Drilling makes us more dependent on foreign oil

Just thought I should point out that US oil reserves are not inexhaustible, and that most of the oil in the world is still elsewhere. If we continue to feed our addiction to oil-based energy by producing more in the US, that means, when our reserves are depleted, we will end up having to feed that addiction by buying more oil from abroad. On the other hand, if we shift to other forms of energy (which unfortunately include coal), we can hopefully break that addiction and really end our dependence on foreign oil.

My title is a bit of an exaggeration, I admit. Drilling doesn't necessarily make us more dependent on foreign oil, but it doesn't make us less dependent either, except in the short run. It shifts our dependence into the future. It makes us more dependent in the sense that we will remain dependent for a longer period of time (but be less so initially).

While I'm on the subject, a nice slogan for the Pigou Club, courtesy of Al Gore, via Battlepanda:

Tax what we burn, not what we earn.

Porn and Transportation are Substitutes

OK, I couldn't leave this one alone. Greg Mankiw points to some research showing that "many websites focused on adult or erotic material have experienced an upswing in sales in the recent weeks" since the stimulus checks were mailed out. I can buy the theory that many of their marginal customers are liquidity constrained, which I'm guessing is the way Greg sees it, but there's another issue here that hasn't been addressed. The stimulus checks are only one of a number of things that have happened over the past few months. You might also have noticed, for example, a dramatic increase in the price of gasoline, coming at a time when people were already adjusting to dramatic increases over the past 4 years. I think that particular change is an important part of the picture.

"Adult or erotic material" is a form of entertainment, or, if you will, recreation. But unlike various other forms of entertainment and recreation, it can be consumed at home. And I suspect that a lot of people think it's more fun than most other forms of entertainment and recreation that can be consumed at home. You can go out to a bar or a club or a ball game or a movie or a show or the beach or, well, a brothel, if you're in Nevada, or you can stay home and consume forms of entertainment that can be consumed at home. I can remember seeing a story recently (I don't remember where) about how brothels in Nevada are being hit hard by the economic slowdown. If you stay home, you don't have to use up gasoline, so the relative cost of at-home entertainment goes down when the price of gasoline goes up. Adult Web sites are probably not a Giffen good, so, if we could hold other income constant, we should expect that the demand for adult Web sites should go up when the price of gasoline goes up.

Granted, other income isn't constant. The rising price of gasoline affects a lot of other areas besides entertainment and recreation, so it represents a general decline in real income. And the economy is weak. So maybe the stimulus checks compensate for these declines in income. If the effect of the stimulus checks is to bring income up to the level that it was before the increase in gasoline prices, we should expect an increase in demand for adult Web sites. So the stimulus checks matter, but it isn't just the stimulus checks.

I should give credit where credit is due. The basic substance of this idea about gas prices and porn comes from this YouTube video:



Not coincidentally, the woman in the video (Isobel Wren, whom you may remember from an earlier post on this blog) has her own Web site "focused on adult or erotic material." And in the interest of smoothing the transition to a less energy-intensive economy, or maybe just to be naughty, I'll give you the link again. (Note that it is an adult Web site, so don't click the link unless you're over 18 and your boss isn't watching.)


UPDATE: I just noticed that this video is the same one that I linked to in the earlier post. Oh, well, now you get to watch it in embedded form.

Should we develop alternative fuels?

Until someone convinces me otherwise, I'm going to go with "no" -- at least if by "fuels" you mean carbon compounds that are used to release energy through combustion. Combustion of carbon compounds produces carbon dioxide, which aggravates global warming. If we're running out of oil, let's just run out, start driving less, flying less, doing less of things that produce greenhouse gases, and doing the remainder more efficiently. Or else let's find replacements that don't involve "fuels" in the sense I described: try electric cars that run on power from wind, solar power, hydroelectric power, nuclear power, etc..

From an environmental point of view, running out of oil is a good thing, an opportunity to slow down climate change, and are we now to try replacing that oil with other combustibles? When opportunity knocks, close the curtain and pretend you're not home?

If the government is going to subsidize anything, let it subsidize alternative sources and uses of electric power, or solar heating, or something like that. Why subsidize products that are going to aggravate our environmental problems?

The Pigou Club on YouTube

This video was posted several months ago by Razela (i.r.l. Jamie Bernstein, but not apparently Leonard Bernstein's daughter of the same name) on YouTube, as a response to a video by Bill Richardson asking for ideas about energy.



She also has a blog with embedded videos, but I couldn't find this one on her blog.

