Environmental Economics

Daily demand and supply: olive oil

From the WaPo (Olive oil prices reach record highs as Spain’s harvest is halved):

Extreme heat, wildfires and drought have decimated much of the world’s olive oil harvest yet again, driving prices to a record high of $9,000 per metric ton.

Most home cooks aren’t buying olive oil by the ton. But retail olive oil prices in the United States have risen in recent years because of extreme weather in olive-oil-producing countries, growing 12.5 percent this year atop an 8.8 percent increase in 2022, according to Circana, a Chicago-based market research firm.

Spain, the source of half the world’s olive oil supply and the global price setter, in May reported a drop in production of 48 percent compared to last year. Concerns intensified following the release of the most recent olive oil report from the Spanish government, which showed dwindling supplies in August.

"Oh, dear!"

 

OPEC+ teaches us that demand curves are downward sloping

From the NYTimes (In Surprise, OPEC Plus Announces Cut in Oil Production):

Saudi Arabia, Russia and their oil-producing allies announced on Sunday that they would cut production by more than 1.2 million barrels of crude a day, or more than 1 percent of world supplies, in an apparent effort to increase prices.

Oil prices soared as markets opened Sunday evening, with both the American and global oil benchmark prices rising by 7 percent. ...

“I really am surprised,” said Tom Kloza, the global head of energy analysis at the Oil Price Information Service. Mr. Kloza said he expected that the Brent global oil price benchmark, which has been hovering at $75 to $80 a barrel in recent weeks, would climb above $80. On Sunday evening, the price of Brent crude surged to $85.48 a barrel. West Texas Intermediate, the American benchmark, rose to $81.04.

Various energy experts estimated the eventual cut differently. Helima Croft, head of global commodity strategy at RBC Capital Markets, said that the voluntary cuts on paper amounted to more than 1.6 million barrels a day but, she added, the “real effect could be around 700,000 barrels a day.”

The global oil market is roughly 102 million barrels a day.

What more can you ask from a Monday?

Some bad economics at the Department of Energy

From E&E News (DOE: Major LNG project ‘would not increase’ CO2) from June 2022: 

A proposed liquefied natural gas project in Alaska would not raise greenhouse gas emissions, according to a new federal environmental review that assumes LNG exports elsewhere will continue to meet demand even if the planned pipeline and terminal aren’t built. ...

The Department of Energy’s draft SEIS includes a life-cycle analysis of the greenhouse gas emissions tied to the project’s LNG exports. It finds that “exporting [liquefied natural gas] from the North Slope would not increase GHG emissions when providing the same services to society,” as the No Action Alternative, a scenario where the Alaska LNG project is not developed.

If you don't believe E&E news then here is the screenshot:

So, as asserted earlier, this isn't how markets work. In the no action alternative supply and demand don't move and there is no change in price or quantity of liquidfied national gas (LNG). With a new LNG facility the supply curve shifts to the right and the quantity of LNG increases (and price falls):

If there is no climate impact from the increase in LNG supply as the DOE report claims then either (1) buyers want the same amount no matter the price (i.e., the demand curve is vertical) or, (2) in the no action scenario, someone else magically increases the supply of LNG. Here is how the EPA puts the second scenario in their comment letter: 

Hat tip: Patrick Walsh in response to this post: link.  

The NYT's Willow article allows issue advocates to alternately assume perfectly elastic demand and supply

The decision to allow mining in Alaska is controversial (Biden Administration Expected to Move Ahead on a Major Oil Project in Alaska): 

In one of its most consequential climate decisions, the Biden administration is planning to greenlight an enormous $8 billion oil drilling project in the North Slope of Alaska, according to two people familiar with the decision.

Alaska lawmakers and oil executives have put intense pressure on the White House to approve the project, citing President Biden’s own calls for the industry to increase production amid volatile gas prices.

But the proposal to drill for oil has also galvanized young voters and climate activists, many of whom helped elect Mr. Biden and who would view the decision as a betrayal of the president’s promise that he would pivot the nation away from fossil fuels.

