Half Sigma

Solar energy: your tax dollars being used up

Somehow, the number-one most emailed story at the NY Times is about solar energy. I’m surprised that this made the top of the list. After all, it’s not about how a woman can train her husband like one trains a sea mammal.

The power they produce is still relatively expensive. Industry experts say the plant here produces power at a cost per kilowatt- hour of 15 to 20 cents. With a little more experience and some economies of scale, that could [or maybe could not?] fall to about 10 cents, according to a recent report by Emerging Energy Research, a consulting firm in Cambridge, Mass. Newly built coal-fired plants are expected to produce power at about 7 cents per kilowatt-hour or more if carbon is taxed.

The solar plants receive a federal tax subsidy, like other types of renewable energy, which makes the economics work for builders but also feeds skepticism about the technology’s long-term potential. “Unless there’s a subsidy involved, it doesn’t seem like a very attractive technology,” said Revis James, a renewables expert at the Electric Power Research Institute, a utility industry consortium.

So you see, you’re tax dollars are paying for this.

Furthermore, I’m sure the figure above doesn’t account for the fact that these plants require a backup plant using conventional fuels for when the sun isn’t shining. I used to live in Phoenix; even though it’s the desert, we did get cloudy days from time to time. The need for a backup plant significantly increases the costs of this technology.

This article also gets a basic fact of electricity production wrong:

As prices rise for fossil fuels and worries grow about their contribution to global warming, solar thermal plants are being viewed as a renewable power source with huge potential.

There’s a misconception about how fossil fuels relate to electricity. We rarely use oil to generate electricity in the United States. Coal is the fossil fuel of choice for electricity production, and coal is entirely a domestic market and is not effected by a worldwide shortage of petroleum. The quote above plays into that misconception.

There’s plenty of uranium available. We should be building nuclear plants.

The stupidity of "energy independence"

One thing that really annoys me about every presidential debate is that every candidate feels the need to say “America must have energy independence!” Why?

Let’s step back and ask the question, should America be (a) an island completely self-sufficient and independent from the rest of the world with no foreign trade; or (b) part of a global economic community?

Although there are some dissenters who will like option (a), the policy of our government and both political parties, for many decades, has been solidly in camp (b). Thus we are now in a position where we are not only dependent on foreign countries for our oil needs, but just about all of our other needs as well. Walk through any store that sells stuff, such as Walmart, Best Buy, or Macy’s, and just about everything they sell is manufactured in some foreign country. Even the rare item that says “made in the USA” probably was manufactured with imported raw materials or subcomponents.

In light of the above, exactly what benefit does being “energy independent” bring when we are dependent on so much else for our well being? The only energy source we are dependent on is petroleum, which is a fungible resource which means that any country with excess petroleum production can supply us with it. We also have a Strategic Petroleum Reserve, which means that if the supply is suddenly cut off, we have a reserve that gives us time to resolve the issue.

We should be more worried about China. China is a communist country, historically an enemy, on which we are dependent for a huge number of manufactured items.

The only explanation for the obsession with “energy independence” is that people are recalling the oil embargo from 35 years ago, and left-wing environmentalists (new-age liberals) , who hate petroleum with every fiber of their body, are taking advantage of this collective memory to trick us into thinking there are legitimate conservative (as opposed to liberal) reasons for using less petroleum.

Just as the army is always fighting the last war, our politicians are busy fighting the last trade embargo and not thinking about the present or the future.

Nuclear energy and the Pigou Club

Greg Mankiw's Pigou Club Manifesto talks only about taxing gasoline. Go read the manifesto if you don't believe my analysis. That's why I'm not joining the club, because I don't see why it's so important to to reduce gasoline usage.

But it is true that, perhaps, I overemphasized the importance of bovine methane as a source of global warming. According to the EPA, landfills and stray natural gas emissions are bigger sources of U.S. methane emissions, although cows are still a big source. And it's not clear to what extent methane and carbon dioxide can be traded off. The same amount of methane causes twenty times the global warming of carbon dioxide, but methane doesn't stay in the atmosphere as long.

