Libya & gas prices

Currently, Libya is having a political battle in its country. The oil industry analysts believe that if this political unrest spreads to the other high density oil producing countries, the crude oil production may go haywire, causing gas prices to become $5.00 a gallon by the summer of 2011. The biggest fear is of an uprising in Iran, OPEC’s second biggest oil producer. As a result of the problems in Libya, West Texas Intermediate Fuel has declared that their price per barrel of oil will increase by 5% in April 2011, reaching $94.30 per barrel. Currently there is a “fear premium," which has caused gas prices to rise by $10.00 a barrel. However, once Libya becomes less violent, the prices could drop. Based on 2010 gas prices, gas prices have increased by 20%. As well as the unrest in Libya, the growing U.S. economy, an increase in oil demand in the spring, and an increase in demand by China are all contributing factors that are speculated to increase gas prices to between $3.75 and $4.00 per gallon. However, when gas becomes too expensive, Americans will demand less, pressuring gas prices to decrease. There are also speculations that this large increase in price is unlikely, as we will not know until it happens.

The problems that are occurring in the Middle East can definitely affect gas prices in the United States and all over the world. Since the Middle East is the largest gas supplier, their decisions can affect us deeply. As for now, gas prices are increasing, which makes it seem as though gas prices will only get worse if Libya does not get back into a comfortable state. I do not think Libya will settle down any time soon, however, it is too premature to say that gas will be $5.00 in the summer of 2011, because we are unaware of the events that are still to come. However, who is to say that gas will be $5.00 per gallon, rather than $10.00 per gallon. It is scary to think about: however, it is hard to know the reality of the situation when there is not enough information to back up rising gas prices. If there is a decrease in supply, then the demand in the U.S. will remain the same until prices become so high that they are not affordable.

--Karyn Hawley

Gas from bacteria

How many problems would be solved if gas were produced in a pond? Some see the fuel of the future as coming from engineered cyanobacteria. If they can just figure out how to collect the fuel produced in the ponds, their claims of being able to produce gas at $30 per barrel may come true. Here's to hoping they'll solve a lot of the tradeoffs we face today! Hat tip to class member Scott.

Limits to Growth

At least since Malthus we've been worrying about whether future generations will have enough to eat, and this year is no exception. The Economist has weighed in with its set of information and predictions, concluding as usual that we are all doomed.

While I don't doubt that demand will increase both due to expanding populations and due to increased demand for biofuels, I wonder more about other pressures on the land. If demand grows at a faster rate than supply, prices will go up. That will mean that people are tempted to bring new land under cultivation. It will also mean that people are tempted to use other inputs more effectively to get the most out of their land. That might sound benign, but it might mean that organic agriculture is no longer feasible, or that a larger share of our labor force is once again called to contribute to agriculture. The fallout of increasing food prices could be considerable: it's once again an interesting time to be an economist!

Towson gas tax?

Infrastructure of various types is paid for at different levels, and while it seems appropriate to have a gas tax to pay for our roads, no one wants to pay taxes. A petition drive is underway here in Towson to avoid an increase in our local gas tax. Are you ready to pay 10% more per gallon- right now, about 30-35 cents per gallon, or $4 per 12 gallon tank? This isn't a theoretical question!

Natural gas: cleaner air, but dirtier water

NYT Feb 27, 2011: “In shifting away from coal and toward natural gas, we’re trying for cleaner air, but we’re producing massive amounts of toxic wastewater with salts and naturally occurring radioactive materials, and it’s not clear we have a plan for properly handling this waste.”

Corn Prices Showing Pending Problems

The article focused on how the demand for corn is now at an all time high and how as a result the price of corn is reaching record highs. The article stated that “Corn futures have nearly doubled from $3.60 per bushel in June 2010 to $7.00.” The trend does not seem to be slowing down either, since the demand for corn and corn products seems to be increasing. In the United States the corn stocks have declined by 1.8 million metric tons, and it’s estimated that world ending supplies would decrease by 4 million metric tons. This means that the demand for corn is so high that expert analysis could not account for the usage.

