Receding horizons in energy economics

Over at The Oil Drum, a reader has expressed an idea they call the ‘Law of Receding Horizons.’ This pertains to the energy industry and holds that, for unconventional fuels like ethanol and the oil sands, higher oil prices are not a guarantee of increased profits. This is because their own costs of production are not insulated from the direct and indirect effects of oil price increases. As such, their costs of production often rise to squeeze away any increased profit margin. Robert Rapier expresses the same idea in his recent post on fuels made using a thermal depolymerization process.

It seems unlikely that this holds true in all cases. Certainly, oil sands producers were a lot more upbeat when oil was around $150 a barrel than they are now that it is around $40. That being said, it may prove to be one reason for which new sources of unconventional fuel do not emerge in a cost-effective way as older and cheaper sources are depleted.

It is also worth mentioning that the costs here exclude any externalities. I maintain that if all the people who are and will be affected by oil sands production offered a dollar value equivalent to the level of harm they suffered to the oil sands producers, in lieu of continuing to produce they would choose to take this settlement. The externalities associated with the oil sands are probably greater than the welfare benefits of the fuel being produced.

The budget and federal environmental policy

Crossword in bike spokes

The Globe and Mail has a fairly lengthy article about the recent federal budget, oil sands policy, and environmental policy integration with the United States. It highlights the speculative nature and unknown costs of emissions reductions associated with carbon capture and storage (CCS) technology:

However, this week’s federal budget provided little sense that Ottawa is preparing the country for a shift to a green economy, or even that it is concerned about the slump in the oil sands, which extends to the oil and gas industry generally.

Rather than any direct measures, the federal government provided $69-billion to ease access to credit in the economy generally — admittedly, an important problem for a capital-intensive oil industry — and vague promises of funding for carbon-capture-and-storage technology.

CCS is the fig leaf of the oil sands — an untested, hugely expensive technology that governments and industry claim will be critical if oil-sands emissions are to be reduced to acceptable levels. The idea is to divert CO2 emissions from smokestacks and store it permanently underground, but skeptics doubt it will ever be commercially viable.

A lot of talk these days surrounds a joint North American approach to climate change and energy security. Few people seem to have publicly considered the jurisdictional difficulties associated with such an approach. If I were Barack Obama, trying to get a cap-and-trade bill through Congress, I really doubt that I would want to have to deal with ten provincial governments, a second federal government, a separate legal and constitutional arrangement (including, for instance, aboriginal issues), and all the other complexities associated with jumping straight into a two-state system. That being said, having a North American strategy that is at least poised for integration could be important for securing the support of private firms worried about cross-border competition.

Without a doubt, these are interesting times for the emergence of climate policies.

Obama visiting Canada

President Barack Obama will be visiting Canada on February 19th. Presumably, that will include some sort of large public gathering, hopefully with an appearance from the man himself. In preparation, it seems fitting to contemplate what sort of message it would be most valuable to convey to the new president.

With that aim in mind, I propose that people submit their best ideas for a message that could be put on a placard for the media (and maybe even the President) to catch a glimpse of. Text versions and images would both be welcome. The former can be posted as simple comments. In the latter case, people can email images to me for possible posting. My immediate idea would be something along the lines of:

The oil sands are a trap!
Choose zero-carbon energy!

These days, it seems that the best hope for an aggressive shift towards decarbonizing the global economy comes from the possibility of new US leadership and the destruction of the reckless approach to energy the world is using at present. The challenge of expressing that general necessity in a compact statement is a considerable one.

Profiting illicitly from chance

Canada's eternal flame, Parliament Hill

Skimming through a local newspaper the other day, I came across an advertisement for ‘investment advice.’ Basically, it was someone hoping to manipulate random chance to make a profit. It worked like this:

  • You sign up and, for the next month, you get free weekly investment advice.
  • You are encouraged to either invest according to the advice or pretend that you have done so, keeping track of the relevant stocks and how much you would have earned if you had invested.
  • After the free trial period, you start paying a fee for further advice.

The system works in a pretty obvious way. The people running it either produce one weekly piece of advice or, if they are smarter, many. They then send this information to people at random. Naturally, some of the advice will lead to real or simulated losses. Those people will stop taking the advice. Some people, however, will receive seemingly good advice week after week. These people, impressed with the ‘track record’ of the financial advisors will presumably start paying for the information, perhaps giving up when things inevitably go wrong.

