Donald Marron
Aerial views of Rifle, the Roan Plateau, and the surrounding area on the Western Slope show the many inroads that natural gas drilling has made. Natural gas is currently the cheapest option for power generation, which is causing some to abandon plans for nuclear and wind power sources. (Amanda Paulson/The Christian Science Monitor/File)
The natural gas glut is reshaping electricity markets
Over at Bloomberg, Julie Johnsson and Mark Chediak document how low natural gas prices are reshaping electricity markets. Wind, nuclear, and coal all look expensive compared to natural gas generation:
With abundant new supplies of gas making it the cheapest option for new power generation, the largest U.S. wind-energy producer, NextEra Energy Inc. (NEE), has shelved plans for new U.S. wind projects next year and Exelon Corp. (EXC) called off plans to expand two nuclear plants. Michigan utility CMS Energy Corp. (CMS) canceled a $2 billion coal plant after deciding it wasn’t financially viable in a time of “low natural-gas prices linked to expanded shale-gas supplies,” according to a company statement.
Mirroring the gas market, wholesale electricity prices have dropped more than 50 percent on average since 2008, and about 10 percent during the fourth quarter of 2011, according to a Jan. 11 research report by Aneesh Prabhu, a New York-based credit analyst with Standard & Poor’s Financial Services LLC. Prices in the west hub of PJM Interconnection LLC, the largest wholesale market in the U.S., declined to about $39 per megawatt hour by December 2011 from $87 in the first quarter of 2008.
Power producers’ profits are deflated by cheap gas because electricity pricing historically has been linked to the gas market. As profit margins shrink from falling prices, more generators are expected to postpone or abandon coal, nuclear and wind projects, decisions that may slow the shift to cleaner forms of energy and shape the industry for decades to come, Mark Pruitt, a Chicago-based independent industry consultant, said in a telephone interview.
The hard question, of course, is whether low natural gas prices will persist, particularly if everyone decides to rush into gas-fired generation:
“The way to make $4 gas $8 gas is for everyone to go out and build combined-cycle natural-gas plants,” Michael Morris, non-executive chairman of American Electric Power (AEP) Inc., said at an industry conference in November. “We need to be cautious about how we go about this.”
The whole article is worth a read if you follow these issues. (ht: Jack B.)
This file photo shows a car's gasoline tank. Oil prices have risen to nearly 33 times those of natural gas. Are natural gas vehicles our future? (Alfredo Sosa/The Christian Science Monitor/File)
Gap between oil and natural gas prices widens
In 2010, I wrote a series of posts documenting how oil and natural prices had decoupled from each other (see here and here). For many years, oil prices (as measured in $ per barrel) were typically 6 to 12 times natural gas prices (as measured in $ per MMBtu). That ratio blew out to around 20 in 2009 and again in 2010, a severe break with historical trends.
At the time, that seemed like an enormous disparity between the two prices. In retrospect, we hadn’t seem anything yet. As of yesterday, the ratio stood at more than 33:
A barrel of oil has roughly 6 times the energy content of a MMBtu of natural gas. If the fuels were perfect substitutes, oil prices would thus tend to be about 6 times natural gas prices. In practice, however, the ease of using oil for making gasoline means that oil is more valuable. So oil has usually traded higher.
But the current ratio is unprecedented. Each Btu of oil is now worth about five times as much as each Btu of natural gas. Thanks to a torrent of new supply, natural gas prices are down at $3.00 per MMBtu even as oil (as measured by the WTI price) has risen back above the $100 per barrel mark.
Perhaps natural gas vehicles will be the wave of the future?
Note: Energy price aficionados will note that I’ve used the WTI price in these calculations. That used to be straightforward and unobjectionable. Now, however, we have to worry about another pricing discrepancy: WTI is very cheap relative to similar grades of oil on the world market (for background, see this post). For example, Brent crude closed Monday around $112 per barrel, well above the $101 WTI price. Brent prices are relevant to many U.S. oil consumers. There’s a good argument, therefore, that my chart understates how much the price ratio has moved.
