September 06, 2011
Links for 2011-09-06
Swiss National Bank announces it will buy foreign currency in unlimited quantities to achieve a target exchange rate. That's quantitative easing with real meat on it.
Jim Brown on the importance of immediately opening up Alaska to more oil exploration and development.
Felix Salmon on why it's depressing to see S&P giving AAA rating to a new security structured from subprime loans.
Felix Salmon again on how to solve the problems with the U.S. Post Office.
Journal of Statistical Software on estimating state-space models.
Posted by James Hamilton at September 6, 2011 07:33 AMdigg this | reddit
The Swiss thing is weird. Unless they intend to pour their assets down a rathole, the Franc will rise if the Eurozone continues on its likely path. I'd say: buy the Franc because it will go up.
Posted by: Jonathan at September 6, 2011 11:23 AM
Roubini: Slowdown Brings Forward New Financial Crisis
The mechanics seem about right to me. How long can Greece withstand 50% interest rates before default? Can't be more than a few weeks, I would think.
But that's the second time I've linked Roubini in little over a week. One more and I'll qualify for counseling.
Posted by: Steven Kopits at September 6, 2011 12:49 PM
Re Felix Salmon on the USPS - I don't think any of his solutions will work in the end because setting the USPS free also means allowing it to fail. The Post Office has been a long time without the discipline of a profit and loss statement and it has no particular unique advantages other than the monopoly of the mailbox.
Posted by: Rich Berger at September 6, 2011 12:54 PM
So with the Alaska pipeline we have a case of a private owner of a fully depreciated capital asset asking the government to release new oil in order to allow the owner of that capital asset to extract additional profits. So why is it so unreasonable to ask the owners of that capital asset to make the necessary improvements using their own resources? Yes, I'm sure that it's very expensive to insulate a pipeline. So? If they want to earn a profit, shouldn't they have to make an investment? And wouldn't that investment in upgrading the pipeline translate into jobs?
Posted by: 2slugbaits at September 6, 2011 02:48 PM
Why not build a newer, smaller pipeline alongside the existing one? The significantly reduced cross-section would boost the velocity of the oil flow. If you had a "gang" of say four pipes and leave one or two idle for current production levels, then you would have the added capacity later if production were to increase.
Posted by: Doc at the Radar Station at September 6, 2011 06:09 PM
The investment in upgrading the pipeline might translate into jobs. What if the investment is not significantly positive for the owner of the fully depreciated asset?
I would be dead set against the government paying the cost to upgrade the pipe. But that is not what Brown is suggesting.
If the story has been presented accurately, and I understand that it seems to be presented from the oil company's point of view, then the insulation investment would be to allow the pipe to continue to operate at a much lesser rate than its historic capacity.
That is not the kind of capex most businesses look for. In my experience, that is when the owner looks for a lesser cohort, or a well connected group of former insiders, to take over the depreciated asset for a royalty.
The independent lesser cohort runs the asset into the ground while it squeezes the last pennies out of the asset in an innovative and risky way. The process potentially leads to learning the bigger company can benefit from and potentially leads to messy situations that fold the lesser cohort and leave the cleanup costs as an externality.
And in any case, the drillers will pay dearly for the right to drill. There is no proposal in the article to let them off that hook.
Posted by: Anonymous at September 6, 2011 06:24 PM
would you invest in upgrading that pipeline if you owned it... knowing that the U.S. government is doing everything in its power to prevent full utilization of that pipeline.
What are the economics of throwing good money after bad policy? Of course, you fully understand that the government creates an untenable situation in order to say that the nation is in an oil crisis which requires the government mandating expensive alternatives and doubling vehicle mileage standards. But that is another issue....
Posted by: Bruce Hall at September 6, 2011 08:15 PM
Rich: Re Felix Salmon on the USPS - I don't think any of his solutions will work in the end because setting the USPS free also means allowing it to fail.
The USPS has never been set free. Congress still controls the price the USPS is allowed to charge for postage. And because we are in a severe recession, mail volume is down 20%. The USPS is in a revenue crunch driven by the recession just like GM or Toyota or any other large corporation.
The biggest cash crunch is created by the Congressional mandate the the USPS pre-fund all retirement and health benefits, unlike any other public or private corporation that is permitted pay-as-you-go.
Posted by: Anonymous at September 6, 2011 10:33 PM
Or we could extract more oil and everybody wins.
Posted by: aaron at September 7, 2011 03:58 AM
Any comment on the UBS Euro report?
Posted by: Steven Kopits at September 7, 2011 07:01 AM
I've got news for you, public and private corporations can't use pay as you go for their pensions (except for some covering executives). On the other hand, they are generally prevented from prefunding retiree health benefits, even though they are required to account for the benefits as they are earned.
