June 27, 2012
Links for 2012-06-27
Quick links to another proposal for Europe, and estimates of U.S. consumer benefits from lower natural gas and gasoline prices.
Should Germany save the euro by abandoning it? If Greece is forced out of the euro, who is next? Speculation that the same could happen to Spain, or Portugal, or Italy, could lead to self-fulfilling speculation against banks and sovereign debt, and where does the process end? Kenneth Griffin and Anil Kashyap suggest that the solution is for Germany to exit and leave everybody else in:
Although repeated currency devaluations are not the path to prosperity, a weaker euro would give a boost in competitiveness to all members of the monetary union, including France and the Netherlands, which is why they might very well choose to remain in it even if Germany were to gradually leave. A resurgence of manufacturing would also allow the vast unemployment rolls of Spain, Portugal, Greece and other countries to begin to decline.
Consumer benefits from natural gas fracking. Mark Perry points to these calculations by some Yale researchers, who suggest that a lower bound on the gain to consumer surplus from new technologies to obtain natural gas is the quantity consumed in 2008 (25.6 trillion cubic feet) times the change in price between 2008 and 2011 ($4.02 per thousand cubic feet), or $102.9 billion in extra consumer surplus each year. With natural gas prices in March down another $1.70 per thousand cubic feet relative to 2011 values, we're on track for more than $146.4 billion in extra consumer surplus for 2012 compared to 2008.
Retail gasoline prices. That $146.4 billion is in addition to the $112 billion boost I calculated that we might anticipate as a result of lower oil prices. Political Calculations has a nifty tool to calculate the long-term U.S. retail gasoline price associated with a given price for Brent crude oil based on the cointegrating relation I described on Sunday. By the way, the average U.S. retail gasoline price has already come down 6 cents/gallon since I wrote that piece.
Posted by James Hamilton at June 27, 2012 10:56 AMdigg this | reddit
I thought the calculation for remediation, their "worst" case, for contamination was low given the history of cleaning up contamination of any kind. They essentially add in the cost of drilling a new well for water for a bunch of individuals.
I'm also a little surprised the result is not more than the cost of a decent-sized highway bill. Nice to see, but it's only about the cost of FY2012 spending requested for the war in Iraq & Afghanistan.
Posted by: jonathan at June 28, 2012 06:16 AM
There goes the price of gasoline back up on the heels of the most recent European agreement.
Posted by: westslope at June 29, 2012 08:13 AM
With natural gas prices in March down another $1.70 per thousand cubic feet relative to 2011 values, we're on track for more than $146.4 billion in extra consumer surplus for 2012 compared to 2008.
I would have thought that economists would know better than to look at one side of the story. The 'savings' for consumers are clearly real and to be welcomed. But the process that is responsible for them, fracking used in conjunction with horizontal drilling, is not economic and not sustainable. When prices were high and the CEOs of the producing shale companies were honest they admitted that they needed around $6.00 to $7.50 per Mcf to break even because their full costs ran at those levels. After prices fell the shale producers stopped talking about the full cost and began to muddy the waters. The problem for them was that they could not hide the very large negative cash flows and their need to borrow more and more money just to stay in business. Because the leases required drilling and production the companies were stuck. Had they stopped their activity they would have had to write off a large portion of their assets and would have been seen as bankrupt. Instead of cutting their losses the management groups decided to continue adding debt, selling off some of their conventional assets, and using accounting tricks to make their operations profitable. With EURs substantially higher than what the production data suggested was reasonable the depreciation costs could be reduced substantially and the losses could be hidden.
The problem is that these games cannot last much longer. The 10-Ks are still showing negative cash flows and the conference calls are revealing 'funding gaps' that have to be closed by even more borrowing or further asset sales. And the production data is showing that the only profit to be had is in the core areas of better formations. It is clear that the shale companies know that, which is the reason why they are selling themselves as 'shale liquids' players and using the same tricks to hide the effects of the high depletion rates that make tight oil and gas drilling in shale formations uneconomic.
Posted by: VangelV at July 4, 2012 06:53 AM