Archive for the 'Energy' Category

Jul 14 2008

The opportunity cost of pristine wilderness is…

Bush, Democrats point fingers over energy crisis – Jul. 12, 2008

…apparently just over $4.00 per gallon of gasoline; at least according to the article above:

With gasoline prices above $4 a gallon, Bush and his Republican allies think Americans are more willing to allow drilling offshore and in an Alaska wildlife refuge that environmentalists have fought successfully for decades to protect.

Nearly half the people surveyed by the Pew Research Center in late June said they now consider energy exploration and drilling more important than conservation, compared with a little over a third who felt that way only five months ago. The sharpest shift in attitude came among political liberals.

The travesty of Americans’ attitude in favor of drilling and against conservation is the shortsightedness of it. Regardless of how many millions of acres of wilderness the government opens to drilling, gas and energy prices will only continue to rise over the long-run as emerging market economies like China’s will continually drive demand for energy higher and higher as growth rates remain above 8%.

America, in the mean time, with the largest per capita levels of energy consumption in the world (and some of the lowest gas prices), turns its back on conservation just when it is needed most. The cost to the environment, society and the bounteous wildlife that inhabit the vast tracts of land and sea that Congress is considering opening to exploitation by energy companies will create a permanent scar in one of the most valuable (and simultaneously undervalued) resources, its wilderness.

As my summer vacation approaches its end and I begin to think about another year of teaching Economics in international schools, I find myself reflecting on what’s most important in the world: to me, to my home country, to my fellow Americans, to the kids I teach and the students I will teach 10, 20, 30 years from now. I spend my summers in one of the most beautiful parts of this great country, the Pacific Northwest, whereMy wife Liz, overlooking the Selkirk mountains of Northern Idaho despite over a century of logging, mining, hunting and trapping, beautiful wilderness still remains. Only 2% of America’s original forests remain standing today. Countless species of predator and prey have been wiped out. There are around 300 wolves running wild here in Idaho, and thousands of citizens here are campaigning for a hunting season that will threaten to wipe out that great species once again. Clearcuts dot the landscape, proposed mines threaten watersheds and the wild Bull trout, an endangered species in the lakes and streams of Northern Idaho. Bears are put to death when the stumble into our yards, yet we turn more and more of their habitat into housing tracts every year.

Conservation is on my mind, and the news from Washington saddens me today, as I read that Americans concern themselves less and less with what I consider this country’s greatest resource, its wilderness, when times get the slightest bit difficult economically. As I prepare for another year of teaching Economics, this year at a new school in a new country, one where conservation is of the utmost importance, I will think about ways to incorporate more of an environmental economics perspective into this blog and my own teaching. As I prepare to leave my home in the mountains of Northern Idaho once again, I will cherish what little wilderness remains in this beautiful country, and try to make as little impact as I can on an individual level towards the continued destruction and exploitation of nature that characterizes the path that Americans seem to be choosing in this time of economic hardship.

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May 26 2008

It may not be a recession, but it sure feels like one…

FT.com / Columnists / Wolfgang Munchau – Inflation and the lessons of the 1970s

It seem that everyone’s speculating about the US economy today. Recession or no recession, that is the question. The economy has even surpassed the Iraq War as the number one issue in the US presidential race! John McCain, who has publicly admitted that economics is not his strong suit, may just find himself in trouble in a general election where the most important concern among voters is the economic situation.

So what IS that situation, anyway? Is the US in a recession? In other words, has real gross domestic, or total output in the US economy, actually declined over the last six months? Technically, the answer is no. My fellow blogger, Steve Latter, explains this clearly here. What is true, on the other hand, is that the current situation shares many similarities to the global economic slowdown that did occur in the 1970s.

In 1973 OPEC, the newly formed oil cartel consisting at the time of only Arab states, reduced its output of oil and cut off exports to the United States in response to US support of Israel in the Yom Kippur War, in which the Israelis officially occupied the Palestinian territories of the West Bank and Gaza and seized the Golan Heights from the sovereign nation of Syria. To punish the US for its position on this conflict, OPEC cut off supplies of oil to the west, driving gas and energy prices upwards by 70%, triggering a supply shock characterized by a decline in total output and an increase in both unemployment and inflation, a phenomenon known as stagflation: a macroeconomic policy maker’s worst nightmare.

