The importance of the liberal arts

... the usual suspect scientific and technical conundrums which the techdysiasts would have us address are defined and constrained far more by their social and political dimensions than by the hard science issues at their core. Fixing climate change, poverty, or even global financial regulation is not merely a problem of finding the correct solution to a thorny technical problem. These big issues are big because they entail questions of philosophy, ideology, justice, the proper form of society, and even culture. The underlying science is almost trivial compared to the value questions at stake.

That's the Epicurean Dealmaker.

I am grateful for, among many other things, a broad formal education, as well as the unprecedented opportunity to continue learning through the blogosphere. Happy Thanksgiving.

Unexpected side-effects of floods

All of the spiders climb into trees (see #8).

Perfectly logical and yet utterly unanticipated; I feel like there is an allegory and/or warning related to systemic financial risk in there somewhere.

Update: It happens in Australia too:

Learning from comments

Great example of the value of rapid collective dialogue in a comments section, started by Felix Salmon's post on vehicle-to-grid:

This is a fantastic idea, and it’s a no-brainer, really, that all electric cars should have the ability to power the grid, rather than just drawing power from it. The number and size of power plants is a function of peak electricity demand; if electric-car owners collectively can help meet peak demand, then that means we need fewer power plants. And, the revenue from selling that electricity would help offset the extra cost of buying an electric car in the first place.

The comments point out two things. First, constant charging and discharging of a car battery would significantly decrease its useful life. Second (by yours truly), in most states, regulations prevent utilities from charging residential customers different prices for electricity at different times of day, so the financial benefits or charging off-peak wouldn’t be be captured by users.

Then Dan Ferber, the author of the original article that was the subject of Felix's original post, clarifies that the vehicle-grid interaction is mainly frequency regulation, not bulk power - very helpful!

The problem with comments, though, is that people lose interest or stop checking. So my final question - "if the main vehicle-to-grid interaction is frequency regulation, rather than bulk power transfer, then it’s unlikely to lead to the type of load-shifting and peak-shaving that Felix suggests, correct?" - has, as of now, gone unanswered.

The Rise of the North, data center edition

Facebook, the latest tech company to take the polar plunge, announced this week that it will build a data center just south of the Arctic Circle in Lulea, Sweden, where the average low in January is 3 degrees Fahrenheit.

If you had told me this fact and asked me the rationale, I would have said something about cheap electricity due to some combination of abundant hydro power and cheap Norwegian gas, but the real reason is more elegant.

Drawn by the promise of lower electricity costs, a growing number of tech companies are harnessing the region’s abundant cold air to cool their servers, cutting expensive air-conditioning out of the equation.

So the electricity savings, which Gartner believes could reach “tens of millions, if not hundreds of millions [of dollars], of savings per year”, are from quantity as well as (more than?) price. Who knew cold air was so valuable?

Hat tip MR, for both this news and an earlier pointer to The World in 2050, which I apparently never blogged about, but was fun to read and also put considerable meat on the bones of the case for why northern countries will rise in importance in the coming decades (better weather, increased agricultural productivity, abundant water, wealthy countries with good institutions, etc.).

Electric power supply-demand is nuanced

This post over at Marginal Revolution is a great example of why industry-specific knowledge is important, and why extrapolating from general economic principles can be dangerous.

Can you discuss whether [energy efficiency via smarter thermostats] can possibly work? As I understand the power industry, such a high percentage of the costs are upfront (with nuclear plants in particular, but with carbon burning plants as well) and the marginal price of producing energy (up to plant capacity) is so low, that falling demand would mostly cause plants to cut prices until they were again operating at capacity.

So “saving” energy at the consumer level won’t really reduce total energy consumption or gas emission.

As people familiar with the electric power industry already know, baseload power (e.g. nuclear) has low marginal cost but is also not supplying marginal supply - that role is played in most regions by gas turbines (and in some places by older coal or oil), which sell pretty much at marginal cost. A quick way to check this is by multiplying the price of natural gas by the heat rate of the marginal gas plant, and comparing that to the price per MWh of electricity - they will usually be pretty close.

The best commenters do a good job of explaining this. Ignore the first half dozen or so, Alfred and valuethinker are strong.

For what it's worth, U.S. industrial and commercial load is still below 2007 levels; energy efficiency standards from EPAct and EISA may be one factor, although obviously very difficult to parse out the effect of energy efficiency from other drivers like, say, the economy.

Food prices and riots keep company

Via Michael Roberts, food prices cause are highly correlated with riots.

Cool-looking chart and good hypothesis to pursue further, although I am always suspicious of people who say things that sound suspiciously like dumb linear extrapolations.

Today, the food price index remains above the threshold but the long term trend is still below. But it is rising. Lagi and co say that if the trend continues, the index is likely to cross the threshold in August 2013.

You, too, can innovate

13-year-old makes solar power breakthrough by harnessing the Fibonacci sequence (and files for U.S. patent).

Apologies for the light posting, which will likely continue - various professional demands on my time have increased, and I'm working to keep a certain amount of personal time sacrosanct.

On droughts

1. The drought has missed the corn belt, but the heat waves haven't (making Michael Roberts bullish on food prices).

2. You know a drought is bad when the camels are dying.

Ahmed Mohammad, a Somali camel herdsman, told BBC: "It is a terrible sign when camels start dying because when they start to die, then what chance have sheep, goats and cattle?"

Tyler Cowen's next book on food!

I saw Tyler Cowen live in DC tonight - a fun experience for those of you who are familiar with his written word. Most of the discussion focused on The Great Stagnation (a.k.a. TGS), but an exciting tidbit was that his next book will be on food and food economics. Especially given that agriculture recently surpassed climate change as my most-posted-on topic, I for one can't wait.

Volatility cuts both ways

Lest we be lulled into the assumption that commodity prices are on a one-way trip to infinity:

In just the last couple weeks corn prices have fallen from nearly $8/bushel to about $6.15. All of that is due to a rather small amount of information about the progress of this year's crop. Yes, there were reports of flooding and late plantings, but that kind of thing rarely has much effect on the overall crop production. The late plantings just set up even more volatility going forward, since the plants will be susceptible to extreme heat in July and August.

