May 30, 2012
Links for 2012-05-30
Quick links to a few items of interest.
The transition to using natural gas to meet U.S. transportation needs continues.
Timothy Taylor unpacks the declining U.S. labor force participation rate.
Here's another reason you always want to pay attention to what Bill McBride has to say.
What's a supply-side liberal?
Iraq's oil production is picking up.
I'll be speaking at a symposium on oil supply and demand in New York on June 19, along with Econbrowser contributor Steve Kopits and others.
Posted by James Hamilton at May 30, 2012 07:28 AMdigg this | reddit
Regarding natural gas -
The Sierra Club is tryng to take down the industry. They played a large role in bringing down new coal.
The motive - eliminate the fossil fuel challenge to their green energy special interest. However, since there is no viable short run substitute to fossil fuel, they will bring down the economy instead.
Posted by: tj at May 30, 2012 08:27 AM
Right now, "alternative" [aka wind and solar] energy sources are based on the same premise as the Facebook IPO: not much. Consequently, the Sierra Club has a long, uphill, expensive, and contentious battle to begin to move the needle on natural gas.
Spain shows what happens when economic reality meets green rhetoric:
I recently contacted the U.S. Energy Information Administration and requested:
Can you direct me to your report that compares the average generation cost and retail prices of electricity by generation source?"
The response was to look at their faqs which linked to this:
A table displayed "Levelized Cost of New Generation Resources in the Annual Energy Outlook 2012" for 2017... meaning that current data was either unavailable or detrimental to the story of alternative energy sources.
If you can believe all of the assumptions for 2017, then the "levelized" cost for ONSHORE wind power was roughly equal to conventional coal and 40-50% higher than natural gas. This presumes wind turbines running at 34% of capacity. OFFSHORE wind power was roughly 500% the cost of natural gas. Again, these are projections for five years from now.
Then came the big caveat:
"Since load must be balanced on a continuous basis, units whose output can be varied to follow demand (dispatchable technologies) generally have more value to a system than less flexible units (non-dispatchable technologies) or those whose operation is tied to the availability of an intermittent resource. The levelized costs for dispatchable [coal,gas, nuclear] and nondispatchable [wind, solar] technologies are listed separately in Tables 1 and 2, because caution should be used when comparing them to one another."
Yes, indeed. Sierra Club has an uphill battle if economics has an influence on decisions.
Posted by: Bruce Hall at May 30, 2012 12:13 PM
Timothy Taylor didn't comment on the possibility that over 55 workers hanging onto jobs might be squeezing out the entry of younger workers. Older workers are hanging onto jobs longer for two reasons. First, collapsed 401k plans and vanishing defined benefit retirement plans. Second, the higher full benefit Social Security retirement age is starting to kick in now. This suggests that simply raising the retirement age may not do all that much to improve the Trust Fund's health if working longer on the back end is matched by a later start at the front end of the working life. What we really need is strong demand for labor, not a game of musical chairs in the job market
Posted by: 2slugbaits at May 30, 2012 03:54 PM
Bruce Hall You won't live to see it, but coal will get more expensive while the marginal cost of wind energy will always stay the same.
Posted by: 2slugbaits at May 30, 2012 04:03 PM
It doesn't matter if I live to see it. What matters is that wind-generated electricity is not presently competitive with coal or natural gas... and that it is only through government intervention raising the cost of operating with coal can wind be considered almost cost competitive, but not reliability competitive.
"There is always the argument that entrenched forces will make it impossible for new alternatives to reach the marketplace. You know, the airplane would never take the place of passenger trains. Cars would never take the place of horse-drawn carriages. Light bulbs would never take the place of gas lamps. But they all did because they were better alternatives and were developed without the government picking a winner or subsidizing them. Private individuals took the risks and proved their products were superior. With that proof came plenty of investors willing to risk their money... not the taxpayers' money.
The marketplace recognizes a better idea... and a worse one."
Posted by: Bruce Hall at May 30, 2012 06:02 PM
Re: Natural Gas Production & EIA Vs. Texas RRC Data
The following file has what appears to be the most recent monthly and annual oil and gas RRC production numbers for Texas (2/12 is provisional):
The RRC data show that Texas gas wells had a secondary annual production peak (absolute production peak so far was in 1972) in 2008, and from 2008 to 2011, annual Texas natural gas production, from gas wells, fell at 3.5%/year, even as the number of producing gas wells in Texas increased at about 2.5%/year (from 2008 to 2010). The RRC data show that monthly Texas natural gas production, from gas wells, fell at 8.5%/year from 1/09 to 1/12.
