Expect the Unexpected.

Change and innovation lead to un-foreseen effects.  Caller ID allows people to tell whether they are being called by someone they know or by some unknown person.  If the call comes at the dinner-hour, it’s 99.9 percent sure to be somebody trying to raise money for the local fire department or somebody conducting a survey.  In either case, most people don’t want to talk to the caller.  In 1997, the response rate to telephone surveys was a measly 36 percent (unless you count “Go to Hell!” as a response).  By 2014 it had fallen to 9 percent.[1]  How exactly is anyone supposed to measure public opinion if the public won’t give it?  Hard for politicians to pander to the voters if they don’t know what the voters want to hear.  Maybe they’re stuck pandering to the donors?  We could end up back in the land of “Dewey Beats Truman!”

“Baby Boomers” are entering the “golden years.”  One natural response to having the kids out of the house is “downsizing” to a smaller home or an apartment.  Lots of older people with—comparatively—lots of money are entering the market for smaller homes and apartments.  This pushes up the price of what used to be “starter homes” (now to be re-labeled “finisher homes”?) and the rent for apartments.  Between 1995 and 2005, the average share of income devoted to rent was 24 percent.  By Summer 2015, it had risen to 30.2 percent.[2]  This is likely to make things more difficult for younger people with—comparatively—less money.[3]

The “fracking revolution” has brought down energy prices.  (By August 2015, they were at a six-year low.)  The fall in energy prices has damped down inflation.  Low inflation means that—for the third time since 2010—Social Security recipients will see no increase in their benefits.  On the other hand, Medicare premiums are not linked to the inflation rate.  So these will rise in 2016.[4]  The disposable income of retirees is likely to shrink.

When energy (if not yet the climate) became a grave concern back in the 1970s, a sustained drive got underway to make all sorts of things more energy efficient.  Today, American houses are 31 percent more energy efficient than they were forty years ago.  On the other hand, American homes are 57 percent larger than they were forty years ago.  In the 1970s the average American home was about 1,300 square feet.  In 2012 the average American home was 1,864 square feet.  The most recently built homes are averaging 2,657 square feet.  This cancels out the gains in efficiency.[5]  Several puzzles arise.  Where does the extra space go?  Garages?  Bigger bedrooms for the kids?  A bathroom every ten feet?  Why are homes larger when families are smaller?  What is it like to live in one of these homes?  Do family-members retreat into their own space and close the door?  Is the same thing true of the improved gas mileage of cars?  Is efficiency improved, but we drive more?

The current, much-discussed surge in opiod addiction has led to a surge in deaths from drug overdoses.  That, in turn, has led to a rise in the number of organ donors.  They now provide better than ten percent of all organ donations, up from about 3 percent in 2006.[6]  So, higher death rates for some mean longer lives for others.

After the San Bernardino terrorist attack liberals characterized the attack as a “mass shooting” and called for tighter gun controls. Unlicensed gun-dealers, a common “bete noire” of gun control advocates, came in for special presidential attention.  Gun sales zoomed upward.  In December 2015, Americans bought 3.3 million guns.  All of these sales have been from licensed gun-dealers because the government background check system has been swamped.  Attorney General Loretta Lynch has asked for the hiring of 430 additional people just to process the background checks of Americans complying with the existing gun laws.[7]

The Americans with Disabilities Act bars discrimination against people with disabilities.  Some of this is left open to interpretation by government officials.  As a result, the state of Iowa will issue gun permits to blind people.[8]

Should these random reports make people cautious in regarding business plans, campaign platforms (“The New” Anything), or succeeding at their New Year’s Resolutions?  Just asking.

[1] “The bottom line,” The Week, 5 September 2014, p. 32.

[2] “Noted,” The Week, 28 August, 2015, p. 14.

[3] “The bottom line,” The Week, 15 October 2015, p. 36.

[4] “The bottom line,” The Week, 30 October 2015, p. 36.

[5] “The bottom line,” The Week, 20 November 2015, p. 32; “Noted,” The Week, 27 November 2015, p. 16.  .

[6] “Noted,” The Week, 20 May 2016, p. 18.

[7] “Noted,” The Week, 5 February 2016, p.8.

[8] “Noted,” The Week, 20 September 2013, p. 16.

Climate of Fear XVI.

