Skip to content

Category: energy

1

Published on 1 Comment on The Soviet Collapse: Grain and Oil

I thought this article by Yegor Gaidar, based on his talk at the American Eneterprise Institute in November 2006, was an interesting and straightforward explanation for the end of the Soviet empire: complications from the need to import grain and the need to earn foreign currency by exporting oil. Consider this excerpt:

Yet one of the Soviet leadership's biggest blunders was to spend a significant amount of additional oil revenues to start the war in Afghanistan. The war radically changed the geopolitical situation in the Middle East. In 1974, Saudi Arabia decided to impose an embargo on oil supplies to the United States. But in 1979 the Saudis became interested in American protection because they understood that the Soviet invasion of Afghanistan was a first step toward--or at least an attempt to gain--control over the Middle Eastern oil fields.

The timeline of the collapse of the Soviet Union can be traced to September 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices, and Saudi Arabia quickly regained its share in the world market. During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed by approximately the same amount in real terms.

As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive. The Soviet leadership was confronted with a difficult decision on how to adjust. There were three options--or a combination of three options--available to the Soviet leadership.

That's an interesting explanation. What are the lessons learned? From the conclusion:

In this latter case, it becomes evident that the "contract" between authoritarian rulers and their subjects--which secures stability by people's tolerance of the authorities and the authorities' noninterference in people's affairs--will need to be reexamined. Such reevaluation undermines the regime. The rulers, who for the longest time have insisted that their rule is the best, find it hard to ask for and get broad societal support in a moment of crisis. In this situation, the society has a habit of answering, "For many years, we were told that we are led to a ‘brighter future,' but now you would like us to tighten our belts. Instead, tighten your belts--or leave."

Russia does not need new upheavals. During the course of the twentieth century it saw enough of them. In this regard, the understanding by the elites and society that a real democracy is not an ideological dogma or something imposed by the West, but rather an important precondition for the stable development of the country, will finally give Russia the hope of escaping crises and cataclysms. This realization is vitally important for Russia's development in the next decades.

We may not be "fighting" the Cold War at present, but we are still cleaning up the battlefield.

Published on Leave a comment on Seeing RED To Be Green

Two interesting pieces today, both concerning carbon "sinks" and their ability to alleviate global warming due to carbon release.

First up is a story on "Reducing Emissions from Deforestation:"

Tropical deforestation, which releases more than 1.5 billion metric tons of carbon to the atmosphere every year, is a major contributor to global climate change. Recognizing this, a group of forest-rich developing nations have called for a strategy to make forest preservation politically and economically attractive. The result is a two-year initiative, dubbed "Reducing Emissions from Deforestation" (RED), launched by the United Nations Framework Convention on Climate Change.

So is 1.5 billion metric tons per year a lot or a little? Continuing its summary of the study:

[T]he authors found that reducing deforestation rates by 50% over the next century will save an average of about half a billion metric tons of carbon every year. This by itself could account for as much as 12% of the total reductions needed from all carbon sources to meet the IPCC target of 450 parts per million of carbon dioxide in the atmosphere by the year 2100.

It also finds:

[C]omputer models that link climate effects to changes in the carbon cycle have predicted that tropical forests will survive and continue to act as a "sink" by absorbing carbon, provided that emissions can be kept under control . The efficiency of the tropical forest as a carbon sink might in fact diminish over time, but the authors expect that it will not disappear completely.

A second article considers the role of the oceans in absorbing carbon from the atmosphere and the reverse:

A University of Colorado at Boulder-led research team tracing the origin of a large carbon dioxide increase in Earth's atmosphere at the end of the last ice age has detected two ancient "burps" that originated from the deepest parts of the oceans.

The new study indicated carbon that had built up in the oceans over millennia was released in two big pulses, one about 18,000 years ago and one 13,000 years ago, said Thomas Marchitto and Scott Lehman of CU-Boulder's Institute of Arctic and Alpine Research, who jointly led the study. While scientists had long known as much as 600 billion metric tons of carbon were released into the atmosphere after the last ice age, the new study is the first to clearly track CO2 from the deep ocean to the upper ocean and atmosphere and should help scientists better understand natural CO2 cycles and possible impacts of human-caused climate change.

As a non-specialist, it does seem like the public debate about global warming seems to focus quite a lot on how much carbon is introduced into the atmosphere, rather than how much is taken out.

