No. Not Cap= c*(energy Price Index); it would be more like cap=A + b*(energy price index). The size of “A” would not be trivial; it reflects labor and capital costs. Note also that “A” would probably be set somewhat above the normal competitive price level, to reflect the scarcity of capacity.
Sure you do, beatle. You implied that the oil companies compensate the commonwealth for the value of oil on public lands. Ok, say they do. (Presumably, oil companies will bid for oil based upon their alternative drilling opportunities in the private sector.) You also acknowledged the importance of environmental mitigation. But if environmental mitigation is anything less than 100% effective, there will be environmental damage that does not end up as part of the price of oil. The holders of that environmental claim -present and future generations- foot the bill.
Now, I acknowledge that there is some combination of crude oil prices and environmental mitigation technology that would make drilling in ANWR a sensible activity. But I’ve yet to see that case seriously made. Historically, the price of oil really isn’t that high today. Personally, I’d want to wait until oil hits, say, $100 in today’s dollars. But that’s a pure WAG.
flowbark, pal, I’m trying to understand, but I’m afraid I’m in murkeyville right now. So, with the Cap=A+B, where A=capital (amortization?) and operating costs less feedstock and B=energy price index times feedstock, I’m left wondering how B is arrived at (yes, I expanded on your equation a bit in attempting to grasp). Is it a fraction of the change in market price relative to some anchor (price at some, possibly moving, point in time)? If that’s the case I can easily see $8 gas bankrupting the utilities again.
Perhaps an easier way would be for you to demonstrate to me what happens at the consumer level when wellhead gas goes from $4 to $6.
While I am inclined to think you are attempting to address the issues at hand with some thoughts that bear some merit, you’ve also mentioned pricing collusion and gouging with the same dismissive (i.e., that’s a given) air that I see reported in the media.
Now I’m way upstream of the electricity generating portion of the market, but I can tell you that collusion, hoarding, gouging, etc. just don’t happen in the producer sector. It just doesn’t work that way. We are going to produce as much as we can, right now, today, in a very competitive market. We cannot afford to sit on something because a.) we have to produce revenues, and b.) we know that nobody can drive the market.
Exxon Mobil, Shell, BP, Chevron, Texaco and TotalFinaElf control less than 15% of world oil production, and their domestic USA production is less than that. OPEC has almost 40% of world market share, but they’re hardly a unified voice, and, besides the Saudis and Iraq, they are all pretty much producing (and shipping and selling) at their max right now. And there’s a whole lot of the rest of the world that’s buying at ever increasing rates.
The price manipulation thing is a fantasy that the pols still find an easy sell.
Let me run through an entirely hypothetical example. The numbers are made up. We have a quantity of electricity worth $10. $4 of that reflects the cost of natural gas. The cap is set at, oh, $12. Suddenly, the cost of natural gas goes up by $2 (the price goes up by half). The cap does not go up by 50%. It goes up by $2, to $14. (b=1; I should have said so.)
…
I’m not talking about price gouging at the wellhead level. Or at the refinery level. The press sometimes does. I don’t. Sure, Exxon et al make big profits when oil prices rise. And California orange producers make money when there’s a freeze in Florida. Doesn’t imply collusion.
And I’m not talking about meeting with your competitors and manipulating the price. I’m talking about controlling 4 electrical plants that together make up 8% of capacity, shutting down one of them for “repairs”, and announcing that to the world. Shut down two of them and in certain markets that can cause a spot-shortage, rolling blackouts and higher prices. Heck, even implicit collusion may not be necessary.
Though, I must confess that I’m reaching the end of my empirical knowledge here. It would be better of course if I could name names and give dates.
I would like to underline the plausibility of my argument again: remember this a new market, one that previously was considered a natural monopoly and was regulated for generations. When airlines were deregulated in the 1970s, there was a great deal of thought put into the problem. I get the sense that in California, the Public Utilities Commission didn’t analyze the problem at the same level of rigor. They certainly didn’t anticipate the mess that resulted. (Nor did anyone else.)
At the California Energy Commission’s website, I found a table of the Statewide Average Daily Forced or Scheduled Megawatts Off-Line.
