It is disappointing to see an economically sophisticated argument that perpetuates two of Matt's intellectual weaknesses: never criticize Republicans and only cite evidence favorable to your argument. See, e.g. the fundamental economic concept of "externalities". The oil and gas business owns Texas politics and counts on shifting costs to the public. Fracking does not make sense if environmental costs - especially water in Texas now - are taken into consideration. At least Matt stopped beating the nuclear power drum.
"The upshot is that even someone like me... whose home electricity expenses are essentially zero"
I would assume this is due some sort of net metering or feed-in-tariff scheme in DC. So while your house may produce enough electricity within a typical 24 period I very much doubt you've considered disconnecting your house from the gird.
My basic take is that renewables are shifting the cost of electricity from people like yourself to poorer users of the grid. On the day when your solar panels are covered in snow and it's -10 degrees outside, you'll be generating no power but definitely want to draw a lot electricity from the gird. Meaning that your local power company cannot reduce it's *fixed cost* generating capacity (coal, natural gas, nuclear).
My basic take is that you've reduce *your* electricity costs, but the *total* cost of electricity has not been reduced asided from the small marginal costs of fuel. If anything it has gone up once you factor in the cost of the panels.
This is a legitimate perspective. Another legitimate perspective is we need to work to increase the elasticity of demand for gasoline to make things more efgicient and resiliant.
A recent study found that burning fossil fuels costs us $600 billion per year in health care costs from particulate pollution and will cost about $290 billion per year in climate change mitigation.
I know Matt is not a fan of particulate pollution so I'm not sure why that didn't come up as a tradeoff in the article that exhorts to "make every effort to increase production" of fossil fuels.
I see two likely historical paths for Biden's Presidency
The first is the Jimmy Carter path, with rising energy prices causing stagflation he becomes a one term president. This stagflation causes voters to forgive the corrupt and anti-democratic Republican Party that they had rejected 4 years earlier.
The 2nd path is the Reagan path. Reagan's first two years were quite similiar to the Carter years with a recession. Democrats made fairly large gains in the 1982 midterms as a result and Reagan's approval rating was awful.
But from 1982 to 1984 the economy began to recover and inflation started to get under control, although the unemployment rate was still 7.3% and inflation was 4% it was much better than the beginning of Reagan's term so he got credit for the positive direction.
Hopefully there will be some hysteresis in the substitution away from petroleum products and we'll come out of this a smidgen closer to negative net emissions of CO2 than otherwise. But let's not let "silver-lining" thinking get in the way of common sense. The way to get to negative emissions of CO2 is by reducing demand for good that require the oxidation of carbon atoms or remove already oxidized carbon atoms (CO2) from the atmosphere. Trying to make fossil fuels more expensive by restricting their supply is politically and economically* stupid
*"Economically" stupid becasue it's generally a very cost ineffective way of reducing the ultimate amount of carbon oxidized. One might do something unwise like not permitting the XL pipeline to go forward at some cost and negligible reduction in net CO2 emission!
I don't think this is appreciated enough. The solution to climate change, and it really is a solution, is to remove CO2 from the atmosphere. The less CO2 there is, the less of a greenhouse effect there is. We should really be investing a lot more into CO2 removal and sequestration. It will take time to develop the technologies to remove CO2, even more time to deploy the technologies at scale, and then even more time to remove and sequester the CO2. It is the time in between in which there could be some harmful, climate-related disasters.
Negative supply shocks of anything are bad. The lower the substitutability between the shocked goods and other goods, the worse. So yes, a supply shock of petroleum products is bad.
As such, it need not (if perfectly foreseen) force the Fed to deviate from its inflation target, but it probably SHOULD cause the Fed to deviate. Precisely becasue petroleum products are not easily substituted the relative price changes necessary to maintain full employment may be large. And the only way to get large relative price changes when some prices cannot go down (THAT is the "zero lower bound" that matters) other prices on average must go up.
"But imagine a world in which Democrats did a smaller stimulus bill and the Fed showed better judgment around FAIT and inflation was exactly on target today."