That's Michael Roberts, who concludes that

this volatility does provide a teachable moment: it shows how sensitive prices are to small quantity changes.

True, but I think we are collectively more attuned to the downside factors (climate change, growing demand) than the potential upsides (e.g., a sudden removal of biofuels mandates, or a restoration over several years of typical buffer stock levels). A 25% fall in a matter of weeks is huge, and a reminder that high food prices and food price volatility are not the same thing (a huge pet peeve of mine).

This can also be true for seemingly exhaustible physical resources, as yesterday's announced discovery of "vast deposits of rare earth metals" on small plots of Pacific Ocean seabed show us.

estimated rare earths contained in the deposits amounted to 80 to 100 billion metric tons, compared to global reserves currently confirmed by the U.S. Geological Survey of just 110 million tonnes that have been found mainly in China, Russia and other former Soviet countries, and the United States.

(don't sleep on the B vs. M - that is 800-1,000x current confirmed reserves)

I am pondering a longer post on what this means for commodities as an asset class (namely that over decades, they will not provide attractive real returns, although they may have some value as a hedge against inflation).

Third largest ag exporter is... the Netherlands?

Take the case of the Netherlands. Unbeknown to most people, it is world’s third largest agricultural exporter, despite having little land (it has the world’s fifth highest population density). This has been possible because the Dutch have “industrialised” agriculture by, for example, deploying hydroponic agriculture (growing plants in water) that uses computer-controlled feeding of high-quality chemicals—something that would not have been possible if the Netherlands did not have some of the world’s most advanced chemical and electronics industries.

Via Chang via Yglesias via MR. Note that the data is from 2003-2004 (I was suspicious because Brazil didn't breach the top ten). But nevertheless an impressive feat. Although it's worth mentioning that a large $ trade surplus in agriculture is not the same thing as being self-sufficient - the Netherlands is as exposed to rising staple crop prices as any other country (albeit with a high level of income, so consumers don't feel the hurt nearly as much).

Yucca mountain revival and Fukushima design specs

It seems that science may prove more enduring than politics in the case of Yucca Mountain, which was given up for dead by many two years ago when Harry Reid apparently made it his price to support Obama's legislative efforts. A recent review calls into question the decision, in particular the conduct of NRC chairman Gregory Jaczko (former science advisor to, coincidentally, Harry Reid). My views on this are pretty clear and it's encouraging to see the disappointing decision receive this scrutiny.

In related news, I found it interesting (from this CSIS report on nuclear power after Fukushima) that the Fukushima reactors did not fail their design specifications:

First, the nuclear facility itself seems to have withstood a record 9.0 earthquake without critical damage because all of the reactors struck by the earthquake shut down as intended. The March 11 earthquake exceeded the design criteria and reinforces a lesson learned from an earthquake that damaged the Kashiwazaki-Kariwa reactors several years earlier—these facilities are very robust. A second lesson is that the facility was vulnerable to compromise from damage to external elements of the plant brought about by a tsunami that was 150 percent larger than the design criteria.

Little comfort after a full meltdown of three different cores, but at least interesting in diagnosing the root cause of the problem and planning for the future.

P.S. The fact that that was what jumped out at me makes me wonder if I should be driving more consistently for higher-level messages, rather than interesting factoids.

PUMA's EP&L

As you may have heard, apparel company PUMA has recently published the world's first EP&L (environmental profit and loss) statement. It is a modest first step in a very neat direction. For example, it's not surprising that

The analyses have shown that the biggest environmental impacts in the value chain occur, not through PUMA’s core operations but at the level of its Tier 4 suppliers, where raw materials are derived from natural resources, such as the cultivation and harvesting of cotton, cattle ranching for leather, and natural rubber production. [36% of GHG emissions and 52% of water]

... but nevertheless a meaningful step to have it quantified, agreed upon and audited. The report notes that there are real risk management benefits in terms of understanding exposures, quite aside from any sustainability benefits. Worth perusing, and hopefully we will see more of this from PUMA (stage 2 plans to include social impact, and stage 3 to include broader economic impact) and from other companies as well.

NYTimes weekend round-up

I don't often read the full NYTimes, but I happened to this Sunday, and since I haven't posted in over a month, and it's almost the end of June, and my blogging progress seems eerily paused at 666 posts and 7,777 hits, I figured I'd throw out a few links with brief commentary:

• Insiders Sound Alarm Amid Natural Gas Rush: an interesting article seriously examining the claim that shale gas isn't profitable and is a big bubble. There's certainly some truth to that idea that many shale gas investments aren't making very good returns at $4.30/mmbtu gas; that said, the article would have really benefitted from some actual numbers (even ranges) comparing production costs to current and potential future gas prices. Without those, it's a qualitative discussion of a problem with a largely knowable quantitative answer.
  
  The one thing I did find intriguing (and again, would love to see real numbers on) is the steep decline in productivity of shale gas wells over the first few years. I would assume that since the technology is not new, this performance has been built into business cases for individual wells, but you never know...
  
  There's also a fundamental difference between a gas "bubble" (if there is one) and the typical bubble (e.g. internet) in media parlance, which is that North American gas prices have already crashed. This article would be analogous to calling the internet a bubble in 2003, not 1999, and that limits the usefulness of the analogy.


• Chevy Volt and Future of Electric Cars: A feel-good article from Joe Nocera after he test-drives a Chevy Volt; made me want to try one too. The “it’s like playing a video game that is constantly giving you back your score” comment particularly resonated with me. The lack of that type of feedback is a common motif across consumer energy usage (think about the current opacity of household electric power) and a thematic area for substantial change and impact.


• Power Drain From Cable Boxes: Striking; I had no idea that "some typical home entertainment configurations eating more power than a new refrigerator and even some central air-conditioning systems." Once again, greater feedback in home energy consumption could help move the needle on consumer behavior here.