On one side is the "environmental activist" worried about a "carbon bomb" (in fairness to issue advocates, this is not a quote from an activist): 

Still, Willow would be the largest new oil development in the United States, expected to pump out 600 million barrels of crude over 30 years. Burning all that oil could release nearly 280 million metric tons of carbon emissions into the atmosphere. On an annual basis, that would translate into 9.2 million metric tons of carbon pollution, equal to adding nearly two million cars to the roads each year. ...

Environmental activists, who have labeled the project a “carbon bomb” have argued that the project would deepen America’s dependence on oil and gas at a time when the International Energy Agency said nations must stop permitting such projects to avert the most catastrophic impacts of climate change.

Increasing the amount of oil produced would increase the supply of oil if we consider new mines as firms entering the industry. But, the only way that the amount of oil produced would increase the amount consumed by the same amount (the "carbon bomb" scenario) is if the demand for oil is perfectly elastic. In the picture below the additional mining shifts (rotates) the supply of oil from S to S' and buyers in the market snap it up at the existing price. The increased quantity of oil consumed is equal to the increased supply at the market price (both arrows are the same size). 

But, if the demand for oil is sensitive to price (note: it is) then the amount consumed (the bottom arrow) will be less than the supply increase (the upper arrow): 

On the other side is the energy industry making even less sense: 

Kevin Book, managing director of Clearview Energy Partners, a research firm, ... argued that the emissions linked to burning oil drilled from the Willow project would not have been eliminated if Mr. Biden had rejected the project, but simply generated elsewhere.

This quote assumes that there is some demand increase, the source of which I don't know, and a perfectly elastic supply from existing miners. 

If the supply curve is upward sloping (it is) then the increase in consumption would be less than the demand increase. I'm not going to dignify this scenario by drawing this out because I'm not sure where the demand increase is coming from. As far as I can tell, if there is no oil from the Willow project nothing changes in the oil market. 

Happy to be corrected, what have I missed?

Does this mean the tenure police are coming to revoke my tenure?

From the inbox:

The SSRN Processing Team has added the following comment to your submission, Count Data Models and the Problem of Zeros in Recreation Demand Analysis (Abstract ID 3559768):

This submission has been removed from SSRN at the request of Wiley-Blackwell, copyright holder of the work. The publisher will allow authors to submit a working paper or preprint version to SSRN by going to https://hq.ssrn.com and starting a new submission. Once Submitted, contact the SSRN Support Center (https://service.elsevier.com/app/home/supporthub/ssrn/), and we will assist in reinstating your views and downloads.

Some thoughts:

1. I didn't submit anything to start with.
2. That paper was published in 1996--one year after I got my PhD. It was also my job market paper that got me my first job at East Carolina University, where I met John.
3. That paper was also part of my dissertation that won the the AAEA Outstanding PhD Dissertation Award in 1996 (talk about peaking early).
4. It has been cited 132 times according to the Google.
5. A copy of the paper can be found here, (so take THAT SSRN).
6. It has been cited once for each of the last two years. I think its useful life might be over.

*Unless there are external costs or benefits not captured in the market transaction

I think I cringe that I wrote this:

While it is tempting to think of a market transaction resulting in winners and losers, it turns of that this is not the case.  A market transaction is not a competition between buyers and sellers, but rather a mutually beneficial exchange that result in both sides being better off than before the transaction. 

*See the title.

An example of a negative externality from Murphy, NC #crypto

From CNN (How the blare of a crypto mine woke up this Blue Ridge Mountain town): 

When Judy Stines first heard about cryptocurrency, “I always thought it was smoke and mirrors,” she said. “But if that’s what you want to invest in, you do you.”

But then she heard the sound of crypto, a noise that neighbor Mike Lugiewicz describes as “a small jet that never leaves” and her ambivalence turned into activism. The racket was coming from stacks and stacks of computer servers and cooling fans, mysteriously set up in a few acres of open farm field down on Harshaw Road.

Once they fired up and the noise started bouncing around their Blue Ridge Mountain homes, sound meters in the Lugiewicz yard showed readings from 55-85 decibels depending on the weather, but more disturbing than the volume is the fact that the noise never stopped. ...

