Coyote Blog

My first column at Forbes.com is up here (and on the opinion home page, which is kind of cool), and extends on some thoughts I have already posted on my blog about why government decisions in multi-agency task forces, such as those running the Gulf cleanup effort, seem to be made in such a stupid manner.

As most scientists know, one of the best tests of a theory is whether it makes correct predictions about future events.  Since I wrote this article several days ago, we have seen this new story which is absolutely consistent with the decision-making paradigm I describe in the article (from Q&O)

Louisiana has been busily building berms about a mile out from the coast to halt the infiltration of oil into its sensitive marshes, wetlands and prime fishing areas. This process was greatly delayed by federal red tape, and now that the state has permits in hand it's being order to stop because, according to the U.S. Fish and Wildlife Department, it's doing it wrong:

The federal government is shutting down the dredging that was being done to create protective sand berms in the Gulf of Mexico.

The berms are meant to protect the Louisiana coastline from oil. But the U.S. Fish and Wildlife Department has concerns about the dredging is being done.

Plaquemines Parish President Billy Nungesser, who was one of the most vocal advocates of the dredging plan, has sent a letter to President Barack Obama, pleading for the work to continue.

[...]

Nungesser has asked for the dredging to continue for the next seven days, the amount of time it would take to move the dredging operations two miles and out resume work.

Work is scheduled to halt at midnight Wednesday.

Pat Austin is trying to understand the federal obstruction, but finds that political reasoning is the only thing that makes sense of it all:

I'm trying to see both sides here; I'm trying to understand the "coastal scientists" who contend that the berms will "change tidal patterns" and lead to more long term erosion of the islands, but if the islands are killed off by the oil what difference does it make? To borrow from Greta Perry's analogy, if my house is on fire, what does it matter what room I try to extinguish first? It's all doing down.

Read the Forbes article -- why exactly this decision was not only possible but inevitable is discussed in detail.

I was thinking today, what must the families of the 11 people killed on the Deepwater Horizon be thinking?  Their losses are never mentioned in any news reports I see.  Its all about getting oil on the ducks.

Sure, I am pissed off about the enormous damage to the Gulf Coast as well.  But I got to thinking, were I the engineer that made the wrong risk/safety decisions here, what would I feel most guilty about?  I was put in that position for years in a refinery, constantly asked, "is this safe" or "can we keep running" or "do we need to shut down" or "is that vibration a problem?"  These are difficult, because in the real-world of engineering, things are not ever perfectly safe.  But never-the-less, if I had made the wrong call here, I think I would be feeling a lot worse about the 11 dead people than a number of dead fish and birds.  Perhaps my priorities are out of whack with the times.

By the way, TJIC has a great post on risk and cost in the real world of engineering.  I agree with his thoughts 100% from my experience as a troubleshooter / engineer in the field making just these decisions.

Look, we all trade off safety in order to save time and expense.

Do you put on your seat belt when moving your car from one point in the driveway to another?

Do you buy the car that costs twice as much, because it's got a 1% increase in crash survivability?

Did you pay $40k to get industrial fire sprinklers installed in your house?

Do you have a home defibrillation machine?

There is nothing wrong, in the abstract, with trading off safety in order to save time and expense.

The question is whether BP did this to a level that constitutes "gross negligence".

In the 1970's, during the Arab oil embargo, oil company presidents were dragged to Washington to defend themselves from charges that they were holding tankers offshore to drive up prices and all kinds of crazy BS.  Since that time, in every oil price spike, oil companies were vilified by the Left for destroying the American economy by driving up oil prices (artificially, I suppose).

Now, however, is seems that this was all wrong.  The fossil fuel price increases and artificial supply shortages needed to cut our CO2 emissions by 50% are enormous.  The Europeans have $9 gas and they are not near these targets, in fact in many countries their fossil fuel use has gone up.  We have been in a substantial economic slowdown, but even at these lower output and consumption levels we are far short of a 50% target.

But now the EPA says it has a computer model (stop me if you have heard that one before in the global warming debate) that says that proposed efforts to cut CO2 emissions by 50% in the next 20 years will have a negligible impact on the US economy over the next 20 years.

But there's another reason it was disappointing that Obama didn't mention carbon pricing: his own EPA had handed him a perfect excuse just one day before. In a detailed analysis of John Kerry's American Power Act, the EPA provided estimates of how it would affect carbon emissions and how much it would cost the average American. The results were remarkably reassuring.

On the emissions front, the APA would have a dramatic effect: US emissions would be cut nearly in half by 2030 compared to doing nothing. That's an enormous impact.

But how much would it cost? The answer is: almost nothing. According to EPA's models, if we do nothing, consumption of goods and services in the United States will increase 74.1% by 2030. If APA is passed, consumption will increase 73.4%.That's it. We can cut carbon emissions nearly in half, and the net cost will be a decrease in consumption of 0.7% in 2030. EPA figures this comes to an average annual cost of $146 per household. That's 40 cents a day per family.

And everyone on the Left is credulously lining up to say that this sounds about right to them.    Well, now you tell us.   And if this is true, why have you been hammering on the oil companies for 40 years if oil price increases are virtually irrelevant to the economy.

Look, the is is utter BS.  I have a wild optimism about the power of free minds to innovate and handle about anything if they are allowed, but even so there is no way that an energy price increase (or artificial shortage, take you pick of mechanisms) large enough to cut output by 50% in 20 years will have a negligible impact on the economy.  No way.

Update: I am skimming the EPA power point presentation.  I am looking at one chart that shows a shows coal with CO2 capture around 5% of US energy production about 12% of electricity production by 2030.  Absolutely no freaking way.  They are on drugs.  CO2 capture is never going to happen except when exorbitantly subsidized by the government.