So going back to the issue of carbon dioxide, electricity production causes more U.S. emissions of carbon dioxide than transportation. So the U.S. can signficantly reduce its emissions of greenhouse gases by converting its fossil fuel electricity plants to nuclear plants. At the same time, this would actually save us money instead of costing us money, because nuclear energy is the most economically efficient form of electricity production, and this will even become more so in the future as there are technological advances in nuclear reactors, while electricity generated from coal will become more expensive as we use up our nation's stockpile of coal.

But gasoline has nothing to do with electricity generation, so the tax on gasoline will have no effect on all the global warming being caused by electricity. Nor would a "carbon tax," which is something that someone metioned in a comment, I didn't read anything about a carbon tax in the Pigou Club Manifesto. The reason why nuclear power plants aren't being built isn't because coal is too cheap, it's because government regulations are not friendly to the construction of nuclear power plants.

Anyone truly concerned about global warming would forget about cars and gasoline and instead lobby for changing the regulatory environment so our fossil fuel powered electricity plants can be replaced by less expensive and more environmentally friendly nuclear plants. But ironically, it's often the very people who scream about global warming who are opposed to nuclear energy.

Pigou Club: just say no

Greg Mankiw is constantly hyping his Pigou Club, which is based on the concept that there should be a higher tax on gasoline.

If the goal is to lower gasoline consumption, then Greg Mankiw is correct that a tax on gasoline is the most sensible way to accomplish this goal. A higher price for gasoline will cause consumers to seek the most efficient way to reduce their gasoline consumption, which is superior to the government creating arbitrary regulations like fuel economy standards and tax breaks for hybrid cars. However the tax will have to be a lot higher than the one dollar per gallon proposed by Greg Mankiw because, as I've written before, demand for gasoline is highly price inelastic.

But I fail to see a reason why the government should be discouraging gasoline usage. In other words, I fail to see that gasoline usage results in net negative externalities. I used the word "net" in there because most pundits fail to mention the positive externalities of gasoline usage. When you drive in your car you don't just benefit yourself, but there's almost always some other party who benefits. If you drive to work your employer benefits, if you drive to the store the store owner benefits, if you drive to visit friends and family they benefit from seeing you. To discourage driving is to discourage commerce, and commerce is a good thing.

Now let's examine the supposed negative externalities that result from gasoline usage.

(1) Global warming. A bigger source of global warming is from cows, not cars. Therefore, if the goal is to reduce global warming, it makes a lot more sense to go after cows. There is much that can be done to reduce greenhouse emissions from cows. By giving cows feed which results in less gas, breeding cows for less burping and farting, giving them additives like bovine growth hormone which make cows more efficient, the greenhouse gases emitted from cows can be reduced by a significant amount with only a small increase in the price of meat. Rather than go after gasoline, why not go after the low hanging fruit (or in this case, the low hanging meat)? [I was wrong to overemphasize bovine methane, so please see my follow-up post on Nuclear Energy and the Pigou Club.]

(2) Air pollution. Modern cars emit very little air pollution because of their catalytic converters. However, the catalytic converters don't work when they are cold, which is when they are first started up. It is estimated that 60% to 80% of total pollution from cars occurs within the first 3 minutes of the engine being started. Thus air pollution from cars is correlated with how often the car is started and not how many miles they are driven. If a higher gasoline tax encourages people to take shorter trips, there will be barely any effect on air pollution if they take the same number of trips. A more efficient way to reduce air pollution is to tax cars based on how much pollution they emit after they are started. There are possible ways to improve performance of the catalytic converters, such as moving them closer to the engine so that they heat up faster. However taxing gasoline will do nothing to create more efficient catalytic converters.

