Market Manipulation is Not Market Choice

Florida Congressman Carlos Curbelo plans to introduce a carbon tax bill to reduce carbon emissions, create incentives for clean energy, and use the proceeds to replace the gasoline tax. Although he refers to his legislation as market choice, it is just another example of market manipulation and energy suppression…

All of the carbon tax proposals that have been pushed in recent years are promoted as a cost-effective means to mitigate catastrophic damage from human caused climate change by reducing carbon dioxide emissions. The alleged damages are a collection of environmental hobgoblins–rapidly rising temperatures, rising sea levels, and increased hurricanes, tornados, and droughts.

It has been 30 years since climate change—aka global warming—became the number one environmental apocalypse. Over this three decades the asserted climate damages have been unsupported by empirical evidence. Temperatures have only risen a few tenths of a degree. Hurricanes have not gotten stronger, tornados have been declining, and sea level rise has not been accelerating. None the less, advocates continue to market an artifact of computer models and ignore what is taking place in the real world.

The problems with a carbon tax are much greater than just the lack of empirical evidence. To begin with, the so-called damage function that would be mitigated by the tax lacks precision because the estimate of climate sensitivity—how much temperatures increase from doubling of CO2—vary by a factor of 3. In addition, concern about atmospheric concentrations is global while the proposed Market Choice act only applies to the US. Dr. Ben Zycher of the American Enterprise Institute did an analysis of a carbon tax that was larger than the one being proposed by Rep. Curbelo–$30 versus $23. He concluded that the carbon tax effect in 2100 would be twenty-five one-thousandths of a degree. On a chart, that would be less that the width of a line drawn with a number 2 pencil and given the inherent uncertainties of models is essentially zero.

A carbon tax may be intellectually elegant to many economists and very appealing to free spending members of Congress because it is like an ATM machine without limits—small changes in the tax generate large sums of money.

Advocates of a carbon tax attempt to portray it as being simple. Has anyone known of a tax that was truly simple? In the case of a carbon tax, building political support would require provisions that benefit supporters—environmental groups, rent seeking corporations, affected populations like the poor and politically powerful users of energy, and groups dependent on government largesse. There is virtually zero probability of a carbon tax being a simple straight forward $X per ton of carbon emitted. Instead, a coalition of Baptists—those whose support is based on moral fervor and Bootleggers whose support is driven by profit and rent seeking.

Finally, Rep Curbelo’s proposal is predicated on shifting US energy use from fossil fuels to “clean energy” which continue to exist in the market place only because of subsidies and government mandates. Our economy needs energy to grow and prosper but that energy needs to be abundant and affordable. Rep. Curbelo wants to make it scarce and expensive. The example of Germany proves that point. Germany’s emissions reduction crusade has produced the highest electricity price in Europe, a prices three times greater than the average US electricity price.

30 Years of Manufactured News

We have just observed the 30th anniversary of Jim Hansen’s explosive and infamous testimony before a Senate committee claiming that climate change was taking place, humans were causing it, and that an environmental catastrophe would occur in the near term unless prompt action was taken.

How this came about and the accuracy of Hansen’s predictions are a case study in “manufacturing” news. Anyone who objectively looks at claims about a climate catastrophe and the evidence that supports them would have to conclude that the climate agenda disguises a political agenda, which it does.

The background to Hansen’s testimony is illuminating. Al Gore and Tim Wirth, Senator from Colorado and committee chair, orchestrated the hearing to gain maximum publicity and push the US to join European greens in the battle against climate change which was called global warming back then. Gore and Wirth had become true believers in the sustainable development movement under the leadership of Maurice Strong who was the founding director of the UN’s environmental program. Strong was a tireless advocate for global governance, believing that national sovereignty must yield to the “imperatives of global environmental cooperation.”

According to the book, The Real Global Warming Disaster by Christopher Booker, Wirth has bragged about how he had committee staff call the Weather Bureau to find out what was likely to be the hottest day that summer. Armed with that information, Wirth scheduled his hearing and to make sure that it had the desired effect, he had all of the windows in the committee room opened and made sure the air conditioning would not be working. Under those steamy conditions, Hansen’s testimony received national attention and provided Gore, Wirth, and their environmental allies the ammunition to make global warming the number one environmental issue.