And they show natural gas going way down.  Why?  Replacing coal-produced electricity with natural gas produced electricity is probably the most effective single CO2 reduction step that exists after certain conservation approaches.  But despite huge availability in the US, they show gas consumption going down by half.  If so, those are some pretty screwed up incentives in the bill.

Update #2: I found the price chart.  Apparently they project they will get all this fossil fuel reduction with an increase of electricity prices from 11 cents per Kwh in 2030 without the law to 14 cents with the law.  Gasoline prices with the law will be increased by about 25 cents a gallon in 2030 by the law.  So we are going to get a government imposed 50% reduction in CO2 output in 20 years with a price increase that is within the natural variation over a couple of months in the gasoline market?  Yeah, right.  We all will be riding unicorns to work instead.

Bruce McQuain tells some stories of bureaucratic frustration in the Gulf, as local governors trying to protect their state from the spill fights against a myriad of mindless bureaucracies.

The governor said the problem is there's still no single person giving a "yes" or "no." While the Gulf Coast governors have developed plans with the Coast Guard's command center in the Gulf, things begin to shift when other agencies start weighing in, like the Environmental Protection Agency and the U.S. Fish and Wildlife Service. "It's like this huge committee down there," Riley said, "and every decision that we try to implement, any one person on that committee has absolute veto power."

I would state the problem differently.  In the Federal bureaucracy, seemingly everyone has the power to say "no," and absolutely no one is willing to risk their career or even a minor bureaucratic sanction to over-rule when someone else in the room says "no."  I have seen it a hundred times in my business -- we will be close to doing something for the public, building a new shower building in a campground for example, and some government employee in the room will say that their sister's gynecologist's barber's housekeeper once overheard a conversation in a bar that some guy who may have visited a university once said he had heard a rumor that there might have been a Native American settlement somewhere within 100 miles of that spot 10,000 years ago -- and suddenly the work on the shower has to stop for 6 months while we all run around calling in archeologists and taking this concern seriously.

The problem  in a government discussion, particularly a multi-agency discussion, is that EVERYONE can say "no," and worse, since their incentives are loaded towards risk avoidance (they get punished for violating procedure, but never punished for missing an opportunity), they have a tendency to say "no" a lot, in fact to say "no" by default.  In the Gulf you have a thousand federal employees from 20 agencies whose entire incentive system, whose entire career, whose every lesson from every bureaucratic battle in a sort of long-term aversion therapy, prompts them to say "no" by reflex.

What is missing is someone who can say "yes," and make it stick against all the no's.  That does not have to be Obama -- but it probably does have to be someone very senior who knows (and who everyone else knows) is backed to the hilt by the President and has an incentive system where the only measure of success is more or less oil damage, and thus for whom aggrieved bureaucrats (even senior ones) and petty procedure are irrelevant.  It does not appear such a person has been appointed.

Postscript: By the way, I don't want folks to fall into the trap of thinking that these government folks are necessarily bad people.  I think that is a mistake both conservatives and liberals make -- conservatives vilify government employees, while liberals want to believe that government would work right if we just had the right people in it.   I work with a lot of very bright, very good people in government.  The problem is that their incentives and information are awful.  How would you behave if for 20 years your main feedback was to be criticized for violating minor procedures or trying new things?  How would you have any understanding of business if you grew up in the bizarro world of government budgeting and accounting?   This is the problem with government - not that it is full of bad stupid people, but it takes good smart people and incentivizes them do counter-productive things.

Update: Here is a great example, from Kevin Drum, who is a smart guy but can't do anything but dither in a decision among multiple risks:

It's pretty hard to take the other side of this argument [ie defending the Coast Guard's decision to hold up the GUlf cleanup barges for minor rules violations]. But I wonder. We are, after all, talking about barges that are sucking up oil, and the last time I checked oil was pretty damn flammable. Everyone wants the cleanup operation to proceed with breakneck speed, but that's exactly when people get tired and sloppy. And I wonder what everyone would think of the Coast Guard's ridiculous rules if they waived them and then some boat went up in a huge fireball because a spark caught somewhere and no one had a fire extinguisher handy?

I will say again - I have been in many rooms of bureaucrats, both federal and private, and they all think this way.  These rooms are full of Kevin Drum's wondering out loud, "I don't know, what happens if..."  This is such a common phrase in these meetings I wish I had a dollar for every time I heard it.  Then everyone in the room defers to this hypothetical risk.   Bureaucrats are always more worried about sins of commission  (e.g. knowingly allowing a barge to go out without enough fire extinguishers in violation of guidelines) than the sin of omission (e.g. delay will allow the spill to get worse).  Even when the omission is 100% certainty and the danger from the act of commission is vaguely hypothetical.  It takes a leader to say "send the damn barges out now."

Bruce McQuain has this take from Obama's oil spill speech last night:

The rest of the speech was an exercise in what Obama does best "“ selling smoke. He begins it with a false premise:

But a larger lesson is that no matter how much we improve our regulation of the industry, drilling for oil these days entails greater risk. After all, oil is a finite resource. We consume more than 20% of the world's oil, but have less than 2% of the world's oil reserves. And that's part of the reason oil companies are drilling a mile beneath the surface of the ocean "“ because we're running out of places to drill on land and in shallow water.

Of course his claim about drilling in deeper water because we're running out of places to drill in shallow water is false. 97% of the shallow water on the Outer Continental Shelf -97%- has been placed off limits by government. The oil companies are forced into deeper water not by the lack of oil, but by government refusing to allow them to drill there.

As an aside, Daniel Foster makes a great point:

There's an added layer of irony here as well. As Planet Gore contributor Chris Horner rehearses at length in his book Power Grab, the prime architect of the cap-and-trade idea was "” you guessed it "” former BP CEO Lord John Browne. So there is a special kind of cognitive dissonance going on in the juxtaposition of BP bullying and carbon tax cheerleading.