This, along with the RRC crude oil production data, does not bode well for the Shale Play model, i.e., the assumption that increasing production from shale plays can keep total US oil & gas production on a generally upward slope.
Comments on Texas & US Crude Oil Production:
Combined net oil exports from the seven major net oil exporters in North & South America, inclusive of rising net oil exports from Canada, recently fell by 1.4 mbpd, declining from 6.2 mbpd in 2004 to 4.8 mbpd in 2010 (BP, total petroleum liquids) . . .
If we use the RRC data for Texas production, instead of the EIA data, it puts US crude oil production at 5.3 mbpd for 2011, which would be no increase over the 5.3 mbpd rate that we saw in 2010.
Based on the Texas RRC data, it appears that a thousand rigs drilling for oil in the US in 2011 served to keep production flat year over year. Note that--based on the RRC data--all of the cumulative expenditures by the US oil industry from 2005 to 2011 inclusive only served to bring US crude oil production back to the 2004 pre-hurricane rate of 5.3 mbpd.
Incidentally, we have also seen sizable discrepancies between the EIA and other data sources for regions like Saudi Arabia, where the EIA's annual 2010 total petroleum liquids production number for Saudi Arabia is 500,000 bpd higher than what BP shows.
Posted by: Jeffrey J. Brown at May 30, 2012 06:49 PM
While you can cherry pick whatever data you want about a particular state, the bigger picture is that production of natural gas and oil is increasing in North America as newer sources come on line.
Besides, we were commenting on the natural gas aspect of energy... and the larger point that "alternatives" are far more expensive and far less reliable. The marketplace will decide when alternatives are ready... given the chance by hopey changey.
Posted by: Bruce Hall at May 31, 2012 05:32 AM
The Oil Symposium to which Jim alludes should be very good, speakers include the optimistic Ed Morse from Citi. Jim is giving the lunch talk. Worth a trip to New York just for that.
Posted by: Steven Kopits at May 31, 2012 05:46 AM
I have a question for the economically inclined out there:
If the marginal utility of a given good is greater in one country than another, should it represent a greater share of GDP in the higher utility country?
For example, the US can sustain about 4% of GDP to spend on crude oil; China, perhaps 6.2% of GDP--but this number appears to be declining quite fast there. Thus we might conclude that oil has a higher marginal utility in China than the US. True? Or not true?
The notion of equalizing marginal rates of substitution is helpful for cross-checking long-term forecasts for intra- and inter-country consistency. For example, health spending has been increasing rapidly for many years in the US, with doom-laden declarations along the lines that "Medicare alone will consume 120% by 2050". (I am exaggerating.)
Now, if we use a marginal rate of substitution approach to checking such a forecast, it should be possible to find resistance points where society will begin to push back--we're clearly not going to spend all our income on healthcare. An MRS approach would therefore be useful, I think, in making long term forecasts--like those of the CBO and EIA--more plausible.
I welcome any thoughts on the topic.
Posted by: Steven Kopits at May 31, 2012 06:11 AM
Agree,this conference is made enticing with distinguished speakers such Pr Hamilton and S.Kopits.
As an ersatz will read several Econbrowser posts and comments starting with the title “A rational reason for high oil prices” few preceding posts on energy, will read again the long term yield curve and its predictions.
Posted by: ppcm at May 31, 2012 06:23 AM
Sorry, I forgot to mention that in my reading list
J.Brown comments and Photo buckets are included.
Posted by: ppcm at May 31, 2012 06:29 AM
A historical record that completely ignores the government investment, both direct and indirect, for cars, planes, electricity and even coal isnt really much of a historical record. Is it?
If the government mandated every building have solar panels and wind turbines that would be the government picking winners....but if they mandate the building must have parking spots, thats free market magic.
Posted by: jason at May 31, 2012 07:13 AM
I agree that the EIA is reporting increasing US oil & gas production, but the EIA uses a sampling approach to estimate US production, while the Texas RRC sums the reported production from Texas oil & gas producers.
Texas natural gas wells represent a significant portion of total US natural gas production, and the RRC data show an ongoing multiyear 8.5%/year annualized rate of decline in monthly Texas natural gas production.
The Texas RRC data for natural gas wells completely contradicts the shale play model, i.e., the assumption that rising production from shale plays can indefinitely offset the underlying decline rate and result in a steady upward increase in US oil & gas production.
And as noted above, if we just use the actual reported crude oil production from Texas producers--instead of the EIA estimates--there was no increase in annual US crude oil production from 2010 to 2011.