And the post office would still be in the hole if it could unload its benefit obligations. Mail volume is down - do you think that raising the price would boost volume?
Posted by: Rich Berger at September 7, 2011 09:29 AM
Smaller diameter pipes would cool faster. It's a matter of the ratio of surface area to volume. Smaller diameter pipes would require heavier insulation and stronger pumps to overcome the greater drag of a smaller pipe. We already have a pipeline that could be operated with more insulation and stronger pumps, without the expense of building another pipeline, as well.
If the government were doing everything in its power to prevent full utilization of the pipeline, the government would be doing a great deal more. We do not understand that the government is creating an untenable situation in order to require mandates. What we know is that the US taxes oil use far less than a number of other G20 nations, and that serious thinkers have called for an increase of the tax on extracted hydrocarbons for decades, with little success. A government that doesn't tax hydrocarbon fuel use to the level that offsets negative externalities is nowhere near trying to create an untenable situation for oil use. Miles away. To say otherwise is to demonstrate a misunderstanding of the place of oil in the US political economy.
If it were true that more oil production would mean "everybody wins" then there would be no resistance to increased oil production. The fact that there is resistance is prima facie evidence against your claim that "everybody wins". Should be pretty easy to see things that are clear on their face like that.
Posted by: kharris at September 7, 2011 10:31 AM
'A government that doesn't tax hydrocarbon fuel use to the level that offsets negative externalities is nowhere near trying to create an untenable situation for oil use. Miles away. To say otherwise is to demonstrate a misunderstanding of the place of oil in the US political economy.'
You mean like European nations that are capable of producing little oil. These "externalities" wouldn't happen to be part of the CO2 scam now, would they?
How about the externalities like jobs in Texas and North Dakota? How about the dwindling jobs in California as it has choked off what was once its major source of revenue? Bad policies are certainly "negative externalities."
Posted by: Bruce Hall at September 7, 2011 11:33 AM
Anonymous I would be dead set against the government paying the cost to upgrade the pipe. But that is not what Brown is suggesting.
That is exactly what Brown is suggesting, albeit in a roundabout way. Right now the discount rate is near zero. Oil in the ground is an exhaustible resource with significant extraction costs. The government owns the oil. From the government's perspective, as is standard in any Hotelling model, it makes more sense to leave the oil in the ground and let it appreciate over a longer time period. What Brown wants to do is have the government sell the oil to Big Oil and move it through the pipeline at sub-rent price. In other words, he is arguing for subsidizing the Great White Elephant of the North by having the government make an uneconomical extraction of Alaskan oil. Brown was just hoping no one would notice.
And in any case, the drillers will pay dearly for the right to drill. There is no proposal in the article to let them off that hook.
That's because it's understood that they will be let off the hook. Here's how the argument will go. First, we need to keep the pipeline going and to do that we need more oil. Second, if drillers have to pay dearly for the right to drill, then we can't fill the pipeline. Conclusion, let the drillers off the hook. We've been down this path before. We know the script.
There's a general principle that in order to follow a sustainable growth path the economy should focus on net product rather than gross product. A country's net income represents the amount it can consume today without adversely affecting how much it can consume tomorrow. If our NIPA methods correctly captured the consumption of exhaustible natural resources (and NIPA accounting gets it wrong), then we would be more sensitive to the actual price of pulling oil out of the ground today when the discount rate is near zero. Bryce ought to like it because it would help us with "honest prices."
Posted by: 2slugbaits at September 7, 2011 02:45 PM
Bruce Hall would you invest in upgrading that pipeline if you owned it
At today's interest rates, you betcha. Or do you think it makes more sense to do capital improvements only when interest rates are high?
These "externalities" wouldn't happen to be part of the CO2 scam now, would they?
Oh, you're one of those. Nevermind.
Posted by: 2slugbaits at September 7, 2011 02:53 PM
2sb, oil prices are very high, it is a very poor assumption that price will always increase. Oil prices are high because of constraints on production, not supply. What is uneconomical is to not take advantage of these high prices, as oil will inevitably fall in price in the next 50 years as demand is met by substitutes, CO2 levels and higher temperatures increase food production and decrease demand (vehicles are much less efficient in harsh winter weather), and efficiency improves (for all oil, not simply combustion).
Posted by: aaron at September 8, 2011 04:03 AM
"Oh, you're one of those. Nevermind."