Update, via Planet Gore:

So you have a Nobel winner who knows nothing about oil running the Energy Department and you have an environmental lawyer who knows nothing about drilling as the head of MMS, the oil-drilling regulatory body.

So, choosing key people in the Energy department and MMS based on their knowledge of about 2% of the energy world (wind and solar) is a problem?

As y'all know, I am not a member of either the Coke or Pepsi party, so I find all the partisan mudslinging on the political blogs to be just kind of funny.  Particularly when both sides are piously accusing the other of exactly the same behavior, while maintaining that they are immune from said behavior  (or only engaging in it because the other guy started it).

I really don't understand political strategy.  I admit this.  Take global warming.  I really thought the CRU email thing was a minor distraction.  After all, the there were so many fundamental flaws in the science and scientific process that a lot of the CRU stuff was old news to those who have paid attention.  But I was wrong.  There was something about the scandal that was more compact and easy to tell, it fit into a box or storyline familiar to both the media that had to report it and the public that had to consume it.  I understood the whole scandal and its impact so poorly that I have done little blogging at my climate site lately, as I still can't get excited blogging about commissions and investigations into the scandal that seem to obsess the skeptic community currently.

So I won't say that this strategy by Kevin Drum is wrong, I will just say I don't understand it:

On Twitter, here was my insta-reaction to Obama's oil spill address from the Oval Office:

What a terrible speech.

Unfair? Maybe! I mean, compared to Sarah Palin's (literally) incomprehensible burbling on Bill O'Reilly's show afterward it was a model of straight talk and reassurance. But that's a pretty low bar.

What's the deal with Sarah Palin?  I swear she gets more pub from her enemies than her supporters.  How does it somehow help a sitting President -- who was supposedly elected because he was the most competent person of all time -- to be compared, however favorably, to a woman with limited political experience who holds no office?  Granted the Republicans really have no one of distinction leading them right now, and Palin is about the only Republican in years with any modicum of charisma.  But since when have losing VP candidates been the standard against which Presidents are measured?

Progressive green web site the Thin Green Line takes on subsidies for petroleum products, saying that reducing such subsidies could immediately have a major impact on CO2 production.  Fine with me, I am no fan of subsidies by governments of any private activities, though I don't live in fear of CO2.

However, the author, trying I guess to buff his progressive credentials in a sort of typical knee-jerk for green writers, tries to imply all this largess is somehow flowing to large oil companies, and the implication is that western nations like the US are subsidizing folks like Exxon and BP:

The timing couldn't be better: With BP's oil continuing to pollute the Gulf Coast, the question of how much our alliance with the oil industry really costs us is at the front of the everybody's mind.

The International Energy Agency released an early draft of a report documenting, for the first time ever, how much the fossil fuel industries get in subsidies each year (H/T Grist). The timing is, of course, coincidental: The IEA's work stems from an agreement made at this years G20 conference that subsidies of fossil fuel industries should be phased out as part of international efforts to reduce carbon emissions.

So "” drum roll, please! "” how much money are the energy giants taking in? $550 billion a year.

But the author is, I believe, misunderstanding the study and the underlying economics (no surprise there from a green progressive writer).  This is from a study of 37 developing, not rich, nations.  There is no way these guys are paying $550 billion in cash into private oil company pockets.  In fact, most of these countries barely let the private oil companies even play, or force them into some marginal operator role subservient to their state oil company.

If these countries are subsidizing producers at all, the vast majority who are getting such largesse are large state-run companies, not western private oil companies.

However, my guess (and I have not seen the report yet) is that what they mean by most of these subsidies is actually selling fossil fuels to their citizens at below-market prices.  These subsidies are not transfers of state dollars to oil companies at all, but below-market pricing of oil products to consumers by state-run oil monopolies.   The people getting subsidized here are poorer consumers, not private oil companies.  Countries like China, Iran, Iraq and even Venezuela (run by progressive heart throb Hugo Chavez) sell petroleum products way below market prices to their citizens.  I am fairly certain this is the half trillion dollar subsidy the report refers to.

So we have the ultimate irony of a "progressive" lamenting government-subsidized energy for poorer people in developing nations.  Wow, I never thought I would say this, but if this is the progressive position, I agree with it.  The whole situation does highlight the difficult tension between development and CO2 reduction programs, and reinforces my argument that aggressive worldwide CO2 abatement will mainly hurt the poor.

Conservatives, nominally supporters of smaller government and free markets, are yet again torpedoing these principles in the name of short term political expediency.  In order to score a few fleeting points against Obama, they are calling him out over the BP oil spill, saying that this is his Katrina, a massive failure both in regulation and response.

That's stupid.  One can certainly raise some questions about the government -- why have they been collecting an oil spill cleanup tax but not any oil spill cleanup capability or equipment, why are we driving oil companies out of easy oil in shallow waters to crazy-hard oil in deep waters.  But this is not Obama's fault nor the government's fault.  This is BP's fault.  They screwed up and started the spill, and it was they that had no contingency plan for such a disaster.  And its going to cost them a staggering amount of money, as it should.

After all, what are the feds going to do?  They certainly can't be expected to maintain the expertise to deal with this kind of thing, particularly in cutting-edge deep water.  Which is why Obama has had to resort mostly to joggling BP's elbow demanding that hey hurry.

We have the incredible sight of Conservatives, rightly, saying that more regulation could not have prevented the financial crisis because regulators are any better than industry participants in spotting problems when entering uncharted territory.  But here we have exactly the same situation and Conservatives are hammering on Obama for not being authoritarian enough or regulating enough.