While Hansen continues to be a prophet of doom his credibility has taken a hit as his predictions of a climate apocalypse have become like the horizon, receding as it is approached. While he has become embittered and ever more shrill, his puppet master, grifter Al Gore, has become a multi-millionaire.

Around the 30th anniversary of Hansen’s testimony, Pat Michaels, former Virginia state climatologist and a senior scientist with the CATO Institute did a look back on Hansen’s predictions that was published in the Wall Street Journal. He pointed out that based on 30 years of data, Hansen missed the mark on his three warming scenarios. His first based on business as usual was that temperatures would increase 1degree C by 2018. His second, based on emissions rising at the same rate today as in 1988, was that temperatures would rise about 0.7 degrees C while his third was constant emissions beginning in 2000 that would result in temperature rising a few tenths of a degree C. The outcome of his third scenario proved correct but not for the reasons he cited.

Hansen’s other predictions also missed their mark as pointed out by Michaels. There was no spike in temperatures in the southeast and mid-west in the 80s and 90s. Hansen also predicted that Greenland’s ice would melt raising sea levels 100 feet by 2107. Wrong again, just as he turned out to be wrong about hurricanes getting stronger. And, tornadoes have declined, not increased.

Models are useful analytical tools for gaining insights and testing hypotheses. When they are used to confirm preconceived outcomes and ideology, they are no different that the sorcerer’s bag of tricks.

It’s economics and Trustworthiness Mr. President

At the opening of the NATO meeting, boorish Donald Trump was on full display as he lectured NATO’s Secretary General about Germany’s purchase of natural gas from Russia. Even he should know that is the type of discussion that is best had in private.

When you don’t take time to become familiar with issues, don’t understand history, or have a strategic perspective, it is easy to do dumb things. The President’s ignorance was evident from his lecture about Germany’s buying Russian gas and the Nord Stream pipeline. Germany isn’t buying US LNG for a very simple reason. In an article, Just Business, Sputnik News wrote, “Russian natural gas will remain significantly cheaper in the long run than shipments across the Atlantic. With the Nord Stream 2 pipeline, Germany wants to ensure a technologically secure basis for supplies from Russia,” –sputniknews. Does this carry risks and make Germany vulnerable to political manipulation by Russia? Of course, but the same is true for Western Europe which relies on Russian for about 30% of its gas demand.

US exports of LNG are increasing and could become an important source of energy diversification from over dependence on Russia. Achieving that goal takes time and demonstrating that the US is a reliable trading partner. The president’s behavior on trade, NATO, our European allies and his cozying up to Vladimir Putin all go in the opposite direction.

The New York Real Estate model worked from him in real estate dealings but is proving to be counterproductive in international relations. And, bullying eventually ends when those on the other end decide enough is enough and stand up.

Elon Musk: P T Barnum Flim Flam ?

 

CORRECTED VERSION

The end of the quarter marked the achievement of Tesla’s production goal for its Model-3.  By all reports, it represented a herculean effort That involved setting up a tent and makeshift assembly line.  Given the level of effort to achieve the 5000 per week production goal, it is reasonable to ask whether it can sustain that level of output and whether Tesla can finally make a profit and lower its large debt load?  Most financial analysts still rate it in bubble territory.

Elon Musk has demonstrated that the Tesla roadster is an exciting and fun to drive.  That along with generous subsidies and mandates has breathed life into the future of electric vehicles.  Forecasts going out as far as 2040 show EVs capturing a growing percentage of the light duty market globally.  Bloomberg New Energy Finance projects that EVs will represent over 50% of new light duty vehicle sales in 2040.  Such long range forecasts are based on a lot of assumptions, many of which may be questionable.

These forecasts are driven primarily by two factors—the constantly repeated dread of climate change and a belief that EV costs can be reduced to be competitive with internal combustion vehicles.