This chart from donaldmarron.com shows the unemployment and underemployment rates through December 2011. Both rates have improved over the past two years, but Marron argues that growth is still too slow. (Source: Bureau of Labor Statistics)
Jobs picture improves, but there's still a long way to go
Friday’s jobs data confirmed that labor markets are getting better, but slowly. Payrolls expanded by 200,000, the unemployment rate fell again to 8.5%, weekly hours ticked up from 34.3 to 34.4, and hourly earnings rose by 0.2%.
Of course, there is still a long, long way to go. Unemployment and underemployment both remain very high, but they’ve been moving in the right direction. After peaking at 10% in October 2009, the unemployment rate has declined by 1.5 percentage points. The U-6 measure of underemployment, meanwhile, peaked at 17.2% and now stands at 15.2%:
(The U-6 measures includes the officially unemployed, marginally attached workers, and those who are working part-time but want full-time work.)
Shinzo Nakanishi, chief executive and managing director of Maruti Suzuki poses with company's new compact SUV XA Alpha car after unveiling it at India's Auto Expo in New Delhi January 5, 2012. Marron argues that innovations in engine efficiency haven't improved fuel economy, but they have made cars bigger and faster. (Adnan Abidi/Reuters)
How do consumers use engine efficiency? On bigger, faster cars.
Auto companies have made great strides in improving engine efficiency in recent decades. But those improvements haven’t done much to improve the fuel economy of America’s passenger car fleet. Instead, consumers have “spent” most of those efficiency improvements on bigger, faster cars.
MIT economist Christopher Knittel has carefully quantified these tradeoffs in a recent paper in the American Economic Review (pdf; earlier ungated version here). As noted by Peter Dizikes of MIT’s News Office:
[B]etween 1980 and 2006, the average gas mileage of vehicles sold in the United States increased by slightly more than 15 percent — a relatively modest improvement. But during that time, Knittel has found, the average curb weight of those vehicles increased 26 percent, while their horsepower rose 107 percent. All factors being equal, fuel economy actually increased by 60 percent between 1980 and 2006, as Knittel shows in a new research paper, “Automobiles on Steroids,” just published in the American Economic Review.
Thus if Americans today were driving cars of the same size and power that were typical in 1980, the country’s fleet of autos would have jumped from an average of about 23 miles per gallon (mpg) to roughly 37 mpg, well above the current average of around 27 mpg. Instead, Knittel says, “Most of that technological progress has gone into [compensating for] weight and horsepower.”
This is a fine example of a very common phenomenon: consumers often “spend” technological improvements in ways that partially offset the direct effect of the improvement. If you make engines more efficient, consumers purchase heavier cars. If you increase fuel economy, consumers drive more. If you give hikers cell phones, they go to riskier places. If you make low-fat cookies, people eat more. And on and on. People really do respond to incentives.
Marron argues that America's political think tanks are increasingly geared at winning elections, but there should still be room for nonpartisan research away from all the political noise (Bob Wellinski/AP/The LaPorte Herald-Argus)
The devolution of America's think tanks
Over at National Affairs, Tevi Troy reviews the evolution–and, he believes, devaluation–of America’s think tanks. He leads off by noting how many think tanks have shifted toward political combat and rapid response and away from non-partisan research:
One of the most peculiar, and least understood, features of the Washington policy process is the extraordinary dependence of policymakers on the work of think tanks. Most Americans — even most of those who follow politics closely — would probably struggle to name a think tank or to explain precisely what a think tank does [DM: This is true; even close friends and family often wonder what I do.]. Yet over the past half-century, think tanks have come to play a central role in policy development — and even in the surrounding political combat.
Over that period, however, the balance between those two functions — policy development and political combat — has been steadily shifting. And with that shift, the work of Washington think tanks has undergone a transformation. Today, while most think tanks continue to serve as homes for some academic-style scholarship regarding public policy, many have also come to play more active (if informal) roles in politics. Some serve as governments-in-waiting for the party out of power, providing professional perches for former officials who hope to be back in office when their party next takes control of the White House or Congress. Some serve as training grounds for young activists. Some serve as unofficial public-relations and rapid-response teams for one of the political parties — providing instant critiques of the opposition’s ideas and public arguments in defense of favored policies.