To imagine this, one first must assume that Congress and the Fed can dial in any desired levels of inflation by precisely targeting spending and interest rates, presumably after having run a series of intensive holodeck simulations.
Or, maybe, any spending adequate to meet the needs of the pandemic and the then-cratering economy would also result in high inflation. Maybe we can't thread the needle because it's not a needle, it's a hatpin.
Among the dumbest ideas ever advanced by any economist, against some pretty tough competition, is the very concept of 'stranded assets' when it comes to the oil business. It required a breathtaking amount of ignorance for them to obscure the very idea that a lot of oil isn't burnt and produces no atmospheric CO2. I expect to live to see the day when half of every barrel lifted out of the ground is used to make stuff. That day is fast approaching. What stuff you may ask? The short answer is nearly everything.
If you are the praying type, include this in your prayers: that the oil companies are still in business and doing fine thirty years from now. I note this article briefly mentions something called petrochemicals. Well there are a lot of those. and we don't have any alternative sources for most of them in the quantities required to keep civilization chugging along. And without them you would probably be living in a cave and dressed in animal skins. If you happened to be among the lucky survivors of the production apocalypse.
In my youth I remember seeing ads for BASF, that great nemesis of Alon-Levy, to the effect that they do not make consumer products. They make the things used to make consumer products. And they still do. In Germany their raw material supply happens to be Russian oil. It will be interesting to see how fast Germany industries collapse when they can't get petrochemical feedstocks to maintain production. That will be a nice test case of the whole stranded asset idea.
"Energy prices rising faster than wages will be politically and substantively damaging even if overall inflation is right on target, and it calls for making every effort to <b>increase production.</b>"
And yet making literally 'every' effort to increase production means increasing oil and gas production which I think actually is incompatible with accomplishing anything about climate change, like keeping earth under 1.5, 2, or any other reasonable number. (Reasonable being that which prevents or minimizes catastrophes)
But as you say, this is a genuinely difficult problem because energy prices are regressive, politically toxic, and in general bad. So the nuanced solution is trying to increase short term oil and gas production while keeping on track with the long term transition away from fossil fuels. That raises some questions.
A) Is that possible?
B) Under what political circumstances could America even do that?
C) Why should I believe that any effort to increase short term production _wouldn't_ lead to increases in the long term? Either through built infrastructure, or in the political constituencies around oil & gas. It's not like oil & gas companies are good faith actors trying to reduce production in line with climate goals.
It'd be nicer if we could make more policies on the demand side, outside of something drastic and bad like price controls, to actually reduce that but I'm not sure there is a politically feasible way of doing anything there.
Is increasing oil production when people don't *currently* have alternatives to using ICE cars really incompatible with pursuing climate change? If people were refusing to buy abundant and excellent EVs, with a nationwide network of charging stations, and we wanted to give them a big push to make the change, a big increase in oil prices might do the trick, just like the 1970s oil crises pushed people to higher MPG cars. But absent that, all we'll do at this moment is immiserate them, which means putting the crazy Republicans (and Trump!) into power. And nothing will be worse for our efforts to deal with climate change than that.
In other words, if you want to pursue effective climate change policies, then do everything you can to lower the price of gas right now.
As for how we then actually transition to a post-ICE world, you do it gradually and incrementally and by pursuing mandates that signal to the car companies where the world is heading. Thus, California (my state) will phase out sales of ICE cars by 2035, which means we could be on a glide slope to greatly increased EV sales year by year before then. (Other states are more aggressive, but California will drive the national trend.) You don't raise the price of gas (see: putting Republicans in power) but you cooperate with industry to create better alternatives (Tesla, Ford Mustang and F-150, etc.) and over time people will see fewer ICEs for sale, more shuttered gas stations, and greater desirability to own and operate an EV.
But none of that happens if we do stupid stuff that puts Republicans back in power.
Again why should I believe that doing "everything" to lower the price of gas now _wouldn't_ lead to increased carbon emissions, create a pro-oil&gas production policy status quo that is difficult to pivot from, empower the political constituencies that fight against reducing those emissions? It's not do everything/anything. It's do the right thing but not too much. That's a needle that's extremely difficult for to thread no?