Postscript: One of the few things the Obama administration has done is demand BP stop using a certain oil dispersant chemical because it is toxic.  Duh.  So is all the oil.  Which is probably why BP ignored him.  Government is terrible with this type of decision.  We have something really bad happening that we can't control.  But we can make it less bad by doing X, but X has some downsides as well.   In the heat of battle, when discretion is required, government will choose the sin of omission (letting more oil reach the shore) over the sin of commission (using a toxic dispersant), even if this decision is irrational.  In their incentive system, the sin of commission is impossible to sluff off on someone else.  The sin of omission can always be blamed on BP, or Bush, or whoever.  This is one reason why government bureaucratic rules are often so detailed and prescriptive -- given these incentives, certain decisions will never be made in the heat of battle by bureaucrats unless their actions are guided by detailed rules, which then give them cover.

Postscript #2: I think the media has tended to underestimate the difficulty here.  5000 feet of water is really deep and complicated to work in, orders of magnitude harder than shallow water, which in turn is orders of magnitude harder than on land.  In a way, its actually kind of amazing that BP has sealed this thing, given that the Soviets, in much less difficult leaks, reportedly had to resort to nukes to seal the well.

At least, that is, when the government is managing the ice supply:

Venezuela's economy is in trouble despite the country's huge oil reserves. Blackouts plague major cities. Its inflation rate is among the world's highest. Private enterprise has been so hammered, the World Bank says, that Venezuela is forced to import almost everything it needs.....

This is not the way it was supposed to be. Venezuela is one of the world's great energy powers. Its oil reserves are among the world's largest and its hydroelectric plants are among the most potent.

I guess I could have predicted this, but I didn't know until this weekend that a variety of conspiracy theories were circulating about the BP oil platform fire and spill, including the incredibly absurd notion that the platform was torpedoed by a North Korean submarine.

I am not a military analyst, though my sense is that a North Korean submarine would have difficulty even sailing reliably to the Gulf of Mexico.  But I do know petroleum operations.  And I can say that any petroleum facility is a playground for fire, and only unwavering, intelligent management can prevent disaster  (and even then sometimes shit happens).

It seems that, like the 9/11 truthers, the arguments are based on statements that sound plausible to laymen but in fact are meaningless.  An example:

Many have concluded that the platform sunk due to sabotage of some nature. No oil spills happened when Hurricane Katrina hit the area in 2005, they note.

While hurricanes are dangerous to oil rigs, they are something rigs are designed for.    This kind of blowout likely was due to forces at work down in the borehole, meaning that the problem was thousands of feet below the surface of the ocean, where one would not even know a hurricane was present.

This piece of evidence is funny

This conclusion has been spurred by alleged Kremlin reports that the Obama Administration has ordered a news blackout, preventing reporters from gaining access to the area or discovering information that would confirm or disprove the charges

LOL, the Obama Administration ordered a news blackout of gay protesters around the corner from the White House.

Government bureaucracies do not exercise power by allowing activities to occur - they only have power, and thus have reason to justify their continued funding and jobs, when they say no.   Every incentive that they have is to say no.  When a government agency allows progress to proceed smoothly, it is doing so because some person or small group is fighting against the very nature of the organization.  Anyone who believes otherwise about government agencies is challenged to go build and open a new restaurant in Ventura County, California.  Here is the latest example:

The [weatherizing] program was a hallmark of the American Recovery and Reinvestment Act, a way to shore up the economy while encouraging people to conserve energy at home. But government rules about how to run what was deemed to be a ''shovel-ready'' project, including how much to pay contractors and how to protect historic homes during renovations, have thwarted chances at early success, according to an Associated Press review of the program.

''It seems like every day there is a new wrench in the works that keeps us from moving ahead,'' said program manager Joanne Chappell-Theunissen. She has spent the past several months mailing in photographs of old houses in rural Michigan to meet federal historic preservation rules. ''We keep playing catch-up.''

And of course, even in a skeptical article about a "stimulus" project, no one ever mentioned what productive activities the $5 billion was being used for by private individuals before the government yanked it away for this little catastrophe.

By the way, the overblown rhetoric award has to go to this:

''This is the beginning of the next industrial revolution with the explosion of clean energy investments,'' said assistant U.S. Energy Secretary Cathy Zoi. ''These are good jobs that are here to stay.''

Given that the first one was about steel mills and railroads and oil and electricity, if this new industrial revolution is all about caulking, I think I am getting nostalgic for the first one.

As I have written a number of times, reserves numbers for oil are not based on the total oil though to be under the ground, but the total oil thought to be under the ground that is economically recoverable at expected prices.  Changes in technology and/or oil price expectations change the amount of reserves, even without the discovery of a single new field.

Oil companies have known about the formation, and the oil trapped in it, since at least the 1950s. But they couldn't get more than a trickle of oil from the dense, nonporous rock.

That began to change in the early 2000s, when companies in Texas began using new drilling techniques in a similar formation near Fort Worth known as the Barnett Shale. They would drill down thousands of feet and then turn and go horizontally through the gas-bearing rock"”allowing a single well to reach more gas. Then they would blast huge volumes of water down the well to crack open the rocks and free the gas trapped inside.

The real shift has come in the past two years as companies honed drilling techniques, leading to bigger wells, faster drilling and lower costs. Marathon, for example, last year took an average of 24 days to drill a well, down from 56 days in 2006."

So apparently, oil production in North Dakota may soon pass that of Alaska, though this is more due to the fact that production can be ramped up in North Dakota without an act of Congress, which is not the case in Alaska.

The largest threat to oil prices and production remains not peak oil, but the fact that most of the world's best reserves rest in the hands of state-run oil companies whose competence and willingness to invest for the long-term is sometimes in question.