A Crude Form of Inflation Targeting

In his latest sermon against core inflation, Barry Ritholtz makes an important point – sort of. At least, he brings up an important issue, but I think his message that the core is evil distracts him from thinking more subtly about the implications. The title of his post, “Rising Crude Oil Pushes Consumer Prices Higher,” says most of it, and when he says, “consumer prices,” he means, “even core prices.” It’s a fact that we can’t escape: energy is a critical input to many goods (and services) that are part of the core. And even if it is only targeting a core price index, the Fed still has to worry about oil prices.

This is, as I said, an important point, but I don’t think it implies that everyone who emphasizes the core is either a liar or an idiot. It just means that anyone who claims to make an optimal forecast of the core without taking oil prices into account is not being careful. It also means that, even if we are confident that the Fed is targeting a core index, we should expect the Fed to take into account the inflationary impact of large oil price increases. At the same time, the Fed may take into account the potential recessionary impact of rising oil prices, if it judges that the price increases are a supply-side effect and not a demand-side effect.

So the monetary policy implications of rising oil prices are ambiguous, but they clearly don’t follow the simple formula that the bond market sometimes seems to expect: tighter oil => weaker economy => easier money. If the change in oil prices is a demand-side effect, then it’s actually a symptom of a stronger economy rather than a cause of a weaker economy, and the formula goes something like this: stronger economy => tighter oil => tighter money. If the change in oil prices is a supply-side effect, it will unambiguously tend to weaken then economy, but the Fed may perhaps prefer an even weaker economy to an unchecked inflationary impulse, and the result may still be tighter money.

If it were up to me, the Fed’s target would not be core consumer prices but something (such as unit labor costs) that excludes the effects of energy shocks altogether. Such a target would allow the US to take an adverse energy shock entirely in the form of a higher price level (rather than going through the painful process of squeezing profit margins, which tends to have unemployment as a side effect) without raising long-term inflation expectations. (An abrupt energy shock could still weaken the economy by James Hamilton’s mechanism of forcing difficult transitions – squeezing profit margins in some areas while raising them in others – but I don’t think there’s much we can do about that.) Since unit labor costs seem to be a politically unacceptable target (and the data are unreliable in the short run), one could perhaps imagine a core price index that is corrected for the indirect effects of food and energy prices. (I guess that would piss Barry Ritholtz off even more.) I’d also like to exclude import prices, so the GDP deflator might be a reasonable first-round candidate, though it brings in another set of problems.

Carbon Taxes

Apparently, the public in most countries supports Pigovian carbon taxes, but economics students (at least those at Gettysburg College) don't.

Stay Away from the Fan

If we lived in my fantasy world where the Fed targets unit labor costs and everybody knows it, we’d be fine – and due for some more substantial rate cuts. Not that I would have the Fed react dramatically to the latest dip in unit labor costs – which is only one quarter out of many and, after all, could be revised away. My fantasy Fed might take the latest labor cost report as a minor reason to congratulate itself on past policy actions, what with earlier seeming evidence of an acceleration in labor costs turning out to have been falsely alarming. But as for cutting rates, the Fed has plenty of other reasons: a deepening financial crisis that threatens to affect the real economy; a deepening housing recession (depression?) that threatens to spill over to the rest of the economy; a substantial decline in labor demand that has finally begun to show up in the unemployment rate. If labor costs were the target, the Fed could respond to all these concerns and shrug off the other news: the fastest increase in commodity prices since the 1970s. If everyone knew the Fed were targeting labor costs, then workers wouldn’t expect pay increases to compensate for rising energy costs and the like, and the Fed could ease without risking losing credibility or creating an inflationary spiral.

If we lived in my other fantasy world where the Fed follows a backward-looking Taylor rule, we’d be doing OK too – and still (in my opinion) due for some more rate cuts. Although there is inflation on the horizon, the Fed could use (and could already have used) the low reported trailing inflation rates as an excuse to cut rates. By the time the commodity price increases found their way into core inflation, hopefully the financial crisis would be over, and, with any luck, the Fed would re-tighten at just in time to prevent a boom.

But in the real world, Fed policy is judged not by unit labor costs or by its adherence to a backward-looking rule but by outcomes in the core inflation rate. (I’m thankful at least that I live in the USA, where we know that smoking cigarettes causes cancer and targeting headline inflation causes unnecessary recessions and booms.) If the Fed lets the core inflation rate rise for any reason, that will lead people to question the resolve of its still relatively new chairman. And workers, facing a reasonably healthy economy, will feel entitled to wage increases to offset their rising cost of living. And businesses, facing that same reasonably healthy economy and a seemingly friendly Fed chairman, will see no reason not to raise prices enough to preserve their record profits and compensate both for increased energy and materials costs and for increased wages. Unfortunately, the only way for the real Fed to maintain its credibility today is by keeping the economy weak and risking recession, so as to damp any economic optimism, which, in combination with rising non-labor costs, would result in a higher core inflation rate.