Coal is an important source of fuel: 38.7 percent of America’s electricity comes from 600 coal-fired generators.[1]

The trouble is that coal is bad for you and other living things. Coal burning for power generation in the United States gives off about 1.575 billion tons of carbon dioxide. That feeds the greenhouse gases responsible for global warming. Burning coal is worse than burning other fossil fuels. All the gasoline-powered vehicles in the United States give off about a billion tons. Burning natural gas gives off about half the carbon-dioxide as does burning coal.

No one is talking about having passed “peak coal”: there is a lot of coal still in the ground. People concerned about global warming want it to stay there. As the former Secretary of Energy Steven Chu memorably phrased it “there’s enough carbon in the ground to really cook us.”

However, the coal industry looked to be in decline for the same reason that gasoline prices have fallen recently. Hydraulic fracturing (“fracking”) has succeeded. Natural gas prices have fallen by 74 percent over the last ten years. Natural gas, emitting half the carbon dioxide as coal, is now price competitive with coal. Thus, a shift from coal to natural gas would achieve a substantial reduction in emissions without harming anyone—except the coal producers of course. The economics certainly tilt in that direction: 150 of the less efficient coal-fired generation plants have shut down already.

For these reasons, it may have looked like an opportune time to push for a reduction in coal-burning. The Obama Administration is pushing hard to cut carbon dioxide emissions by 30 percent from the 2005 level by 2030. In June 2014, the Environmental Protection Agency (EPA) announced a Clean Power Plan to limit coal burning in the United States. Each state would be required to reduce its carbon emissions. The logical thing to do would be to switch to other forms of energy generation ranging from nuclear to natural gas to “renewables” (solar, wind).

The EPA plan has elicited hard push-back from coal-mining states. The efficiency of coal-mining techniques has increased with the introduction of “open cast” mining (knock off the top of a mountain and excavate the coal with machinery). Coal miners will be thrown out of work[2] and coal mine owners will see their investments destroyed. Senate Majority Leader Mitch McConnell (R-Kentucky) has denounced the president’s “War on Coal.”[3] A dozen states have sued the EPA, claiming that it has exceeded its authority.

One way to smooth the path from coal would be to invest more in research into “clean coal” technology. So far, research has shown the process to be expensive and difficult. An experimental “clean coal” plant in Kemper, Mississippi, cost five billion dollars. However, it could both pacify the coal interest and find an international market.

The industrialization of countries like India and China are powered by coal. An estimated 82 percent of global coal reserves are still in the ground. China, which recently promised to reach peak carbon-burning by 2029, plans to build 363 new coal-fired plants before then. India is planning to build more than 450 coal-fired generating plants in years to come. The carbon dioxide emissions from these plants will overwhelm any reductions in the United States. Finding a way to “clean coal” might be one way to avert disaster.

[1] “The end of coal?” The Week, 27 March 2015, p. 11.

[2] Although employment in coal mining in Kentucky has fallen from 38,000 in 1983 to 17,000 in 2012.

[3] Bearing mind the importance of both tobacco and coal for the state’s economy, maybe they could find a new slogan for Kentucky license plates: “Kentucky is for Respirators.”

Shock Waves.

The implications and possible effects of the drop in oil prices are complex and hard to predict.[1]

One effect of falling oil prices is to hammer oil producing countries at odds with the US (Russia, Venezuela, Iran). The fall in oil prices is putting far more pressure on Russia than are the international sanctions imposed over the unpleasantness in Ukraine. Both the Saudis and the Americans are quietly amused by the difficulties being encountered by the Iranians and the Russkies.

At least over the short-term (but likely over the longer-term) the fall in oil prices will reduce the revenues earned by the established oil producers. The effects could ripple through Middle Eastern politics. Saudi Arabia buys off domestic discontent with a high standard of living paid for by oil sales. Less revenue could translate into more discontent. When the United States scaled back aid to Egypt after the overthrow of the Morsi government, Saudi Arabia stepped in with generous assistance. Egypt plowed ahead with its suppression of the Muslim Brotherhood and other dissidents in open defiance of the United States. How long and how generously will Saudi Arabia be able to continue to support Egypt and other conservative regimes if the money stream starts to fall? Other Muslim states—like Algeria—are in something like the same boat in their dependence on oil revenues to fend-off unrest.

What does this suggest about climate politics in the United States? Will falling gasoline prices lead to more driving in bigger vehicles—with more emissions? Will the deflation of predictions about having passed “peak oil” reduce the pressure for the development of alternative energy sources?