In opposition to a proposal for park privatization in Utah:

Mary Tullius, director of the Division of State Parks and Recreation, doesn't think so.  She says the state prides itself on giving Utah families affordable destinations like state parks. And if those destinations were made private, the quality would suffer.

"History has told us that whenever you privatize something people are so focused on making money that they don't pay attention to the infrastructure or to the maintenance of the facility. What happens after five years and they've run something and they haven't taken care of it and they turn back to the state? And then the state has a much bigger problem," she said.

This is hilariously wrong.  As readers probably know, my business is the private operation of public parks.  The number one problem we have in taking over government parks is that they are usually terribly run down.  By the time the government is finally willing to turn to private companies for help (generally in the category of "last resort") the government has typically been ignoring the capital maintenance needs of the parks for years.  As I have written before, government is terrible about appropriating sufficient amounts of capital maintenance dollars.  We see it in everything from parks to the Washington metro.

Nowadays, as a condition of taking over the operation of public parks, our company is generally asked to make a large up-front contribution to tackling deferred maintenance in the park.  In fact, in our newest contract with the Tennessee Valley Authority, we actually have rebuilt the entire park and campground from the ground up.

I am sure there are some private operators who have let things run down, but in general this has occurred when the public authority has insisted on giving the operator a series of 1-year contracts rather than a real 10-20 year contract.  Who is going to replace the roof if the contract only lasts for another 6 months.  On the other hand, who is going to fail to keep things nice if he knows he is going to be there for another 15 years?

I hear this kind of rant from people within the government all the time.  They seem to believe it, but it is hard to find an example where it is true.  When I worked for an oil company, they planned on having to totally rebuild their retail stations every 20 years or so.  What legislature plans for this kind of expenditure?

My current proposal to keep a number of Arizona State Parks open is here.

Roger Pielke, Jr. (hat tip to a reader) points to an interesting FT Lex column that should offer some interesting insights to America's progressives:

"Big" and "oil" are mentioned so often in the same breath that it is easy to lose perspective. Motorists and environmentalists never tire of berating the dominant supermajors whose petrol stations and share listings make them the public face of the industry, their favourite target being America's ExxonMobil. If market value were the sole magnet for opprobrium then Exxon's executives could breathe a bit easier because PetroChina recently overtook it as the world's most valuable listed energy company.

But there is "Big Oil" "“ last year, Royal Dutch Shell earned more than $1bn a month "“ and then there is bigger oil. No oil major is able to affect energy prices on its own and even Exxon is far smaller than the world's largest energy company. It is not even close. Saudi Aramco's estimated hydrocarbon reserves of 300,000 million barrels of oil equivalent make it 15 times Exxon's size. Exxon comes in about 17th place, with the top 10 being entirely state-owned.

US oil company executives routinely get pulled in front of Congress to defend themselves against charges they are manipulating world oil prices.   Huh? It would be as rational to accuse Grinnell College of manipulating national tuition rates.  Americans can take comfort in the fact that by limiting their ability to seek new oil in the US, we have made sure that oil markets are not controlled by evil publicly traded companies like Exxon and Shell but instead are controlled by entirely more trustworthy entities like the governments of Iran, Saudi Ariabia, Venezuela, Russia, Nigeria, and China.

This chart also supports the one good argument I think there is for peak oil -- that most of the world's oil reserves are controlled by patently incompetent institutions (e.g. governments) that have very bad incentives that make them highly unlikely to invest well.  The only reason these countries are able to produce at all is because western companies are stupid enough to keep walking into this cycle:

1.  US companies invest huge amounts of capital and know-how to build oil industry
2.  Once things are producing, local government steals it all (they call it "nationalization")
3.  Oil fields go into extended decline due to short-term focused and incompetent government management
4.  US companies invited back int to invest huge amounts of know-how and capital
5. repeat

From the SEC web site (via frequent contributor LK)

The Securities and Exchange Commission today voted to provide public companies with interpretive guidance on existing SEC disclosure requirements as they apply to business or legal developments relating to the issue of climate change.

I haven't seen anyone explain the reason for this requirement, so I thought I would do so.  Companies know that no real investor is going to pay any attention to these climate disclosures, so to avoid any future action accusing them of not being forthcoming enough, companies are going to go overboard outlining potential risks far beyond what they think is likely.  These exaggerations will protect them from the SEC while at the same time having no effect on their stock price.  Then, alarmists will collate all of these and use them as evidence of the high cost of climate change, saying "see, look at what all these public companies are saying climte change will do to them."  Lacking any evidence of harmful climate change in the actual climate or economy, this is one way to manufacture fake evidence.

By the way, here is the diclosure every oil company should put in their reports:

Notice:  Poplist politicians are very likely to demagogue this company for a wide-range of imagined crimes in an attempt to get re-elected, including crimes against the climate in various forms.   Politicians will attempt to preferentially saddle this company with new taxes and regulations given that this company is not liked by many voters (despite the fact that many of these voters freelydo business with this company).  Politicians will likely continue to try to sieze portions of this company's earnings, despite the fact that those earnings are relatively low given the magnitude of the our investments and the amount of value we add.

For a variety of reasons that have a lot more to do with subsidizing preferred business interests than energy or environmental policy, Congress has fallen in love with biofuel subsidies and mandates.  We've talked quite a bit on this site about ethanol.  Here is another example, via Mark Perry:

It sounded like a good idea: Provide a little government money to convert wood shavings and plant waste into renewable energy.

But as laudable as that goal sounds, it could end up causing more economic damage than good -- driving up the price of raw timber, undermining an industry that has long used sawdust and wood shavings to make affordable cabinetry, and highlighting the many challenges involved in decreasing the nation's dependence on oil by using organic materials to create biofuels.