Incidentally, I wouldn't call using actual production data in lieu of an estimate as "cherry picking."
But people will believe what they want to believe, and most people seem to want to believe that there is no problem with a virtually infinite rate of increase in our consumption of a finite fossil fuel resource base.
Posted by: Jeffrey J. Brown at May 31, 2012 07:14 AM
Labor force participation rate:
1. There may be seniors leaving the work force in greater numbers such that they could impact the participation rate, but many seniors actually would continue working if jobs were available. This is not as much an impact as it is claimed.
2. Women entering the work force would have increased the participation rate but women should have no impact on a reduction in the participation rate. They are in the work force and are a majority in higher education. If the participation of women has peaked at most it should be a neutral impact.
3. Young adults are the seed-bed of future production and they are being systematically excluded from the work force by minimum wage laws and other government restrictions on this group. This is alarming.
4. Again the decline in men in the labor force is alarming. Men are moving in with parents but as Taylor notes many are claiming disability. SSI disability insurance has gone through the roof. In the 1980 disability insurance was less than 10% of SSU. Today it is 50%. The laws have been changed so that it is almost impossible to deny someone disability or to take someone off.
So looking at this article it is what is not said that is important. The declining participation rate not only distorts the real unemployment rate but it tells us of how bad many government decisions concerning unemployment really are. Essentially we are forcing many who are willing to work to become "deadbeats."
Posted by: Ricardo at May 31, 2012 07:20 AM
In my opinion, the primary factor in global oil markets, is ongoing post-2005 decline in Global Net Exports of oil* (GNE), with the developing countries, led by China, consuming an increasing share of a declining volume of GNE. Developed countries like the US are gradually being priced out of the global market for exported oil, as global annual (Brent) crude oil prices doubled from $55 in 2005 to $111 in 2011.
Following is a link to a graph showing the ratio of Global Net Exports of oil (GNE) to Chindia’s net imports (CNI), or GNE/CNI, on the vertical scale, versus years on the horizontal scale. This is analogous to a production to consumption ratio. The ratio of Global Net Exports of oil (GNE) to Chindia’s net imports fell from 11.0 in 2002 to 5.7 in 2010.
Regarding the Chindia graph, it certainly goes a long way toward explaining why global annual (Brent) crude oil prices rose from $25 in 2002 to $111 in 2011.
What this graph drives home is that global oil exporters, led by Saudi Arabia, have been working hard to try to meet demand from the developing countries, led by the Chindia region (especially China), since 2002. The 2002 to 2005 increase in GNE was not sufficient to both meet developing demand and developed demand (without a rise in oil prices), and annual oil prices doubled from $25 in 2002 to $55 in 2005, to balance aggregate demand against supply. This was not enough of an increase to have a serious impact on the developed countries, but GNE stopped increasing in 2005.
Global annual prices doubled at as slower rate after 2005, from $55 in 2005 to $111 in 2011, as the developed countries economies slowed.
From 2002 to 2010, our data base shows that the ratio of total global net oil exports to the Chindia region's combined net oil imports (GNE/CNI) dropped by about half. If the GNE/CNI ratio hits 1.0--and note that the ratio has already fallen by half from 2002 to 2010 --the Chindia region would be consuming 100% of GNE.
An interesting note. Saudi net oil exports divided by Chindia's net imports for three key years (mbpd, BP data):
2002: 7.3/3.5 = 2.1
2005: 9.1/5.1 = 1.8
2010: 7.2/7.5 = 0.9
In other words, by 2010, 100% of Saudi Arabia's net oil exports were no longer sufficient to meet Chindia's demand for net oil imports.
I estimate that in just five years, from 2006 to 2010 inclusive, globally we may have already consumed about 40% of the total post-2005 cumulative supply of Global Net Exports of oil that will be available to importers other than China & India.
Of course, from this perspective, US domestic production is even more important than the shale promoters believe it is; however, I continue to think that the US oil & gas industry is making a serious mistake in vastly overpromising what we can produce domestically.
*Top 33 net oil exporters in 2005, BP + Minor EIA data, total petroleum liquids
Posted by: Jeffrey J. Brown at May 31, 2012 07:26 AM
Link to Chindia graph, Global Net Exports Divided by Chindia's combined net imports on vertical scale:
Posted by: Jeffrey J. Brown at May 31, 2012 07:28 AM
Jeffrey and Jason, when I said "cherry picking" I referred to looking at one state's production and ignoring the dramatic rise of production elsewhere. Incidentally, a static look at today's production will not necessarily be a great indicator of future production.