(3) Traffic congestion. We all want less congestion, but I don't see how taxing gasoline will lower traffic. Traffic is at its worst during the rush hour, which for most people is a non-discretionary drive to work. People will attempt to save gas by avoiding discretionary trips which usually occur when the roads are emptier. Furthermore, the most likely response to higher gas prices is more fuel efficient cars rather than less miles driven, so a reduction in gasoline usage will do little if anything to lower traffic congestion, especially during the busiest times of day.

(4) Reduce dependence on foreign oil. Given how much oil is used by the United States, it is impossible for the United States to be energy independent without a radical change in our lifestyle. Yet even if this were accomplished, it is not clear how the United States would benefit from not being dependent on foreign oil. There is no general goal for the U.S. to be completely independent from other countries. Just the opposite, the same people who preach energy independence support free trade in all other respects.

Some people, perhaps, have the foolish dream that, if only the world could reduce its oil consumption enough, the Middle East and its crazy conflicts will become irrelevant to the rest of the world. That's not going to happen no matter how high we raise gasoline taxes. Even if the U.S. reduces oil consumption, other countries will see the benefits of using imported oil, so the Middle East will remain an important exporter of this valuable commodity. As long as there is free trade, the price of oil in the U.S. will reflect its price in the world market. And as long as oil is scarce, wars in the Middle East pose the danger of causing oil price shocks.

There is also the myth that the U.S. presence in Iraq is related to oil, when that's not at all true. We invaded Iraq to remove a dictator, and we are still there because people believe we need to restore order to the country. Certainly the status quo before the invasion was more beneficial to low oil prices.

Furthermore, it's not clear how low oil prices will bring stability to the Middle East. Just the opposite, wealth tends to increase stability, so money flowing into the Middle East is probably making the place more stable rather than less stable. The problem with the Middle East is the crazy religous beliefs of the people who live there. It has nothing to do with the price of oil being too high or too low.

But if we really want to lower our dependence on foreign oil, why not open up Alaska to more oil drilling? Often, the same people who say "oh no we import too much oil" are the same people who seem to be doing everything possible to prevent domestic production from increasing.

CONCLUSION

I'm not joining Greg Mankiw's Pigou Club because I don't see why we need to reduce our gasoline usage.

Self-funding terrorism

Steve Sailer points out that support for terrorism is self-funding for oil exporting nations.

If Iran exports 2.6 million bbl/day of oil, and the war between Israel and Hezbollah creates a $3/bbl risk premium for oil which lasts 30 days, then Iran makes an extra $234 million of profits (assuming all of its export oil is sold at the spot price), which maybe pays for two years of Hezbollah's funding. Or maybe a lot less than two years, know one really knows how much money Iran is spending on Hezbollah.

But the real winner is Sunni Saudi Arabia which exports more than three times as much oil as Iran.

Oil and geopolitical tensions

Are geopolitical tensions inflating the price of oil? Read my thoughts about oil and geopolitical tensions in my other blog.

Demand for gasoline is price inelastic

Via Instapundit, there's an opinion piece in Forbes about how high oil prices are not causing a drop in demand, at least not in the United States (although the author doesn't mention the foreign angle).

As I previously mentioned in my blog (in a post about the minimum wage), the demand for gasoline, like the demand for low wage labor, is price inelastic, which means that rising prices have barely any effect on demand. So if you read my blog, you don't have to read anything else because you already know what's going on.

Demand inelasticity (as well as supply inelasticity) contributes to the huge swings in prices. So if people want to know why prices are so high, the answer is inelasticity of both supply and demand. This is not an especially unusual situation for commodities. For example, the price of silver has more than tripled since November, 2001.

Liberal hypocrites and bottled water

Next time you see some annoying pro-environment liberal drinking bottled water, call them out on their hypocrisy.

Bottled water is bad for the environment. Fossil fuels are required to tranport the bottles of water and to make the plastic containers it comes in.