Agr tho, just having high gas prices puts Reps in power. This is why I'm struggling. I just don't see the solution being that simple. Cause one really does want price signals to incentivize moving off of gas, like you say the 1970s oil shock really did lead to high MPG cars. Sucks that somehow back then when were less ready a supply shock *did* lead to better policy but one now would probably lead to a bad one. Still wrapping my head around that as well
Thank you for this article - very rarely is there writing that considers both 1. Global warming is a real threat with 2. Our energy transition isn’t going to happen overnight. Energy prices seem to be the #1 thing voters judge politicians on, so in my opinion is better to have more carbon produced short-term while implementing a long-term vision of switching to renewables (via EV subsidies, repeal of solar tariffs, investments in charging infrastructure and R&D etc.) than to have the democrats be the “party of high gas prices” and be unable to make consistent progress towards the goal.
My mental model here is that coal use didn’t production didn’t plummet because of taxes or restrictions of mining grants, it plummeted because clean natural gas got much much cheaper. I imagine that due to American’s general allergy to raising prices on themselves this will be true for oil as well.
Also, with so many folks still working from home where is all this demand coming from? You look at vehicle miles traveled and it’s at a record high. Where the f—k is everyone going?
Commuting is a smaller chunk of traffic than most people assume--something like 15 or 20 percent. And you wouldn't guess it from the discourse, but the proportion of people who have email jobs and are still doing them at home is similarly a low double digit percentage.
It makes sense for producers to be cautious. Putin is obviously suffering from some pretty serious health problems. If he dies tomorrow and his replacement wisely pulls a Khrushchev and blames all the bad things that have happened on the late Putin, withdraws troops and makes amends with the west, oil prices will plummet.
From my understanding, it's not the oil production that's the issue, as the oil price and the price of its constituents are now having something of a discontinuity, i.e gas is much more expensive that oil prices would necessarily reflect. It's that Democratic interest in sending signals to energy companies that the era of oil was over and the COVID pandemic drop in demand indicated to the oil companies that they had excess refining capacity and they moved to mothball their least efficient refining capacity. And now here we are.
Maybe it just takes a while for these old rigs to be brought back into production. Matt on Twitter posts regular updates on the increase in US rig counts, suggesting that nature is (slowly) healing itself.
"Oil companies look at permanent refinery cutbacks
BY RONALD D. WHITE
MARCH 11, 2010 12 AM PT
Some of the nation’s biggest oil companies are looking at permanently reducing how much gasoline and diesel fuel they make, a move that analysts say would almost certainly trigger higher prices for drivers.
Energy companies are suffering huge losses from refining because of slumping gasoline use -- a product of the economic downturn and changing consumer habits and preferences. Energy experts say refining cutbacks have begun and will accelerate as corporations strive for profits.
Major refiners have been circumspect about their plans, saying that they are considering options that could include closing refineries, selling parts of their operations, laying off workers and slashing spending.
“Refineries will have to be closed,” said Fadel Gheit, senior energy analyst with Oppenheimer & Co. “Unless this excess capacity is permanently shuttered, a recovery in refining margins is unsustainable.”"
"Factbox: Oil refiners shut plants as demand losses may never return
By Reuters Staff
NOVEMBER 10, 2020
(Reuters) - Oil refiners are permanently closing processing plants in Asia and North America and facilities in Europe could be next because of uncertain prospects for a recovery in fuel demand after the coronavirus pandemic cut consumption."
It is disappointing to see an economically sophisticated argument that perpetuates two of Matt's intellectual weaknesses: never criticize Republicans and only cite evidence favorable to your argument. See, e.g. the fundamental economic concept of "externalities". The oil and gas business owns Texas politics and counts on shifting costs to the public. Fracking does not make sense if environmental costs - especially water in Texas now - are taken into consideration. At least Matt stopped beating the nuclear power drum.