I do agree with you that when the government mandates anything that more costs have to be baked into the outcome... even if they are not readily apparent.
My point is that the marketplace rewards innovation AND savings. Innovation comes first and is normally adopted by those willing to pay a premium. Savings comes as production and product improvements lower costs and demand ramps up. Happened with airplanes, cars, light bulbs, flat-screen TVs... and it will eventually happen with renewable energy WHEN efficiency, reliability, and costs make it competitive.
When the government says, "Stop using the most efficient, reliable, and least costly alternatives and pay for the least effective, least reliable, most costly alternative... then you have a mess. Political cronies are rewarded with bloated loans, grants or contracts. The average guy on the street sees his bills skyrocketing.
Posted by: Bruce Hall at May 31, 2012 09:32 AM
I think that you need to take into account the size of the economy when you are looking at the marginal utility. What I mean is that 4% of US GDP is a lot greater than 6.2% of Chinese GDP. The greater percentage may or may not mean that the marginal utility in China is greater than in the US. Perhaps marginal utility considered relative to the whole domestic economy but that may be different from the marginal utility between countries.
My thoughts for what it is worth.
Posted by: Ricardo at May 31, 2012 11:50 AM
Steven Kopits: In general, it's not possible to compare marginal utility across different people, let alone across different countries. The reason is that there are no natural units in which "utility" is measured.
Instead, all economic theory focuses on the ratio of the marginal utility of one good to the marginal utility of another. Whatever units you might want to conceive of measuring utility in, that ratio would be invariant. Moreover, standard economic theory says the ratio of marginal utilities should equal the ratio of prices of the two goods.
So, with that interpretation, you are talking about the possibility of different relative prices across different countries. That can arise from factors such as transportation costs and taxes.
Posted by: JDH at May 31, 2012 12:08 PM
My point is that if we simply use the actual Texas RRC data for Texas crude oil production, instead of the EIA estimates for Texas crude oil production (EIA and RRC both define crude oil production as Crude + Condensate), there was no increase in annual US crude oil production from 2010 to 2011.
Again, I simply substituted actual RRC production data for EIA estimates for Texas and then I used the EIA data for the rest of the country.
Here is what the EIA and the Texas RRC are showing for January, 2012 crude oil production:
Texas: 1.7 mbpd
US: 6.1 mbpd
Texas: 1.1 mbpd
If we substitute the actual Texas RRC production data for the EIA estimate, then in January, 2012 US crude oil production was 5.5 mbpd, versus the 2011 annual average of 5.3 mbpd (using RRC for Texas in both cases).
And if the EIA is this far off for Texas, what about the other US producing areas, and what about the global data set?
Posted by: Jeffrey J. Brown at May 31, 2012 01:12 PM
Greece Finding Crude Oil Increasingly Hard to Come By
"Greek refiners are finding fewer willing sellers of crude oil as suppliers wary of the country’s economic situation avoid doing business there, people familiar with the situation said. The issue extends beyond the supply of crude oil to oil products that are used for fuel, heat and power generation and are essential for industrial activity.
A trader described people in the market as “completely reluctant” to deal with Greece, amid concerns over customers’ ability to pay for oil, as rising fears that the troubled country could be forced out of the euro zone have dented sellers’ confidence, and with banks increasingly reluctant to supply Greek companies with credit lines . . .
For much of last year and the beginning of this year Greece bought substantial amounts of oil from Iran at very advantageous credit terms, but Iranian state media reported in April that the country was cutting off supply to Greece as a result of unpaid bills, and in any event a European Union-wide embargo on the import of Iranian oil is set to come into force July 1."
Posted by: Jeffrey J. Brown at May 31, 2012 01:33 PM
Random thought, question.
Babyboomers are getting to the age that they'll be required to draw from their 401k's. What will this do to consumption, tax revenue and investments?
Posted by: aaron at May 31, 2012 07:20 PM
The Sierra Club was pro-nat gas until the problems with fracking became too widely known to ignore.
Posted by: Robert Hurst at May 31, 2012 07:49 PM
I understand that estimates can have biases and shortcomings, but projecting a Texas estimate error to the U.S. may be stretching it a bit. Could there not be offsetting errors as well?
Interesting that you bring up the limitations of estimates and surveys versus complete [census] counting. Would that apply to employment surveys as well in your mind? [BLS]
Regardless, with more shale production coming online, it would seem reasonable to expect a gradual increase in supplies for the future. That's dependent, of course, on Obama and EPA actions. It's not lack of oil or technology.
