We Should Reward Those Who Take Risks to Produce What We Need

On the Democratic and Republican-in-Name-Only side, we have the idea of "windfall profits taxes" on energy companies. These would presumably mandate a desirable level of corporate profits in one sector on which we depend. (And how long do you think it would apply to only one industry?) If profits exceeded that level, they would be taxed.

As far as I can tell, there is no plan to give a rebate to the companies if their profits have fallen below that desired level.

In other words, the plan is to send this message to energy-company investors, including retirees and pension funds: "Yes, we are in a situation of oil and gas shortage. Yes, we want you to risk billions of dollars exploring for and producing and refining oil and processing gas. But if you succeed for any reason, and even if no price-fixing is found, we will punish you for it."

This is what I would call confusion. You usually get more of something by rewarding people for doing it or producing it, not by punishing them for doing it or producing it.

Yes, the human instinct of envy demands that we get some licks in against people who are doing well, even if we are doing only slightly less well ourselves. But economies built on the politics of envy are rarely successful. Ask the Cambodians or the Chinese or the Russians before they went capitalist.

 

For the full commentary, see:

BEN STEIN.  "Everybody’s Business; A Quick Course in the Economics of Confusion."  The New York Times  (Sun., May 28, 2006):

Current Cost of Gas Needed to Drive a Mile, Is Not High, by Historical Standards

GasCosts.jpg 

Source of graphic:  p. C1 of NYT article cited below.

 

(p. C1) The price of gasoline is hovering around $3 a gallon, and politicians are falling over each other to pander to voters’ gas fears.  In a recent Gallup Poll, 70 percent of people said they favored price controls, a relic of Richard Nixon’s day.

But it’s time to take a deep breath and consider a radical fact: gas still isn’t all that expensive.  I’m not just talking about the disparity between prices here and in Europe, where gas taxes are much higher.  What really matters to people is the cost of the gas that is needed to drive a mile, a function of both the price of oil and the fuel efficiency of cars.

By this measure, gas for the average American now costs about what it did throughout the 1960’s and early 70’s and much less than in the early 80’s.  The 1990’s, in other words, were the big exception.

 

For the full commentary, see:

David Leonhardt.  "The High Costs of Cheap Gas and Vice Versa."  The New York Times  (Weds., May 10, 2006):  C1 & C11.

Charlie Munger Calls Ethanol “Stupid”

Charlie Munger.  Source of image:   http://daily.stanford.edu/tempo?page=content&id=16135&repository=0001_article#

 

Charlie Munger is the number two executive, next to Warren Buffett, at Berkshire Hathaway.  He is old enough, and successful enough, and gutsy enough, and curmudgeony enough, to call ethanol "stupid" while in the "cornhusker state" for the company’s annual meeting.  (Of course, he wasn’t running for public office, and knew he would soon be flying back to his home in California.)

 

Munger said using ethanol for fuel seems "stupid" to him because it takes more energy to create than it produces as a fuel.  Buffett said there are so many ethanol plants, existing or planned, that he doesn’t see how they can all continue operating profitably.

 

For the full article, see:

STEVE JORDON and JONATHAN WEGNER.  "Berkshire Notes: Clayton’s Excutives Double Up."  Omaha World-Herald  (Sunday, May 7, 2006):  1D.

(Note:  the annual meeting was held on Sat., May 6, 2006)  

Taxpayer Pays $120 to Displace a Barrel of Oil With Ethanol

 

John Deutch served as Undersecretary of Energy under President Jimmy Carter.  He also served in the Clinton administration, and is now an MIT chemistry professor.  In the selection below, he explains why corn-based ethanol in the United States, is not an efficient way to produce energy.  In a later section of his commentary, he is more positive about the economics of producing ethanol from switch grass.  (The main difference, he says, is that switch grass can be cultivated using much less petroleum than is used for corn.) 

 

Today, we use corn to produce ethanol in an automobile fuel known as "gasohol" — 10% ethanol and 90% gasoline.  Generous federal and state subsidies, largely in the form of exemption from gasoline taxes for gasohol, explain the growth of its use; in 2005, over four billion gallons of ethanol were used in gasohol out of a total gasoline pool of 120 billion gallons.  Politicians from corn-states and other proponents of renewable energy support this federal subsidy, but most energy experts believe using corn to make ethanol is not effective in the long run because the net amount of oil saved by gasohol use is minimal.

In the U.S., cultivation of corn is highly energy-intensive and a significant amount of oil and natural gas is used in growing, fertilizing and harvesting it.  Moreover, there is a substantial energy requirement — much of it supplied by diesel or natural gas — for the fermentation and distillation process that converts corn to ethanol.  These petroleum inputs must be subtracted when calculating the net amount of oil that is displaced by the use of ethanol in gasohol. While there is some quarreling among experts, it is clear that it takes two-thirds of a gallon of oil to make a gallon equivalent of ethanol from corn.  Thus one gallon of ethanol used in gasohol displaces perhaps one-third of a gallon of oil or less.

A federal tax credit of 10 cents per gallon on gasohol, therefore, costs the taxpayer a hefty $120 per barrel of oil displaced cost.  Surely it is worthwhile to look for cheaper ways to eliminate oil.

The economics are not the same in other countries.  Brazil is a well-known example, where sugarcane grows in the tropical climate and conventional fermentation and distillation readily yields ethanol.  Ethanol is said to provide 40% of automobile fuel in Brazil and compete with gasoline without government subsidy.  Depending on the future world price of sugar and the lessening of trade restrictions on both sugar and sugar-derived ethanol, Brazil could become a net exporter of this biofuel.

 

For the full commentary, see:

JOHN DEUTCH.  "Biomass Movement."  The Wall Street Journal  (Weds., May 10, 2006):  A18.