• Ethanol Production Wastes Corn: Steve Rattner is right, but has nothing new to say

6/30 addendum: A colleague told me that Chevy loses $18,000 per Volt it sells. So we are still a ways away from the economic tipping point.

Great news for cows

Rinderpest, a cattle disease that for centuries felled herds in Europe, Africa and Asia and caused periodic human famine, has been eradicated, veterinary epidemiologists announced this week.

Eradication is the Holy Grail of disease prevention and has been successful only once before. Smallpox, an equally devastating human scourge, was eradicated in 1980, proving it is possible to stamp out a microbe across the entire planet.

I always wonder how they prove eradication beyond a reasonable doubt. But nevertheless, a huge triumph. I spent some time last year with some folks who were instrumental in beginning this campaign back in the late 1980s/early 1990s - here is to them and their hard work over two decades.

Germany to phase out nuclear by 2022

This isn't the first time they've said this (the last was before the commodity boom), but

Germany will shut down all its nuclear plants by 2022, and eight reactors shut down after Japan's nuclear disaster in March won't be reactivated, the government announced Monday.

I'm generally bullish on nuclear power compared to other power sources (especially those which are currently baseload capable), so I'm sad to see this. And as a colleague of mine noted, the Russians must be grinning with glee that their geopolitical leverage and economic profits from natural gas will return with a vengeance.

Finite room for construction in China

China's explosive demand will finally drop from its stratospheric level, either because China's economic development falters or because China is finally totally covered over in cement.

That is Rick Bookstaber, a deeply thoughtful blogger on financial markets, in response to Jeremy Grantham's newsletter on "the mother of all paradigm shifts" (i.e., "Days of Abundant Resources and Falling Prices Are Over Forever"), which excited the likes of Cowen and Krugman.

Like Rick I am in the less apocalyptic camp, although for much prosaic reasons (he believes that eventually our resource consumption will decrease as we increasingly lead virtual lives and turn away from material consumption). As Tyler Cowen says, China cannot continue to invest 50% of its GDP forever. There is a long way to go for the world to catch up to rich-world consumption levels, but it also won't happen all at once (apply an optimistic GDP growth rate to your favorite sub-Saharan African country and you'll be shocked at how long it will take to get where China's income is today, even if everything goes well). Resource demand may not be curbed any time soon, but ultimately I have more faith in the power of prices and markets to change behavior than the doomsayers seem to.

A few responses to Prince Charles

I just read the transcript of Prince Charles' speech on sustainable agriculture in DC last week. There are a lot of good ideas, and a few areas in which I think more can be said.

Ag subsidies: I believe there’s a strong consensus across many individual issues and disciplines that American and European agricultural subsidies are wasteful and counter-productive. The challenge is a political one – there are about 20 farm states, and it’s very difficult to get things done legislatively in other areas (health care, immigration, climate change, you pick) without the support of at least some of that bipartisan group of 40 farm senators. It’s not a rich-world-only issue, too – here’s a year-old WSJ article (subscription required) on how difficult it has been to repeal fertilizer subsidies in India despite 40 years of trying, and recent fertilizer subsidies in Malawi have become a darling case study of country-led agricultural development proponents, despite criticism by the World Bank and others.

Scale: I think Prince Charles is too blasé about dismissing the benefits of scale for cost and efficiency of agricultural production. Cost is important not as much to you and me, but definitely to the urban slum-dweller in Cairo or Mumbai who spends 2/3 of his or her income on food. And efficiency is important for the environment – less yield per hectare of land means more land under cultivation, and since there’s not much unused cropland around the world, this results in degradation and cultivation of ecologically sensitive areas like the Amazon, the Sahel, Indonesia’s peat swamps, etc. If we can replicate current yields at scale using organic methods, that would be great, but the burden of proof is still on those who claim this can be done.

Local production: Another attractive idea that I think is easier to apply to ourselves (living in not only the richest but also one of the most agriculturally productive countries), but runs into difficulty when generalized across the world. There is a lot of upside in smallholder productivity in Sub-Saharan Africa, but in other regions that import food today – I’m thinking of mainly the Middle East and China – it would be very difficult for them to produce more food domestically without exactly the kind of unsustainable drawing down of natural capital that Prince Charles rightly warns against. If we want the most holistic and least naturally destructive agricultural system at a global level, it has to include a significant component of trade between the most fertile parts of the world and the less fertile but more populated parts (unfortunately the two don’t match).
To close, a photo I took from an airplane of pivot-irrigated wheat in the middle of the Egyptian desert, with water drawn unsustainably from the underlying aquifer (we do this in the American West, too). We Americans are very fortunate for the fertility as well as the economic prosperity of our country, and not all countries have the agro-ecological potential to feed themselves in a sustainable way.

Who funds mining in Afghanistan?

When he landed in Baghdad for a meeting with Iraq's oil minister, the minister asked, "What are you here for?"

"I'm here to make five new Iraqi billionaires every year for the next 10 years," Hannam said with a twinkle in his eyes. It was an effective icebreaker...

Remember Afghanistan's $1 trillion in mineral reserves? Meet the JP Morgan investment banker who is catalyzing financing for their development. Not very critical, but pretty interesting.

Feeding the world just got harder

Whoops, that would be 10 billion people, not 9. Africa is the big driver. I suspect this number could still move a lot. Economic growth will be a key determinant.

Whoa

So apparently crude fell ~10% today. I've heard poor economic data, OPEC raising output limits and even "sudden realization of the impact of CNG and EVs" (not joking), but that is still a whopper of a one-day move.

Refining margins and crude price

Linking to a comment exchange with Geoff Styles in response to his recent post on the oil earnings backlash. My initial reaction was that it seemed like Geoff was implying that refining businesses are structurally short crude and therefore oil majors are not as long oil as we think they are.

I agree with you and Robert that the majors are price takers, and accusations of "gouging" are generally misguided, but it's misleading to imply that they are not way long crude price. High prices are great for upstream and generally passed through by refining (unless there's some evidence that refining margins shrink when crude prices rise?), so on net a clear plus for the integrated majors.