Posted by: Bruce Hall at June 1, 2012 05:40 AM
Just for the record, Miles Kimball should be sued for false advertising for implying his ideas are supply-side.
Posted by: Ricardo at June 1, 2012 06:02 AM
As noted above, we see material differences between the EIA and other data sources for other producing regions. For example, the EIA and BP numbers for total petroleum liquids production for Saudi Arabia in 2005 were the same, but in 2010 the EIA's number was 500,000 bpd higher than what BP showed.
But even if we take the EIA's numbers for US crude oil production at face value (which I did in the article below), the recent increase in US crude oil production is virtually a rounding error in the context of the overall decline in global net exports:
"While the US has shown a small increase in crude oil production, up from the pre-hurricane rate of 5.4 mbpd in 2004 to 5.7 mbpd in 2011, a net increase of 0.3 mbpd, this is virtually a rounding error in the context of the multimillion barrel per day declines that we have seen in GNE, especially the ongoing decline in the volume of GNE available to importers other than China and India, which dropped from 40 mbpd in 2005 to 35 mbpd in 2010.
And while it is certainly true that US net oil imports have declined, a significant contributor to the decline in net imports was a large decline in US consumption, which was down by 1.5 mbpd from 2004 to 2010 (EIA).
So, while slowly increasing US crude oil production is very important, the dominant trend we are seeing is that developed oil importing countries like the US are being gradually priced out of the global market for exported oil, as global oil prices doubled from 2005 to 2011, and as developing countries like the Chindia region consumed an increasing share of a declining volume of global net exports of oil. For more information, you can search for: Peak Oil Versus Peak Exports. [article at Energy Bulletin]
The Titanic hit the iceberg at 11:40 P.M. on the evening of April 14, 1912. At midnight, only a handful of people on the ship knew that it would sink, but that did not mean that the ship was not sinking. The Titanic’s pumps helped, but they could not fully offset the flow of seawater into the ship. In my opinion, slowly rising US crude oil production is to the ongoing decline in Global and Available Net Exports as the Titanic’s pumps were to the flood of incoming seawater."
Posted by: Jeffrey J. Brown at June 2, 2012 05:53 AM
Then you better buy as much Exxon and BP and Shell as you can afford... if you truly believe that.
Somehow, despite the "peak oil" alarms for the past 5 decades, there has been sufficient oil to meet the demands of the world... even as the demands increase.
Is supply finite? Of course. Do our present supply sources define the supply limits? Of course not.
At some point in the future... 25 to 50 years... electric car technology will become superior to gasoline car technology and gasoline cars will go the way of the horse-drawn carriage. Of course, that schedule could be speeded up artificially by government interference in the marketplace forcing a substitution of efficient/effective lower cost vehicles with inferior "alternative". We can never discount the impact of government on the marketplace leading to higher costs/inflation.
Posted by: Bruce Hall at June 3, 2012 12:30 PM
We have seen a slight (0.5%/year) increase in total global annual liquids production, inclusive of low net energy biofuels, but we have seen no material increase in global annual crude oil production since 2005, even if we take the EIA numbers at face value.
But as noted up the thread, we have seen a material decline in Global Net Exports of oil (GNE), with developing countries, led by China, consuming an increasing share of a declining volume of GNE.
A doubling in annual global crude oil prices from 2005 to 2011 necessary to balance global demand against a declining supply of GNE.
Posted by: Jeffrey J. Brown at June 4, 2012 09:14 AM
Jeffrey, agreed that the recent minor increase has not been that notable, but shale oil production has been a recent and growing phenomenon. Additionally, foreign offshore drilling holds huge potential... not so much for the U.S. under present restrictions.
The automotive marketplace has reacted well to the price increases as the mix of vehicles are substantially shifting toward small cars. U.S. manufacturers have learned to upgrade the trim levels and functions of these smaller vehicles to make them more appealing... and profitable. Consequently, demand for gasoline has been softened.
Posted by: Bruce Hall at June 4, 2012 10:32 AM
Graph showing ratio of Global Net Exports* of oil (GNE) to Chindia's combined net oil imports (CNI) follows. I think that most people would agree that there is a definite trend here:
At a 1.0 ratio, the Chindia region would consume 100% of GNE.
*Top 33 net oil exporters in 2005, BP + Minor EIA data, total petroleum liquids
Posted by: Jeffrey J. Brown at June 5, 2012 06:31 AM