What are the implications for the business-government relationship going forward? Eduardo Porter argues that government support for the development of the technology behind “fracking” endorses smart industrial policy. He suggests that this can offer a model for the development of new technologies to limit climate change. In particular, he endorses raising the gas tax during the period of low oil prices. The revenues “could be leveraged into a boon in tax revenues that the government could use to pick some of the winners that will help solve the [environmental] problems.”

The problem with “industrial policy” is that it’s just like other forms of politics. Established interest groups have a stronger position than do rising interest groups. The winners “picked” by the government are likely to be big campaign donors or the pet causes of political leaders. When government picks winners, we get farm subsidies and Solyndra. Porter’s own account of the development of fracking technology emphasizes the importance of research into new technologies paid for by the government, not that government picked winners. One thing that goes unmentioned by Porter is that government labs and subsidies were spread over a wide area. They didn’t focus on one technology or energy source. Continued investment in research certainly sounds like a good idea. So does an increase in the gas tax. Within that framework, however, would it be better to let the market pick the winners?

Why was this a surprise? Between 2008 and 2015 American domestic production of oil doubled. The European economy has been stagnant for a bunch of years. “Fracking” has been a loudly contested issue in American domestic politics for years. These are the key factors in the price decline. Yet markets, media, environmentalists, and politicians all seem equally surprised. Did no one see the rise in production/fall in prices coming? It’s a sort of Pearl Harbor in reverse.

[1] Eduardo Porter, “Behind Drop in Oil Prices, A Federal Role,” NYT, 21 January 2015.

Seismic Shift.

It’s probably hard for most people to accept this, but economic growth raised incomes all around the world by 28 percent between 2005 and 2013. All that growth required a rise in oil production of 19 percent. That rise in oil production never happened. In large part, it never happened because Saudi Arabia and other major producers never increased their production.[1] They preferred a stable target price of $100 a barrel. Instead, oil prices held steady. By June 2014, West Texas crude was selling for $107 a barrel. Revenues flowed in to oil-producers. But, as the Germans said about the Greeks, “they’ve had their fun.” Nemesis was at hand.[2]

It has been a long time coming. In October 1973 the Organization of Petroleum Exporting Countries (OPEC) launched the first “oil shock” against the industrial democracies. The target countries responded in a variety of ways. Some of the responses were ludicrous, but some had important long-run consequences. In the United States, Congress approved construction of a pipeline from Alaska’s Prudhoe Bay, tried to foster nuclear power generation, first imposed fuel-economy standards on car manufacturers, and created the Energy Research and Development Administration. All these were efforts to prepare a long-term strategy.

Eduardo Porter has argued that federal support for research and development paid big dividends.   In particular, Porter touts the role of government “industrial policy” in the developments that led to the recent shale revolution. The government helped pay for the development of “directionally deviated drilling,” the antecedent to the horizontal drilling that is used in “fracking.” The government pioneered large-scale hydraulic fracturing. The government subsidized the “polycrystalline diamond compact bits” that do the drilling. Micro-seismic imaging, originally developed in government labs to trace coal mine collapses, found application in identifying fracturing sites. The Reagan administration ended obstructive price regulations that had hindered investment.

The shale revolution took decades to develop. Recovering natural gas from shale formed the initial target. When natural gas produced by “fracking” entered energy markets in large quantities a few years ago, natural gas prices started dropping. The drillers’ effort shifted to releasing oil. By 2013 it began to pay off. That year American producers generated 3.5 million barrels of oil derived from shale. From June 2014 to January 2015 the price of oil fell from over $100 a barrel to $45 a barrel.

Why didn’t OPEC cut its own production to push the price back up? Probably because they could not cut back enough to off-set the rise in American production. Cutting production would just cede market-share to the Americans. They are hoping that prices will bounce back up in the future. A revival of world economic growth will increase the demand for energy. This will off-set the expansion of American production to a degree. Shale oil is expensive to produce in comparison to “regular” oil. The current low price will cause many American producers to shut down their operations until prices rise to a profitable level. However, no one now expects oil prices to rebound to anywhere near $100 a barrel. A ceiling of $70 a barrel is more likely.

Falling oil prices have dragged down prices for gasoline, diesel, heating oil, and natural gas. Consumers all around the world are enjoying the equivalent of a tax cut, which in the US amounts to $1,000 a year. That is a valuable prop to growth when strong growth tarries.

[1] Excluding a brief fun-up to counter the 2008 economic collapse.

[2] Eduardo Porter, “Behind Drop in Oil Prices, A Federal Role,” NYT, 21 January 2015.