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.)
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.
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.)
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.
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.