Energy back-of-the-envelope of the day

Geoff Styles calculates that the newly-approved Cape Wind will generate only slightly more energy than is leaking from the single well drilled by Deepwater Horizon:

Cape Wind and the Macondo prospect that the Deepwater Horizon rig was drilling into represent opposite poles of the energy spectrum, and not just because the latter is now leaking oil into the marine environment at a rate that the latest estimate puts at 5,000 barrels per day, much higher than initially thought. Cape Wind would tap into the clean and renewable, but extremely diffuse energy sources that surround us. After taking into account the restrictions imposed by DOI, its 130 turbines would on average generate as much electricity as a gas turbine power plant consuming a quantity of natural gas equivalent to 6,000 bbls/day of oil. In other words, it takes a very large array of offshore wind turbines to match the energy in the oil currently leaking from a single well. Platforms similar to what BP might have been planning to install after successfully completing the exploration of Macondo routinely produce up to 20 times that much oil.

Louisiana spill quickly worsening

Lots of things look very bad about the Deepwater Horizon explosion and oil spill, starting with the fact that it can now be seen from space:

It is also five times larger than originally thought (and they have discovered a previously undetected third leak), only 16 miles off the Louisiana coast and expected to come ashore on Friday, the military has been called, state of emergency declared, and platform owner BP has already started finger-pointing at operator Transocean.

Meanwhile, Geoff Styles is, while still dignified, about as defensive as I have ever read him. For example, while it may be true that much more oil leaks naturally than from man-made spills, natural leakage simply does not cause the magnitude of environmental impact that I fear we will see shortly on the Louisiana coastline, so its relevance is negligible. His conclusions are more robust, but still optimistic - first, that

However we assess the cost of such spills when they happen, the benefits of offshore drilling are still compelling

... which is probably true, but could turn into political kryptonite depending on how badly this environmental disaster plays out. His second main conclusion is that

It is only right and fair for states like mine that are adjacent to the federal waters in which drilling would occur to share in the royalties this will generate. Politicians in inland states might see those royalties as belonging to the whole country, but their states won't bear any of the risk, no matter how small it might be before the fact.

This is very reasonable, but may not be very relevant for his home state of Virginia, among others, if this very visible accident swings the political tide against "Drill, baby, drill!" for the foreseeable future.

Can't quit "dirty power" cold turkey

In response to an over-enthusiastic Earth Day petition, the always-thoughtful Geoff Styles thinks through the following:

What would it mean if every power plant burning coal, oil or natural gas shut down today and remained idle? The short answer is chaos and social collapse, but let's take a quick look at why.

Here are a few of his facts for the numerically inclined:

As it turns out, all renewable sources plus nuclear generated a bit over 1.2 trillion kilowatt-hours (kWh) last year... Unfortunately, it's also less power than the US has generated in any year since 1966.

If we adjust for energy:GDP, then 1979, with its net generation of 2.25 trillion kWh, looks like a more appropriate basis of comparison to the economic work that our current zero-emission power output could do. The problem is that the US population has grown by 84 million people since then, and our economy, expressed in constant dollars, is more than twice as big as in '79--even after last year's contraction.

The wind, solar and geothermal power sources we've focused intensely on expanding accounted for just 2% of the electricity we used last year. Double them, and then double them again (10 years?) and that's still only 8%, compared to the 69% we got from fossil-based generation last year.

The argument almost makes itself, but he makes it well. And rightly doesn't even bother with the triviality of a similar argument for fossil transportation fuels.

Does the rare earths market lie?

There is a lot of press about the scarcity of rare earths, but what is the market saying, and does it really lie? Compare these three points of view. First, America (and by the way MolyCorp is the only rare earths company in the U.S.):

“The pricing of the rare earths doesn’t make sense — they’ve been way too low for way too long,” grumbled John Benfield, the square-jawed senior chemical engineer at the [currently non-operational] Mountain Pass mine.

Then China:

Low prices for rare earth elements from China contributed to cuts at the Mountain Pass mine before it closed in 2002. They also discouraged most entrants to the industry until the last two years, when prices began to climb because of strong demand.

Then financial investors:

The Kaiser Bottom-Fish Online Index of share prices of rare earth companies soared eightfold last year, and has kept most of its gains. That has encouraged worries about a possible bubble.

“Most of them will get nice share prices for a while and then what goes up, comes down,” said Judith Chegwidden, a managing director and longtime rare earth specialist at Roskill Consulting Group in London.

I recognize that mines like these have long lead times, but when financial investors are worried about a bubble and prices are still not high enough to make American production viable, the worries start sounding to me more like supply chain security concerns (particularly for sensitive applications like defense) than commercial concerns about an aggregate supply shortfall. Also, if the rare elements are extremely valuable in minute quantities, they would be much easier to store than oil, for example (in which large-scale physical speculation has recently occurred), so why aren't savvy investors or countries doing this already?

While I'm critiquing, I also don’t really agree with this analysis:

With each start-up typically raising $10 million to $30 million and signing up one or two long-term customers, the ventures are fragmenting the market’s search for reliable supply sources beyond China. A result could be that few mines actually open outside China, which would remain the dominant supplier.