In a matter of months, the Biomass Crop Assistance Program -- a small provision tucked into the 2008 farm bill -- has mushroomed into a half-a-billion dollar subsidy that is funneling taxpayer dollars to sawmills and lumber wholesalers, encouraging them to sell their waste to be converted into high-tech biofuels. In doing so, it is shutting off the supply of cheap timber byproducts to the nation's composite wood manufacturers, who make panels for home entertainment centers and kitchen cabinets.

The federal government can provide up to $45 a ton in matching payments to businesses that collect, harvest, store and transport biomass waste to an authorized energy facility. That means sawdust or wood shavings may be twice as valuable if a lumber mill sells them to a biomass energy company instead of to a traditional buyer.

This is bad news for the composite panel industry, which turns these materials into particleboard and medium-density fiberboard, and outranks the U.S. biomass industry in terms of employees and economic impact, with 21,000 employees and annual sales of $7.9 billion, according to 2006 U.S. Census data.

The article poses this as a dueling jobs situation, but the result not only leaves us worse off economically, it leaves us worse off environmentally.   And the explanation is all Hayek and the limits on information possessed by a few individuals in Congress vs. 300 million market actors.  It is pretty clear to me that, to whatever extent Congress even thought at all about this legislation, they must have assumed that wood shavings were "waste."  What happened, most likely, is some entrepreneur and his VC backers came to Congress saying that all this sawdust is just wasted and if you give us a fat subsidy, we can build a valuable business burning it for power.

But in fact, businesses (no matter how much environmentalists believe otherwise) abhor waste.    When a tenth of a percent on margins is important, a lot of people have financial incentives to either reduce the waste or do something productive with it.  Which is why there is a whole industry using sawdust and chips already to make various building products.  And I won't go into the math, but trust me that this kind of use for waste is far more efficient, both economically and environmentally, for the waste than just burning it.

A lot of climate skeptic sites are jumping on the apparent irony of this story:

Senator Dianne Feinstein introduced legislation in Congress on Monday to protect a million acres of the Mojave Desert in California by scuttling some 13 big solar plants and wind farms planned for the region.

But before the bill to create two new Mojave national monuments has even had its first hearing, the California Democrat has largely achieved her aim. Regardless of the legislation's fate, her opposition means that few if any power plants are likely to be built in the monument area, a complication in California's effort to achieve its aggressive goals for renewable energy.

I think that there is an important lesson here that even "clean" energy sources have environmental downsides.  Its funny how things come full circle - thirty years ago I used to argue with people who had obsessive concerns about nuclear waste.  I would say that the volume of waste was really small, and in fact coal and oil were no different in that they generated a lot of waste but that they spewed their waste all over the atmosphere -- at least nuclear waste was compact and defined and easy to store.

Anyway, I actually think Feinstein is correct here.   Here is the origin of the plot of land:

For Mrs. Feinstein, creation of the Mojave national monuments would make good on a promise by the government a decade ago to protect desert land donated by an environmental group that had acquired the property from the Catellus Development Corporation.

"The Catellus lands were purchased with nearly $45 million in private funds and $18 million in federal funds and donated to the federal government for the purpose of conservation, and that commitment must be upheld. Period," Mrs. Feinstein said in a statement.

I have some bias in this, because my personal charities of choice tend to be private land trusts, that use private funds to buy lands for conservation.   I have always argued from an individual liberty angle that people who want land conserved shouldn't be demanding that government take it, they should be putting their money where their mouth is and helping to buy the land.  This story actually gives me another argument, because you can see that the private conservation buyers made a mistake in giving it to the Feds.  The Bush Administration, looking to score a PR victory in the alternative energy front, reneged on the promised conservation and committed the land to solar projects.

I was reading through some leftish/alarmist environmental blogs, and I was struck by how many desperately want to buy into the story line that poorer nations are the true heroes of Copenhagen, holding the rich nations feet to the fire so they will commit to deeper CO2 cuts.

Really?  A bunch of dictators who demonstrably have little concern for their citizens and spend most of their time trying to figure out how to divert state funds into their Swiss bank accounts suddenly care about the effects of anthropogenic climate change on their nations?  Hugo Chavez, whose nation currently is avoiding following Zimbabwe down the toilet only by its oil revenues really wants the world to wean itself off oil?

Here is the perfect analogy for the Third World's sudden interest in climate:  The "I will work for food" sign.  Beggers learned that (at least for a while) this sign was a good marketing tool.  They had no intention of doing any work  (I had a friend who used to drive up to all of them and offer them landscaping work in exchange for lunch, always to be turned down flat) but they knew it made potential donors more sympathetic -  see, they really want to work but are just down on their luck.   If you haven't seen the movie Interstate 60, you really need to.  Relevant clip below:

This is exactly the equivalent of the Third World's sudden interest in climate change.  Up to this point, their leaders have shown no interest in stopping the raping of their own local ecosystems.  These guys are certainly not conservationists, but they know a good marketing tool.  Copenhagen is about these guys putting their hands out, and using climate as the marketing tool to soften up their marks in the West.  These nations certainly have no intention of having any targets or restrictions placed on their countries.   And it looks like they may succeed, at least in the treaty phase.

Obama has positioned himself in such a way that he feels that he has to have something he can call a win at Copenhagen.  So he goes to the politician's traditional playbook, which is to use taxpayer money to buy a deal to try to make himself look better.  He is working to do this with the passage of the health care bill and he probably will do this in Copenhagen, agreeing to $100 billion a year in payoffs to third world kleptocracies so he can look like a winner to western socialists.

I thought this was really funny -- from an email I got today:

With water supplies drying up in the next 10 years, the Salton Sea poses an economic and ecological threat to the Coachella Valley and large portions of Riverside and Imperial counties. And while plans to restore the Salton Sea exist, government funding and determination to tackle this potential multi-billion disaster have not materialized.