While assertions of a climate apocalypse continue to be made, it continues to be always moved to decades in the future.  Last week, Pat Michaels of the CATO Institute did a 30 year look back on Jim Hansen’s dramatic predictions of doom at a Senate hearing in 1988—a very hot summer—in a hearing room with the air conditioning turned off and the windows raised. Pat Michaels reminded readers that Hansen’s testimony described three scenarios—business as usual, emissions continue to rise at the same rate as 1988, and constant emissions beginning in 2000. These scenarios led him to predict that by 2018 the world would warm between 1degree C on the high side to a few tenths of a degree on the low side.  As Michaels points out, Hansen’s third scenario result of a few tenths of a degree C proved correct but not because we achieved constant emissions beginning in 2000.

With rapidly rising temperatures and increased hurricanes, droughts, and tornados being illusions and not actual happenings, it is fair to ask how long the world will continue to act as if the illusions are the reality? The answer is not another 30 years. EU nations that were the foundation of agreements starting with Kyoto are gradually backing away from their commitments as the pain of their cost increases.

The second driver is the ability of EV costs to be truly competitive with internal combustion engine vehicles.  That depends on achieving still lower battery costs and greater range between recharging.  Currently, the price difference between a Chevy Bolt or Nissan Leaf and the gasoline vehicle of equivalent size is about $10,000.  While the Tesla Model 3 is advertised at around $30,000, the cost with features most of us want run the cost up to $50,000.  In addition, there is the range penalty from temperature extremes.  It helps to explain why almost 52% of EV sales last year took place in California.

Overcoming the cost and range limits of the current generation lithium-ion batteries is not on the immediate horizon.  Toyota and several other auto manufacturers are working on solid state battery technology but assessments indicate that developers have not mastered how to mass produce them to last as long as buyers expect. Gong from the lab to the market can take 5 to 10 years and Menahem Anderman, the president of Total Battery Consulting recently said, “Solid-state batteries for automotive technology are still in the research stage with no timeline for commercialization.”

When the Elon Musk Tesla hype wears thin will Tesla be a viable manufacturer or will it go the way of DeLorean Motors?  One analyst was quite pointed on this, “Tesla’s persistent cash burn has been a major investor controversy … In fact, Tesla may be the largest public company in history to have never generated either positive annual cash flow or positive annual profit,” As other manufacturers get deeper into the California market, Tesla’s ability to generate and sell zero emission credits—a major source of revenue—will decline.  The same is true if the Trump Administration lowers CAFÉ mileage standards as appears likely.

Over the next few years, Tesla has over $1 billion in debt coming due while also having to contend with interest payments on the junk bonds it issued last year.  In this time frame, we are likely to learn whether Elon Musk is the visionary who changed the future for light duty vehicles or just another huckster who managed to create a bubble like the great tulip bubble of 1637.

 

 

 

Fake News Isn’t New

Long before “fake news” entered our vernacular, the late historian and former Librarian of the Library of Congress, Daniel Boorstin wrote The Image:  A Guide to Pseudo-Events in America.   Boorstin defines pseudo-events as ones that are fabricated as opposed to those that are real.  These are fabricated by press conference, surveys, press releases, interviews, and leaks that represent synthetic news that creates or foster illusions to influence how we think about specific topics.  He wrote about this phenomenon in 1962 long before twitter, Facebook, blogs, social media, issue advertising, electronic news, and the 24/7 new cycles that reinforces our biases.  All of these mechanisms are used to shape and reinforce our beliefs.

The supply of illusions and pseudo-events has gotten greater because the demand for them keeps increasing.  Boorstin says that “we believe these illusions because we suffer from extravagant expectations.”  As our expectations increase but our capability to separate the real information and facts from illusions and synthetic news does not.  To manage an excess supply we engage in mental triage by shutting out sources that don’t conform to our beliefs and relying on summaries and digests because we suffer information overload.  Our tendency for confirmation bias has become a barrier to finding common ground as our sources push us further from the center and to binary choices.