You could perform the same trick with any random and money-connected activity: betting on races or sporting events, commodity prices, and so forth. In every case, enough random sets of advice being distributed will lead to a subset of people winning on the basis of the ‘advice’ several times in a row.

At one level, this is a pretty simple confidence trick. At the same time, it isn’t hugely different from what a lot of legitimate financial firms do from day to day. Buying mutual funds, in particular, bears similarities. People evaluate funds based on their past performance, despite how that may have been the product of chance rather than good choices. At least some mutual funds will always do well, driving people to believe that money can be made with them. In fact, mutual funds are more insidious than the con described above. That is because they charge management fees. As a result, there are likely to be many circumstances in which fund managers are getting paid on a day-to-day basis for making trades that underperform the market.

Incidentally, a related trick could be performed with fake medicine: offer it to sick people for free, to begin with, then start selling it to the ones who happen to see their condition improve significantly for unrelated reasons during the ‘treatment’ period. This would work especially well with chronic conditions where the level of suffering varies significantly from one point in time to the next.

Free book on environmental economics

Jason Scorse, of the Monterey Institute of International Studies, has written a book on what environmentalists need to know about economics. He has also made it available online, free of charge.

The first six chapters consider the general approach of economists to environmental issues. The next eight chapters look into specific environmental issues, including climate change (PDF). The relatively brief climate chapter concentrates on the possibility of an international cap-and-trade or carbon tax system, rather than focusing on some of the more conceptual issues in climate change economics, such as the appropriate discount rate or the degree to which we should hedge against catastrophic risks. Nonetheless, it is a potentially useful resource for those seeking to increase their knowledge of the general subject area.

Norway: green ambitions and oil exports

Dylan Prazak

This Economist article on Norway should make interesting reading for Canadians interested in questions of energy, environment, and politics. It highlights how Norway is both progressive on climate change – with a carbon tax and a grid almost completely dominated by hydroelectric power – and a major indirect emitter on account of its large exports of oil and gas. Oil and gas sales produced 413 billion kroner ($75 billion Canadian) in revenues in 2008, and such exports have allowed Norway to build up an oil-revenue fund worth 2.1 trillion kroner ($382 billion Canadian).

The challenge of being a hydrocarbon exporter at a time when future human prosperity depends on the fairly rapid abandonment of fossil fuels is an acute one. While carbon capture and storage (CCS) technologies may eventually help square the circle a bit, that is by no means guaranteed. Indeed, placing excessive confidence on the rapid and economical deployment of that technology will leave states in the lurch if it doesn’t deliver as rapidly as promised.

In addition to discussing carbon pricing instruments and oil exports, the article examines the practice of ‘offsetting’ emissions by paying to have them reduced somewhere else, then taking the credit for doing so by counting those avoided emissions against your own. As discussed before, it is an idea not entirely without merit. That being said, it must be rigorously operated, or it will risk being abused.

Norway’s considerable efforts to respond appropriately to climate change deserve to be both applauded and, where appropriate, replicated in Canada. As for balancing the desire to do what’s right against the temptation of cash for dirty fuels, hopefully Norway will opt to show other oil producers that the temptation can be restrained without destroying prosperity, and that there are big opportunities to be found in alternative, renewable sources of energy. Depressingly, it may only be with strong examples of this type elsewhere that Canada will even begin to seriously contemplate such a shift.

Ice and solar power

Indirectly, Ottawa winters provide a good demonstration of just how immense a quantity of solar energy there really is on this planet. Consider the fact that the Earth’s axial tilt produces thirty degree weather here in the summer and negative thirty degree weather here in the winter. Walk out onto the frozen surface of Dow’s Lake and think about how the only reason the lake is ever liquid is because of the massive amount of solar energy striking it in the spring and summer. Then, recall that all the lakes and seas everywhere on Earth would freeze solid without the constant solar influx. This is well illustrated by the frozen moons in the outer portion of our solar system.

Burning all the world’s fossil fuels wouldn’t let us keep oceans liquid, in the absence of solar assistance. Moving to an energy system that relies directly (solar photovoltaic and concentrating solar) or indirectly (wind, hydroelectricity, biomass) on the sun is an overwhelmingly important part of creating a sustainable society. The amount of energy available to harness vastly exceeds the amount we can drill or dig up out of the ground.

