UUF DAH! That was my reaction today when I saw how high oil prices went today in world markets. In the US,

``The supply situation is dire,'' said Phil Flynn, a senior energy trader at Alaron Trading Corp. in Chicago. ``Crude-oil inventories are dangerously low. We are only one small problem away from the minimum amount needed to operate the nation's refineries. If refiners want to make more distillates and gasoline, they are going to have to pay up.''

Lower Inventories

Demand for heating oil will be robust in the days ahead because of cold weather, analysts said. Temperatures in the U.S. Northeast, the fuel's biggest market, will be below normal for at least 10 days, according to meteorologist Joel Burgio at Meteorlogix LLC in Lexington, Massachusetts.

``It looks like the incentives to make heating oil are so strong that refiners aren't making gasoline,'' said Michael Busby, manager of crude oil and refined products trading at Northville Industries Corp. in Melville, New York.

A lot of what's driving the incremental increase in the US is the report today from the DOE that

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1.0 million barrels, and are 53.1 million barrels below the level last year at this time. Crude oil inventories in PADD II (Midwest) also fell, and are the lowest ever since EIA has kept regional inventory data. Distillate fuel inventories fell by 4.5 million barrels, with most of the decline in high-sulfur distillate fuel (heating oil). Total distillate fuel inventories are below 100 million barrels for the first time
since May 2000. Motor gasoline inventories fell by 3.1 million barrels last week and are below the low end of the normal range. Total commercial petroleum inventories, at 898.0 million barrels, are 124.3 million barrels less than last year at this time.

Total product supplied over the last four-week period averaged 20.1 million barrels per day, or about 3.7 percent more than the same period last year. Over the last four weeks, motor gasoline demand is down 0.8 percent, but distillate fuel demand is up 20.9 percent compared to the same period last year. Kerosene-type jet fuel demand last week, partly due to snowstorms temporarily shutting down some Northeast airports, was at its lowest level since the week ending September 21, 2001.

VENEZUELA AND TERRORISM? This Insight magazine article from 19 February explores the possibility that Venezuelan president Hugo Chavez has contacts with, or will increasingly form contacts with, terrorists who want to flex the oil muscle. From the article's introduction:

As Washington prepares a high-stakes military venture in the Persian Gulf, a growing physical threat is being posed by Iraq, Libya and Iran to the soft underbelly of the United States. Hundreds and possibly thousands of agents from rogue Arab nations are working hard to help President Hugo Chavez of Venezuela take control of South America's largest oil industry and create al-Qaeda-friendly terrorist bases just two hours' flying time from Miami.

I cannot verify or falsify the claims in the article, but the possibility of its being true is certainly worth considering. Although it's a bit scary.

Ya wanna increase fuel economy and reduce our dependence on oil? Let high gasoline prices do their work. From an article in the Press Enterprise (registration required), an inland Southern California newspaper:

Amid soaring gas prices nationwide, Californians are paying the most to fill up their vehicles, causing many people to cut back on recreational activities and some to complain of price gouging.

Albert Ontiveros, 27, a bank teller in downtown Los Angeles, said he's cut back on evening activities.

"I've stopped visiting friends after work. I'm trying not to drive anywhere now, just trying to drive the 15 miles to work and back," said Ontiveros, who lives in suburban Downey.

Ontiveros said he recently began saving to trade in his Ford F150 pickup truck for a more fuel-efficient car [emphasis added].

Don't throw government subsidy money at technologies that won't mature soon enough to make a difference. Let people like Albert Ontiveros exercise their consumer sovereignty, vote with their dollars, and learn from that market process how much people really do value fuel efficiency.

The uncertainty, and the continuing unrest in Venezuela, keep pushing those oil prices higher and higher. See for example this BBC article, this Forbes article, this ABC News article, and this Financial Times article. Ugh.

Just got back yesterday from Philadelphia, and the Mercatus Center Congressional Chief of Staff Retreat. Very fun, lots of good conversations.

WHY DO WE GET THE SHORT END OF THE STICK? Because no one in the Midwest (or anywhere else, for that matter) wants a refinery built next to them. Plus we have oxygenated fuel requirements, reformulated gasoline requirements, and some of us have state-level boutique fuel requirements. So gas prices in the Midwest are the most volatile in the whole country. See, for example, this article in today's Tribune about a recent BP refinery fire in Indiana, and its likely effect on gas prices, in combination with the Iraq and Venezuela things.

Many thanks to Mindles Dreck for re-introducing (or introducing, in my case) us to Sophismata, replete with interesting stuff, including this insightful analysis of power efficiency and price efficiency. Yay! That's a point that will become increasingly important as we weigh increasing our energy generation from renewable sources, and particularly in light of the energy that goes into producing the things that we use to harness renewables, such as solar PV panels and platinum catalysts for breaking hydrogen out of fossil fuels to use in fuel cells.