Recently the world has seen a similar (albeit of a different cause) rise in the price of oil and energy prices. Today the rise in energy prices is driven primarily by rising demand, rather than reduced supply (since the 1970s the OPEC cartel has grown to include many non-Arab nations, making it harder to achieve collusion to restrict output and drive up oil prices). Global demand for oil has risen steadily, driven ever higher due to rapid growth in China and other developing nations, and exacerbated by the falling value of the dollar, the currency in which oil prices are denominated.

The supply shocks of today have combined with falling aggregate demand in the US due to weak consumer spending to slow real growth rates to nearlry 0%. So technically, the US has avoided a recession, but the effect on American workers and consumers may be just as painful as the real recession of the 1970s. In order to prevent the “r” word from becoming a reality today, central banks (including the US Fed) have eased money supplies, lowering interest rates, fueling even greater increases in the price level.

…the global weighted average inflation rate will be 5.4 per cent this year, while the global money market interest rate is currently only 4.3 per cent. This means that global short-term real interest rates are negative – at a time when inflation is rapidly accelerating. As monetary policy has been excessively accommodating for more than a decade, inflationary pressures have built up in the global economy.

Central bankers like Ben Bernanke have to make tough decisions sometimes, weighing the trade-off between unemployment and inflation, and determining their monetary policies based on whatever they deem to be the “lesser of two evils”. Rising energy prices have forced firms to cut either cut back their production and raise the price of their products, both actions that result in less overall spending and output in the economy. Falling house prices have led consumers to cut back their own spending, further reducing demand for firms’ output. These factors have all pushed the unemployment rate from around 4.8% a year ago to 5.1% today, which combined with an estimated additional 3-5% of American workers having dropped out of the workforce, (referred to by the Department of Labor as “discouraged workers”) paints a pretty ugly picture of the reality for the American worker today.

The harsh reality of the weak labor market has led Mr. Bernanke and the Fed to pursue an expansionary monetary policy aimed at avoiding further increases in the unemployment rate and decreases in the GDP growth rate. Expansionary monetary policy means lower interest rates, with the goal being increased consumption and investment, both factors that could worsen the inflation problem already experienced thanks to the global supply shock. Evidence indicates that the inflation problem, even in the US where slow growth usually leads to lower price levels, is not going away:

In the US, a survey-based measure of inflationary expectations recently showed an increase to more than 5 per cent. I would estimate there are now several hundred basis points of difference between the current Fed funds rate and an interest rate that would be consistent with price stability in the medium term.

…meaning the Fed, in its attempt to avoid recession and rising unemployment, has created a condition where real interest rates are actually negative, a highly inflationary condition. All this wouldn’t be so bad if wages in the US were rising along with the price level. This however, does not appear to be happening:

The main difference between the situation in the 1970s and now is today’s absence of wage inflation, which explains why absolute inflation rates are a little more moderate. I guess this is probably because of some combination of deregulated labour markets and globalisation. But the lack of wage-push inflation is not necessarily good news. Falling real wages mean falling disposable income and tighter credit conditions mean less borrowing for consumption.

Rising prices for energy, transportation and food have put American households in a tough situation. In the past, periods of inflation have often been characterized by rising wages, meaning the full brunt of nominal price level increases was not entirely born by the American worker. Today, on the other hand, a recession has thus far been avoided, but the combination of record numbers of “discouraged workers”, rising unemployment and inflation may make the pain of our current economic situation just as real as recessions of the past.

In the words of billionaire investor and economic sage Warren Buffett just today:

“I believe that we are already in a recession… Perhaps not in the sense as defined by economists. … But people are already feeling the effects of a recession.”

“It will be deeper and longer than what many think,” he added.

Discussion Questions:

  1. What is the difference between nominal and real GDP? Which must decline in order for the economy to be in a recession?
  2. What impact do rising energy prices have on the behavior of individual firms?
  3. Why are low interest rates likely to make the inflation problem even worse?

