Environmental Economics

Here we go again: DRIVE LESS! is the answer

Every 6 years or so (I'm rounding) gas prices rise, and the results are predictable:  Price go up because of some supply shock, the news starts to cover it, people start to complain, politicians start to rumble about price gouging and restricting prices, supply increases, prices fall, and everyone calms down.

While higher gas prices can be caused by a number of things (supply decreases both domestic and international,demand increases, increased taxes,...), there is only one guaranteed, fool-proof, tested, economically justified way for you, as an individual, to lower gas prices:  COMPLAIN!

Oh wait, that's not right.  No it's: DRIVE LESS!

So here's my once every 6 year reminder (I'm rounding) of the economics of the Env-Econ Drive Less! solution to higher gas prices.

April 26, 2006: I launch the Drive Less! campaign on NPR

January 17, 2012: Here we go again.

April 25, 2019:  GASP! $4 gas is here...what should we do?

Consumers could start driving less, rethinking large purchases and changing their summer travel plans should the national average price near $3.25 per gallon, [AAA spokesperson Jeanette] Casselano said. While the national average probably won't hit $4, Casselano said $3.25 is possible.

[emphasis added]

Glad to see the Drive Less! campaign is having an impact.

 

An estimate of the demand elasticity of Saudi oil exports

WSJ (Saudis Plan New Export Cuts in Hopes of Lifting Oil to $80 a Barrel): 

Saudi Arabia is planning to cut crude exports to around 7.1 million barrels a day by the end of January in hopes of lifting oil prices above $80 a barrel, according to OPEC officials.

The new strategy comes as the kingdom seeks to cover a large government spending boost. It said last month that it planned to increase its expenditures by 7% in 2019—the equivalent of about $20 billion—as the country struggles to fund ambitious plans to diversify its economy beyond petroleum products.

Crown Prince Mohammed bin Salman, the de facto Saudi ruler, has faced a sharp decrease in oil prices since October amid a supply glut. The brutal killing of journalist Jamal Khashoggi by Saudi operatives in October has also deterred foreign companies from working in the kingdom and investing in its economic development plans.

The new Saudi budget requires oil prices to rise to as much as $95 a barrel, according to an official with the Organization of the Petroleum Exporting Countries. But the kingdom would be satisfied with prices at $80 to $85 a barrel, a range that would limit its need to dip it into its financial reserves, according to people familiar with its thinking.

To cover proposed expenditures, Riyadh is set to reduce crude exports by up to 800,000 barrels a day from November levels.

Saudi Arabia exported about 7.3 million barrels a day of crude last month. That was already down from around 7.9 million barrels a day in November and 7.7 million barrels a day in October.

Brent crude, the global benchmark, rose 1.2% to just under $59 a barrel and WTI jumped 3.5% to just under $50 a barrel Monday after The Wall Street Journal reported Saudi Arabia planned to deepen export cuts.

The own-price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. Here are some calculations from my interpretation of the excerpt above:

• % change in quantity = (7.1 - 7.9)/7.9 = -0.11
• % change in price = (80 - 59)/59 = 0.36

According to me, the elasticity is -0.28. What am I doing wrong?

And one more thing:

The U.S. market will see the largest reduction in Saudi oil exports, according to an OPEC official. Overall, the export cuts would go beyond the six-month commitment it made in early December to OPEC. ...

Oil prices fell below $80 a barrel in October after Saudi Arabia turned up the spigots in response to U.S. pressure to replace sanctioned Iranian oil. The increase turned out to be more than the market needed.

President Trump is going to need to place another phone call to get U.S. gas prices back down. 

Hey U.S. Senate, how about a letter calling for simply ending all of those stupid #TrumpTariffs (not just the ones that hurt your states)?

NEW: A group of eight Republican senators send a letter to the @USTradeRep, @SecretaryPerry and @SecretaryRoss calling for utility-scale #solar panels to be exempted from the #TrumpTariffs. pic.twitter.com/QxutfjkQ6y

— Solar Industry (@SEIA) May 11, 2018

Krugman on renewables

I'm not sure I'm as optimistic as Krugman but the attempt to reduce the use of from renewable energy is likely a huge mistake (in terms of dynamic efficiency):

Not that long ago, calls for a move to wind and solar power were widely perceived as impractical if not hippie-dippy silly. Some of that contempt lingers; my sense is that many politicians and some businesspeople still think of renewable energy as marginal, still imagine that real men burn stuff and serious people focus on good old-fashioned fossil fuels.