Published on Leave a comment on Congestion Pricing in Manhattan

I applaud Mayor Bloomberg for proposing congestion pricing in Manhattan as part of his Earth Day initiatives, patterned after a similar system in London. From The New York Times on Sunday:

The proposal that is sure to attract the most attention, and possibly objections, is one to impose the $8 fee on car drivers, and $21 for truck operators, to drive in Manhattan south of 86th Street.

The mayor said congestion on the city’s streets is the source of many of the city’s health, environmental and economic problems.

“We can’t talk about reducing air pollution without talking about congestion,” he said.

“As our city continues to grow, the cost of congestion to our health, to our economy and to our environment are only going to get worse,” he said. “The question is not whether we want to pay, but how do we want to pay — with an increased asthma rate, with more greenhouse gases, with more wasted time, lost business and higher prices. Or do we charge a modest fee to encourage more people to take mass transit.”

The fee the mayor is proposing would only be imposed during the week, between 6 a.m. and 6 p.m.. And motorists driving the major highways along Manhattan’s east and west sides would not be fined, so it would be possible to go from Brooklyn to Harlem along Franklin D. Roosevelt Drive without entering the zone.

The article contains other information about the implementation that suggest that it has been reasonably well thought out. But this doesn't stop the critics from making a raft of self-serving claims. Let's take a look at a few:

State Assemblyman Richard Brodsky said he opposed the mayor’s proposal for a congestion fee because it is a regressive tax.

“The middle class and the poor will not be able to pay these fees and the rich will,” said Mr. Brodsky, who is chairman of a committee that oversees the Metropolitan Transportation Authority. “There are a lot of courageous things in the mayor’s package, but this one is not very well thought out.”

According to this logic, all prices for services not linked to income are regressive, since the rich can more easily pay them than the poor. It might technically be true, but it isn't particularly helpful. Besides, when I go to Manhattan, I see the middle class and the poor on the subways and buses, not their own cars.

Here's some more, of the more nakedly self-serving variety:

Clayton Boyce, a spokesman for the American Trucking Association, a national industry group, told The Associated Press, “It will be a real problem for operations for trucking companies and shippers, including all the retailers in Manhattan, which is substantial.”

“And all the people who get FedEx and UPS deliveries will have problems and will bear extra expense, so we definitely see problems with it,” he said.

It's time to give Mr. Boyce a refresher course in microeconomics. Start by considering what his answer might have been last week to the question, "What is the biggest problem your industry faces in providing excellent service to lower Manhattan?" Based on what I've seen on those streets, my answer would have been "congestion." So the mayor has proposed to tax the thing that has been encumbering the trucking industry, and its spokesman is complaining because his clients will need to pay the tax in proportion to the congestion they cause.

Think of it by the numbers. How many packages are on the typical FedEx truck in Manhattan? If it were 210, then the extra expense would be a dime per package. That's trivial. How does $21 compare to the total value of each truck's cargo in a given day? It has to be tiny. And look at what the FedEx truck drivers get in return--fewer passenger cars clogging up the city streets where they need to make pickups and deliveries. They waste less time and less gas. It doesn't take much abatement of that wasted time and gas to make back the $21 per truck. The trucking industry should be this proposal's biggest supporters.

Published on Leave a comment on Republicans and Gas Taxes


Daniel Gross writes about the "emerging" consensus of economists in favor of higher gas taxes. I thought the graphic above was quite telling, about the U.S. in relation to other western countries.

The word "emerging" is in quotes, referencing a theme of the article, which is that it is much easier for people who have worked inside a Presidential administration to advocate for politically unpopular ideas when they are on the outside. That's true but only to a point. It's not that Greg Mankiw ever said anything other than what he now says about the gas tax while on the inside. It's that the President sets the framework for all policy outcomes--not the CEA--even on economic issues. CEA, like every other part of the administration, works to generate the best outcomes within that framework. And if the President is not interested in a gas tax, then it becomes a very short conversation.

Gross quotes me, from a telephonoe conversation last week, as follows:

What gives? Clearly, there is an emerging consensus among economists — right and left — that the nation would be better off, geopolitically and economically, if Americans used less gasoline. “Given the role that imported oil plays today, you can’t continue to be a responsible economist and not talk about ways to reduce that dependence,” Mr. Samwick said. “If you are concerned about the external consequences of imported oil, then you should raise the cost of it.” And free-market economists view a higher gas tax as a more elegant solution than, for example, raising auto efficiency standards.

So it's not that the consensus is emerging because it is new--it is emerging because there is more of an audience for it.