Why is this funny?  Because the Salton Sea is the result of a man-made environmental disaster about a century ago.  The lake formed when floodwaters from the Colorado River roared down a man-made canal, breached a dike, and formed the lake.  Since then, this record "spill" which dwarfs the sum total volume of every oil spill of all time has been slowly drying up like a puddle on the garage floor.  I suppose I am OK retaining it if people have gotten used to it, but I find it funny that the natural reversal of a man-made ecological disaster is itself an ecological threat.

The following, by the way, has to be the dumbest idea of all time from an economic and energy balance perspective:

The Imperial County Board of Supervisors and Imperial Irrigation District have voted to explore the Sea to Sea Plan, which not only brings water to the sea, but generates hydroelectric energy that will be used for desalinization of water that can then be sold to water users throughout the Southwestern United States and Mexico. This new, reliable water supply will generate funds for further Salton Sea restoration.

So we pay money to pump water out of the Sea of Cortez, but then somehow have this generate electricity that pays for desalinization to then pump the water back out of the Salton Sea for irrigation.  Sorry folks, but I think the second law of thermodynamics says this won't work.

Update: OK, from here, one source says the water generates energy via hydroelectric plants, which seems odd (pumping water up and then harvesting the energy going down never balances, though this is used in certain California lakes as a method of energy storage) while one source says the power is geothermal.  Hmm, does "half-baked" come to mind reading this?

Update #2:  Shouldn't desalinization occur as close as possible to the source?  Otherwise you are paying to pump tons of salt you are going to eventually remove.

Great article in the SF Weekly on San Francisco:  The Worst Run Big City in the US.  The article is lengthy and packed full of government fail.  Just one example:

You can't get San Francisco running efficiently, because that would require large numbers of unionized city workers to willingly admit their redundancy and wastefulness. Inefficiency pays their salaries. "It's been going on for decades," Peskin says.

This problem comes up almost every time the city negotiates labor contracts, which is part of the reason San Francisco is constantly on the brink of fiscal ruin. Politically powerful unions "” the progressives are beholden to the service unions; moderates cater to police, firefighters, and building trades; and Republicans ... what's a Republican? "” negotiate contracts the city knows it can't afford. Politicians approve them, despite needing to balance the budget every year, because the budget impact of proposed contracts is examined by the Board of Supervisors only for the following year, no matter how long contracts run. According to former city controller Ed Harrington, it has become common practice not to schedule any raises for the first year of a contract, but to provide extensive raises in later years.

The result is a contract that looks affordable one year out, then blows up in the city's face. City employees receive up to 90 percent of their already generous salaries in pensions and many also receive lifetime health care "” meaning that as they retire, labor costs soar.

Sounds like the health care bill in Congress, no?  The bit near the beginning on the problem in the parks department - overstaffing, no one showing up for work, lost money, poor controls, no process - particularly resonate with me.  My business is the privatization of public parks.  I can't tell you how many public parks agencies I know to be providing terrible service (service levels that I would be ashamed of) with grossly inflated budgets tell me face-to-face that they can't privatize because that would jeopardize the quality of the parks.  Well, that and the fact that the public employees unions would not allow it.

I always laugh when folks tell me that government intervention is needed because private industry is too short term oriented.  But no one is more short term oriented than politicians looking to the next election or closing this year's budget hole.  In particular, capital maintenance is always ignored until infrastructure is literally falling apart.   We see it in parks, transit systems, roads, schools, etc.  It is the same phenomenon that causes third world state-run oil companies to have their production fall off - instead of reinvesting their profits into upgrades and maintenace of their fields and infrastructure (as those short-term focused American oil companies do) they transfer the money into social giveaways that cement their political power.  Here is a great example from San Francisco:

In 2002, the San Francisco Chronicle revealed that the city had, for decades, been siphoning nearly $700 million from its Hetch Hetchy water system into the San Francisco General Fund instead of maintaining the aging aqueduct. Several mayors and boards of supervisors used that money to fund pet causes, and the Public Utilities Commission didn't say no. Unfortunately, spending maintenance money elsewhere doesn't diminish the need for maintenance. By 2002, the water system was in such desperate condition that voters were asked to pass a $3.6 billion bond measure to make overdue fixes. Obligingly, they did "” who doesn't like water? Since then, the projected costs have swelled by $1 billion. So far.

My favorite line:

"San Francisco is Disneyland for adults, or a place people go until they grow up."

Via Q&O:

Venezuelan President Hugo Chavez told the military and civil militias today to prepare for war as a deterrent to a U.S.-led attack after American troops gained access to military bases in neighboring Colombia.

Chavez said a recently signed agreement that gives American troops access to seven Colombian bases is a direct threat to his oil-exporting country. Colombia has handed over its sovereignty to the U.S. with the deal, he said.

"Generals of the armed forces, the best way to avoid a war is to prepare for one," Chavez said in comments on state television during his weekly "Alo Presidente" program. "Colombia handed over their country and is now another state of the union. Don't make the mistake of attacking: Venezuela is willing to do anything."

Dictator play book page 1, paragraph 1:  When domestic situation goes bad, find an external enemy.

From hedge fund manager Reagan Silber, via South Bend Seven:

If you are long oil, you are short ingenuity.

My post on the 19th century Peak Whale crisis is here.

Strangely enough, it turns out that increased prices seem to induce market participants to seek out and invest in new sources of supply.   Someone should develop a theory around this.

From a good article in today's New York Times: 2009 is turning out to be a bumper year for new oil discoveries; new oil discoveries always occur, but this year has been unusually fruitful. This quote from the article illustrates the important dynamic intertemporal incentives that price signals provide:

These discoveries, spanning five continents, are the result of hefty investments that began earlier in the decade when oil prices rose, and of new technologies that allow explorers to drill at greater depths and break tougher rocks.