But the truth is nearly the opposite, certainly when it comes to electricity generation. Believers in the primacy of fossil fuels, coal in particular, are now technological dead-enders; they, not foolish leftists, are our modern Luddites. Unfortunately, they can still do a lot of damage.

About the technology: As recently as 2010, it still consistently cost more to generate electricity from sun and wind than from fossil fuels. But that gap has already been eliminated, and this is just the beginning. Widespread use of renewable energy is still a new thing, which means that even without major technological breakthroughs we can expect to see big further cost reductions as industries move “down the learning curve” — that is, find better and cheaper ways to operate as they accumulate experience. ...

But there is no longer any reason to believe that it would be hard to drastically “decarbonize” the economy. Indeed, there is no reason to believe that doing so would impose any significant economic cost. The realistic debate is about how hard it will be to get from 80 to 100 percent decarbonization.

For now, however, the problem isn’t technology — it’s politics. ...

What can I say? You should know how this article ends. 

This morning I answered the question: "How's blogging going?"

Blogging is tough these days. Other than Pruitt dismantling Federal environmental policy and ignoring/undermining benefit-cost analysis (and then there is Zinke) I'm not finding much inspiration. 

 

And then there are days like today where I'm just a grumpy old guy: http://www.env-econ.net/2018/04/what-should-a-reviewer-do-when-the-journal-increases-the-costs-of-providing-a-review.html

In case anyone was wondering.

Note: The big news is that the New York Times allowed me to copy and past these excerpts. 

"US solar company to lay off hundreds of workers after Trump tariffs"

You should beware U.S. companies making announcements about decisions and using government policy as a cover these days, but this seems to make economic sense:

American solar company SunPower will lay off about 3 percent of its workforce in March, a decision that comes after President Trump began imposing new tariffs on imported solar materials earlier this month. 

SunPower has already started the process of laying off between 150 and 250 workers, largely from its research and development and marketing positions, CEO Tom Werner told The Hill. The cuts will amount to about a 10 decrease in operational expenses.

The cuts made by the publicly traded company, which is based in San Jose, Calif., are largely an effort to stop the bleeding from the new costs associated with the 30 percent tariffs, Werner said.

via thehill.com

New Energy Economics book

Energy Economics By Peter M. Schwarz

From the publisher:

Energy Economics outlines the fundamental issues and possible solutions to the challenges of energy production and use, and presents a framework for energy decisions based upon sound economic analysis. It considers market forces and policy goals, including economic prosperity, environmental protection, and other considerations that affect societal well-being. This book focuses on both energy choices and the impact of these choices on market performance, environmental conditions, and sustainability. The initial section covers the fundamental economic concepts for analyzing energy markets. Following this, a detailed analysis of established energy sources, specifically fossil fuels and nuclear energy, leads into consideration of energy alternatives such as renewable energy and next-generation alternatives. Electricity production and regulatory trends are covered in depth. The final section considers policy: environmental considerations, sustainability, and energy security. The concluding chapter is a comprehensive vision for our energy future.　

Drawing on current energy headlines, perspectives familiar from the popular press, and views outside economics, this text sharpens students' ability to understand, evaluate, and critique policy using appropriate economic analysis. The text builds a foundation that culminates in a view of a comprehensive energy policy that improves upon the vacillations of past decades.　

You can order it here: https://www.routledge.com/Energy-Economics/Schwarz/p/book/9780415676786

"Trump's solar tariffs" are likely being oversold

Economists don't like tariffs. In a 2011 survey of AEA members, only 5% disagree with the statement: "Tariffs and import quotas usually reduce general economic welfare." The U.S. has been generally moving towards freer trade over the past 35 years. That's what makes the current protectionist trend so puzzling (Trump’s Solar Tariffs Are Clouding the Industry’s Future):

Across North Carolina, textile factories and tobacco farms have disappeared, giving way to fields of solar panels.

But for those venturing into solar farming ..., the future of this vibrant industry is now cloudy. On Monday, the Trump administration announced that it would impose steep tariffs on imported solar panels, which could raise the cost of solar power in the years ahead, slowing adoption of the technology and costing jobs.