So here we are, people. Just over a month ago, I insisted that the s___ was not yet hitting the fan, but it looks like I spoke too soon. The fan is running. The s___ is flying. Just get out of the way.

More about Morality and Global Warming

In response to my previous post it has been suggested, as I expected it would be, that global warming is a moral issue because it concerns our moral obligation to future generations. I disagree, because I don’t think that those who oppose action on global warming are any less concerned about future generations. They just disagree about the best way to serve those generations. The disagreement is an economic/scientific/technological one and not a moral one. As usual, each side has tried to make the issue into a moral one by claiming that the other side has ulterior motives. For some interested parties, no doubt, there are ulterior motives, but the same is true of almost any political disagreement.

There is almost certainly a tradeoff between economic growth and action to reduce global warming. There is room for considerable disagreement about the terms of that tradeoff, but it would be foolish to deny that a tradeoff exists. Future generations are the ones who will benefit most from economic growth. People who oppose action on global warming argue that the negative impact of such action on future generations by reducing economic growth will exceed the positive impact by reducing global warming.*

On the margin, of course, they are clearly wrong, provided that all the relevant functions are continuously differentiable. If there is some positive chance of harm from global warming, then there is some cost that is worth paying in order to reduce global warming. The optimal Pigovian tax is nonzero. It is, however, reasonably argued that some of the relevant functions are not well-behaved. If there is a “critical mass” involved in reducing global warming, the cost of attaining that critical mass may not be worth paying. Or if there is a cost to the precedent of, for example, instituting a Pigovian tax, then even a small tax may be detrimental. I don’t find these arguments convincing, mostly because I think that the expected benefits of effective action against global warming (averaging over the entire range of possibilities) are extremely high, but it is a reasonable matter for dispute (at least theoretically).

The big problem with viewing any issue as a moral one is that it more or less ends the discussion. Those who disagree with you will never be convinced, because their morality is different from yours.

*Another way to put this discussion is that economic growth, properly measured, is by definition the only thing that benefits future generations. Proper measurement would require subtracting the harmful impact of global warming. The question, then, is whether action on global warming would ultimately increase or reduce properly measured economic growth.

Not a Moral Issue

According to Al Gore, speaking at the Oscars a few hours ago, global warming is “not a political issue; it’s a moral issue.” He’s wrong.

Viewing global warming as a moral issue is like viewing inflation as a moral issue. Telling people it’s immoral to overuse carbon-based fuels is like telling people it’s immoral to raise prices. WIN buttons didn’t help with the inflation problem in the 1970s, and the environmental equivalent of WIN buttons won’t help with the global warming problem. The problem in responding to global warming is one of coordinating our response, and that is precisely a political problem.

Unfortunately it’s a very difficult political problem. President Carter was ultimately able to solve the US inflation problem relatively easily by appointing Paul Volcker as Fed Chairman and letting Volcker take the heat for the necessary adjustments. By making money scarcer, Volcker’s Fed provided the incentives that induced businesses (and labor unions) to coordinate their pricing policies. Dealing with global warming will require much wider coordination (it can’t be done one nation at a time), and there is no existing mechanism to provide an independent scapegoat for the pain that may be involved.

Oil Demand Elasticity

In the light of the story in column 5 of today’s Wall Street Journal, I’d like to amend my application for membership in Greg Mankiw’s Pigou Club. To quote my earlier position,

I have to confess that my rationale is not 100% Pigovian. It seems clear to me that, even if Al Gore is only a little bit right about the causes and consequences of global warming, the optimal Pigovian tax is extremely high – much higher than what would be politically feasible (in the US) even in my wildest dreams. Energy demand is just not elastic enough, even in the long run, and the social costs of global warming are too high. So, for practical purposes, I see any increase in energy taxes more as a nondistortionary tax than as a Pigovian tax. There is a standard argument that taxes don’t do any harm if they don’t change behavior; in this case, changing behavior is gravy. (As for global warming, well, I’m just glad I’m going to die in another 40 years or so.)

“Energy demand is just not elastic enough, even in the long run…” After today’s news, I’m not so sure:

Oil consumption fell in the developed world last year for the first time in more than 20 years…

Never mind the rest of the article; the first half of the headline is enough. I thought oil consumption might fall eventually, but I was sure it would take a big recession to accomplish that. But instead here it is: good, old-fashioned demand elasticity. Make energy more expensive, and people just buy less of it. I feel like a kid who is old enough not to believe in Santa Claus but then sees a man in a red suit climb out of the fireplace.