"That's the wonderful thing about price signals in a free market "” it puts people in a better position to take more exploration risk," said James T. Hackett, chairman and chief executive of Anadarko Petroleum.

More than 200 discoveries have been reported so far this year in dozens of countries, including northern Iraq's Kurdish region, Australia, Israel, Iran, Brazil, Norway, Ghana and Russia. They have been made by international giants, like Exxon Mobil, but also by industry minnows, like Tullow Oil.

I realize I did not comment on the Joe Romm oil price bet per se.  Here are two reasons I don't like the bet:

1.  Romm is making a catastrophic forecast (ie oil >$200) but wins his bet at $41, what one might consider a fairly normal current oil price.  This is very equivalent to Romm forecasting a 15F increase in world temperatures in the next century (which he has) but making a bet that he would win if temperatures go up by only 0.1F.  Clearly, a 0.1F increase over the next century would be considered by all a thorough repudiation of catastrophic anthropogenic global warming forecasts.  So why should he win the bet at this level?

2.  The bet, particularly in the next few years, has more to do with the current government's actions than Exxon's or Saudi Arabia's.  To bet that oil prices will stay low in nominal dollars, one must bet that Obama's deficits won't destroy the value of the dollar, that the Fed's expansionist monetary policy won't lead to inflation, that Congress won't pass some kind of legislative restrictions making oil production more expensive, and that the world won't sign a treaty to restrict carbon.  In short, Congress will have more effect in the near term on oil prices than flow rates in Saudi fields, and I am certainly not going to make a bet in favor of Congressional or Presidential restraint.

Postscript: Here is what you have to believe to accept Romm's 15F global warming forecast.   Here is how I opened that post.  It is interesting how similar the forecasting issues are:

For several years, there was an absolute spate of lawsuits charging sudden acceleration of a motor vehicle "” you probably saw such a story:  Some person claims they hardly touched the accelerator and the car leaped ahead at enormous speed and crashed into the house or the dog or telephone pole or whatever.  Many folks have been skeptical that cars were really subject to such positive feedback effects where small taps on the accelerator led to enormous speeds, particularly when almost all the plaintiffs in these cases turned out to be over 70 years old.  It seemed that a rational society might consider other causes than unexplained positive feedback, but there was too much money on the line to do so.

Many of you know that I consider questions around positive feedback in the climate system to be the key issue in global warming, the one that separates a nuisance from a catastrophe.  Is the Earth's climate similar to most other complex, long-term stable natural systems in that it is dominated by negative feedback effects that tend to damp perturbations?  Or is the Earth's climate an exception to most other physical processes, is it in fact dominated by positive feedback effects that, like the sudden acceleration in grandma's car, apparently rockets the car forward into the house with only the lightest tap of the accelerator?

Joe Romm of Climate Progress is a leading climate alarmist, telling the world that burning fossil fuels will increase CO2 concentrations by 0.04% of the atmosphere over the next century and thus destroy mankind.  As such, he is a supporter of the current cap-and-trade bill in Congress, whose purpose is to raise the price of fossil fuels (either directly as a tax or by restricting their supply) so that less will be used.

On a different but related topic, Joe Romm is also apparently a peak oil alarmist.  As I have written, I suspect real oil prices will rise steadily over the coming decades, but we aren't going to fall off some cliff and see a sudden hyperinflation of oil prices (temporary spikes are a different story).  He writes

The IEA's work makes clear that for oil to stay significantly below $200 a barrel (and U.S. gasoline to be significantly below $5 a gallon) by 2020 would take a miracle

I tend to doubt it, in part because I have seen so many very similar predictions ever since the mid-1970s, but I suppose some day someone will be right with one of these.   I wonder if there is some kind of psychological profile that causes people to see positive feedback-driven accelerating curves everywhere.

But here is my confusion -- he is absolutely convinced that oil is going up by $140 a barrel or more.  Let's look at this in the context of Co2.  The CBO estimates the clearing price for a ton of Co2 emissions under the current bill will be between $20-$30 a ton.  Since a barrel of oil creates about a third of a ton of CO2 emissions, this implies the cap and trade bill might increase the price of oil by $7-$10 per barrel.  But if Romm think oil is going up by natural market forces by $140+, why even bother?  Why not just put a tax on coal and be done with it?

I congratulate Mr. Romm, however.  If he is so sure of 2020 oil prices, there are all kinds of fabulous ways to become ridiculously wealthy with this knowledge.

Postscript:  There are two reasons why people have been making this same forecast for 30 years and have been wrong most of the time.

First, there is a very human tendency to assume current conditions and trends will go on forever.  Everyone is subject to this bias, even the smartest analysts.  Romm might argue that these are savvy, detail-oriented commodities analyst, but I only have to point to the recent behavior of savvy detail-oriented debt security analysts.

Second, analysts tend to apply current understandings of what technologies and substitutes are economic at $60 oil to a world where oil is priced at $160.  It just doesn't work that way.   The market for petroleum and its substitutes is enormously multi-variate and complex.  A $100 bump in prices will do things that are sometimes hard to predict in detail to the markets for exploration, new technologies, substitutes, conservation, etc.  But in all this complexity, the one thing we do know is that time and again, such changes have occurred quickly and decisively in response to rising oil prices, and have acted to mitigate and reverse price increases.

One ironic way of looking at it, since this is Joe Romm, is to say that there are negative feedbacks that cut in to slow and even reverse sharp rises in oil prices.  Romm seems to reject these negative feedbacks, in favor of a price model that rapidly accelerates.  This is all ironic, since this issue of negative vs. positive feedback is what separates climate alarmists like Romm from many climate skeptics like myself.