9 responses so far

Feb 25 2008

Stagflation – a blast from the past could mean trouble for US economy

Stagflation??Inflation gets a new focus along with recession worries – Feb. 21, 2008

As we begin our studies of the theories underlying the aggregate demand/aggregate supply model in AP Macroeconomics, it is useful to look in the news to see if we can try and understand how these theories apply to the real world. In the US, it appears as if a dangerous economic phenomena that plagued the country in the early 1970’s may be returning to wreak its havoc among households and policymakers.

Stagflation, “the unwanted combination of stagnant economic growth and destructive inflation”, has emerged in America today, in the face of weak aggregate demand and rising unemployment, combined with rising costs to firms thanks to energy costs and food prices.

Recession has been getting so much attention lately that it’s been easy to forget about the threats posed to the U.S. economy by inflation.But inflation worries are now back in focus in a major way. Oil prices hit a record of $101.32 a barrel in trading Wednesday, and was briefly above $100 again Thursday

Meanwhile, the Consumer Price Index, the government’s key inflation reading, showed a 4.3% rise in overall prices over the past 12-months. That reading has risen steadily from only 2.0% last August. Even stripping out volatile food and energy prices, the so-called core CPI posted the biggest seasonally-adjusted one-month jump in 19 months.

Continue Reading »

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Feb 19 2008

Turning gray to blue – the alchemy of clean air in China

Published by under China,Energy,Environment

Beijing’s Olympic Quest: Turn Smoggy Sky Blue – New York Times

In ancient times alchemists exerted great energy trying to turn worthless metals into gold. Their endeavors proved to be in vain as science would later show that such alchemy was a fantasy.

In Beijing, similar endeavors are underway to turn the city’s gray sky to blue for the upcoming Olympic games in August of this year. In a city where 1,200 new cars and trucks appear on the road every day and where a massive construction boom has been underway for years, the sky remains thickened with particulate rich smog for over 100 days a year. The problem is, China has promised the world that during the month of August, when the world’s athletes congregate in the city for the Olympics, the skies would be clear and blue.

The solution to Beijing’s problem is obvious, yet impossible to achieve: halt new construction, ban automobiles, and shut down the factories surrounding Beijing. So how IS Beijing planning to deal with this challenge? Turns out they’re once again turning to alchemy, this time to turn gray to blue: Continue Reading »

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Jan 25 2008

If only EVERYONE took AP Economics…

Carbon tax bill in the mail – Canada.com

…then we’d be spared the naive statements that appear in our media and out of the mouths of our citizens when a basic economic principle plays itself out in the market place.

In Quebec, the provincial government levied a carbon tax on energy producers:

When the provincial government imposed the country’s first carbon tax last fall, it wanted producers to pay.

But just as oil refiners have already done, Gaz Métro started passing on the cost of the carbon tax (to consumers) this month.

Big surprise, right? Only in a market in which demand is perfectly elastic would the entire burden of a tax be born by producers, since raising prices at all would mean loosing all their customers. Clearly, electricity is not such a market, and given the inelasticity of demand for a necessity such as electric power, chances are a big chunk of the “0.67 cents per cubic metre of natural gas” tax placed on utilities is being passed onto consumers.

In market economies, tax incidence is shared between producers and consumers. This of course, is the way it should be. If the price stays low and output remains high, no externality has been corrected and just as much greenhouse gas will be emitted as before the tax. In order to decrease output to a more socially optimal level, the tax should be passed on to consumers, but also born by producers in the form of lower profits. Despite this economic reality, consumers still aren’t happy about it:

“I don’t care how much it is, even if it’s just half a penny,” said Leonard, a Laval resident who called to complain about his gas bill. He spoke on condition that his last name not be used.

“They said consumers would not pay for this – and now here we are, paying for it.”

Poor old Leonard… never got to take an economics class in school! If only everyone had taken AP Econ in high school, naivety like this could be avoided! Ask ol’ Leonard if he’s stopped using electricity due to the higher price, and I bet you can guess his answer. Why? Inelastic demand.

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