Climate change and the perception of threat

Winter pigeons and bricks

This David Roberts post, over at Gristmill, discusses the relationships between public awareness of climatic science and the need to take action on climate change. In short, it concludes that the general public will not understand climatic science in the foreseeable future. The critical task is not to make them do so. Rather, what is critical is altering the answers they reach when they ask themselves the two questions through which they evaluate potential problems:

  1. “Is this a problem that threatens me/my family/my tribe? Is there an imminent threat? Is it an emergency?”
  2. “Do the proposed solutions to the problem threaten me/my family/my tribe? Am I going to get screwed?”

It goes on to argue that scientific reports and data will not change how people answer these questions. Rather, to get action on climate change, the following must be done:

  1. Greens, politicians, and other communicators need to get serious about calling climate change the impending catastrophe it is, with serious, dire consequences for people now living, certainly for their children. That means risking being called “hysterics” by conservatives and their dupes in the media.”
  2. “The same folks need to get better at showing the public the opportunities and benefits of action. It’s about expanding the winner’s circle and making damn sure everybody in it, or potentially in it, knows about it.” (emphasis in original)

This is a strategy quite different from climate change mitigation by stealth, but it does seek to respond to the same fundamental problems of selfishness and misunderstanding.

The critical flaw in thinking we can achieve a technocratic solution to climate change is a failure to appreciate the influence of those who will be harmed by effective climate change mitigation efforts (such as coal and oil sands producers), as well as their willingness to manipulate the public into demanding inaction. In order to counter the influence of such status quo powers, there does need to be a political constituency for effective climate change action. I think Roberts is basically correct in asserting that it will be through changing the public perception of risk and opportunity that such a constituency might best be constructed.

Lofty ambitions for space travel

This is one of the best bits of satire The Onion has produced in a while: Kim Jong Il Announces Plan To Bring Moon To North Korea. It is especially amusing if you are familiar with some of the actual governmental propaganda about Kim Jong Il. I once saw a North Korean press document claiming that their leader is ‘the most energetic man in history.’ He has a fondness for doctoring photos of Napoleon to include his own face, and North Korean songs claim that he can “dispel raging storms.”

My favourite quotes from the video:

  • “A force of one million men will anchor [the moon] to a resplendent pedestal modeled on the Dear Leader’s perfect hand.”
  • “We will study the moon once it is here to learn the effects of moon possession on national glory.”
  • “The plan is perfect. We have already succeeded.”

The artwork is also an amusing impersonation of a classic propaganda style.

The usefulness of being methodical

'Justice' stonework

Whenever I need to wake up early in order to catch a bus or train, I make sure to lay everything out in a clear and sequential manner. That is the most effective way of not forgetting critical items, while also not wasting too much time checking and re-checking things. While, in my case, it is early-morning brain woolliness that makes such clear sequencing valuable, there is evidence that simple lists and straightforward procedures can also serve a useful purpose in situations where complex and demanding tasks are undertaken, sometimes making it too easy to forget a seemingly small but crucial step. Flying airplanes and performing surgery are examples. Indeed, it seems that the pilots might be able to teach some useful techniques to the men and women with the scalpels.

Some recently published research has shown that a simple World Health Organization (WHO) checklist (PDF) is highly valuable for preventing surgical mishaps. The British National Patient Safety Agency found that the use of the checklist (which includes simple items like having the surgical staff confirm the patient, site, and procedure to be performed) can cut deaths by over 40% and complications by over a third. The finding is especially impressive due to the sample size examined: 7,688 patients, 3,733 before the checklist was implemented, and 3,955 afterwards. The patients were located in a diverse collection of countries, including the United States, Canada, the United Kingdom, New Zealand, Jordan, India, the Philippines, and Tanzania. Clearly, surgeons worldwide tend to overlook the same things.

It’s a curious quirk of human nature that someone can be both capable of performing advanced cardiac surgery and capable of forgetting a sponge inside the patient’s body while sewing them up. Hopefully, simple tools like the WHO checklist will help the former to occur more successfully without the danger of the latter. In a less specific context, it is worth remembering the value of simple tools that produce welfare improvements quite disproportional to their cost or difficulty of use.