"The upshot is that even someone like me... whose home electricity expenses are essentially zero"
I would assume this is due some sort of net metering or feed-in-tariff scheme in DC. So while your house may produce enough electricity within a typical 24 period I very much doubt you've considered disconnecting your house from the gird.
My basic take is that renewables are shifting the cost of electricity from people like yourself to poorer users of the grid. On the day when your solar panels are covered in snow and it's -10 degrees outside, you'll be generating no power but definitely want to draw a lot electricity from the gird. Meaning that your local power company cannot reduce it's *fixed cost* generating capacity (coal, natural gas, nuclear).
My basic take is that you've reduce *your* electricity costs, but the *total* cost of electricity has not been reduced asided from the small marginal costs of fuel. If anything it has gone up once you factor in the cost of the panels.
This is a legitimate perspective. Another legitimate perspective is we need to work to increase the elasticity of demand for gasoline to make things more efgicient and resiliant.
A recent study found that burning fossil fuels costs us $600 billion per year in health care costs from particulate pollution and will cost about $290 billion per year in climate change mitigation.
https://theness.com/neurologicablog/index.php/health-benefits-of-clean-energy/
I know Matt is not a fan of particulate pollution so I'm not sure why that didn't come up as a tradeoff in the article that exhorts to "make every effort to increase production" of fossil fuels.
I see two likely historical paths for Biden's Presidency
The first is the Jimmy Carter path, with rising energy prices causing stagflation he becomes a one term president. This stagflation causes voters to forgive the corrupt and anti-democratic Republican Party that they had rejected 4 years earlier.
The 2nd path is the Reagan path. Reagan's first two years were quite similiar to the Carter years with a recession. Democrats made fairly large gains in the 1982 midterms as a result and Reagan's approval rating was awful.
But from 1982 to 1984 the economy began to recover and inflation started to get under control, although the unemployment rate was still 7.3% and inflation was 4% it was much better than the beginning of Reagan's term so he got credit for the positive direction.
I do wonder if the same will happen to Biden.
Jeh Johnson has ruined the way I assume the name "Jay" is spelled.
Hopefully there will be some hysteresis in the substitution away from petroleum products and we'll come out of this a smidgen closer to negative net emissions of CO2 than otherwise. But let's not let "silver-lining" thinking get in the way of common sense. The way to get to negative emissions of CO2 is by reducing demand for good that require the oxidation of carbon atoms or remove already oxidized carbon atoms (CO2) from the atmosphere. Trying to make fossil fuels more expensive by restricting their supply is politically and economically* stupid
*"Economically" stupid becasue it's generally a very cost ineffective way of reducing the ultimate amount of carbon oxidized. One might do something unwise like not permitting the XL pipeline to go forward at some cost and negligible reduction in net CO2 emission!
I don't think this is appreciated enough. The solution to climate change, and it really is a solution, is to remove CO2 from the atmosphere. The less CO2 there is, the less of a greenhouse effect there is. We should really be investing a lot more into CO2 removal and sequestration. It will take time to develop the technologies to remove CO2, even more time to deploy the technologies at scale, and then even more time to remove and sequester the CO2. It is the time in between in which there could be some harmful, climate-related disasters.
Negative supply shocks of anything are bad. The lower the substitutability between the shocked goods and other goods, the worse. So yes, a supply shock of petroleum products is bad.
As such, it need not (if perfectly foreseen) force the Fed to deviate from its inflation target, but it probably SHOULD cause the Fed to deviate. Precisely becasue petroleum products are not easily substituted the relative price changes necessary to maintain full employment may be large. And the only way to get large relative price changes when some prices cannot go down (THAT is the "zero lower bound" that matters) other prices on average must go up.
"But imagine a world in which Democrats did a smaller stimulus bill and the Fed showed better judgment around FAIT and inflation was exactly on target today."
To imagine this, one first must assume that Congress and the Fed can dial in any desired levels of inflation by precisely targeting spending and interest rates, presumably after having run a series of intensive holodeck simulations.
Or, maybe, any spending adequate to meet the needs of the pandemic and the then-cratering economy would also result in high inflation. Maybe we can't thread the needle because it's not a needle, it's a hatpin.
