not in the oil business and trade oil futures.

So "they" are evil and to blame for the high price of oil. Except Morgan handles all the hedging business for United Airlines. The trades appear as Morgan trades but they are for an airline that critically needs to try to hedge its exposure to the volatile price of oil. Who gets outlawed?

Those being called "speculators" are players in the futures market. If they were to be the drivers of the price of oil, they would have to take possession of the commodity and hoard it. As it is they buy a piece of paper and for every buy decision there is going to have to eventually be a close out sell decision. They do not buy the physical product. When a "speculator" buys a futures contract, there has to be a seller and that's what free markets are all about.

Congress should know the price of oil has been driven primarily by the fact that more than 2 billion people in the Far East have been rushing into a more modern world and are demanding their share of the good life that is powered by oil. Demand is up, therefore the price is up. Also, since oil is priced in dollars, the precipitous decline in the value of the dollar due to the twin budget and trade deficits, has raised the price of oil. In 2002 one euro equaled one dollar. Today it costs about $1.55 to buy one euro. If the one-to-one ratio was still true, oil would be around $80.

Institutional investors that now consider commodities to be an asset class to invest in don't hoard the commodity and should have every right to be buying at the top of a bubble like they did in the internet boom. If investors like these were creating a bubble by buying futures contracts, how then to explain the soaring prices of potash and iron ore. These commodities don't have futures to trade!

But it's so easy to blame people, especially during an election year. Don't try to figure a solution. Just assign the blame and maybe get re-elected.

Farrell echoes the argument of Bush-bashing economist Paul Krugman. This is not a left–right issue. This is a fact vs. fiction issue.

Commodities speculation: A comparison of oil with onions

Fortune Magazine compares oil and onions to show how commodities speculation is not responsible for volatile prices:

Before the U.S. Commodity Futures Trading Commission starts scrutinizing the role that speculators may have played in driving up fuel and food prices, investigators may want to take a look at price swings in a commodity not in today's news: onions.

The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders (and not the new farms sprouting up in Wisconsin) were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April.

The volatility has been so extreme that the son of one of the original onion growers who lobbied Congress for the trading ban now thinks the onion market would operate more smoothly if a futures contract were in place.

In fact, the entire reason commodities speculation exists is to reduce volatility and allow farmers to guarantee the future price of their crops.

High oil prices are good

The EconoSpeak blog speaks the truth:

The strategy of choice right now seems to be “blame the speculators”, and Obama has jumped on this bandwagon. Not a good idea, in my opinion, for two reasons. First, there’s not much evidence that speculators are the cause of this price runup. Second, high oil prices—in fact, much higher oil prices—are good. They will combat climate change...

5 Reasons to love $4 gasoline

From Foreign Policy, here are five reasons to love $4 gas:

1. The mass transit boom


2. Lower obesity rates


3. Fewer accidents


4. Shorter commutes


5. The biofuels craze

Hat tip to Greg Mankiw.

Financial speculation not responsible for high oil prices

Paul Krugman says today's high oil prices are based on actual supply and demand, not financial speculation:

Are speculators mainly, or even largely, responsible for high oil prices? And if they aren’t, why have so many commentators insisted, year after year, that there’s an oil bubble?

Now, speculators do sometimes push commodity prices far above the level justified by fundamentals. But when that happens, there are telltale signs that just aren’t there in today’s oil market.

Imagine what would happen if the oil market were humming along, with supply and demand balanced at a price of $25 a barrel, and a bunch of speculators came in and drove the price up to $100.

Even if this were purely a financial play on the part of the speculators, it would have major consequences in the material world. Faced with higher prices, drivers would cut back on their driving; homeowners would turn down their thermostats; owners of marginal oil wells would put them back into production.

As a result, the initial balance between supply and demand would be broken, replaced with a situation in which supply exceeded demand. This excess supply would, in turn, drive prices back down again — unless someone were willing to buy up the excess and take it off the market.

The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.

But it hasn’t happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth.

Saying that high-priced oil isn’t a bubble doesn’t mean that oil prices will never decline. I wouldn’t be shocked if a pullback in demand, driven by delayed effects of high prices, sends the price of crude back below $100 for a while. But it does mean that speculators aren’t at the heart of the story.