Some new think tanks have even been created as direct responses to particular, narrow political exigencies. As each party has drawn lessons from various electoral failures over recent decades, their conclusions have frequently pointed to the need for new think tanks (often modeled on counterparts on the opposite side of the political aisle).
He summarizes this trend as ”lose an election, gain a think tank”. Looking ahead, he then notes:
As they become more political, however, think tanks — especially the newer and more advocacy-oriented institutions founded in the past decade or so — risk becoming both more conventional and less valuable. At a moment when we have too much noise in politics and too few constructive ideas, these institutions may simply become part of the intellectual echo chamber of our politics, rather than providing alternative sources of policy analysis and intellectual innovation. Given these concerns, it is worth reflecting on the evolution of the Washington think tank and its consequences for the nation.
Needless to say, I hope–and intend–that there remains a place for policy research separate from the political noise.
In addition to recounting the origins and activities of many prominent think tanks, including the American Enterprise Institute, the Brookings Institution, the Center for American Progress, and the Heritage Foundation, Tevi offers some interesting facts about the industry, including the rising number of think tanks (1,800 today versus 45 after the Second World War) and the declining share of Ph.D.s on think tank staffs (13% of scholars in think tanks founded since 1980 vs. 53% in those founded before 1960).
The entire essay is well worth your time if you are interested in the evolving role of think tanks in policy discussions.
P.S. Tevi’s article make no mention of my research center, the Tax Policy Center, or my employer, the Urban Institute.
Television cameras capture St. Louis Cardinals first baseman Albert Pujols (R) hugging Boston Red Sox David Ortiz before Game 2 of MLB's World Series baseball championship in St. Louis, Missouri in this file photo. Because of the way cable packages are bundled, subscribers pay a disproportionate amount per year for sports programming–no matter how much of it they actually watch. (Sarah Conrad/Reuters/File)
How much are you really paying for cable sports?
Today’s exercise in everyday economics: Brian Stelter and Amy Chozick making the case that cable and satellite TV subscribers are paying a “sports tax” (ht: Jennifer R.). Writing in the New York Times, they say:
Although “sports” never shows up as a line item on a cable or satellite bill, American television subscribers pay, on average, about $100 a year for sports programming — no matter how many games they watch. …
Publicly expressing the private sentiments of others, Greg Maffei, the chief executive of Liberty Media, recently called the monthly cost of the media empire ESPN a “tax on every American household.”
Patrick Flynn personifies the consumer challenge. He and his wife, who pay Comcast $170 a month for television, Internet and a home phone in Beaverton, Ore., are keenly aware that part of their bill benefits the sports leagues that charge networks ever-increasing amounts for the TV rights to games. Save for one regional sports channel, he said, none of them are worth it. …
But there are also millions of viewers like Russell Tibbits, of Dallas, who says, “If you eliminate sports channels from cable packages, I literally would not own a TV.”
Sports channels apparently make up a sizeable chunk of subscription costs. The authors report, for example, that ESPN earns about $4.69 monthly for each subscriber, while the next closest channel is TNT at a mere $1.16.
Given the limited number of channel bundles that cable and satellite services typically provide, the relatively high cost of sports channels creates the possibility of significant cross-subsidies. The sports-agnostic end up covering some of the costs of the sports-obsessed.
Of course, the reverse can also be true. Russell Tibbits may watch only sports channels, but he’s helping pay for AMC, Lifetime, and TNT, too.
RELATED: Sports
For that reason, both sports fans and non-fans may prefer more choice about which channels they pay for. This “a la carte” discussion has been around for years, but Stelter and Chozick highlight a new factor. Changing technology make it make it easier for subscribers to get around current subscription models:
Soon, though, there may be an Internet alternative — something that was heresy until recently. Distributors like Dish Network are talking to channel owners about creating virtual cable providers that would stream channels over the Internet instead of traditional cables. That would break up the bundle of channels that subscribers have grudgingly accepted for years and allow subscribers who don’t like sports to avoid paying for them.