Mr. Trump has long championed trade barriers as a way to protect United States manufacturers from foreign competitors. On Monday, he also slapped tariffs on imported washing machines, and his advisers say additional measures on steel, aluminum and other products will soon be coming. ...

The two solar companies that had sought the tariffs, Suniva and SolarWorld Americas, argue that low-cost imports have decimated American manufacturing of solar cells and modules in recent years. Today, 95 percent of the solar panels used in the United States are imported from countries like Malaysia and South Korea, and the companies contend that tariffs are needed to protect the nation’s remaining solar factories. ...

But while the tariffs may help domestic manufacturers, they are expected to ripple throughout the industry in ways that may ultimately hurt American companies and their workers. Energy experts say it is unlikely that the tariffs will create more than a small number of American solar manufacturing jobs, since low-wage countries will continue to have a competitive edge.

Solar manufacturing now represents just a fraction of the overall jobs that have developed around the solar industry. More than 260,000 Americans are employed in the sector, but fewer than 2,000 of those employed in the United States are manufacturing solar cells and modules, according to the Solar Energy Industries Association.

Far more workers are employed in areas that underpin the use of solar technology, such as making steel racks that angle the panels toward the sun. And the bulk of workers in the solar industry install and maintain the projects, a process that is labor-intensive and hard to automate.

The tariffs the president announced start at 30 percent next year and ultimately fall to 15 percent by the fourth year. In each of the four years, the first 2.5 gigawatts of imported solar cells will be exempted from the tariff.

But by raising the cost of one all-important ingredient, the tariffs could make solar power less competitive with other sources of energy, like gas and wind, resulting in the construction of fewer solar projects. On Tuesday, the Solar Energy Industries Association said that the president’s action would result in the loss of roughly 23,000 jobs in the solar industry this year, as well as the delay or cancellation of billions of dollars of investments. ...

In North Carolina, state laws and tax incentives that favor solar projects selling power directly to the electrical grid have helped the industry expand to the point where it now powers more than 400,000 homes and employs around 7,000 people. ...

The move is expected to hit utility-scale solar projects like this one, which sell their electricity to power companies, particularly hard. Home and business owners may decide to continue buying solar panels for their rooftops, even if the price is a little higher. But when solar projects sell to a utility company, they compete with other sources of energy, and every cent counts.

Over the last eight years, an influx of cheap imported panels has driven down the cost of solar projects by 85 percent, according to Lazard, a financial advisory company. As a result, the number of solar installations has soared to 12 gigawatts last year, from less than one gigawatt in 2010.

While the tariffs are likely to slow the adoption of solar power in the United States, they will not entirely halt the industry. An analysis by GTM Research found that solar installations will continue to rise from 2018 to 2022, though there will be 11 percent fewer panels installed as a result of the tariffs.

One reason for the muted effect: Solar cells and modules account for one-third or less of the overall cost of solar systems, and the industry has been relentlessly cutting the costs of all components. All told, the tariffs will increase the cost of utility-scale solar projects by about 10 percent and residential rooftop systems by just 3 percent — raising them roughly to prices seen two years ago. ...

Duke Energy, a major utility company in North Carolina, said Tuesday that the tariff would cause it to carefully evaluate the economics of each of its solar projects. The company currently owns more than 800 megawatts of solar power capacity and had planned to build and buy more than 3,000 megawatts in the next five years.

Many analysts say the tariff may fall short of its goal of reviving solar manufacturing in the United States. While at least one company has reportedly expressed interest in opening a 1,000-worker module assembly plant in Jacksonville, Fla., that is likely to be a rare case.

 

It sounds as if the solar panel tariffs are designed mostly to increase the profits of Suniva and SolarWorld Americas (and hurt the little guys). The overall impact in the renewable energy markets will be small. The number of jobs added in production will likely be more than offset by jobs destroyed and the overall number of solar panels installed will be lower than otherwise. And the cost difference between coal and solar is so large that it won't help coal (the graph is from the same article):  

The shutdown rule (e.g., coal)

In micro principles we teach that when price falls below average variable cost (e.g., labor and materials) the firm will shut down (Coal’s Decline Seems Impervious to Trump’s Promises):

The decline in demand has forced a 38 percent drop in the nation’s coal production in a little less than a decade. Now only the most efficient mines containing the highest-quality coal are able to survive.