With the amount of savings and state tax surpluses, seems like there was a lot of overshooting on subsidies.
Among the dumbest ideas ever advanced by any economist, against some pretty tough competition, is the very concept of 'stranded assets' when it comes to the oil business. It required a breathtaking amount of ignorance for them to obscure the very idea that a lot of oil isn't burnt and produces no atmospheric CO2. I expect to live to see the day when half of every barrel lifted out of the ground is used to make stuff. That day is fast approaching. What stuff you may ask? The short answer is nearly everything.
If you are the praying type, include this in your prayers: that the oil companies are still in business and doing fine thirty years from now. I note this article briefly mentions something called petrochemicals. Well there are a lot of those. and we don't have any alternative sources for most of them in the quantities required to keep civilization chugging along. And without them you would probably be living in a cave and dressed in animal skins. If you happened to be among the lucky survivors of the production apocalypse.
In my youth I remember seeing ads for BASF, that great nemesis of Alon-Levy, to the effect that they do not make consumer products. They make the things used to make consumer products. And they still do. In Germany their raw material supply happens to be Russian oil. It will be interesting to see how fast Germany industries collapse when they can't get petrochemical feedstocks to maintain production. That will be a nice test case of the whole stranded asset idea.
"Energy prices rising faster than wages will be politically and substantively damaging even if overall inflation is right on target, and it calls for making every effort to <b>increase production.</b>"
And yet making literally 'every' effort to increase production means increasing oil and gas production which I think actually is incompatible with accomplishing anything about climate change, like keeping earth under 1.5, 2, or any other reasonable number. (Reasonable being that which prevents or minimizes catastrophes)
But as you say, this is a genuinely difficult problem because energy prices are regressive, politically toxic, and in general bad. So the nuanced solution is trying to increase short term oil and gas production while keeping on track with the long term transition away from fossil fuels. That raises some questions.
A) Is that possible?
B) Under what political circumstances could America even do that?
C) Why should I believe that any effort to increase short term production _wouldn't_ lead to increases in the long term? Either through built infrastructure, or in the political constituencies around oil & gas. It's not like oil & gas companies are good faith actors trying to reduce production in line with climate goals.
It'd be nicer if we could make more policies on the demand side, outside of something drastic and bad like price controls, to actually reduce that but I'm not sure there is a politically feasible way of doing anything there.
Is increasing oil production when people don't *currently* have alternatives to using ICE cars really incompatible with pursuing climate change? If people were refusing to buy abundant and excellent EVs, with a nationwide network of charging stations, and we wanted to give them a big push to make the change, a big increase in oil prices might do the trick, just like the 1970s oil crises pushed people to higher MPG cars. But absent that, all we'll do at this moment is immiserate them, which means putting the crazy Republicans (and Trump!) into power. And nothing will be worse for our efforts to deal with climate change than that.
In other words, if you want to pursue effective climate change policies, then do everything you can to lower the price of gas right now.
As for how we then actually transition to a post-ICE world, you do it gradually and incrementally and by pursuing mandates that signal to the car companies where the world is heading. Thus, California (my state) will phase out sales of ICE cars by 2035, which means we could be on a glide slope to greatly increased EV sales year by year before then. (Other states are more aggressive, but California will drive the national trend.) You don't raise the price of gas (see: putting Republicans in power) but you cooperate with industry to create better alternatives (Tesla, Ford Mustang and F-150, etc.) and over time people will see fewer ICEs for sale, more shuttered gas stations, and greater desirability to own and operate an EV.
But none of that happens if we do stupid stuff that puts Republicans back in power.
Again why should I believe that doing "everything" to lower the price of gas now _wouldn't_ lead to increased carbon emissions, create a pro-oil&gas production policy status quo that is difficult to pivot from, empower the political constituencies that fight against reducing those emissions? It's not do everything/anything. It's do the right thing but not too much. That's a needle that's extremely difficult for to thread no?