“They’re aggressively looking for ways to offer a lower-cost package of channels without sports,” said the chief executive of one such channel owner, who insisted on anonymity because the talks were confidential. “There may be a market in America, whether it’s 10 or 20 million people, that would be very happy to have 50 or 60 channels but not ESPN.”
By streaming the channels online, old distributors like Dish or new ones like Google could do an end run around the contractual commitments and market dynamics that effectively force them to carry sports channels now.
In this file photo, airline passengers check-in for their flight at George Bush Intercontinental Airport in Houston. For an additional fee, New Zealand air has introduced shared couches in coach on overnight flights. (David J. Phillip/AP/File)
Couches in coach: A cozier way to fly?
Yesterday’s Wall Street Journal had a fun article about Air New Zealand’s latest innovation: Cuddle Class. As “the Middle Seat” columnist Scott McCartney describes it:
Steve Metz of Houston cuddled up with his wife Jackie and slept as they flew to New Zealand on a small futon. This flying couch wasn’t in a private jet or even a high-priced business-class cabin. They snuggled in coach.
“I don’t sleep well on planes, but I actually slept a good five hours,” said Mr. Metz, aboard a 13-hour Air New Zealand flight from Los Angeles to Auckland recently. “It’s no king-sized bed, but we made do.”
“Cuddle class” is an innovative seat design that has given coach passengers the first real opportunity to lie flat for sleep on long flights. To create the extra space, three seats in a row have fold-away armrests and a padded foot-rest panel that flips up and locks into place. Two passengers take up three seats and pay an average of half the cost of the third seat, typically an extra $500 to $800 for an overnight flight.
This sounds a fun innovation, but don’t get too excited:
The sky couch has limitations. To make it fit, Air New Zealand narrowed the aisles in the coach cabin. And since the couch is only about 4½-feet long, most people have to scrunch up to keep their feet from hanging into the aisle. In the middle of the night on a recent flight, it was impossible to walk through the coach cabin without bumping feet and legs hanging out of sky couches. And since it’s still the cheap-ticket cabin, two people have to cuddle closely in only 32 to 33 inches of width for each row, including the seat.
Now what does this have to do with economics, you might ask? Well, Air New Zealand faces a classic problem for any supplier who offers different levels of service. On the one hand, it wants to offer better service to attract more customers. On the other, it wants to make sure that some travelers still opt for higher-priced service. As McCartney puts its:
Air New Zealand doesn’t want to make the couch longer or wider—if it were better, it might start cannibalizing passengers from business-class or premium-economy seats.
So there you have it. Coach air travel isn’t unpleasant just because the airlines want to reduce costs. It’s unpleasant so that some flyers will pony up for better service.
P.S. For more economics of the air, see this post on the Tragedy of the Overhead Bin.
This International Labour Organization chart shows the change in the risk of social unrest between 2006 and 2010. Change has been greatest for the world's most advanced economies, followed by the Middle East and North Africa. (IILS statistics based on Gallup World Poll data)
The rising risk of social unrest
The risk of social unrest is on the rise around much of the world, according to polling data summarized in the International Labour Organization’s latest World of Work Report (ht: Tortsen Slok).
Above, the ILO estimates that the risk of unrest has risen the most in advanced economies over the past five years, followed by the Middle East & North Africa and South Asia.
With people in the streets from Athens to Oakland, the ILO clearly has a point about the advanced economies.
And what factors contribute to a rising risk of unrest? The ILO pegs six, all of which sound familiar:
• Income inequality and perception of injustice: Perception of economic and social disparities, and increasing social exclusion, is said to have a negative impact on social cohesion and tends to lead to social unrest (Easterly and Levine, 1997).