In brief, I ran a few quick correlations based on this refinery margin data, and came out with R squareds of approximately zero. This would indicate no consistent relationship (i.e. full price pass-through over time), although I recognize that the analysis is crude and I'd welcome any improvements or corrections.

Also keep in mind that while refining margins don't rise and fall with crude prices, it's a highly cyclical industry, and through-cycle returns are pretty thin. Not a place I'd want to be sinking a lot of capital right now, especially with lots of NOCs building refinery capacity for reasons often more related to jobs than pure financial returns.

Most shipped bulk commodities

One other factoid I found interesting in Prime Movers of Globalization was the relative volumes of the most shipped bulk commodities (besides crude and petroleum products, which dwarf them).

• iron ore, ~800 million tons


• coal, ~800 million tons


• grain (I think including oilseeds as well), ~300 million tons


• bauxite and alumina, ~80 million tons


• phosphates, ~30 million tons
  

This might only be interesting for commodity nerds, but I thought the drop-off was impressive.

Book review: Starved for Science

Along with Prime Movers of Globalization, I bought and read Starved for Science: How Biotechnology Is Being Kept Out of Africa after Tyler Cowen recommended it (although a colleague also mentioned it earlier the same day – the two together were motive enough for me). The thesis is that the under-penetration of GMO crops in Africa is a travesty, ultimately caused by the post-colonial export of rich-country attitudes from Europe to Africa’s urban political elites, who are then reluctant to take the risk of allowing GMOs, despite the tremendous potential benefits.

Author Robert Paarlberg is aggressive, even polemical, but one can sense his deep passion and anger on the topic, and his ample supporting evidence is hard to argue with. A few of his strong points are that proving the absence of risk is impossible (and in practice a selectively enforced double standard in regulation); rich-country citizens do not object to pharmaceuticals produced through GMO pathways, perhaps because they provide tangible benefits to the majority of the population, whereas higher crop yields do not; and that the safety standards applied to GMOs in the African countries that don’t allow them (all but South Africa) wildly exceed the level of other food safety standards in those countries (something like 700,000 people are estimated to die from food poisoning in Africa every year, and millions are affected by hunger and malnutrition).

Worth a read to hear an uncompromising and well-informed exposition of the pro-GMO position; although I believe there are multiple, interdependent paths to improve smallholder farmer productivity, I found myself swayed by his arguments. I would be interested to hear a critical rebuttal from the other side, though.

Book review: Prime Movers of Globalization

Prime Movers of Globalization: The History and Impact of Diesel Engines and Gas Turbines by Vaclav Smil (who I love) was the first of two books recommended by Tyler Cowen that I devoured in the past ten days (only available in hard copy, so great for plane take-off and landing when the Kindle is forbidden). The book is technical but fascinating, and recommended; the rest of this post will be more of an attempt at synthesis for intellectual diary purposes rather than a critical review.

• A very small number of prime movers have been used throughout human history: human and animal power since the Agricultural Revolution, sail, waterwheels and later windmills by the Middle Ages; and the steam turbine, the gasoline engine, the diesel engine and the gas turbine in the Industrial Age.


• Diesel engines and gas turbines (a.k.a. jet engines) are markedly more efficient than the next-best technology for the critical-for-globalization applications of large-scale shipping and flight, respectively. Despite approaching technological asymptotes (the basic designs of Rudolf Diesel, Frank Whittle and Hans-Joachim Pabst von Ohain are still recognizable, and conversion of energy efficiency is near theoretical maxima), they’ve enjoyed “prime mover primacy” for half a century or more, and it’s not even close.


• Nor are any likely replacements on the horizon, so we can predict with remarkable confidence that they will remain dominant for another half century or more. Their use will depend on fuel prices, so in a peak oil scenario it could diminish, but there’s not an alternative way to ship petroleum, ore, grains, and manufactured products from Brazil to China to America, etc.


• Biofuels will never dent fossil fuel consumption by these prime movers. Biodiesel from palm oil has ~2x the land intensity of corn ethanol and ~4x that of sugarcane ethanol, and biodiesel from temperate crops is almost an order of magnitude worse. Supplying marine diesel demand from palm oil would require 1/3 of the land currently under cultivation globally for agriculture. Smil believes algae will never scale economically, although the supporting evidence for this is less clear.


• Rudolf Diesel was a bit of a socialist and hoped the diesel engine would enable small industry to compete with large; as he grappled with late in his life, it instead enabled industry and trade on a hitherto unimagined scale, and whether the world is a happier place for this is hard to say.

Fragiler-than-it-seems-Brazil, continued

I've worried before about whether Brazil's economic and political progress would falter if commodity prices swooned. Via MR, this FT article not only puts a number on that...

Plug in 2005 commodity prices, for example, and Brazil’s $23bn trade surplus would become a $20bn deficit.

... it also calls out another worrisome trend, the explosion of consumer leverage.

Bank credit is now growing at a 20 per cent annual clip.

That has given Brazil’s economy an appearance of strength, but also risked stretching it thin. Typically, Brazilians now spend a quarter of disposable income on debt payments. At the height of the US credit boom, by contrast, American households spent about 15 per cent.

With the real now at 1.57 vs. the dollar - higher than it ever got in 2008 - I am pondering whether now is the time to trim my Brazil investment exposure...

The line between trading and manipulation

Ah, the publicity that comes from an IPO...

This is OK and unsurprising...

Glencore made a speculative bet on rising wheat and corn prices in the early stages of last summer’s Russian drought, the world’s largest commodity trader has revealed ahead of its initial public offering that will value the company at $60bn.

... but this is pretty sketchy:

As it bet on rising prices, senior traders at the Swiss-based company publicly urged Russia to impose a grain export ban... On August 3, Yury Ognev, head of Glencore’s Russian grain unit, encouraged Moscow to ban wheat exports, saying: “From our point of view the government has all the reasons to stop all exports.” His deputy made similar comments. At the time Glencore distanced itself from the comments, saying they represented Mr Ognev’s personal views. Russia imposed the ban on August 5, sending the price of the cereal more than 15 per cent higher in two days.