Almost 60 years ago, Boorstin observed that consumers of information were “less interested in whether something is a fact than in whether it is convenient that it should be believed”.  What would he say today?  Then he concluded that we had become use to using the image to test reality, making it hard to regain the ability to test the image with reality.

In the Introduction to The Image  Boorstin wrote that “To discover our illusions will not solve the problems of our world.  But if we do not discover them, we will never discover our real problems.”  So, what is the solution.  According to Boorstin, illusory solutions are not the cure for our illusions.  There is no easy answer.  Each of us “must emancipate” ourselves.  “Each of us must disenchant himself, must moderate his expectations, and must prepare himself to receive messages …from the outside.”  Most important, “ We should seek new ways of letting messages that reach us…”.

The Image was republished in 1987 as a 25thanniversary edition.  In his commentary on it, George Will wrote,”Boorstin’s book tells us how to see and listen, how to think about what we see and hear.”  He also wrote, “one of the effects …has been to induce in readers a healthy skepticism.  It shows readers how to stand back and squint at the world.”

The Image  may be 56 years old but it is just as relevant today as it was then.  Indeed, it may be more relevant.  A healthy dose of skepticism and an attitude of “I’m not convinced” would go a long way in helping us see more clearly through the fog of illusions and recapturing the ability to find common ground so that once again the influence of the majority will be greater than that of extremists on the right and left.

Looking Backward and Losing

President Trump is attempting to tilt trade in our favor at the expense of our trading partners.  His focus, using national security as the justification as well as the assertion that our trading partners are taking advantage of us, is based on discredited economics and policy.

Other nations are focusing on the fast growing sectors that reflect advances in technology, which is what his predecessors did because new industries contribute to being the world’s leader.   The President is looking backward and focusing on  once iconic industries that are shrinking as a share of our economy.

The President wants to increase exports at the expense of imports.  What he ignores is that increased exports come from increased production.  In a global economy we get those increases by being a more efficient producer than our competitors.  As economists have repeatedly pointed out, we need the market and not government to generate winners.  The president thinks that because we are the world’s largest economy, we can bully our way to achieving his export objective.

He’s wrong, just as nation states of prior centuries were wrong in pursuing mercantilism which is based on the belief that maximizing net exports is the best approach to national prosperity.  To make mercantilism work, nations engaged in protectionism which is what the President’s tariff policy is trying to do. Mercantilism was a flawed and failed policy in the 18thcentury and it just as flawed today. Adam Smith’s Wealth of Nations demonstrated that trade could be mutually beneficial and that exports should be driven by a nation’s comparative advantage, which is based on productivity.

In 1978, Milton Friedman pointed out that if the Japanese flood us with steel, it will reduce employment in the steel industry but increase employment in industries that use that steel.  The dollars that the Japanese got from selling us subsidized steel eventually found their way back here as demand for US goods and services.  In his concluding remarks, he asked, “ why should we object to their giving us foreign aid.”

In an interconnected global economy, it is a fool’s errand to attempt to protect declining industries.  Attempting to shield them from global competition simply makes them more dependent of government and stimulates crony capitalism.

President Trump and his economic Svengali, Peter Navarro, claim that the tariff policy is being pursued for national security reasons. But that has been widely shown to be totally bogus.  Further, A review of industrial policy initiatives decades ago in the journal Science, ended this way. “Here the historical record seems, for a change, unequivocal. Unequivocally negative.”  Nothing has changed since then.  The President’s policy is producing bads; not goods and the bads will just get worse.

 

 

A Different War of Attrition

Steve Hayward’s recent Wall Street Journal opinion piece provides an important reminder of the life cycle of advocacy driven environmental issues and the importance of persistent, fact-based resistance to counter campaigns based on ideology and visions of impending catastrophes.

Going back to the 1960s, we have witnessed an unending series of apocalyptic threats created by ideologues who have tried to use them promote increased political control by entitled elites. In all cases running from the population bomb to the limits of growth, to the war on pesticides, and climate change over the last 30 years, the problem has always been activities promoting economic growth and the solution has always been a reduction in personal freedom, serious constraints on market-based progress, and increased control from the center. Federalism and the Constitutional based limited government are treated as quaint ideals that have long outlived their relevance.