Starting in May 2000, a lot more power was withheld from the grid. Interestingly enough, even after 2/2001, after the State of California became the nation’s biggest power broker, substantial amounts of capacity were still withheld. So we can’t blame financial conditions (as we might have in January).
Power held offline (Megawatts): "Repairs"
1999 2000 2001
---- ---- ----
Nov 2988 < 10343
Dec 2569 < 8988
Jan 3068 2423 < 9940
Feb 5096 3243 < 10895
Mar 5740 3389 < 13737
Apr 5739 3329 < 14911
Note how much more power was withheld, starting in Nov 2000 above. Further details available at the link.
According to an industry flak that I heard over the radio, some of the withholding of power that was done in January 2001 was due to the incredibly heavy usage sustained over the Summer of 2000. Hogwash. More power was withheld in Summer 2000 than in Summer 1999.
The indis appear to be withholding power to jack up prices. Our national regulators in Washington, DC should respond accordingly, thus stemming this artificial supply shock. But they won’t, notwithstanding the effects of this electrical shortage on the wider economy.
By the way, here is an interesting briefing from Union of Concerned Scientists discussing the California electricity crisis: http://www.ucsusa.org/energy/brf.calif_energy.html. Much of it is only tangentially related to this thread, but it does discuss this issue of the high level of power plant shutdowns and the speculations that these shutdowns were used to artificially drive up the price.
(I can’t believe I’m hanging out in GD-land, where nobody convinces anybody else of anything, but flowbark seems a reasonable sort)
Nobody anywhere will ever be able to prove what degree of environmental remediation will be/was achieved. I suspect even the most ardent anti-oil drilling interests would acknowledge that we might get close to 98% or so (however the hell you actually measure that), and nobody will be ever able to tell us how many baby critters did or didn’t happen because of drilling activities. The facts of the matter are that ANWR can be developed for its energy potential with modern drilling techniques with a minimal impact on the flora and fauna. And the vast potential revenues to the government and the potential energy benefits to the populace easily, in my mind, outweigh the relatively trivial minor points of what might be the minimal “footprint” of humanity on a place that few humans will ever see and that the earth’s activities are bound to change anyway.
So, no, I still don’t see the “subsidy” to those who, if things work out well, provide the populace with more energy while providing the government with HUGE revenues, and take ALL of the risk.
So I guess you’re saying that, in your estimation, the time just isn’t right?
Of course, when we talk of the environmental mitigation issues here, we are also conveniently neglecting to factor in the environmental costs associated with the use of that oil, which is another form of subsidy. If these costs aren’t put onto the consumers or producers of the energy, then the price will not reflect the full costs and the oil will be over-consumed.
Ok, jshore, but we’re talking about ANWR here. It’s not clear that a (somewhat high) carbon tax of $50 per ton would make ANWR uneconomical. Still, you are correct that fossil fuels in general are favored/subsidized both directly (via tax breaks like oil depletion allowances and the like) and indirectly (by not charging consumers the for the full costs that they place on society.
I doubt that it’s 98%; if it was close to that, I’d favor ANWR drilling. I would think that most biologists would as well. The environmental movement is less absolutist than they were in the 1970s and have learned to pick their battles. (For example, they are no longer insisting on total cleanup of all superfund sites provided that the new use is industrial/commercial. They do this because they figured out that its better to site a new plant or shopping mall in a brownfield site than in, say, habitat.)
Here’s a report of a letter from a bunch of biologists advocating that ANWR receive permanent protection. FWIW.
Still, I’m not a biologist. From what I’ve read though (in Environmental Review, can’t give the issue), there’s a fair amount of uncertainty involving the effects of modern oil drilling on “fragile” Alaskan habitat.
Pretty much. I’ve always believed that President Eisenhower’s energy strategy was pretty sound, ie , “Drain the rest of the world first.” Now maybe there will be a nuclear waste processing breakthrough (or one with fusion energy) and oil will never hit $100 per barrel. Or maybe when oil hits $50, shale oil will become economical. But it doesn’t seem a big deal to me to set aside about a third (?) of the North Slope for nature and leave the rest to the oil drillers. Especially when oil is not particularly expensive, historically speaking (and adjusting for inflation).