The demand for corn comes from all over the world but can be attributed to numerous reasons. The fact that corn or its derivatives are part of so many products is the main reason. The versatility of corn causes its demand to rise and causes competition for many industries all vying for the limited supply. The shortage of available acreage is another major reason; since crops other than corn must be grown, this constantly stresses available land. Estimates put the amount of additional land that would have to be devoted exclusively to corn cultivation at about 90 million acres. Another reason is the huge demand for ethanol which is an important component of gasoline. In the United States alone we consume more gasoline than any other nation, thus our demand for ethanol is huge. There is a constant fight for the use of corn as food versus fuel. Another factor leading to the corn shortage and rising price are emerging nations of the world and their growing markets. China in particular is a country that has seen both its corn usage and demand rise sharply. China also has almost half of the world’s corn reserve and maintains their food reserves as a national policy.

These issues over corn have led to food shortages and sky high inflation on food prices for much of the world. The article listed Algeria and Tunisia as countries that have seen public outcry in addition to violent protest over the soaring prices of food commodities. The increase in food prices also can be attributed to crop damages all over the world. This directly affects the supply of corn thus creating higher demand. Experts think that corn prices will rise thus causing food prices to continue to rise until a tipping point is reached.

I feel as though the demand for corn is unlikely to decrease until the United States finds some serious alternatives to gasoline. By reducing our consumption this would allow some of the corn to be used for food instead of going towards fuel production. Another method that could be implemented could be research on alternate methods of growing corn. High-rise gardens that would resemble parking garages have been proposed in other areas and allow the best utilization of land to grow as much corn as possible. Since land is a limited resource using all of it to grow corn is unreasonable and will only lead us further into problems food wise.

Discussion Question- How can we accommodate the demand for corn? Should we impose taxes, come up with alternative growing methods, or curb our ethanol use in fuel?

--Jermaine Hawkins

Gulf Recovery

Two years and $20 billion later BP will have paid in full all of its compensation to local businesses. The Gulf Coast Claims Facility, GCCF, determines who is eligible to receive compensation. The GCCF claims a full recovery will be made by the end of 2012 for all local businesses except oyster fisherman.

The recovery rate for oysters in the gulf is unknown. The fund estimates compensation around four times the amount of documented damages. However if the oysters don’t recover by this time many local fishermen will find themselves unemployed. Many locals believe the fund has “short-changed” them.

BP took full advantage of the economic crisis stating if you accept a final payment then you are no longer allowed to sue the company. Many workers affected by the spill have lost income and are reliant on the compensatory payments to feed their families. They are left no choice but to accept the final payments by BP even if they feel they are being under paid. By accepting the payment each individual gives up his or her right to pursue a lawsuit against the oil giant.

The GCCF was able to predict compensation for each industry quickly by categorizing everything together with the exception of fishermen and determining an arbitrary figure. The time constraint was important but lumping everything together to determine payments couldn’t possibly be fair to the local businesses. Unfortunately, many businesses can’t hold out for a lawsuit and must accept the compensation.

Final payments will start going out as soon as February 16. Once a final payment is received no further compensation can be pursued. If the economy or environment fails to recover many businesses will be closed.

I believe that BP should be held more accountable for their actions. Although they have definitely paid for their mistake they have still been taking short cuts to protect themselves. The environment and local economies should be their priority at this point as it was directly BP's fault they are both suffering. In addition, many of the people who did place claims with the GCCF were unaware of the option to sue for what they believed to be a fair settlement. They should have been notified of their options before having to sign over their rights for a final payment.

--Ben Simon

$53 billion train set

The Obama administration is asking for $53 billion over the next six years to pay for high speed rail, a far cry from China's $450-600 billion investment but still a considerable sum. A lot of time and energy has already been invested in planning out where high speed rail can do the most good, with this report being a prime example. (Others are opposed with equal vigor.) While the energy efficiency of trains is much higher than that of cars, there are a few issues that I've not heard well addressed. First, is there room for an additional or larger corridor for trains? Can the high speed rail supplant all existing slower trains, or can it somehow share tracks? Second, is the supporting infrastructure in place or at least economically feasible? In places like DC and New York, the subway system and buses are well developed, making it relatively easy for people to get to final destinations within the downtown area, at least, but in other places these are not as well established. Third, will systems be competitive? They have to provide dependable, inexpensive service that gets people where they want to go, and I have heard little about whether the systems will pay for themselves even accounting for positive externalities. I loved traveling by train in Japan, but I don't know if such a system fits this country's spacious dimensions well.