As longtime readers know, I generally believe and document that speculation in commodity markets does more good than ill, but this type of lobbying for trade-reducing, volatility and uncertainty-enhancing measures makes me very uncomfortable, and will never be popular.

Resource primacy in African foreign investment

Interesting graphic on FDI in Africa from Afrographique (larger version at link):

Via Rachel Strohm, with the punch line:

Investment levels seem strongly correlated with natural resources (no surprise there), but don’t appear to have much relation to the ease of doing business in a country. Nigeria, Sudan, Angola, and the Republic of Congo are all major oil exporters, even though of the 46 African countries the World Bank included in its 2011 Doing Business rankings*, they were respectively rated #17, 25, 31 and 40. Chad, at #46, had more investment than Botswana at #3. And Somalia, a failed state that didn’t even make it into the Doing Business rankings, had only a touch less investment than vaunted reformer Rwanda. Fascinating stuff.

Could U.S.-Brazil relations watershed survive commodity crash?

A very high percentage of "Event X was a true watershed" articles turn out to be crap, but this one on U.S.-Brazil relations (via MR) is pretty good. (Maybe because that narrative device is totally extraneous - this change has been coming for years and Obama's visit didn't actually change that much). Worth reading in full, but the punch line is:

... the major strategic interests of the US and Brazil are so closely aligned that cooperation between the two countries will be one of the building blocks of the new century... [Brazil’s] its instinct for “order and progress” (the slogan appears on its flag) dovetails very closely with what the United States wants to see in the world.

I agree except for a nagging doubt - with Brazil's economic ascendancy so dependent on commodities, how much of this unravels if resource scarcity isn't all it's cracked up to be and prices crash? After all, we've heard the same arguments before (ahem Paul Ehrlich).

Let me back up a bit to build up the logic. Brazil has historically been commodity-dependent...

In the 19th century Brazil was part of Britain’s ‘informal empire’; Britain was the dominant foreign investor in the country and Britain controlled the markets for the primary commodities (sugar, rubber, cotton, coffee) whose falling and rising prices set the tempo for Brazil’s growth. But the system seemed rigged in Britain’s favor; Brazil could never escape its role as a commodity producer — a hewer of wood and a drawer of water in the international community. Brazil did the backbreaking labor; Britain grew rich.

... but isn't it still? I don't have the stats on hand about how much soy, iron ore, etc. etc. Brazil exports, but it's a lot; it's not clear to me that the economy has fundamentally transformed, rather than simply ridden the latest commodity wave on the way up.

The premise continues that Brazil has demonstrated a successful new model...

Lula’s Brazil stuck up for Venezuela at international gatherings and danced with it at parties. But all the while, Lula’s Brazil was destroying the political logic of the Bolivareans by demonstrating that a pluralistic democracy integrated into the global market can do more for the poor than incompetent populist blowhards. Chavez talked; Lula delivered

(again, on the back of a commodity boom...)

What that means is that Brazilians, even those on the left like former president Lula, are now less inclined to think that Brazil needs to overturn the global economic system.

I have lived in Brazil and I agree with this sentiment, and that "Brazilians have an immense capacity for hard and focused work." But in a world with lower commodity prices (and, again, I don't think this is the most likely scenario, but remember it's been less than 30 months since crude oil was in the low $30s), how will the Brazilian economy hold up, and if it falters, won't that popular support as well?

This is very much a preliminary perspective and I would welcome debate and pushback on it.

Ethanol fact(?) of the day

I hadn't heard this before, but a colleague told me today that 2/3 of the corn that goes into ethanol comes out in a form that can be used as animal feed (probably DDGS). If that's true, if we use 30% of our corn crop for ethanol it's more like 10% out of the food system, etc.

Issues with Howarth paper

Open season has opened on Robert Howarth's paper claiming that shale gas emits more GHGs than burning coal; I like CFR's Michael Levi's take:

Howarth’s basic question is an important one: what happens to the claimed emissions benefits of natural gas once you include the methane leaked in its production and transport? Alas, his analysis is based on extremely weak data, and also has a severe methodological flaw (plus some other questionable decisions), all of which means that his bottom line conclusions shouldn’t carry weight. But someone else, with better data and more careful calculations, ought to address this important set of questions that he raises properly.

He cites four main issues; the first three are:

First, the data for leakage from well completions and pipelines, which is where he’s finding most of his methane leaks, is really bad.

Second, Howarth’s gas-to-coal comparisons are all done on a per energy unit basis... Here’s the thing: modern gas power generation technology is a lot more efficient than modern coal generation, so a gigajoule of gas produces a lot more electricity than a gigajoule of coal. The per kWh comparison is the correct one, but Howarth doesn’t do it. This is an unforgivable methodological flaw; correcting for it strongly tilts Howarth’s calculations back toward gas, even if you accept everything else he says.

Third, the problems with gas that Howarth flags have cheap technological fixes (green well completion techniques, better pipeline care), though there may be institutional barriers to implementing them. If we scale up gas and realize we have an emissions problem, there are things we can do. The only technological fix for coal, in contrast, is CCS, which isn’t commercial yet; if we decide we want to fix our coal problem, it’s not clear we have any options.

The fourth is around the time horizon used - a 20-year horizon makes methane look worse than a 100-year horizon, because it decays much faster than CO2. This one is really more of a judgment call than a serious flaw in the paper (at least it is transparent). But well said, Michael Levi - you've earned your RSS feed entry into my closely guarded Google Reader.

What crop supply response looks like

Stealing the link and title wholesale from Michael Roberts:

When prices for corn and soybeans surged last fall, Bill Hammitt, a farmer in the fertile hill country of western Iowa, began to see the bulldozers come out, clearing steep hillsides of trees and pastureland to make way for more acres of the state’s staple crops. Now, as spring planting begins, with the chance of drenching rains, Mr. Hammitt worries that such steep ground is at high risk for soil erosion — a farmland scourge that feels as distant to most Americans as tales of the Dust Bowl and Woody Guthrie ballads.