So jshore, I guess you’re saying that if we legalize pot-smoking, we’re subsidizing the pot smokers if we don’t somehow economically penalize them for the pot smoke? And of course, they’re “benefitting” from one use of arable land, perhaps that’s another “subsidy?”
Hmmm…, this’s got me thinking about all those tomato-eaters out there.
But that’s an abstraction.
As long as we’re wandering from the OP, let me pursue the apparent subject at hand. I’ve detailed above the likely terms of the deal for any oil reserve developers who might successfully bid into ANWR. And, despite my explanations of my perspective on the subject of a subsidy, defined most applicably in my Webster’s as “a government grant to a private enterprise considered of benefit to the public,” as being hardly applicable in the case where private enterprise receives no monies from the government and supplies quite a bit of such to the government, we remain at a quandary as to how to currently define a subsidized endeavor.
Under what terms would you hope to get someone to develop the energy reserves of ANWR and not call it a subsidy?
bashire: Thanks for the links and the provision of a concrete argument. Allow me to address it in the Price Cap Thread, which has more of a policy bent and less of a “Who to blame?” bent.
bashire, in this thread helpfully provides an alternative explanation for the increased withholding of electrical capacity in California.
Let’s take a look at the timeline:
Average of Total Megawatts Offline:
2000
Jan…2423
Feb…3243
Mar…3389
Apr…3329
May…4012
Jun…2683
Jul…2233
Aug…2434
Sep…3621
Oct…7633
Nov…10343
Dec…8988
2001
Jan…9940
Feb…10895 There’s a fire in a 1100 MW nuke plant.
… The state of CA takes over electricity purchases.
Mar…13737
Apr…14911
Ok. The 1100 MW of roasted nuke capacity is too little and too late to explain the bulk of the offline capacity. The financial situation could conceivably have led to problems prior to Feb 2001, but the March/April 2001 data conflicts with that hypothesis.
Side comment: I find the above data somewhat stunning. The extra capacity withheld in April 2001 when compared with April 2000 amounts to over 11,000 MW. That’s 10 burnt nuke plants, each of which is some 5 or 10 times bigger than your typical 100-200MW plant.
As for “delayed and deferred maintenance”, I can only say that it’s unclear why there would be 3 or 4 times that sort of activity in 2001 than in 2000. Remember that in the summer of 2000, more power was actually held off the grid than in the summer of 1999. So there apparently was less maintenance deferred.
The Washington State power shortage certainly makes things more difficult, but it would not affect the above data, which applies to California plants.
Finally, I don’t believe it implausible that large for-profit companies should pursue profits by individually withholding power. I’m not even sure that’s illegal. I’m only saying that an appropriate response would be to remove or offset their incentives to underproduce.
Another Hypothesis: The new power plant owners are incompetent, at least compared to the old monopolies. Or they lack experience with the plants they’ve just taken over. If this is the case (and I’m not saying that it is), I still believe that they should be given incentives to increase their performance, rather than keeping it the way it is.
As long as producers are charged for the costs that they place on society and the environment, all is well. Generally speaking firms pay for most of those costs, via wages, interest rate payments, etc. In a perfectly functioning market though, the government would tax them based on the damages that they put on the environment. In economic terms, they would be charged for their negative externalities (and I suppose subsidized for their positive externalities, if any).
beatle has correctly alluded to the difficulties of valuing habitat.
I’m sidestepping the question, “What is a subsidy?”, since that is basically a matter of definition. A more classic example of a subsidy would be the Price Anderson (?) act, which caps the liability that nuke plant managers have to pay out following a nuclear accident. Cheney justifies this policy by asserting that nuke plants wouldn’t be built in the absence of such special liability limits. Precisely, I say.
Finally, I’d like to note that the Cheney proposal also includes tax breaks for oil and gas drillers, according to the Cato Foundation: http://www.cato.org/dailys/05-19-01.html
Sorry for the rhetoric. I figured I’d link to a conservative group this time.