Steve Hayward takes us through the five stages that climate change has passed through to go from the “center of public concern …into a prolonged limbo.” He baes his narrative on a1972 article by Anthony Downs, Up and Down With Ecology.

The stated objectives of climate advocates have been to eliminate fossil fuels from the globe’s energy budget, to bring atmospheric CO2 levels down to pre-industrial levels, to promote wind and solar as substitutes for fossil fuels and reduce the carbon foot print of all. All of these objectives are championed as necessary to save the planet. The real objective has been increased political control of the economy by self-ordained elites. We should not forget that in the early 2000s, French President Jacque Chirac called for a world government. And, Christiana Figueres, the former Executive Secretary of UNFCCC, prior to the 2015 meeting in Paris bluntly stated “This is the first time in the history of mankind that we are setting ourselves the task of intentionally, within a defined period of time to change the economic development model that has been reigning for at least 150 years, since the industrial revolution. “

While some ideologues may have entertained the notion that decarbonization objectives could be achieved in a matter of a few decades, no one who understood how the world works could seriously believe that. Instead, advocate leaders championed lofty and unattainable goals recognizing that incremental progress was the real objective. And since the time of Kyoto, they have promoted actions that incrementally would reduce the role of carbon in the global economy. But over time the costs of forced decarbonization have become more apparent and as they have counter pressures has increased. Germany, the leading advocate for alternative energy, is rolling back its Energiewende in the face of growing emissions and costs and the US is undoing much of the Obama initiatives. Other nations, as evidenced by the Paris Accord, have moved from supporting binding targets and timetables to accepting a voluntary agreement that will be honored in the breach while they pursue economic growth and higher standards of living..

There are two major reasons why the march to global government and rapid decarbonization have stalled. First, the public has never ranked climate change as one of its top priorities. Nor has there been any indication that the public at large is willing to sacrifice the benefits that come from continued economic progress. Second, while those opposed to draconian climate change actions are relatively small in number and underfunded, they have been well focused and persistent in pointing out the flaws in the climate orthodoxy and the folly of mandated decarbonization. Climate advocates have imposed significant cost from their actions and policies but those costs are far less than they could have been. And, as Steve Hayward insightfully observed, “Treating climate change as planet scale problem that could be solved by an international regulatory scheme transformed the issue into a political creed for committed believers. Causes that live by politics, die by politics.”

OPEC Channels Adam Smith

Reports that OPEC and Russia are going to end their two-year agreement to limit oil production is an act of necessity and a simple manifestation of an Adam Smith economic truism. In Adam Smith’s 1776 Wealth of Nations, he wrote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”.  The decisions to terminate the agreement reflects the reality that OPEC is not really a cartel.  OPEC isn’t what it used to be and never was.  The media and policy makers called it a cartel but in reality it has mostly been a price taker; not a price maker.

The 2016 Agreement to limit production was an implicit admission that Saudi Arabia’s attempt to maintain market share in the face of growing US production was a flop that sowed the seeds of its own demise.  The fact that it appears to have worked for two years may be a reflection of technical constraints on cheating by other members as well as the collapse of Venezuela’s oil production.

OPEC leaders know that rising oil prices zre a strong incentive for US producers, especially shale producers to step up drilling to increase revenue by taking advantage of higher prices.  They also know that when prices get past $70 per barrel, there are incentives to invest in new technology if it appears that prices will not soon retreat.  In addition to Adam Smith’s economic principle is the economic reality that the cure for high prices is high prices. High prices bring about more supply and when supply exceeds demand, prices drop.

Perhaps more important, as prices recovered from the lows of $40 per barrel, the incentive for members to cheat grew stronger.  Cheating on quotas has been a characteristic of OPEC members for decades. Although today, the number of members who can cheat is fewer than when OPEC represented over 50% of world output, the incentive remains strong for those that can.