Study says fracking emits GHGs

More ammunition for those who oppose the recent explosion of shale gas exploration and production (e.g. local environmentalists, coal companies):

Cornell University professors will soon publish research that concludes natural gas produced with a drilling method called “hydraulic fracturing” contributes to global warming as much as coal, or even more.

The study concludes that shale gas developed through fracking carries a higher greenhouse gas footprint because the “fugitive” methane emissions at the fracking sites are greater than releases from conventional gas wells.

I'm not really in a position to evaluate the credibility of the study, although one might read into the fact that industry groups are pushing back on the study's assumptions about the GHG potency of methane (the range is fairly well-established), whereas I would have thought that the quality of measurement of "fugitive methane emissions" would have been much more suspect.

Commodity dependence of Brazil

The Globalizer, via MR:

When Lula won the presidency in 2002, Brazil’s main trading partners were the United States (25.5%), the Netherlands (5.3%), Germany (4.2%) and China (4.2%).

Over the eight years, the U.S. share collapsed, while the Chinese share more than tripled. By 2009, Brazil’s main trading partners were China (13.2%), the United States (9.6%), Argentina (7.8%) and the Netherlands (5.0%).

The writing was on the wall. As long as demand in these two nations continued for commodities, Brazil will continue to grow — but if demand were to fall abruptly, the situation could get difficult.

Brazil is currently a darling of economic and political progress, but lots (most? >100%?) of the underlying growth has been driven by commodity exports, and that story has ended badly before.

This article on Lula, also via MR, is also worth reading - it starts:

... in democratic conditions, to be more popular at the close than at the outset of a prolonged period in office is rare. Rarer still – indeed, virtually unheard of – is for such popularity to reflect, not appeasement or moderation, but a radicalisation in government. Today, there is only one ruler in the world who can claim this achievement, the former worker who in January stepped down as president of Brazil, enjoying the approval of 80 per cent of its citizens. By any criterion, Luiz Inácio da Silva is the most successful politician of his time.

Cute analogy

Aluminum is to energy as grain is to water.

(Half courtesy of Laurence Smith's The World in 2050, via MR, and half courtesy of a conversation with a colleague.)

Saudi budget breakeven now >$100/bbl

Via The Oil and the Glory (which I've started to read, but really needs to get an RSS feed, because my tolerance for random e-mails that disrupt my carefully metered information diet is limited), the Institute of International Finance has calculated that after taking into account the $130 billion in "largesse" that Saudi King Abdullah has announced to preempt potential unrest, the oil price at which the Saudi budget breaks even has risen from $68 to $88/bbl. That is a scarily high number, and I don't know to what extent that factors in the volume volatility that comes from being OPEC's (and the world's) swing producer. There is clearly embedded risk and uncertainty, even to that threshold.

Current U.S. nuclear waste storage strategy

Speaking of strategies to store nuclear waste, here's an article on the current de facto U.S. government strategy: compensate nuclear operators for storing onsite, and double the expense by continually pursuing doomed litigation to avoid these payments. I think in a perfect world we could probably figure out something better.

Larry Summers, prophet of toxic waste

Two decades after the infamous Summers memo,

The U.S. is reportedly in talks with Mongolia about the country setting up an international repository for nuclear waste.

Via FP Passport, details (fairly speculative) here.

Like a few other Summers statements, the one on toxic waste (which he later asserted was sarcastic) is easily demonized, but upon further examination shouldn't be dismissed out of hand.

I find the nuclear waste storage debate in the U.S. intensely frustrating - it is on par with entitlement spending in the political challenges of doing the right thing in the face of short-term incentives that are much stronger and more visible than the long-term ones.

I also liked an idea from Stuart Brand's Whole Earth Discipline: rather than try to prove a storage site will be safe for 10,000 years, use the Iroquois seven generations rule, find somewhere it will be safe for 200 years, and see how far re-processing technology has evolved by then.

Heat, yields and prices: PPT version

Michael Roberts just posted a great agriculture presentation on his blog - take 5 minutes to flip through it. Not only is it a good synthesis of some meaningful content, it's very easy to follow (and as a consultant, a.k.a. professional PowerPointeer, I have high standards for these things).

Not to be deterred...

... China is going ahead with plans to build a fourth-generation nuclear reactor.

“There are differences between the Japanese and Chinese reactors,” Cui said. “Japan’s Fukushima plant was using old technology while Chinese reactors are more advanced.”

Given the amount of potential in new reactor designs, and the hurdle of technological lock-in, great to see someone boldly taking the lead post-Fukushima.

Neat blue tech ventures

Hydrovolts, a start-up company in Seattle, has developed a portable turbine that generates energy from water flowing in irrigation canals. BlackGold Biofuels, based in Philadelphia, takes fats, oils and grease out of wastewater to create biodiesel.

Via the NY Times, the rest of the article is OK, although I did like this quote to close:

In places like Singapore, “the word ‘wastewater’ doesn’t exist,” he said. “They call it ‘new water.’ They call their wastewater plants ‘water reclamation plants.’ And I think that’s an interesting shift in mentality.”

Web guide to radiation exposure

A colleague directed me to this online graphic, which aims to put different magnitudes of radiation exposure in context. While not taking anything away from the heroic efforts of the on-site engineers and technicians who are battling to prevent further meltdown, or how scary it must be to find radioactive iodine in your spinach, the (highly caveated) message seems to be that we're an order of magnitude or more from Chernobyl or any level of serious danger to populations beyond the immediate vicinity.

Prediction markets in nuclear disasters

Via MR, Intrade has Fukushima reaching Level 5 nuclear disaster status at 94%. Hard to tell how meaningful this is (volume looks tiny), but the people I know who know most believe that the media has been overly optimistic thus far, which is scary. For example:

A particular feature of the 40-year old General Electric Mark 1 Boiling Water Reactor model – such as the six reactors at the Fukushima site – is that each reactor has a separate spent-fuel pool. These sit near the top of each reactor and adjacent to it, so that cranes can remove spent fuel from the reactor and deposit it in a swimming-pool-like concrete structure near the top of the reactor vessel, inside each reactor building.

