Council on Foreign Relations

There’s no shortage of commentary on the fact that continuing unrest in Egypt appears to have driven up oil prices. But what is it precisely that’s sparking market concern?

Much of the market reaction may be (sort of) irrational. Big and unexpected things are happening in the Middle East, and people rightly associate the Middle East with oil. Traders didn’t have time to analyze the full consequences of Friday’s developments before placing their bets. Odds are that many bought oil as a simple and instinctinve way of protecting themselves against an uncertain situation.

But there are also “real” reasons to expect increased prices.

Some have pointed to the fact that Egypt produces about two-thirds of a million barrels of oil each day. But it also consumes roughly as much. Production cuts in Egypt are unlikely to lead to big price rises.

How about oil transit? The Suez canal and the Sumed pipeline each carry on the order of a million barrels a day of oil. Disruptions there would be significant. But oil shipments can be rerouted around the Cape of Good Hope. Yes, that would increase the cost of shipping Middle Eastern oil. It’s unclear, though, whether that would significantly raise world oil prices, since the cost of producing most oil in the Middle East is well below the world oil price in the first place. To put that another way: The extra cost of transport might well be borne by Middle Eastern producers rather than  by consumers. Read more »

I am not a huge fan of the Sputnik Moment / Win the Future / Sky Is Falling rhetoric that President Obama invoked in his State of the Union and that his team have been using to sell their clean energy strategy. But I’m also growing weary of reading contrary economic analyses that seem to believe that economic policy is all about win-wins and kumbaya.

The latest intervention, which is representative of the genre, comes from Northwestern professor Lynne Kiesling, who in a post titled “Dear President Obama: You Don’t ‘Win’ Economics” writes:

“My students are all very clear on a concept that I’m afraid President Obama has forgotten … or at least that his rhetoric contradicts: economic activity is not a win-lose relationship…. Economic activity is grounded in mutually beneficial, voluntary exchange, and thus creates gains from trade….”

There’s a lot of truth in this, and a lot of wisdom in the longer post. But the professor is neglecting some important things about how real markets work. Read more »

Last night, I posted some preliminary analysis on the new Obama goal of 80% clean electricity by 2035. Like most other observers, I assumed, based on the President’s rhetoric and the language in the available White House fact sheets, that the target included renewables, nuclear, and natural gas.

I hear a very credible rumor that the administration did not intend to fully count natural gas toward this target. Gas would, instead, be credited on a carbon basis.

[UPDATE: Rumor confirmed. Here's the administration's fact sheet on the clean energy standard. It's circulating by email but does not appear to have been posted online yet.]

By my estimation, what that means is that a kilowatt-hour of electricity from gas would be counted (roughly) as half a kilowatt-hour of “dirty” electricity and half a kilowatt-hour of “clean” electricity. This means that my numbers (but not my bottom lines) need to be revised. (It also means that environmentalists and gas industry representatives might need to revise their reactions to last night’s speech.)

What does that do to my numbers? By this modified measure, the United States today gets 40% of its electricity from clean sources. By 2035, it is expected to get 55%. The new goal would be to raise that to 80%. Read more »

[UPDATE: I've updated these numbers, based on a 50% credit for gas, here.]

President Obama announced a big new energy goal in his State of the Union address tonight: generating 80% of America’s electricity from clean sources by 2035. In the interest of helping people get a sense of what that means, here’s my quick analysis of how that compares to past climate proposals. The bottom line is that this looks more ambitious, at least for the electricity sector, than the climate bills that failed last year.

My reference point is the ill-fated Kerry-Graham-Lieberman (KGL) cap-and-trade bill. You can find the EIA analysis of that bill here. (That’s where I’m getting my raw numbers.)

Under “business-as-usual”, 55% of U.S. electricity in 2035 comes from “clean” sources. (Obama appears to define “clean” to include natural gas, so I follow the same convention here.) Under the main KGL scenario, that increases to 74%. The goal that Obama proposed tonight is considerably more ambitious.