Another issue that is relevant here is that I would propose that the additional gas tax be done in a revenue-neutral way: returning the proceeds in aggregate in the form of progressive cuts to the income tax. Then fix the long-term deficit by raising the whole schedule (again, progressively) of income tax rates. One problem that the President would have if he advocated higher gas taxes without fixing the long-term deficit problem is that he would be accused of paying for his income tax cuts with higher gas taxes. Not a place he wants to be.

Published on Leave a comment on Conservation on the Lakes

I was surprised but quite unsympathetic to learn how much of an impact higher gas prices have on owners of pleasure boats:

Even with the higher prices, boaters are going out, lest they waste what can be a huge investment.

“It’s a short season,” said Todd Heimlich of Burlington “You’ve paid for the boat - and you’re not going to use it?”

Heimlich and his brother, Mark, from Wakefield, were docking in Paugus Bay in Laconia after a spin this week in their Baja, a gas guzzler with twin 425-horsepower engines.

Mark Heimlich said they’ve noticed some changes, including more boats carrying more people.

“They used to go out on their own, but now four couples are sharing the gas and going out,” he said.

Their boat has a 225-gallon tank, meaning a fill-up at $3.95 pushes $900. Todd Heimlich said running six hours a day, they can burn a tank in a weekend.

The brothers and the Valitons also said they see people anchoring after short boat rides rather than taking long cruises as they did in the past.

Nice to see they're economizing

Published on Leave a comment on You Pay Your Money, You Take Your Chances

I finally decided to go in for TimesSelect. I am greeted by Tom Friedman's column, "Let's (Third) Party," where I read this gem about gasoline prices:

Like someone who will tell the truth: The only way Americans are ever going to enjoy relatively cheap gasoline again is if we raise the price now with a gasoline tax— and fix it at that higher level for several years — so investors know that it is not coming down, and therefore it makes economic sense for them to make the long-term investments in alternative, renewable sources of energy. That is the only way to break our oil addiction and ultimately bring down the price.

That's a fascinating "truth." Note that he is not writing here about the externalities associated with our dependence on oil--he is writing about the direct consumption of it through gasoline. So in order to have cheap gasoline later, we should insist on having expensive gasoline today, even if the price of gasoline would fall in the interim. That is beyond silly.

I understand that post-9/11, Friedman has been frustrated by the failure of the President to launch a national initiative about anything, but particularly about our energy consumption. I share much of that frustration. I even advocate for a higher gasoline tax (because of the externalities associated with its consumption and instead of idiotic CAFE standards). I also wish more people understood Brad DeLong's very cogent point that the correct side of this debate to be on is to have people face the market price of gasoline and certainly to do nothing to shield them from it (again because of the externalities). But Friedman is doing the same sort of pandering as the politicians he is criticizing when he holds out the promise of a future with cheaper gas as the rationale for his proposal.

It doesn't have to be complicated. Estimate the monetary cost of the negative externalities associated with gasoline use, set the appropriate tax, and then do nothing else. The market price then sends the correct signal to investors about how to take advantage of new opportunities in alternative energy.

Published on Leave a comment on Gas Tax Redux

A few months ago, I posted a couple of times on my preference for a gas tax compared to the CAFE standards. Today, I happened across two papers by Professor Jayanta Sen that are, at the very least, quite provocative. They focus on ways that the U.S. could make itself better off by (in the first paper) taxing an imported good that has a relatively inelastic supply and by (in the second paper) forming an international cartel of importing countries, to offset the market power of OPEC. Here are the abstracts, with links to the full papers at SSRN:

A Tax to Save the US $100 billion a Year and Solve Global Warming?

The position of the current US administration is that moves to reduce consumption of gas (like the Kyoto Treaty), will harm the US economy. On the contrary I show that a tax on crude would transfer wealth of $100+ billion a year from foreign governments to the US consumers, thus providing a major economic stimulus to the economy while at the same time reducing consumption of gas. Over the past decade crude oil prices have increased from $12 (1998) to over $65 a barrel. The amount of net oil exported to [by] importing countries is about 28 million barrels a day. With 1998 prices as a reference, this translates to an additional wealth transfer of $1.32 billion a day, or $480 billion a year. If the supply of oil is inelastic, then an increase in tax by the governments of importing countries would push up oil prices and decrease the wealth transfer. For a range of demand and supply elasticities that I study, the wealth transfer savings for the United States (which has about one-third of global oil imports) should be in the range of $108 to $152 billion a year. The new tax revenues to the US government from tax on imported oil should be $160 billion to $250 billion a year. This money can be returned to the US consumers as a lump sum, thus providing the economic stimulus. The reduction in crude oil consumption ranges from 7.13% to 10.30% while providing a stimulus (defined as additional purchasing power to consumers) to the economy of $95 billion to $133 billion a year.