Agr tho, just having high gas prices puts Reps in power. This is why I'm struggling. I just don't see the solution being that simple. Cause one really does want price signals to incentivize moving off of gas, like you say the 1970s oil shock really did lead to high MPG cars. Sucks that somehow back then when were less ready a supply shock *did* lead to better policy but one now would probably lead to a bad one. Still wrapping my head around that as well
Thank you for this article - very rarely is there writing that considers both 1. Global warming is a real threat with 2. Our energy transition isn’t going to happen overnight. Energy prices seem to be the #1 thing voters judge politicians on, so in my opinion is better to have more carbon produced short-term while implementing a long-term vision of switching to renewables (via EV subsidies, repeal of solar tariffs, investments in charging infrastructure and R&D etc.) than to have the democrats be the “party of high gas prices” and be unable to make consistent progress towards the goal.
My mental model here is that coal use didn’t production didn’t plummet because of taxes or restrictions of mining grants, it plummeted because clean natural gas got much much cheaper. I imagine that due to American’s general allergy to raising prices on themselves this will be true for oil as well.
Also, with so many folks still working from home where is all this demand coming from? You look at vehicle miles traveled and it’s at a record high. Where the f—k is everyone going?
Commuting is a smaller chunk of traffic than most people assume--something like 15 or 20 percent. And you wouldn't guess it from the discourse, but the proportion of people who have email jobs and are still doing them at home is similarly a low double digit percentage.
It makes sense for producers to be cautious. Putin is obviously suffering from some pretty serious health problems. If he dies tomorrow and his replacement wisely pulls a Khrushchev and blames all the bad things that have happened on the late Putin, withdraws troops and makes amends with the west, oil prices will plummet.
From my understanding, it's not the oil production that's the issue, as the oil price and the price of its constituents are now having something of a discontinuity, i.e gas is much more expensive that oil prices would necessarily reflect. It's that Democratic interest in sending signals to energy companies that the era of oil was over and the COVID pandemic drop in demand indicated to the oil companies that they had excess refining capacity and they moved to mothball their least efficient refining capacity. And now here we are.
US oil production was more than 10% greater in 2019/20 than it is now, when prices were just over half of what they are now (https://tradingeconomics.com/united-states/crude-oil-production#:~:text=In%20the%20long%2Dterm%2C%20the,according%20to%20our%20econometric%20models.). You would think oil that was profitable to pump and refine at $60/barrel might be profitable at $110/barrel, but I'm not an economist.
Maybe it just takes a while for these old rigs to be brought back into production. Matt on Twitter posts regular updates on the increase in US rig counts, suggesting that nature is (slowly) healing itself.
"Oil companies look at permanent refinery cutbacks
BY RONALD D. WHITE
MARCH 11, 2010 12 AM PT
Some of the nation’s biggest oil companies are looking at permanently reducing how much gasoline and diesel fuel they make, a move that analysts say would almost certainly trigger higher prices for drivers.
Energy companies are suffering huge losses from refining because of slumping gasoline use -- a product of the economic downturn and changing consumer habits and preferences. Energy experts say refining cutbacks have begun and will accelerate as corporations strive for profits.
Major refiners have been circumspect about their plans, saying that they are considering options that could include closing refineries, selling parts of their operations, laying off workers and slashing spending.
“Refineries will have to be closed,” said Fadel Gheit, senior energy analyst with Oppenheimer & Co. “Unless this excess capacity is permanently shuttered, a recovery in refining margins is unsustainable.”"
https://www.latimes.com/archives/la-xpm-2010-mar-11-la-fi-refineries11-2010mar11-story.html
"Factbox: Oil refiners shut plants as demand losses may never return
By Reuters Staff
NOVEMBER 10, 2020
(Reuters) - Oil refiners are permanently closing processing plants in Asia and North America and facilities in Europe could be next because of uncertain prospects for a recovery in fuel demand after the coronavirus pandemic cut consumption."
https://www.reuters.com/article/us-global-oil-refinery-shutdowns-factbox/factbox-oil-refiners-shut-plants-as-demand-losses-may-never-return-idUSKBN27R0AI
How did you calculate the counterfactual inflation rates for Shelter, Medical care services, Apparel, and New cars?