If the hydrogen explosions damaged those pools – or systems needed to keep them cool – they could become a big problem. Keeping spent-fuel pools cool is critical and could potentially be an even more severe problem than a reactor meltdown, some experts say. If water drains out, the spent fuel could produce a fire that would release vast amounts of radioactivity, nuclear experts and anti-nuclear activists warn.

Our thoughts and prayers are with the engineers who are battling to keep Fukushima's four damaged reactors from spiraling out of control, as well as the millions of people in Japan affected by the horrific quake and tsunami of last week.

Decoupling of oil price and renewables

Geoff Styles has a post titled "Will $100 oil help renewables?", in which he argues the counterintuitive answer that, "no, not that much." Worth reading in full, but since I like to practice synthesis:

Today, gas predominantly sets the marginal price of power generation, and gas prices have decoupled from oil due to abundant shale gas supply. Transport is minimally electrified, so renewable power cannot yet substitute oil in that sphere. And prices for commodity input often rise along with oil, increasing renewable costs (a.k.a. the "receding horizon").

The first, I totally agree with. The second is broadly speaking true, although paths like CNG, gas-to-liquids and coal-to-liquids become economically viable with high oil prices and could re-strengthen the link between transport and electric power (as could increasing EV penetration over the longer term). The third is directionally true, but not absolute (and not entirely causal). Many second-gen biofuels use waste inputs which are not otherwise traded, so higher oil prices are an unmitigated boon for them. The prices of silicon and corn are often correlated with crude, but probably more because of overall economic growth than because crude drives their price. It will be interesting to see if corn starts to price off of its value as ethanol, as it did back in 2008. Not good for food security, if it does.

Crowd-sourcing carbon pathways to 2050

I haven't tried it myself, but the new 2050 pathway calculator looks like a neat tool to stimulate reasonable public debate about climate trade-offs in the UK. Reminiscent of Chevron's Energyville, you input your choices for energy sources and see what the outcomes look like in 2050.

Via David MacKay, who also synthesizes the preferred pathways of eight expert panelists.

It's now open to the public to join in. In a couple more days, the opening panel will wrap up their conversation; it'll be interesting if they can achieve consensus on one or two pathways.

A promising experiment, and easily replicable in the U.S...

Coinflation

I vaguely remember when pennies became worth less than the copper they contained; via MR, the same condition has spread to the nickel and beyond:

US five cent coins contain over 7 cents worth of raw material as of this afternoon, mostly copper and of course, nickel. If there is inflation, the prices of metal will increase, and the coin will have 8, 9, 10 cents worth of metal. Pre-1965 dimes contain over $2.42 of metal today, while pre-1965 quarters have over $6 worth of metal.

I wonder what they did to dimes and quarters after 1965, and whether the same is in store for the nickel. (While the penny, of course, should just be abolished.)

Commodity price passthrough, cotton edition

Here are some excerpts of alarmist journalism from the NYT:

A package of Oscar Mayer cold cuts. A pair of Nine West boots. A Whirlpool washing machine.

By the fall, people will most likely be paying more for each of them, as rising prices hit most consumer goods...

After trying to keep retail prices flat or even lower during the recession, Jones says prices for its brands will climb 15 to 20 percent by autumn.

... and here is Michael Roberts appropriately skewering that alarmist journalism.

Yesterday the near month futures price of cotton closed at $1.83/lb. That's pretty high, more than double the price of just a year ago. Before this year, I'm not sure [nominal] cotton prices ever exceeded $1.20...

How much do these high prices matter for the prices we pay for clothes?

Not so much. Consider that there is about 0.6 lbs. of cotton in a typical man's shirt. So that $1/lb increase in cotton prices over the past year means it costs an extra 60 cents to make the Brooks Brothers shirt for which I paid $40. On sale.

That should sound pretty familiar to regular readers who have seen the same trick with food prices.

Passing off 15-20% price increases as cost-driven when they are demonstrably not (at least for raw inputs) seems pretty risky and short-sighted. I can't speak much to the rest of the cost structure, although we are not exactly in a tight labor market in the U.S. either.

Picture of the Day: World of Snow and Ice

Via Tyler Cowen. This picture is a few days old. A reminder of how naturally variable weather can be (and thus how hard things like climate change are to track).

Better energy storage?

Via Geoff Styles, a very intriguing idea: Windfuels, i.e. "storing wind power in gasoline."

Doty Windfuels has been working on a system called RFTS, or Renewable Fischer Tropsch Synthesis. The process looks to use off-peak excess wind energy to recycle CO2 into standard fuels that work seamlessly in the one billion cars and trucks on the road around the world. The chemistry is fundamentally simple and well understood.

Geoff doesn't seem all that enamored of the idea (put off in part, he admits, by the inventor's excessive negativity toward seemingly all other energy alternatives). I'm a bit more positive. There's a lot to be said for building almost entirely on proven technologies (in this case, chemical pathways; the only step not commercialized is reducing CO2 to CO). Even if the economics get worse as other energy storage technologies like CAES begin to compete up the price of off-peak electric power, it certainly wouldn't be a bad thing for there to be one more storage technology in the mix. And even if this specific idea doesn't bear fruit, it encourages further investigation of storing off-peak power as chemical energy (rather than mechanical, e.g. compressed air, or thermal, e.g. molten salt), an avenue I hadn't thought of much, and one which makes a lot of intuitive sense.

Watch the crush spread

Trying to chase down cause and effect in energy and resource markets can be frustrating - it is hard to follow a linear path to a new, coherent equilibrium. Take, for example, Geoff Styles' recent line of thought on the impact of Egyptian unrest on renewable energy.

... since the protests started on January 25, and without any actual disruption in oil deliveries, the price of UK Brent crude... has climbed by around $5 per barrel and now trades solidly above $100.

... [Ethanol and biodiesel] stand to gain if oil prices are driven up by factors that don't also push up the prices of the commodities from which they're made [emphasis mine].