I still think the optimal Pigovian tax is considerably higher than anything that might conceivably be politically feasible in the US. But I’m willing to say now that this is more a problem with the US political climate than with the enormity of the economic problem surrounding climate change. The economic problem is still a big one, but perhaps not so gargantuan as to be unsolvable. And I guess I can be a true Pigovian now, rather than a Ricardian masquerading as a Pigovian.

I temper my newfound optimism, however, in a couple of ways. First, as implied above, given political reality, I do not think a Pigovian tax would be sufficient to solve the problem (especially when you recognize that the US – indeed the whole developed world – is only part of it). Second, I’m not quite sure this guy in the red suit is really Santa Claus: a lot of what has happened recently is a shift of energy-intensive production from the developed world to the developing world, and most of the products are still consumed in the developed world, so it’s not clear how much of this ostensible reduced demand is really just a geographic shift in where the energy is used to satisfy existing final demand. Still, I didn’t expect to see anyone in a red suit coming out of the fireplace, so I’m pretty impressed, even it’s just Uncle Joe who decided to do something crazy after the 20th eggnog.

Energy Independence?

The issue of energy independence has come into the US political limelight recently. But the whole project seems pretty hopeless to me. A policy to move toward energy independence requires 3 components:

1. Reduce domestic energy consumption.


2. Conserve domestic energy resources.


3. Maintain and improve domestic energy production infrastructure.

To do any one of these 3 things on a significant scale would be rather a tall order. But to do all 3 of them at once without violating international trade rules? Anyone who can figure out a set of policies that achieves that deserves some kind of prize. But I’m not sure she deserves many votes, and I expect she will get even fewer votes than she deserves. “Energy independence” is a nice buzzphrase, but when it comes to actual policies, even any 2 out of 3 would be a tough sell.

The toughest part, logistically speaking, is combining components 2 and 3. The less of our domestic resources we use up, the more our energy production infrastructure is likely to deteriorate. The one way out is to develop new, renewable energy resources. But can we do that on a large enough scale? And can we do it on a large enough scale while at the same time reducing our overall consumption? And can we do it on a large enough scale while at the same time reducing our overall consumption without violating trade rules? And if we can do all that, can it possibly be worth the cost?

Join the Club

In reaction to this, I’m ready to join Greg Mankiw’s Pigou Club (people who support Pigovian taxes on carbon-based energy to deal with global warming – or other detrimental external effects of energy consumption – in an efficient way). There are a few reasons I might not be accepted, though:

1. I’m not sure that anonymous bloggers are qualified for admission.


2. I have to confess that my rationale is not 100% Pigovian. It seems clear to me that, even if Al Gore is only a little bit right about the causes and consequences of global warming, the optimal Pigovian tax is extremely high – much higher than what would be politically feasible (in the US) even in my wildest dreams. Energy demand is just not elastic enough, even in the long run, and the social costs of global warming are too high. So, for practical purposes, I see any increase in energy taxes more as a nondistortionary tax than as a Pigovian tax. There is a standard argument that taxes don’t do any harm if they don’t change behavior; in this case, changing behavior is gravy. (As for global warming, well, I’m just glad I’m going to die in another 40 years or so.)


3. I’m not sure Greg Mankiw reads my blog regularly enough to catch this post.

The argument commonly advanced against Pigovian taxes is that we cannot measure the relevant quantities well enough to ascertain the optimal tax. For example, in the (Toronto) National Post article linked at the beginning of this post:

The problem with a Pigovian gasoline tax is that it means using the same tools that failed planners everywhere over the past century. None of this stuff is measurable. What is the planned reduction in gasoline consumption? And what's the price to be set at? How high will the tax have to go before it changes behaviour enough to reduce demand? Will the government just wing it and see what happens? Will the alternative behaviour be any better or create new externalities and unintended consequences? What does government do with the money collected -- except launch a program of subsidies and spending to run alternative economic initiatives?

Since I’m convinced that the optimal tax is much higher than what is politically feasible, the uncertainty about the exact number is not a problem for me: I just advocate the highest tax possible. More generally, though, one might always set some reasonable lower bound and argue that the tax should be at least that high. The Post’s argument, as I commented in Greg Mankiw’s blog post (linked at the top), is essentially saying that government is generally incompetent, so whenever there’s a problem that the private sector can’t fix, the only reasonable approach is to ignore the problem. And then I proceeded to apply the same logic elsewhere:

The problem with using government-supplied police officers to protect citizens from crime is that it means using the same tools that failed planners everywhere over the past century. None of this stuff is measurable. What is the planned reduction in crime? And what are the wages of police officers to be set at? How much of this so-called police protection will have to be supplied before crime is sufficiently reduced? Will the government just wing it and see what happens? Will the police forces be any better than criminals, or will they create new externalities and unintended consequences? Where will the government get the money to pay these police officers?