“The customers and the industry are not being discerning enough, and we’re going to end up with 70 rare earth companies employing geologists and rare earth directors and no more than five new mines by 2020,” predicted Dudley J. Kingsnorth, the best-known consultant in the industry and an adviser to some of the start-ups.

I would characterize that not as fragmentation, but as “competition”, which is generally believed to have positive effects in bringing supply to market in an economically efficient way, and without conceding rents to dominant suppliers.

Some other fascinating tidbits are that Molycorp was owned by Unocal when CNOOC made its famous and ultimately unsuccessful bid (farsightedness only now detected?), and its currently owned by a PE consortium, of which Goldman was a member but has recently sold its participation.

Do sugar quotas have any redeeming qualities?

Subsidies get most of the press and credit for distortionary American agricultural policies, but egregiously protectionist sugar quotas may deserve more attention. Not just because lifting them could help Haiti, but because they seem so single-mindedly rent-seeking, with no socially redeeming characteristics I can think of.

Restrictions on imports have caused American users to pay much more than the rest of the world for sugar. That gap recently blew out to its widest in a decade.

Mr. Vilsack's comments raised the prospect of increased demand for global sugar and drove prices up 2.7%, or 0.44 cent, to 16.98 cents a pound on ICE Futures U.S. Prices for U.S. domestic sugar dropped 2.1%, to 30.8 cents a pound. That narrowed the gap between the two to 13.82 cents a pound.

A nearly 100% price premium to the world market is absurd, and I'm not sure how these could possibly be defensible in, say, the WTO.

Commodities not an asset class

I'm reading old Rick Bookstaber posts on the advice of a friend, and he is quite a thoughtful guy. I found this snippet from his post on asset allocation interesting:

Commodities do not form an asset class
This sounds heretical given what we have seen oil and gold do recently, but a lot of the reason that has happened is precisely because people are treating them as an asset class when they are not.

Commodities are not assets. They are factors of production. They do not generate returns, they have no claim on production. They have supply that flows out at a nearly fixed rate short term, and they comprise very small markets compared to the financial markets. If pension funds all decided to put two percent of their capital into commodities, two things would happen. First, that two percent would be a rounding error in their returns, no matter how commodities behaved. Second, they would swamp the supply of the commodities for economic purposes – i.e. for their true role as factors of production. I agree with Michael Masters’ view that oil prices were pushed up by this sort of financial activity. I might quibble with one chart or another, I might not couch it in the loaded terms of speculation. But the subsequent behavior of the market demonstrated that he was right and Goldman and others who took the opposing view were wrong.

This is an interesting take on the "speculation in commodities" debate - that financial investors played a big role in the commodity price boom, but that it was institutional investors, not nimble hedge funds, who were the financial market movers. And in this case, probably inadvertently so, and probably not lucratively either, since its hard to imagine them getting out of the way in time. A much different story than Bookstaber sees playing out in gold, by the way.

Krugman on environmental economics

Long but excellent article by Paul Krugman on Environmental Economics 101 and the economics of climate change. I also recommend Michael Roberts' addendum and heartily second his emphasis on argiculture, forests and land use which Krugman under-addresses.

One thing I found interesting was Krugman's favorable take on both the legitimacy and the feasibility of carbon tariffs:

To the objection that such a policy would be protectionist, a violation of the principles of free trade, one reply is, So? Keeping world markets open is important, but avoiding planetary catastrophe is a lot more important. In any case, however, you can argue that carbon tariffs are well within the rules of normal trade relations. As long as the tariff imposed on the carbon content of imports is comparable to the cost of domestic carbon licenses, the effect is to charge your own consumers a price that reflects the carbon emitted in what they buy, no matter where it is produced. That should be legal under international-trading rules. In fact, even the World Trade Organization, which is charged with policing trade policies, has published a study suggesting that carbon tariffs would pass muster. [emphasis mine]

These aren't pushover arguments, but my gut reaction is that even if the WTO sanctions this type of action, the reaction from countries like China wouldn't be pretty.

Energy M&A: The boom is back

It was a crazy week for North American energy M&A, with at least five billion-dollar deals I noticed in passing:

• Apache buys Devon's Gulf of Mexico assets for $1.05bn ("an amount that is about $250 million more than some analysts had expected")


• Apache buys Mariner Energy (also Gulf-focused) for $2.7bn


• ConocoPhillips sells its 9% stake in Syncrude Canada to Sinopec for $4.65bn


• Atlas and Reliance form $1.7bn Marcellus shale JV


• Mirant and RRI merge to form $3.1bn independent power generator

This level of activity (and in at least one case level of valuation) seems to signal that energy producers are viewing the global economic outlook positively, and are eager to jump on opportunities before asset prices catch up. With the benefit of hindsight we can say it would have been better to move earlier, but that is perhaps unfair...