Endangered fish vs. farms

The full story has been written up elsewhere, but there's a nice little piece in the LA Times today about a tiny, endangered fish that lives near Sacramento, California. To protect the two-inch long fish, 25 million people and 2 million acres of farmland have had their water supplies reduced. Fox News, as you can imagine, is apoplectic. And indeed, it seems like they might actually have reason to be. While species are important, aren't 25 million people and 2 million acres of farmland more important than a few dozen minnows?

Fish scientist Peter Moyle, expert on the delta smelt, looks at it differently. "If the delta smelt goes away, it's not going to solve the problem." Chinook salmon also need the delta, and protecting it for delta smelt also means protecting it for salmon as well. The bottom line is that the smelt have become the flashpoint for a larger issue: there are too many demands on California's water resources. We're going to have to deal with them sooner or later- why not address them before we lose the smelt? A lot of times tradeoffs are deeper and more complex, involving more issues than we initially suspect, particularly when it comes to ecosystems. Still, we need to try to figure out how to weigh the competing concerns- and that's why we need economists!

Food subsidies

Just finished writing about the energy subsidies when I found this article on food. An interesting counterpoint to the Tea Party: instead of fiscal austerity, this guy wants the government to provide free cooking classes to people. However, he too opposes subsidies (in this case, for food), saying they represent $3 billion down the tubes each year. Anti-subsidy sentiment has been around for years, but giving money to farmers has always been so politically convenient. Need cooperation on your legislation from the representative from Indiana? Increase the subsidies. Senator from Iowa in your way? Increase the subsidies.

Another interesting quote: "Food-related deaths are far more common than those resulting from terrorism, yet the F.D.A.’s budget is about one-fifteenth that of Homeland Security." He proposes disbanding the USDA and subsidizing "home cooking" and "healthful foods." (Could this be a contradiction?) He wants to ban concentrated animal feeding operations and encourage sustainable production of meat. That means more expensive meat- is he ok with that? Sort of, I guess, since he says he wants vegetables to be a larger part of our diet.

Overall he's got many proposals, and honestly I mostly agree with him, but the world is complicated. See if you can think of some of the unintended consequences of this guy's proposed policies and list them in the comments.

Dirty Drilling

The economic and environmental costs and benefits of natural gas have been widely debated though most contend that gas is less environmentally damaging than petroleum. Also, quite a large amount is available right here in the US. However, as with most extractive industries environmental damage results from access. Recently a Congressional investigation reported that part of the extraction process called "fracking" has entailed the injection of tens of millions of gallons of diesel fuel into the ground, a process that could be in violation of the Safe Drinking Water Act. The EPA is responding to the accusations with an investigation of its own.

If natural gas really is a step in the right direction, as it appears to be, then hopefully an appropriate set of regulations can be established to minimize its environmental impact. If we're going to use it because it's cleaner, let's be sure we keep it that way!

Energy subsidies

Solar and wind power are relatively new technologies, and the costs per kilowatt hour of power produced are still high. Since they are easier on the environment than fossil fuels like coal or oil, the government offers a variety of economic incentives to increase their use. While some groups wish the government would stop supporting them, it seems to me that there is at least a good case for this help.

However, it turns out that most types of energy actually get some kind of help from the government. Should government help the coal industry find ways to pipe its emissions underground? That way they shouldn't contribute to global warming; of course, then we end up making a "dirty" industry have an even stronger cost advantage than it already has. (It remains "dirty" in that it still produces CO2 and toxic ash, even if some of its outputs go underground.) Should we support nuclear power, since it too doesn't contribute to global warming, and since historical incidents prevent insurers from being willing to cover the development of nuclear facilities? How about corn-based ethanol? It's not economic, meaning the costs outweigh the benefits, and its impact on climate change is debatable, but it's not coal or oil.

So where should the government draw the line? Tough question, and a very real one for policymakers. These issues are taking shape as a battleground for the next budget: it'll be interesting to see which proposal wins out.

Class begins

If you're in Econ 376, articles posted earlier than this post aren't your responsibility- you won't be asked about them on the reading exams.