Cheating aside, the real reason was put into clear perspective by a recent piece by the Wall Street Journal.  “The fact that U.S. production call fill the gap left by OPEC’s sick men … means that continuing to curtain output will benefit American producers.

Oil Price Forecasting: It’s a Mug’s Game

To paraphrase Ralph Waldo Emerson, foolish precision in the face of uncertainty is the hobgoblin of energy forecasters.  Much has been made recently about how energy forecasters—private and government—seriously underestimated the large increase in crude oil prices that has taken place in recent months.

What is surprising is that so many have been surprised and that so many so-called analysts continue to make point estimates. Crude oil prices have never been easy to forecast very far in the future, except under very stable conditions. And, that difficulty in forecasting also applies to oil companies who have a very strong economic incentive for greater accuracy.  The problem is that there is a great deal of uncertainty in the political, economic, and technical factors that can drive price.

In spite of sophisticated models, forecasters too often assume that the near term will be like the present at that influences how they treat economic and political factors.  Most important, point estimates for uncertain variables guarantees that an estimate will only be correct by luck.  How much the dollar will strengthen or weaken, how companies will respond to rising oil prices, whether shale producers will start drilling or maintain fiscal discipline, how much global growth will occur, whether OPEC producers begin to cheat and how much, how much Iranian and Venezuelan production will fall, and the impact of political risk are all factors that work against point estimates.

Bill Gilmer, Director of the Institute for Regional Forecasting, in a recent Forbes article made the obvious point that the world is dynamic; forecasts are static in that they are based on information available at the time they are made.  It is one thing to use available data to look ahead; it is something else to pretend to divine the future with relative precision.  Gilmer points out that “it doesn’t take big headlines to upset the forecast. The global crude oil market depends on the politics of dozens of producing countries, economic cycles in consumer countries and a vast infrastructure of pipes, ships and refineries. Even if we account for the known issues correctly, we could list 1,000 or more low-probability events that could push our forecast off course. … if these events are independent of each other, the chance that at least one will significantly and unexpectedly affect the oil market within a year is 1-(.999)1000 or 63.2%.”

Oil price forecasts would be more credible if they provided ranges reflecting uncertainty.  Otherwise, forecasting is a “Mugs Game,” an exercise in futility.

The Myth of OPEC Power

OPEC’s “production” cuts which in fact are an illusion. Prior to the agreement in 2016 to cut production 2%, most OPEC producers increased their production with Saudi Arabia leading as a way to maintain market share.
As oil prices have risen above $60 a barrel, more attention has been given to
As some have observed, the cuts were really just a pull back from the production surge. Since then according to EIA data, OPEC production has not decreased. In 2016, it produced 39.2 million barrels a day, last year it produced 39.2 million, and that is the forecast level for this year. So, while it appears that OPEC production has remained constant, production has actually been increasing to offset the decline in production by Venezuela. Venezuela’s oil production has been declining for two decades as a result of nationalization. In the past two years, its decline has increased, dropping from from 2.3 million barrels a day in January 2016 to 1.6 million in January of this year.

Since other member countries have increased their production to maintain OPEC’s overall level of production it is easy to see why its production agreement has not been breached. A look at OPEC’s 50-year history shows that for most of that history, it has been a price taker and not a price maker. That history also shows that most of the member countries cheat to gain or maintain revenue. Price volatility is clear evidence that OPEC’s alleged market control has always been an illusion.

There are several reasons why oil prices have been increasing. The $30-$40 dollar levels were below what many believe to be the long term equilibrium level. Over the past year, the inventory glut has been reduced as a result of a strong global economy, especially Chinese demand. Add to that increased political turbulence in the Middle East where the Trump Administration has introduced a higher level of uncertainty. Increased tensions with Russia, North Korea, and the potential re-imposition of sanctions on Iran. All of those factors put upward pressure on crude oil prices.

Oil prices are cyclical. They never stay low and they never stay high. Today’s prices are leading to increased production and based on history will lead some members of the OPEC-Russia production agreement to cheat. The likelihood of a return to $100 a barrel oil is remote unless there is some external event that spooks the market.