That last bit is critical, and can't be taken for granted. In late 2008 ethanol was clearly the marginal use of corn and corn became priced off of its value in use as ethanol, squeezing margins despite high oil prices. If biofuels come back in a big way, this dynamic is likely to kick in (leading, incidentally, to even higher food prices, not good for most people).

Who are the real cotton speculators?

The WSJ (and the InterContinental Exchange, for that matter) always seem so quick to jump on financial speculators as the cause of price rises in any given commodity. Cotton prices more than doubled from Dec 2009 to Dec 2010, and have risen another 20% in 2011.

The top cotton-futures exchange is clamping down on speculation amid soaring demand that has sent prices up, threatening losses for mills, commodity merchants and apparel producers.

... Over the past year, the number of cotton contracts outstanding has grown by 21%, aided by an influx of hedge funds and small speculators.

ICE is apparently worried, although I can't tell how much of this is journalistic dramatization.

In response, ICE on Thursday said it will increase its scrutiny of big positions from now on.

"Increase its scrutiny," huh? A pretty threatening step!

A few maxims for analyzing commodity price spikes. First, always look to supply and demand first. Second, as Paul Krugman reminds us, speculators can't sustainably increase prices without actually withholding physical supply from the market, so if inventories aren't increasing, be skeptical.

What do we find in this case? First, the supply-demand picture looks tight, as the WSJ itself acknowledges:

Low global stocks of cotton and growing demand, particularly from China, have caused concerns of shortfall in the fiber this year. Rains in Pakistan and India, the second-biggest grower, and recent floods in Australia have fed fears of a shortage.

Second, there is actually cotton hoarding going on at scale - by cotton farmers in China (via Krugman). That is physical speculation (seems morally reasonable when it's farmers doing it, and incidentally not subject to ICE position limits). Finally, political uncertainty makes commodity markets jittery, and Egypt is a major cotton exporter. I think there might be something going on there.

P.S. Egypt is indeed a major cotton exporter, but I was surprised to learn that in 2004, Benin, Mali, Syria, and Greece exported comparable volumes, and FAPRI doesn't even track Egypt for cotton. Based on price per ton from FAOSTAT, Egyptians do the high-end stuff.

Chicken meat discrimination

Via John Durant, I never thought to wonder what happens to all the dark meat?

There's no question that Americans overwhelmingly prefer white chicken meat to dark. We eat chicken almost 10 times a month on average... but on less than two of those occasions do we choose chicken legs, thighs, or drumsticks.

The historical answer is: to Russia.

... in the 1980s, when chicken consumption in the United States increased at a phenomenal rate, the poultry industry needed new outlets to absorb the growing numbers of discarded legs.

It was most fortuitous, then, that the Soviet Union collapsed in 1991, resulting in the relaxation of trade restrictions that had hindered commerce with the formerly Communist state. U.S. chicken exporters, eager to exploit this fresh market, were able to underprice virtually all other animal protein produced in Russia, and American dark meat flooded the country. The chicken legs became so popular that locals endearingly nicknamed them "Bush legs," after President Bush Sr.

The complication now is that Russia seems determined to put up quality-related trade barriers (spurious, to hear American exporters tell the tale), so poultry producers need either a new market abroad, or a revolution in domestic tastes.

I've always preferred dark meat, so I'm raring to go to the grocery store and pick up some discounted bone-in chicken thighs. Although I wonder if they're apples-to-apples cheaper than the whole rotisserie chickens which are currently my favorite (and stupidly cheap compared to other types of meat).

Can't fix commodity prices with monetary policy

Paul Krugman has the more detailed version with his traditional lefty spin, but I'll go with Michael Roberts' synthesis...

Commodity price rises have little to do with monetary and currency policies in the US and around the world.

... and concise takeaway:

We'd be wise to think about possible collateral damage of higher commodity prices, since I suspect high prices could be here to stay. But this really should have no bearing on monetary policy.

It's pretty easy to verify with a quick look at oil prices over the past three years - the dollar didn't fall far enough to push crude up to $145/bbl, nor rise enough to push it back down to $40, nor fall again enough to get back to today's range of $90+.

Sure investment advice?

BlackRock CEO Larry Fink thinks agriculture and water will perform even better than energy:

"Go long agriculture and water and go to the beach," said Mr Fink, whose creation was now the biggest funds manager in the world, with $US3.5 trillion ($3.07 trillion) under management -- more than the GDP of Germany.

"Put those investments in the bottom drawer for 10 years. It's unlike anything else we have in the world."

Agriculture and water would even beat energy investments, he said.

"They're finding lots of ways to find new energy -- Israel's going to be an exporter of natural gas and I'm hearing there's more oil under Iraq than Saudi Arabia, for instance, although it's not secure."

This is probably right, although I have two caveats. First, it's hard to find a vehicle to use to go long on water. Second, I don't buy that it is so simple to prove that commodity prices will trend upward from their current level, as Matt Yglesias tries to do by saying that

Over the past ten years, catch-up growth in India, Brazil, and (especially) China has been the majority of world growth. Consequently, the rate of stuff-utilization is going up higher than the rate of stuff-production, meaning we’ll see rising commodity prices rather than falling ones.

There are real discontinuities in the supply and demand curves for commodities, and if it were that easy, none of us would have to work our day jobs.

I do agree with Yglesias, though, that the implications of rising commodity prices are decidedly not good for poor countries with stagnant growth. What's going down in Egypt looks very, very real.

P.S. From Felix Salmon, the good thing about Egypt is that the WEF fixed it.

Robot harvesting strawberries

It's been a while since I posted anything (since 2010, in fact). So, via Ben Casnocha, here's a YouTube video of a robot harvesting strawberries. Here's a short advocacy documentary on migrant workers harvesting strawberries in California (and our robot is nowhere near ready for those conditions). Here's the AP study demonstrating that unemployed Americans don't want this job (notwithstanding, of course, that white people like to pick their own fruit). And here's Parke Wilde on the agricultural economics of strawberries, or why weather matters and yet sob stories should be taken with a grain of salt.