CAFE STANDARDS ARE BIASED: Virginia Postrel has, in her usual succinct and elegant way, pointed out the deficiencies in CAFE standards for promoting decreased energy use:

I do think it's ridiculous to bias federal policy in favor of SUVs and against station wagons and minivans. That's what the Corporate Average Fuel Efficiency (CAFE) standards for fuel efficiency do. But, rather than raise standards for SUVs, I'd prefer to dump CAFE regulation altogether. It's a ridiculous approach to the issue. If we must have a federal policy to reduce fuel consumption, it should take the form of a hefty gasoline tax, preferably offset by cuts in income or payroll taxes. A tax affects actual fuel use and treats all cars, of all years, equally.

Note Virginia's important qualification: If we must have a federal policy to reduce fuel consumption.

She also suggests that readers check out her Economic Scene column on CAFE standards from December 2001, a suggestion that I heartily second. A source that lays out the arguments against CAFE standards is this Tech Central Station article from 12 February.

Here's an article from Oil and Gas Journal that describes some outlooks and forecasts for oil and natural gas markets, from energy experts at Cambridge Energy Research Associates. Punchline: oil prices will fall over the course of this year, but US natural gas prices will increase as supplies strain to keep up with increased demand from power plants and other uses.

On Wednesday, Exxon Mobil will load Venezuelan oil onto a tanker, the first US oil company to do so since 2 December.

Arnold Kling mentions the success today of the new GBP5 congestion charge for driiving into London. Arnold also has a good discussion question: Why do economists like tolls so much? I plan on asking my Environmental Economics class that very question tomorrow afternoon (we are discussing tradeable emissions permits).

Other links on the London congestion charge are here, from Voice of America, here, from Canada.com, here, from the BBC (the horse's mouth, so to speak), and here, from CNN.

Not everyone is enamored of the toll concept, as shown in this CBS News story. In fact, the Conservative candidate for Mayor of London, Stephen Norris, pledges that if elected he will abolish the toll. In this Sky News interview, Norris explains his abjection to the congestion toll:

Nobody denies there is too much congestion but we should really get public transport right first and that includes making bus lanes and yellow box junctions work.

Doing something about utility companies, something about freight deliveries at peak hours and encouraging parents with safe routes to school for their children.

Before we contemplate a blunt instrument like congestion charging. I would prefer workplace parking charging. This is a far preferable way of raising the money without any of the unfairness of Ken's scheme.

Blunt instrument? As far as I can recall, vehicles are vehicles when it comes to use of the scarce roadways. So how is this a blunt instrument? Because it's not tailored to exempt people with income high enough to have a car but low enough to feel the pinch of such a toll?

Hmmm. And he's running as a Tory? Very unusual.

HOW ARROGANT AND CONDESCENDING IS THIS? French President Jacques Chirac mouthing off with defensive and not-so-thinly veiled threats to would-be EU members, according to this AP story (courtesy of Glenn Reynolds. Some selections:

BRUSSELS, Belgium - French President Jacques Chirac launched a withering attack Monday on eastern European nations who signed letters backing the U.S. position on Iraq, warning it could jeopardize their chances of joining the European Union.

"It is not really responsible behavior," he told a news conference. "It is not well brought-up behavior. They missed a good opportunity to keep quiet."

As if the eastern European countries who would like to enter the EU are recalcitrant children who make bad, ill-informed decisions and deserve scorn and derision, as well as the denial of membership in the Euro trading zone.

Chirac particularly warned Romania and Bulgaria, who are still negotiating to enter the bloc in 2007.

"Romania and Bulgaria were particularly irresponsible to (sign the letter) when their position is really delicate," Chirac said. "If they wanted to diminish their chances of joining Europe they could not have found a better way."

Britain, Spain and other EU nations had suggested the candidate nations attend Monday's emergency summit on Iraq, but France and Germany opposed the idea.

Although Spanish Prime Minister Jose Maria Aznar and British Prime Minister Tony Blair were the driving forces behind the letter backing America — and EU members Italy, Denmark and Portugal also signed up — Chirac saved his wrath for the candidate nations.

"When you're in the family you have more rights than when you're knocking on the door," he said.

Such statements are utterly appalling, regardless of your stance on the Iraq issues. Is Chirac that desperate?

My flabber is well and truly gasted.

Regarding the 1967 oil embargo, Yergin then goes on to say

By July 1967, a mere month after the Six-Day War, it was clear that the "Arab oil weapon" and the "selective embargo" were a failure; supplies were being redistributed to where they were needed. ... the formal emergency machinery for joint operations and antitrust exemptions never needed to be implemented. The international companies themselves, working individually, had managed to handle the situation.