Back on Harshaw Road, Mike Lugiewicz pointed to the For Sale sign in front of his house. “September of 2021, I think, is when they turned this on and my wife and I just shook our heads, said, ‘No, we’re out of here.’” He hopes to stay in the area and keep fighting alongside neighbors like Judy Stines until the quiet comes back.

I don't want to be the guy that always brings the bad news but this house is going to sell at a discount. 

Another daily demand and supply (two in one week!)

From the WSJ Micro Weekly Review (reviewed by Edward Scahill, University Of Scranton):

Canada’s Oil Market Finds Outlet in U.S. Demand

By Vipal Monga | September 12, 2019

Summary: An increase in the demand for dense crude oil from the U.S. and cuts in production ordered by its government has eased an oil glut in Canada. One year ago, Canadian oil sold at a discount of over $50 per barrel to the U.S. benchmark price as pipeline congestion increased inventories. In 2019, a U.S. embargo on Venezuelan oil reduced the difference in price between Canadian and West Texas Intermediate oil.

Classroom Application: The article demonstrates why the market for petroleum is an international, rather than a national or regional, market. Although oil supplies can differ in sulfur content, oil is essentially a homogenous product, as are commodities such as wheat and corn. This implies that market forces tend to reduce differences in the price of oil produced in different countries.

Questions:

• The article mentions that “…output from U.S. oil companies has been plentiful…” Why, then, has the U.S. imported oil from Canada?
• What is an oil embargo? Would an embargo be more likely to result in a shortage or a surplus of oil?
• The Keystone pipeline is used to transport oil from Canada to refiners in the United States. A proposed extension of the pipeline, called Keystone XL, was delayed by legal challenges raised by groups opposed to the route the pipeline would follow. Proponents of the pipeline argue that it would be safer for oil to be transported by the Keystone
• XL pipeline than by rail. Why do advocates for Keystone XL believe transporting oil via pipeline is less hazardous than transportation by rail?
• The article refers to a “glut of oil in Canada.” What is another term for a market glut?
• Draw and label a graph that illustrates the demand and supply for Canadian oil. Indicate in the graph a price that would be consistent with a market glut. In the graph, show how “…higher demand… from U.S. Gulf Coast refineries and government-imposed cuts…” reduced a glut of Canadian oil in 2019.
• “The U.S. imported an average 3.58 million barrels a day from Canada for the four weeks ended Aug. 30…That was an 8% gain from the four-week average recorded at the end of last year and a 3% increase from the end of August 2018.” From the article, cite one reason why the U.S. increased its purchases of Canadian oil over the past year.
• “Moving a barrel from terminals in Alberta to the U.S. Gulf Coast costs between $9 and $12 a barrel by pipeline and between $15 and $20 by rail.” If the cost of transporting oil from Canada to the Gulf Coast by pipeline is lower than the cost of rail transportation, why would any oil be transported by rail?

Here is the link ($): https://www.wsj.com/articles/canadas-oil-market-finds-outlet-in-u-s-demand-11568289600

Daily demand and supply

Summer gasoline market analysis from AAA:

The national average dropped six cents on the week, following a consistent downward trend since Memorial Day. The decline is unusual for this time of year. Pump prices usually trickle higher during the summer months due to increased demand. However, the latest Energy Information Administration (EIA) report reveals that total domestic gasoline inventories jumped a million bbl last week, helping to push pump prices lower. According to OPIS, strong production output and increased imports have helped gasoline storage levels grow consistently over the past four weeks.

OPIS?

Daily Demand and Supply: Bill Nye Explains the Law of Demand...and Carbon Pricing, MFers.

Warning:  NSFW (Unless you work at a University and part of your job is to watch stuff like this and post it on a blog).

The highlights of this have been around all week, but most of the clips are just Bill Nye the Science Guy saying "motherf***ers.   But this segment on Last Week Tonight really does a nice job of simply explaining how Carbon Pricing works.  If you don't want to watch the whole thing, just fastforward to the 9:27 mark or so, and sit back and enjoy.

Bill Nye explains the Law of Demand from 10:21 to 10:37.

Now if I can just figure out how to use this in class without trigger warnings.