I realize that a few anarchists won’t regard this as a reductio ad absurdum, but I’m not an anarchist myself. The debate does continue, however, and you can read it in the subsequent comments to Greg Mankiw’s post.

J. Bradford DeLete

One of the privileges of having my own blog is that I get to re-post the comments that Brad DeLong deletes. As everyone knows, he is quite trigger-happy with that delete button. Well, I can kind of understand: his threads would go on for miles of drivel if he let every Tom, Dick, and Harry post comments. But moi...? For my latest, first some background:

1. Brad attacks a political reporter for making light of Hillary Clinton’s “wonkish” energy proposals. The media should cater instead to careful and concerned readers who really care about her speech.

2. Brad attacks another reporter for not stating prominently enough that global warming skeptics are liars, lunatics, and charlatans. The media should cater to careless and sloppy readers, who will be more influenced by the skeptics’ statements than by the author’s unambiguous but subtle challenges.

3. More of the above: the post on which I commented.

So…

Will the real Brad DeLong please stand up? Is it the one who believes readers are dumb and casual and need to be spoon-fed the truth about global warming? Or is it the one who believes readers are subtle and sophisticated and need to be given more substantive details about Hillary Clinton’s energy proposals?

Oops, I forgot: It’s the one who deletes posts from those who find problems with what he says. I suppose one might be able to avoid this fate by stating the criticisms in unusually diplomatic language, instead of trying to be witty. But isn’t Brad himself the one who is always attacking reporters for being too diplomatic in their criticisms?

My latest comment agrees with something he said, though, so I’m guessing it won’t be deleted. (To be fair, I did make some mildly hostile comments on the first post cited above, and Brad didn’t delete them either. I guess it’s hard to predict.)

Why I support a windfall oil profits tax

Ordinarily windfall profits taxes are one of my least favorite kinds of tax. After all, basic economics says that windfall profits serve an important function: they draw needed capital into industries where supply is currently insufficient to meet demand without driving prices above normal levels. Moreover, the possibility of windfall profits is an important motivator for investment in risky businesses even in more normal times. If potential investors anticipate that there will be windfall profits taxes if things turn out better than expected, then they face a “heads I win, tails you lose” situation going into a venture: if things go badly, they get nothing; if things go well, the government gets everything. In general, our policies should probably be designed to encourage, rather than discourage, entrepreneurial risk taking.

But oil is a special case. I should start by saying that I have long (for at least 26 years, since the last oil crisis – but I won’t say whether I was old enough to vote at the time) been an advocate of much higher energy taxes in the US. I have also long been aware (particularly after observing the fates of John Anderson in 1980 and Ross Perot in 1992) that higher energy taxes are pretty much a lost cause politically. Higher taxes on fossil fuels would encourage conservation, encourage the development of renewable energy sources, discourage pollution of the environment, and slow down exploitation of our limited fossil fuel resources. But, in all probability, they just aren’t going to happen.

In a sense, however, they already are happening. There is a tax on oil, and the tax is being collected not by the government but by the oil companies themselves, with some help from energy speculators. Ordinarily, a dramatic increase in the price of a commodity would induce new investment in the industry, which would increase availability of the commodity and thus ultimately moderate the price. Today, however, that doesn’t seem to be happening: instead of making major new investments, oil companies – somehow bizarrely worried that oil might go back down from $70 to $10/barrel – are sitting on their profits, being good tax collectors but not good capitalists. And as a supporter of higher energy taxes, I think this is a good thing. We are getting exactly what we need: encouragement for conservation, encouragement for development of renewable energy sources, discouragement for pollution, and slowed exploitation of our limited resources.

The only thing we’re not getting is revenue – well, Exxon’s stockholders are getting plenty of revenue, but the federal government is still running a huge deficit. So why not just take some of those oil company revenues and declare them to be revenues of the federal government instead? This will of course further discourage the already ridiculously conservative oil companies from finding and exploiting more oil. Which is all for the better, in my view. Leave the oil in the ground, and it will still be there when we really need it. Some time 20 or 80 or 300 years from now, when oil has become more precious than gold and SUVs have become uneconomical even for the rich, we can repeal the windfall profits tax and say, “Get out there and dig!”