• Fiscal consolidation and budget cuts: Austerity measures have led to politically moti- vated protests and social instability. This has been the case in Europe for many years, from the end of the Weimar Republic in the 1930s to today’s anti-government demonstrations in Greece (Ponticelli and Voth, 2011), but has also been a feature in developing countries, especially in over-urbanized zones, where protests have arisen following the implementation of austerity programmes imposed by the International Monetary Fund or the World Bank (Walton and Ragin, 1990). Meanwhile, societies that are more indebted tend to have higher levels of social unrest (Woo, 2003).
• Higher food prices: In addition to collective frustrations regarding the democratic process, rising food prices were also central to the developments associated with the Arab Spring (Bellemare, 2011).
• Heavy-handedness of the State: In countries where the State has resorted to excessive use of force (police and military) to tackle social upheavals instead of focusing on the actual causes of unrest, such actions have often exacerbated the situation (Justino, 2007).
• Presence of educated but dissatisfied populace: Countries with large populations of young, educated people with limited employment prospects tend to experience unrest in the form protests (Jenkins, 1983; Jenkins and Wallace, 1996). This has been the case recently in many southern European countries, such Greece and Spain.
• Prevalence of mass media: Past studies have highlighted the impact of radio on the organization of demonstrations, and clearly the use of the Internet (e.g. through the use of Facebook and Twitter) have played a role in recent incidences of unrest.
Scarabeo 9, a Chinese-built drilling rig, is seen in Singapore in this file photo. Some experts believe that our luck in finding new oil reserves may soon come to an end. (Keppel Offshore & Marine/Reuters/File)
Is our luck running out on oil supplies?
In an excellent new paper, Jim Hamilton asks whether the “phenomenal increase in global crude oil production over the last century and a half” reflects technological progress or good fortune in finding new reserves. The two aren’t completely distinct, of course. Better technology helps find more resources. But the heart of the question remains: have we been lucky or good?
Based on a careful reading of production patterns in the United States and around the world, Jim concludes that we’ve been both and worries that the luck part may be coming to an end:
My reading of the historical evidence is as follows. (1) For much of the history of the industry, oil has been priced essentially as if it were an inexhaustible resource. (2) Although technological progress and enhanced recovery techniques can temporarily boost production flows from mature fields, it is not reasonable to view these factors as the primary determinants of annual production rates from a given field. (3) The historical source of increasing global oil production is exploitation of new geographical areas, a process whose promise at the global level is obviously limited.
…
Most economists view the economic growth of the last century and a half as being fueled by ongoing technological progress. Without question, that progress has been most impressive. But there may also have been an important component of luck in terms of finding and exploiting a resource that was extremely valuable and useful but ultimately finite and exhaustible. It is not clear how easy it will be to adapt to the end of that era of good fortune.
These arguments should be familiar to anyone who’s followed the peak oil debate, but Jim brings a welcome rigor to the discussion.
And he discusses how oil prices affect the economy. All in all, a great survey.
P.S. If you are interested in the details, Jim’s post over at Econbrowser sparked some thoughtful comments.
A Netflix DVD envelope and Netflix on-screen television menu are shown in Surfside, Fla. Netflix CEO Reed Hastings says the company is abandoning its widely panned decision to separate its DVD-by-mail and Internet streaming accounts. (Wilfredo Lee/AP)
Netflix: When flip flopping is good leadership
Reed Hastings, CEO of Netflix, gave subscribers some good news yesterday:
We are going to keep Netflix as one place to go for streaming and DVDs. This means no change: one website, one account, one password … in other words, no Qwikster.
As a long time subscriber, I can only say Hallelujah.
But I am not surprised. Hastings has changed course sharply before. Most famously, he killed off a set-up box–the Netflix Player–just weeks before its scheduled launch. I take that as a sign of great leadership. As I wrote two years ago:
Reed Hastings is not a man who gets locked in by sunk costs: he’s willing to kill projects … even if he’s got years invested in them.
That’s a real strength. I am sure he regrets the decision to move toward Qwikster, but kudos to him for reversing course.
P.S. Netflix’s corporate culture was the subject of one of my most popular posts. Favorite line: “Adequate performance gets a generous severance package.”
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