The 4 West mine, like many that produce coal for power utilities in Appalachia, is expensive to run. Its coal seam is thin and of lower quality than competing mines, and its traditional form of mining requires costly methods to stabilize roofs to protect against the kind of accidents that caused the deaths of two miners at 4 West over the last three years. Government fines and management turmoil also took their toll. 

The most successful mines these days, particularly here in Appalachia, produce metallurgical coal for steel making in the United States and abroad. 4 West produces only thermal coal for a nearby power plant, which will now rely on other local mines.

“It’s just come to a point where the mine is not economical to continue,” said Brian Osborn, senior vice president for operations for Mepco Holdings, owner of the 4 West mine.

The trick to saving coal jobs is to keep the price high. Increasing the demand for coal was the underlying rationale of the attempt made by the Department of Energy recently, which was rejected by FERC.

Oh goodness, I'm teaching this semester

From the WSJ Weekly Review email:

Trump Administration on Power Plants

By Timothy Puko | Jan 09, 2018

TOPICS: Energy, Regulation

SUMMARY: Federal energy regulators Monday rejected a Trump administration proposal aimed at shoring up struggling coal-fired and nuclear power plants.

CLASSROOM APPLICATION: Students can discuss whether Federal Entergy [sic] Regulatory Commission should alter the electricity market rules to promote coal and nuclear generation. Students can evaluate whether the benefit of multiple energy sources outweighs the allocative efficiency benefits of competitive markets. "The five-member Federal Energy Regulatory Commission ruled unanimously that the administration hadn't provided enough evidence that the measures proposed were needed. The commissioners said the government hadn't provided adequate justification for changing the rules currently governing competitive electricity markets and that the proposal would have unfairly limited competition."

QUESTIONS:

1. (Introductory) What are the benefits to power system of having multiple sources of energy?
2. (Advanced) What are the economic welfare benefits of designing an electricity market that is competitive?
3. (Advanced) Should the federal government distort the electricity market so as to promote coal and nuclear power plants? Should the federal government do so for the purpose promoting multiple energy sources?

Reviewed By: James Dearden, Lehigh University

My answers:

1. security
2. low prices
3. no, the government should not be subsidizing a particular energy source unless there is a market failure (let's say that non-coal and non-nuclear energy gets real expensive, it shouldn't be too hard to quickly ramp up production of coal)

The cost of offshore drilling safety regulations seem low relative to the costs

In case you missed it over the holiday break:

The Trump administration is poised to roll back offshore drilling safety regulations that were put in place after the 2010 Deepwater Horizon oil rig disaster in the Gulf of Mexico that killed 11 people and caused the worst oil spill in American history.

A proposal by the Interior Department’s Bureau of Safety and Environmental Enforcement, which was established after the spill and regulates offshore oil and gas drilling, calls for reversing the Obama-era regulations as part of President Trump’s efforts to ease restrictions on fossil fuel companies and generate more domestic energy production.

Doing so, the agency asserted, will reduce “unnecessary burdens” on the energy industry and save the industry $228 million over 10 years. ...

Industry groups like the American Petroleum Institute have long opposed the safety rules, calling them “flawed and costly.” The fossil fuel interest group warned in 2015 that the regulations would reduce capital investment in the Gulf by $4 billion a year and threaten 50,000 industry jobs. ...

The Obama-era rules, written in 2016, tightened controls on blowout preventers, devices that are intended to stop explosions in undersea oil and gas wells, and called for rig operators to have third parties certify that the safety devices worked under extreme conditions. In the Deepwater Horizon spill, a supposedly fail-safe blowout preventer failed after a section of drill pipe buckled.

As always with industry estimates you need to put them in context (ignoring the need to recognize that industry cost estimates are usually exaggerated to avoid regulations). The U.S. Energy Information Administration says that Gulf of Mexico oil production is 1.6 million barrels per day (2016). If the price per barrel is $65, then that leads to revenues of about $37 billion annually. The cost of the Obama-era rules is $22.8 million per year, about 0.06% of revenues or $456 for each lost job. The regulatory costs seem low to me, especially considering that the BP Deepwater Horizon blowout lead to 11 deaths and damages of $17.2 billion. 

Note, that in contrast to API's warning that 50,000 industry jobs were at risk in 2015, the EIA said that "Oil production in federal Gulf of Mexico expected to continue increasing."

What am I missing?