Thomas Friedman is a moron (a post about oil)

This is Thomas Friedman’s suggested State of the Union address for Bush:

My fellow Americans, on May 25, 1961, President Kennedy gave an extraordinary State of the Union address in which he called on the nation to marshal all of its resources to put a man on the Moon. By setting that lofty goal, Kennedy was trying to summon all our industrial and scientific talent, and a willingness to sacrifice financially, to catch up with the Soviet Union, which had overtaken America in the field of large rocket engines.

"While we cannot guarantee that we shall one day be first," Kennedy said, "we can guarantee that any failure to make this effort will make us last."

I come to you this evening with a similar challenge. President Kennedy was worried about the threat that communism posed to our way of life. I am here to tell you that if we don't move away from our dependence on oil and shift to renewable fuels, it will change our way of life for the worse - and soon - much, much more than communism ever could have. Making this transition is the calling of our era.

There is no doubt that government can create huge engineering feats when it steals labor from its citizenry. We’ve known this ever since the ancient Egyptians used slave labor to build the Great Pyramids. It was many thousands of years before mankind built another structure that tall.

Using tax dollars (stolen from the citizenry) to send a man to the moon was the modern equivalent of the building of the Great Pyramid. A huge waste of public money that accomplished nothing except the bragging rights to say “wow, we did it.” Who knows if another human will ever be sent to the moon? So far it has been 37 years since the first moon landing and we currently have no capability of repeating that feat.

Government is good at spending money, but very bad at actually making things more efficient. The free market makes things more efficient. We sent men to the moon, but we were unable to do it economically. Sure, government can reduce our nation’s fuel consumption, but only through an incredible waste of non-fuel resources.

Friedman talks about the problem of Middle East countries getting rich from their oil sales, but there is no U.S. policy that can change the laws of nature. Oil is an incredibly useful resource. That’s not going to change. Not now, not ever. Countries that have that resource are going to make money selling it to someone and there is nothing that Congress or the President can do to stop that from happening short of military conquest of every oil producing nation.

A "Manhattan Project" to develop energy independence?

In a recent NY Times column (read for free), Thomas Friedman advocates a "Manhattan Project to develop energy independence."

Bad idea.

The Manhattan Project was a project to develop a devastating new weapon. History has shown that government has a pretty good track record when it comes to military research. This may simply be because there's no genuine free market to compare it to. But there is no doubt that government has created a lot of pretty cool weapons, such as aircraft cariers, nuclear powered submarines, and of course nuclear bombs. And in a sense there is a competition between nations to develop the best weapons, so military research is akin to a few huge corporations competing against each other.

On the other hand, government has a really bad track record when it comes to economic investments. A huge government program to develop new sources of energy is guaranteed to become a huge political boondogle and a much bigger source of courruption than of energy. If 50% of military research is wasted money, closer to 90% of energy research would be wasted money.

The free market is especially capable of delivering the most economically efficient forms of energy to consumers. The reason why it's delivering us $3 per gallon gasoline is because at that price there is no better alternative.

When it comes to energy, government is more often the problem than the solution. Our government has been very stupidly encouraging the use of natural gas to generate electricity. This has been the absolute worst energy policy in the history of the United States. Natural gas is too valuable and scarce of a resource to waste on electricity generation when there are more plentiful sources of electricity such as coal and nuclear power. I have been writing about this in my blog for a long time, and if we have a natural gas shortage this winter (which looks to be a strong possiblity if it's a cold winter) I will be able to loudly proclaim "I told you so."

Bad oil advice from the NY Times

Oil is over $60/barrel today, and I notice that yesterday there was an editorial in the NY Times with some pretty bad recommendations, which is very dangerous because policy makers are reading this garbage.

The national security of the United States is already at risk because the nation depends on imported oil for nearly 60 percent of its daily needs. That will only grow as demand increases and domestic supplies dwindle.