Yes, I believe in actual data, not models that have to be constantly modified because they don't fit the data. But then, perhaps you are "one of those" who believe if the models don't fit, the data must be wrong. I suggest you look at the data for more than the past 40 years. You'll be surprise... especially since scientist were at one point proclaiming the coming ice age at the same time CO2 was increasing. But they didn't have Dell laptops back then, of course.
But back to the discussion. Investing against unsound government policies and activist government agencies is bad investment regardless of interest rates. Despite Obama's temporary restraint of the EPA, the political left has made it clear that they have a ideological agenda more than an economic one... and the science is certainly not settled that their technology "solutions" are viable... even with enormous subsidies at taxpayer expense.
Posted by: Bruce Hall at September 8, 2011 08:23 AM
Bruce Hall especially since scientist were at one point proclaiming the coming ice age at the same time CO2 was increasing.
Actually that's an urban myth. Scientists never argued that increasing CO2 would lead to global cooling. The argument about CO2 warming the atmosphere is based on quantum physics and the way molecules are excited by light in a certain wavelength. I think you're confusing CO2 with sulfur compounds in the atmosphere, which do contribute to global cooling:
Back in the 1970s there was concern that too much sulfur dioxide and sulfuric acid aerosols being produced by coal powered electrical generation plants could lead to global cooling. We don't do the high sulfur thing anymore, so the main worry today is CO2 and methane. I hope that refreshed your memory.
the political left has made it clear that they have a ideological agenda more than an economic one.
I think the political left has both, political and economic arguments on its side. I'm simply making the economic argument that we're better off keeping an appreciating asset in the ground when interest rates are low than we are consuming it today. If the government has to fund a project, the government can borrow long term at extremely low interest rates. Why would you sell an appreciating asset to fund government operations if the alternative is to borrow long term at 2 percent? If you owned a Rembrandt would you sell it at a discount to pay for a night out on the town if you're brother-in-law was willing to loan you the money at 2 percent? It's no different. Brown was implicitly making the argument that the government should sell an appreciating asset at a steep discount in order to keep the royalties flowing for the owners of the pipeline. Why? There are alternatives that would serve larger public objectives. Yes, those alternatives would reduce the rent that the owners of the pipeline are currently enjoying, but too bad. Why is it such a bad thing that those of us on the left expect our brave entrepreneurs to actually have to put up some investment money in order to turn a profit?
The only argument I'm hearing from conservatives is DRILL BABY DRILL BECAUSE WE ABSOLUTELY MUST DRIVE OUR GAS GUZZLERS!!! Conservaties, particularly older Tea Party type conservatives, have a very high temporal discount rate. Maybe that's mortality whispering in their ear. I dunno, but all conservatives seem to care about is the present...TAX CUTS NOW....CHEAP GAS NOW...EXPANDED MEDICARE NOW! They don't care about the consequences 2 or 3 generations down the road. I think that's the difference between our views...we have very different discount rates.
Posted by: 2slugbaits at September 8, 2011 03:03 PM
The Alaskan pipeline system is a common carrier pipeline with captive customers. Necessary investment will be fully recovered via regulated rates(currently on the order of a couple bucks a barrel). Of course, the joint owners also happen to be the captive customers and will pay a higher per barrel tariff for use of the pipeline, but this has NOTHING to do with cost recovery of the pipeline, which is effectively guaranteed.
BTW, those of you interested should read the report. I also recommend the several posts on the subject at www.theoildrum.com. The article cited here is very slanted. For one thing it's too late to avoid investing in low flow measures by developing additional production resources. BTW, record numbers of exploration wells are already planned. Alyeska has to solve this low flow problem now and can't wait 5+ years for new oil. The measures required aren't particularly expensive in context, anyway. 100 million barrels a year of captive production (at half today's flow rates) provides a pretty good base to pay for the kind of minor improvements needed.
The current (very low) water content allowed for the pipeline is actually more than typically allowed for U.S. Oil pipelines. The entry temperature is currently unregulated and could easily be required to be higher than 105 as planned. Half the length of the pipeline is underground. The remainder has uniform insulation for the entire length. The temperature delta is substantially higher in the initial sections of the pipeline. Doubling insulation for the first 150 miles ought to basically solve the icing problem. How much can it cost to blanket wrap a 4' pipe with another 4" of foam? If it cost $100 bucks a foot, that's only 15M bucks. If you paid it off in a year that adds less than 15 cents a barrel. Even if it costs 10X that, if you amortize it it's trivial.
The oil passes thru multiple pumping stations along the route. Adding heating to the tanks at these stations is not particularly challenging. Nor is the amount of heat needed all that large. It's on the order of the waste heat from the generators/pumps.
Posted by: benamery21 at September 8, 2011 05:45 PM