 

Endangered Fish Thrive on Oil Platforms

Large numbers of rockfish and other fish near the Gilda oil platform off the Ventura coast.  Source of image: http://www.lovelab.id.ucsb.edu/Check.html

 

SANTA BARBARA, Calif., March 11 – A marine biologist has found that 27 oil platforms off California’s Central Coast may be havens for bocaccio, cowcod and other fish.  

 . . .

Since the 1950’s, when heavy fishing began in the region, some species have been reduced to 6 percent of their previous numbers, Dr. Love said.  Overfishing has led to an economic disaster, leading some fisheries to close.

Dr. Love films fish around the platforms from a submarine and then counts them in his laboratory.

Among his findings are that large fish prefer crevices at the platforms’ base, and smaller ones like the middle section above their predators.

At Platform Gail, which stands in 739 feet of water nine miles off the Ventura coast, Dr. Love found what he believes to be the highest density of two species of overfished rockfish in Southern California.

Dr. Love emphasizes that his research does not draw conclusions about whether the platforms should be removed.  He says his personal view is that the rigs should stay in place, cut below the waterline so that ships can pass safely over them.

Dr. Love gets about 80 percent of his research money from the government, and the rest from the California Artificial Reef Enhancement Program, a Sacramento nonprofit group financed almost entirely by oil companies.  The group has contributed about $100,000 a year to his research since 1999, said its executive director, George Steinbach.  Dr. Love said oil industry money could not sway his research.

 

For the full story, see:

"Citing Oil Rigs as Fish Havens, Companies Resist Removal."  The New York Times  (Mon., March 13, 2006):  A18.

Expecting Nationalization, Companies Held Off Investing in Bolivia

 

Bolivian President Morales announcing the nationalization of Bolivia’s energy industry.  Source of image: http://www.nytimes.com/2006/05/03/world/americas/03bolivia.html

 

Bolivia’s nationalization of its energy industry, announced Monday by President Evo Morales, was a vivid illustration that the populist policies, championed most prominently by Venezuela, were spreading.

. . .

. . .  while Brazil might feel tremors from Bolivia’s decision, it is Bolivia that may be risking its potential as a major natural gas exporter.

Companies had been holding off on investments in Bolivia for some time, unnerved by growing talk of precisely the kind of step that Mr. Morales took this week.  Foreign direct investment, much of which goes to energy and mining, fell to $103 million in 2005, from $1 billion in 1999.

What is more, unlike oil, natural gas is not easily exportable, with costly liquefaction facilities, customized tankers or pipelines needed to take the fuel to markets.  Chile, a potential market for Bolivian gas, may choose instead a project to import the fuel from as far away as Africa.

Even Brazil, while now reliant on Bolivian gas, has recently discovered large offshore gas reserves of its own.  Thus the window of opportunity for Bolivia to become a leading gas exporter may be closing, even as it grows more courageous in its dealings with foreigners.

"If Brazil decides to give the cold shoulder to Bolivia," said Carlos Alberto López, an independent consultant for oil companies in La Paz, "Bolivia will be left with its gas underground."

 

For the full story, see: 

SIMON ROMERO and JUAN FORERO.  "Bolivia’s Energy Takeover:  Populism Rules in the Andes."  The New York Times  (Weds., May 3, 2006):  A8.

 

 BolivianSoldiersNationalization.jpg Bolivian soldiers after seizing natural gas facilities.  Source of image: http://www.nytimes.com/2006/05/03/world/americas/03bolivia.html

 

Chernobyl Accident Cannot Occur In U.S. Type Reactors


Twenty years ago (April 25, 1986), the Chernobyl nuclear accident sent a plume of radiation into the air above Ukraine.  The word "Chernobyl" remains the most emotionally charged argument used by the opponents of nuclear energy.  But if examined carefully, the main lesson from Chernobyl may be that what happened there cannot occur in the better designed light water reactors used in the United States, and most of the rest of the world.  William Sweet, the author of the commentary below, has also authored Kicking the Carbon Habit:  Global Warming and the Case for Renewable and Nuclear Energy.

 

(p. A23) . . . , though it went unnoticed at the time and has been inadequately appreciated since, Chernobyl also cast into relief the positive features of the reactors used in the United States and most other advanced industrial countries.

The reactor at Chernobyl belonged to a class that was especially vulnerable to runaway reactions.  When operating at low power, if such reactors lost water, their reactivity could suddenly take off and very rapidly reach a threshold beyond which they could only explode.  Making matters worse, surprisingly little more pressure than normal in the machine’s water channels would lift its lid, snapping the vital control rods and fuel channels that entered the reactor’s core.

On the night of April 25, 1986, poorly trained and supervised plant operators conducted an ill-conceived experiment, putting the machine into the very state in which reactivity was most likely to spike.  Within a fraction of a second, the reactor went from being barely on to power levels many times higher than the maximum intended.

This kind of accident cannot happen in the so-called light water reactors used in the United States and most of Western Europe and Asia.  In these reactors, the water functions not only as a coolant but as a "moderator": self-sustaining nuclear chain reactions cannot take place in its absence.  This is a very useful passive safety feature.  If coolant runs low, there is still a danger of a core meltdown, because the fuel retains heat; but the reactor will have automatically and immediately turned itself off.

 

For the full commentary, see:

WILLIAM SWEET.  "The Nuclear Option."  The New York Times  (Weds., April 26, 2006):  A23.

 

The reference to Sweet’s related book is:

Sweet, William.  Kicking the Carbon Habit:  Global Warming and the Case for Renewable and Nuclear Energy.  Columbia University Press, 2006.


Source of book image:  http://www.amazon.com/gp/product/0231137109/sr=8-1/qid=1146071688/ref=sr_1_1/104-5668094-9083929?%5Fencoding=UTF8