This implies that the U.S. has some sort of moral failing, when in fact our use of oil is simply a natural result of our country having a large population and the strongest economy in the world. Because we were the first country in the world to develop our own oil resources, our oil production peaked in 1970.

Much of that oil comes from volatile countries in the Persian Gulf region, and the American money flowing there does nothing to encourage either more-balanced economic development or democracy. The rest comes from other parts of the world - often the most unstable parts.

Oil comes from unstable countries because the stable countries develop strong economies, increase their oil use, and become oil importers. But where the governments are run by dictators who stay in power until the next dictator kills them off, the economies stay poor, so they have no domestic uses for their oil.

The antidotes are simple. Americans need to use far less oil than they do now, which means requiring more fuel-efficient vehicles and finding an alternative to refined oil to power cars and trucks.

Bad bad bad! Someone needs to pick up an Economics textbook. When prices rise, demand falls. Price levels will take care of everything if the government will only stay out the market.

The word “requiring” is a dangerous suggestion which implies that the government needs to determine who is “allowed” to use fuel and who isn’t. There is also the implication that billions of taxpayer dollars have to be wasted researching technologies which may be dead ends. We need to remember that billions of dollars let us put a man on the moon, but it did not enable us to do it inexpensively. After tens of billions (or maybe hundreds of billions) of dollars wasted on space research, it’s still not practical to send humans into space.

But the NY Times editorial fails the mention the most important thing our government should be doing, which is to allow the use of nuclear power again. I say “allow” because our policies make it clear that nuclear power is not favored. After the Shoreham Nuclear Power Station fiasco in which billions of dollars were spent to build a power plant that was then closed and never used, no private company is going to build a nuclear power plant again unless the regulatory environment is changed, and that requires government action.

Canadian oil sands

There’s a front page article in today’s Washington Post about Canadian oil sands. I guess with OPEC meeting today and oil prices over $55/barrel, oil is suddenly a hot topic.

People who refuse to believe in the Peak Oil theory (read my Peak Oil post) often point to Canadian oil sands as an example of how we will never run out of oil. But if you read the Post article, there is nothing especially comforting there. Current oil sands production is “about 1 million barrels a day,” and production is expected to triple by the year 2020. An extra 2 million barrels a day brought online gradually over a period of 20 years is not going to make a very significant change in world oil production.

According to the EIA, “worldwide oil demand is projected to reach 121 million barrels per day by 2025, requiring an increment to world production capacity of about 44 million barrels per day over current levels.” Obviously the 44 million barrels are not going to come from Canadian oil sands. In fact, if certain Peak Oil experts are to be believed, there is little chance that the world will ever be able to produce 121 million barrels per day.

Peak Oil: liberals vs. conservatives

The Hubbert’s Peak theory holds that there will soon be day when world oil production peaks and then falls year after year. It’s beyond the scope of this blog to explain in any greater detail. The Hubbert’s Peak website does a far better job than I could ever do here.

Steve Verdon has two posts on his blog (post 1, post 2) in which he is critical of Hubbert’s Peak.

Steve Verdon is on the side of conventional wisdom. I once had lunch with an old time oil industry executive, and he was adamant that we will never run out of oil. “There’s oil under very rock!” But being a natural contrarian, my sixth contrarian sense tells me that the conventional wisdom is wrong and the Hubbert’s Peak theory is correct. Steve Verdon’s anti-Hubbert’s Peak posts remind me of Christian fundamentalists trying to poke holes in the theory of evolution. (We’ve never seen a new species evolve, and we don't really know exactly how this genetic mutation stuff works, therefore evolution must be wrong.)

The thing I find very strange about talk of peak oil is that people take sides based on their political views. Liberals say “yes, we will run out of oil,” and conservatives say “there’s oil under every rock, we will never run out.” Normally, liberals are the ones who think illogically, but in this case it’s the conservatives who refuse to heed the obvious facts. My guess is that liberals, who are environmentalists, hate oil, so they are very attracted to a story about the age of oil coming to an end. And conservatives hate liberals, so they are disinclined to believe any theory that liberals are trumpeting.