How about electricity sector greenhouse gas emissions? The comparison is tricky. Cap-and-trade would have cut emissions both by reducing overall electricity use and by shifting the mix of generating sources. Obama’s announcement tonight focused only on the latter. The inclusion of natural gas in Obama’s announcement on the same footing as zero-carbon sources muddies up the accounting even more. Read more »

News last night that energy czar Carol Browner will be leaving the Obama administration has been roundly interpreted as the death knell for serious climate policy. Politico reports several reactions: one environmentalist argues that it’s “a big blow to the president’s image as a leader on health and the environment,” while an industry lobbyist contends that “her departure may be part of a legitimate effort to pay careful attention to addressing some of the real regulatory obstacles in the way of job creation in the United States.” Joe Romm calls it “a bombshell,” while Chris Mooney says that “there’s no surer sign that nothing major is going to happen on global warming in the next two years.” The FT writes that “green campaigners will be worried about the signal Browner’s departure sends,” though it argues that “the move may be more personal than policy-dictated,” since “Browner had felt personally bruised by Obama’s way of running the White House.” The Wall Street Journal reports that “Eliminating Ms. Browner’s position would be another signal that the White House is giving up the effort [to pass a climate bill].”

Three things:

First, do people really need more evidence that cap-and-trade is dead? The House is controlled by Republicans who ran against the policy. Case closed.

Second, there is still a lot that could happen on energy and climate in the next two years. Policy on shale gas will have big consequences for U.S. greenhouse gas emissions. Offshore drilling regulation is still far from being fleshed out. There may be opportunities for bipartisan cooperation on nuclear power. If gas prices jump this summer, the White House will be scrambling for initiatives that appear to respond to the situation. These may not be the things that excite Carol Browner, but that doesn’t mean that they don’t matter. Read more »

Writing in the Washington Post a couple weeks ago, Jeffrey Leonard argued that Congress should scrap all energy subsidies – and that clean energy would come out ahead. The op-ed was a shorter version of an essay in the current issue of the Washington Monthly. Here’s his bottom line:

“If President Obama wants to set us on a path to a sustainable energy future—and a green one, too—he should propose a very simple solution to the current mess: eliminate all energy subsidies….  It will be better for national security, the balance of payments, the budget deficit, and even, believe it or not, the environment. Indeed, because wind, solar, and other green energy sources get only the tiniest sliver of the overall subsidy pie, they’ll have a competitive advantage in the long term if all subsidies, including the huge ones for fossil fuels, are eliminated.”

I understand the political logical of this pitch: the current climate in Washington makes it easier to cut subsidies than to impose new regulations. But the odds that clean energy would win from eliminating all subsidies is roughly zero.

Here’s the heart of Leonard’s argument:

“One thing about [subsidies] is easy to summarize: they are heavily tilted toward fossil fuels. Government statistics show that about 70 percent of all federal energy subsidies goes toward oil, natural gas, and coal. Fifteen percent goes to ethanol, the only renewable source of energy that consistently gets bipartisan support in Congress (think farm lobby and Iowa). Large hydro-power companies—TVA, Bonneville Power, and others—soak up another 10 percent. That leaves the greenest renewables—wind, solar, and geothermal—to subsist on the crumbs that are left.” Read more »

The New York Times “Room for Debate” asked seven smart experts whether the United States can compete with China on green technology. Their responses, published yesterday, are well worth reading. I worry, though, that they reflect a peculiar, and increasingly unproductive, debate.

The four participants who aren’t academic economists all offer some variation on the claim that green energy can be a central driver of economic growth, and that the United States thus needs a green industrial strategy. I’ve explained on many occasions why I’m skeptical of both assertions. Green technology is important, but there isn’t compelling evidence that it will have big direct consequences for economic growth.

I suspect that’s what motivated the three academic economists who were invited to contribute to all offer variations on a similar theme in response: in a free market, countries specialize in areas where they have comparative advantage; as a result, everyone wins. If China’s gaining market share in certain technologies, they argue, that’s ultimately good for all.

Here’s the massive problem with that: The global economy is nowhere close to being a free market. Barriers to trade and investment abound. Governments frequently use their power to promote favored firms and discriminate against others. The current situation isn’t the consequence of the free market. Saying “the free market works” is no way to defend it.

I have a new article up at Foreign Policy that comes to more mixed conclusions. The central point of my piece is that we ought to stop freaking out so much about supposed Chinese strength in clean energy. Like the academic economists in the New York Times debate, I’m sensitive to the fact that a lot of cleantech migration to China is the result of genuine comparative advantage, and thus doesn’t deserve to be demonized. But I also argue that that’s not the whole picture: in some cases, the shift is the result of anticompetitive Chinese policies that are anything but economically beneficial for the world. That’s not the sort of behavior that should be supported or ignored in the name of free market sensibilities.