Volcanic ash and high-value exports

This was one of my first thoughts when I heard of the flight disruptions in Europe, and now both Tyler Cowen and Owen Barder have picked up on it - the impact on high-value agricultural exports from East Africa to Europe (especially horticulture and floriculture). Owen provides the local perspective:

This evening here in Addis Ababa I bumped into the owner of one of the big flower-exporting businesses. He was looking pensive. Unseasonal rain had damaged part of his crop, and now he is unable to get his roses into European markets. A whole container had had to be destroyed because there was nowhere for them to go. On the back of an envelope, he calculated that the blockage of rose exports is costing Ethiopia about €200k a day. This may not sound very much but it is a big chunk of the export earnings of a poor nation.

On the other hand, seems like local European producers should have been making arguments around supply chain security rather than food miles.

Scary to think that this volcano's last eruption lasted two years. If anything like that happens again, the effect on the world economy via both agricultural production and logistical disruption could be profound.


Update: FP Passport weighs in with some numerical estimates:

- In Kenya, flower growers have lost and estimated $12 million so far, or about $2 million a day. 6.5 tonnes of roses were dumped yesterday, for example. The loss is particularly devestating with Mother's Day coming up -- a big day for flower markets across the European continent.

- In Ethiopia, horticulture exports have lost an estimated $1.75 million Euros so far.

Hard to be transparent about oil when...

... you don't know how much is being produced:

The Nigeria Extractive Industry Transparency Initiative (NEITI) has described the records of the country’s crude production and export as unclear, saying that after 58 years of oil production, the country does not know exactly the quantity it produces.

Speaking at the presentation of a research report on the Nigeria Extractive Industry in Abuja weekend, Chairman of the Board of NEITI, Prof. Asisi Asobie, said despite all the inroads made by the country to expand operations in the oil industry, it had not been able to get operators to tell the truth about the actual oil volumes produced.

“After 58 years of producing oil, Nigeria does not know how much was being produced. It is regrettable that we have not been able to get oil companies to tell Nigerians exactly what they produce. The sector is shrouded in secrecy,” he said.

I find it quite surprising the that the government wouldn't be able to strong-arm this information from oil companies who depend entirely on the continued legitimacy of their concessions. Have they tried?

Kenyan farmers raise money for British theater

China buying Kansas was pretty good, but this video on Kenyan farmers raise money for British theater is also outstanding. "... and the wearing of ruffs" and "... rebuilding our houses with cravats" were my personal favorites.

Via Duncan Green and Chris Blattman.

North American shale: game-changer?

Attractive graphic of shale gas reserves in North America, along with an article on where gas from the massive Marcellus Shale will go, who is building new pipelines, the importance of transparency and proactive communication on the environmental impact of fraccing, and how the Marcellus Shale could change the game:

Van Atta said that ideally it will not be a zero-sum game for the natural gas industry... "Marcellus will be a true game changer if its vast apparent wealth can be leveraged into much higher penetration of natural gas in the overall energy mix in the Northeast market. To accomplish that may require a unity of purpose beyond that which the fragmented natural gas industry can produce."

Implications of agricultural elasticities

Michael Roberts summarizes one of his latest projects in three minutes (speaking time). For those not enamored of econometrics (e.g. why he uses weather as an instrument), his conclusion is:

Globally the demand elasticity for these crops combined is about 0.05 and the supply elasticity is about 0.10, perhaps a little larger. Both of these elasticities are far greater than they would be if estimated using traditional econometric methods that do not account for the joint-dependency of prices on supply and demand. If applied to US ethanol policy, they suggest US ethanol subsidies have caused about a 30% increase in prices for these key commodities and about a 35 million acre expansion of cropland worldwide. That's about the size of North Carolina, the state where I live.

A 30% price increase from biofuels alone is quite substantial. If I recall correctly, IFPRI estimated that biofuels accounted for 30% of the total recent rise in food prices (note the distinction from the absolute 30% implied by Michael's work). Other estimates varied widely, going up to 75% of the total rise in an unreleased but leaked World Bank report that caused quite a bit of controversy.

This also reminds me how inelastic demand makes farmers oppose climate change legislation.

China to buy Kansas

And the award for best April Fool’s I’ve seen goes to... Chris Clayton of DTN:

In a move to help alleviate U.S. debt obligations, China announced a formal offer has been made to the Obama administration to buy Kansas for $2 trillion.

Sources within the administration say negotiations have been going on for weeks with Chinese officials first proposing to buy Iowa. But politically Obama was unwilling to sacrifice the state where he won his first presidential battle in early 2008. Obama was, however, encouraged to part with Kansas even though his mother was from the Sunflower state. A 16-point loss in Kansas in the 2008 general election, coupled with the Kansas Jayhawks and Kansas State Wildcats screwing up the president's NCAA brackets made Kansas a more attractive parcel to sell.

Chinese officials cited Kansas' agricultural output in staples such as wheat and beef, as well as the vast expanse of largely unpopulated and unsettled land.

"This is a (expletive) big deal," Biden said. "Not only can we balance the budget, but we can get Pat Roberts out of the Senate too."

Bravo. The comments are also good.