Until my next oil related post, check out The Oil Drum, a blog devoted entirely to Peak Oil.

Gary Becker endorses nuclear power

There’s an excellent post by Gary Becker recommending the use of nuclear power. Gary focuses on the safery record of nuclear power, and how new technologies are making nuclear plants less expensive than they used to be.

When I previously endorsed nuclear power, I emphasized the fact that our current reliance on natural gas fired electric plants is stupid. I think this is an extremely important issue that Gary Becker hasn’t properly addressed.

When we (the U.S. and Canada) use up our domestic supplies of natural gas, it will have to be imported. Natural gas is expensive and dangerous to transport. A liquefied natural gas explosion is a far more likely possibility than a nuclear plant melting down and killing people.

Furthermore, natural gas is just too valuable for heating buildings to waste our limited supply on generating electricity when electricity can be generated less expensively using uranium or coal.

Say yes to nuclear power

“President Bush presented a plan on Wednesday to offer federal risk insurance to companies that build nuclear power plants.” NY Times.

Good news indeed, a suggestion from Bush that makes sense. Nearly all new electric plants use natural gas because clean burning natural gas is the only thing that can get approved to be built. But the problem is that the U.S. and Canada have only a finite supply of natural gas that is quickly being used up. The price of natural gas is now at all time highs.

Uranium, on the other hand, is very plentiful, and there’s enough uranium to supply our energy needs for hundreds of years. Even coal (our primary source of electricity) isn’t as plentiful as uranium. Furthermore, uranium is mined in politically stable and friendly countries like Canada and Australia so there’s no fear of the supply being suddenly cut off by an Islamic revolution.

* * *

If you click on the linked article, you will also notice a statement which demonstrates the hypocrisy of liberals:

"The Republican plan won't help the families, truckers, farmers and small businesses suffering from skyrocketing gas prices today," Senator John Kerry, the Massachusetts Democrat who ran for president against Mr. Bush in 2004, said in a statement.

Ignoring the fact that less expensive electricity from nuclear power plants will indeed help families and small businesses, it’s liberal Democrats like Kerry who have always said that Americans use too much gas. High prices will encourage conservation which is always what they said they wanted! How else do they expect to make people conserve? Low prices will encourage people to use more. Maybe they never took Economics 101?

Hybrid cars: yuppie toys, not economical

The latest yuppie toy is the hybrid car. It allows yuppies to waste money on conspicuous consumption, yet convince themselves they are helping the world. A press release says that hybrid car registrations are up 81%.

Let me set you idiot yuppies straight: you are not making the world a better place by buying expensive cars. You conserve the world's resources by being frugal and not wasting money on stuff you don’t need.

According to MSN Autos, the Prius gets 51 mpg on the highway. But for $9000 less you can get a Toyota ECHO which gets an impressive 42 mpg on the highway, and it uses a plain old gasoline engine.

If you plan to drive the car 100,000 miles, how much would gasoline have to cost before you save money with the Prius over the ECHO? Over $21/gallon.

James Joyner says: “More people are buying hybrids because they've finally more-or-less caught up to regular cars as reliable transportation and offer several advantages like lower gasoline bills and the ability to drive in carpool lanes alone.”

I think I’ve demonstrated that the first part of James’ conclusion is wrong because as economical practical transportation, hybrid cards simply don’t make sense. But it’s possible that people are buying them to drive in carpool lanes, and if so, this is bad government policy.

If people are willing to pay an extra $9,000 to drive in carpool lanes, then the government ought to be selling those rights and using the money to reduce taxes. By giving this privilege away for free, the government is basically stealing money from the taxpayer. The average working American is paying higher taxes so rich yuppies can drive to work faster.