I spent Friday and Saturday at an excellent (largely academic) workshop on international institutions and global governance. In our discussions about why states do and don’t cooperate, I was struck by how absent states’ capacity to cooperate was from the discussion. In particular, when it comes to energy and climate, it’s one of the bigger blind spots in how both practitioners and scholars think about cooperation.

Here’s a simple example of what I’m referring to: People argue that international oil markets would function more smoothly if states would publish basic data on their domestic markets (supply, demand, stocks, etc). They observe that China (among others) doesn’t do that. The immediate conclusion is that Beijing doesn’t want to. The only policy recourse, then, is to pressure or persuade China to change tack.

But in more than one recent conversation, people have emphasized to me that Beijing doesn’t have many of the needed statistics itself (though it’s working on developing its capacity). Badgering them won’t change that; until they develop the capacity to collect the right statistics, cooperation will fail.

The same thing is true much more broadly. India, for example, won’t be able to force power plants to internalize pollution costs until it develops a serious environmental regulator. Brazil won’t get deforestation properly under control without stronger capacity to enforce the laws that it puts on the books. One might even argue that China won’t improve its IPR protection until its innovation system becomes much more capable of developing technologies itself. Our view of international politics, though, tends to focus much more on pure ambition than on these sorts of features that directly influence results.

I don’t want to take this too far. In many cases (perhaps most), states don’t do what they should on energy and climate because they don’t want to, not because they can’t. (The United States is guilty too.) Moreover, the decision not to have sufficient capacity to act is often quite a deliberate one. Many observers, for example, used to argue that China would never be able to join the WTO because it lacked the capacity to enforce obligations domestically. But it turned out that once Beijing decided that it really cared about WTO membership, it was able to develop the capacity that it needed. Read more »

What do oil and wine have in common? A new working paper from two IMF economists, which is generating a lot of buzz, argues that they’re a lot more alike than you’d imagine. (Hat tip: Steve LeVine.) The authors look at the prices of crude oil and fine wine between 1998 and 2010 and show that they’re highly correlated. They find that that’s because they’re both driven primarily by demand – in particular, they argue that surging global economic growth over the period they’ve studied explains a huge fraction of the movement in both wine and oil prices. Supply constraints, on the other hand, seem to play at most a bit role.

From "A Barrel of Oil or a Bottle of Wine: How Do Global Growth Dynamics Affect Commodity Prices?"

That’s provoked a reaction over at the Wall Street Journal:

“The working paper buries the long-held view that OPEC can move prices up and down solely by turning spigots on and off. Dead are the days of the oil shocks of the 1970s when blockades and revolutions threw wealthy economies into disarray. Long live the demand shocks where price hikes are mainly driven by the roaring engine of fast-industrializing nations.” Read more »

Oil prices are up again today. What’s going on? A look at history gives some interesting insights.

Eyal Dvir (Boston College) and Ken Rogoff (Harvard) have a very interesting working paper that tries to explain some important features of oil prices since 1861. Jim Hamilton has a neat discussion, over at Econbrowser, of the forces behind one particularly interesting episode, which he calls  “the first oil shock.” Starting from $11.65 (in 2009 dollars) in 1861, the price of oil in the United States skyrocketed to a peak of $110.11 by 1864, before dropping back to $36.84 in 1867. The whopping 845% spike in the oil price dwarfs anything seen since.

The interesting question, here, regards the source of the shock – and, in particular, whether there are any parallels to today. Hamilton argues that it was about technological limits to supply combined with idiosyncratic shifts in demand:

“Edwin Drake had drilled the first commercially successful oil well in Pennsylvania in 1859…. But it turned out that in each new well, the flow rate dropped fairly quickly as oil was removed, and the drillers also had difficulty figuring out how to prevent water flooding. After an initial phenomenal rate of success, total production from all wells in Pennsylvania declined in 1863 and fell further in 1864…. At the same time, the demand schedule was shifting to the right, due to war spending and most importantly a new tax on alcohol (a competitive source of illuminants) of $2/gallon, which gave a $40/barrel competitive advantage to crude. The result was that the real price of oil quintupled by 1864.”

Dvir and Rogoff, while not focusing as narrowly in time, argue that high oil price volatility in the period from 1861 to 1878 can be explained by much broader structural factors. The supply side, they argue, was artificially constrained due to a monopoly by railways on the transport of oil (broken only by the Tidewater pipeline in 1879). At the same time, the demand side was steadily climbing due to the rapid industrialization of the United States. Volatility in this period – there were spikes again in 1871 and 1876 – was due to these deeper drivers. Read more »