Oil at $10 a Barrel and $200 Billion Savings a Year for the U.S.: Benefits to the U.S. from a Buyer's Cartel

In the international oil market, the producers are cartelized, whereas the buyers are fragmented. As standard economic analysis suggests, this results in a greater share of the surplus for the producers. The cost of production for a barrel of oil to the producers is approximately $8, whereas the recent price is $65. A buyer's cartel could be formed by the governments of the major oil importing countries like the U.S., Japan, Germany, China, India etc. All oil sold in these countries would have to pass through the buyer's cartel. The buyer's cartel could negotiate a price with the oil exporting countries, say $10 a barrel (which should be a sufficient markup over production costs). After purchasing oil from the producing countries, the buyer's cartel would release the oil in the market and let demand determine the price. If current demand conditions remain unchanged then the price would still remain at $65. However, this would reduce the effective price to the citizens of the importing countries to $10 a barrel as their governments would earn a profit of $55, which could be used to reduce taxes or pay for programs like Social Security. For the U.S. (which imports 10 million barrels a day) the savings would be $55 x 10 million x 365 = $200.75 billion a year.

Blogsearch Technorati

Published on Leave a comment on Fuel Economy and Safety


Karen Lundegaard has an intereting article today in the Wall Street Journal about new thinking about fuel economy and safety.

The story presents a graph from the EPA showing fuel economy over time for cars, trucks, and then their combination. It makes the point well from an earlier discussion of the CAFE standards (here, here, and here). Even though fuel economy per vehicle may have been flat to increasing for both cars and trucks, the shift of more drivers into the less efficient trucks has caused the overall fuel efficiency to fall.

The main new point in the article is to point out that some new research takes issue with the presumption that improvements in fuel economy would come at the expense of safety:

For decades, whenever the federal government leaned on auto makers to improve fuel efficiency, the industry had a ready response: Research showed that lighter, more fuel-efficient vehicles weren't as safe as their heavier, gas-guzzling cousins. Even shedding as little as 100 pounds could lead to a serious increase in traffic fatalities.

The result has been a virtual standstill in fuel-economy improvements for cars, trucks and sport-utility vehicles over the past 20 years.

Now a wave of new studies and technologies -- strong, light materials, better airbags and smarter designs -- are beginning to break the logjam. The upshot: A big shift in government thinking that is paving the way for regulators to revamp fuel-economy rules for SUVs and pickup trucks for the first time in three decades.

I'm glad for the use of research on the other side of a long-held presumption, but I'm not sure the article gets the argument right. Later, we have:

For years, the accepted wisdom in the car industry held that, all things being equal, heavier vehicles are always safer when two vehicles crash. New studies highlight how other factors -- including a car's size, body design and advanced technology -- can do much to counteract the weight issue.

The newer studies also have homed in on the downside of weight: While a heavy vehicle protects its occupants in an accident, it inflicts more damage to those it hits. That means reducing the weight of the biggest vehicles could yield dividends in both fuel consumption and safety.

All of this has contributed to a rethinking of the fuel-economy regulations from the National Highway Traffic Safety Administration. Last month, NHTSA crafted new "Corporate Average Fuel Economy" rules, or CAFE, for light trucks that aim to balance safety and fuel efficiency. The old rules set an average weight target for an auto maker's entire fleet of cars or trucks, encouraging car makers to sell lots of small fuel-efficient vehicles at sometimes unprofitable prices, so they could keep selling their more profitable gas guzzlers.

The article fails to recognize two issues. First, there is a big difference in safety risks that a vehicle poses to its own occupants and the risks that a vehicle poses to occupants of other vehicles. There is a compelling reason for the government to be involved in the latter, far more than would exist for the former. Without government involvement, drivers of heavier vehicles would not bear the costs they impose on other drivers. (It's not clear that they do so now, apart from states without no-fault insurance requirements.)

Second, the flaw in the old system is the presence of multiple categories for fuel economy standards, with lower standards for some groups. That remains in the new system and can be expected to have the same consequences for fuel economy. Exactly what has changed that would arrest the slide in fuel economy shown in the graph above? Only the increase in the standard for trucks as a whole--not the presence of categories.

Consumers can make their own choices about how much safety they want in their own cars. The government can confine itself to providing accurate information about safety. The continued commingling of irrelevant own-occupant safety concerns with legitimate concerns about fuel economy makes the policy less useful than an ideal CAFE or a gas tax.

Blogsearch Technorati