The biggest losers turned out to be the countries that instituted the embargoes. They were giving up substantial revenues to no obvious effect.

Thus endeth the economics lesson for Sunday evening.

THIS IS INTERESTING ... In my more-thorough-than-first-reading revisit of Daniel Yergin's The Prize: The Epic Quest for Oil, Money and Power, I have come upon this interesting paragraph describing the attempts of the U.S. government to coordinate oil supplies among Western countries in the face of the 1967 embargo (which was a consequence of the Six-Day War) when the oil-producing countries in the Middle East attempted to use the oil weapon:

The working assumption was that the oil committee of the Organization for Economic Cooperation and Development, representing the industrial countries, would, in the event of a crisis, declare an emergency and implement a "Suez system," as in 1956, and coordinate the overall allocation among the Western countries. Yet when the United States requested such a step, many OECD countries, confident that they would be able to make their own supply arrangements, resisted. American officials were shocked. Without an OECD resolution to the effect that an emergency was at hand, the Justice Department would not grant the antitrust waiver necessary for American companies to cooperate with each other. Only when the United States warned that, without an OECD statement, American companies would not share information (and, by implication, oil) with foreign copmanies did the OECD unanimously, though with abstentions by France, Germany, and Turkey [emphasis added by LK], approve a motion that the "threat of an emergency" existed, so allowing both American and international coordination measures to be put into effect.

Well, if that doesn't ring a loud bell ...

More on "is it about the oil?" at Instapundit, from Dave Winer, and from a reader who points our attention to the DOE's Energy Information Administration's Country Analysis Brief on Iraq. The EIA CABs are extremely useful and reasonably up-to-date; note that this one was last updated in October 2002. Note also that it gives not just energy-specific information, such as the extent of French and Russian contracts in Iraq, but also general information on economic conditions in the country. For Iraq, those are very depressing, as referenced by Tony Blair in this this outstanding speech given in Glasgow yesterday (with many thanks to Andrew Sullivan for the link.

DELONG ON READING THE HISTORY OF ECONOMIC THOUGHT: This Brad DeLong post on reading the classics of economic thought is wonderful. Brad uses a Machiavelli letter to illustrate an important point -- reading the classics in a body of thought give depth and nuance to your understanding of the current state and practice of methodology.

I teach history of economic thought, and I fully believe that teaching it is making me a better economist. It certainly makes me better able to couch my arguments in terms that are more persuasive without resorting to technical jargon. It has also given me a richer understanding of the importance of deductive, analytical thought, regardless of whether it takes narrative form or mathematical form. I make my students identify models, assumptions, etc. in every reading we do, and I largely teach from original sources.

The comment section also has some good nuggets, although it descends a little too far into snarky flame-land for my taste. One of the observations in the comment section is that "most undergrad economic programs require at least one unit of economic thought." That is certainly not the case in the US. I have taught at a research institution (Northwestern), a liberal arts institution (College of William and Mary), and I attended a hybrid large liberal arts-ish institution (Miami University, the one in Ohio, which is the home of the indigenous Miami indian tribe and the Miami River, which came before Florida). History of economic thought is not a required part of an undergrad econ major at any of these institutions, and I know of very few others where it is required.

The comment section also discusses Noam Chomsky on Adam Smith. My take on Chomsky on Smith is that Chomsky is about subconscious learning and, to some extent, about tacit knowledge somewhat a la Michael Polanyi. Chomsky's interested in the cognitive subconscious, and much of the way that Smith discusses and analyzes trade and exchange is very consistent with the hypothesis that our propensity to truck, barter and exchange is innate and is a product of our cognitive subconscious.

Which all begs the question of why Chomsky is not a classical liberal ... unlike his student, Steven Pinker, who I think takes the cognitive subconscious and tacit knowledge ideas to conclusions that are more consistent with minimal government intervention in human activity.

On Tuesday in the Houston Chronicle, Michael Economides addressed the question of the US taking control of Iraqi oil fields in a post-Saddam scenario. He argues that according to existing international law, such an act would be a war crime. Some aspects of such an act would also contradict the Administration's stated position (via Colin Powell) that a democratic, post-Saddam Iraq should be "of the people, by the people, and for the people."

That "for the people" part, though, highlights where there is some grey area here. What if the US military is required to take control (one would hope, temporary) of the oil fields to ensure their security? Such a move would be sure to raise criticism of American colonial imperialism (where this colonialism thing came from baffles me, we've never done the colonialism thing). But, what's the alternative? One thing that gets overlooked that to be "for the people" means having some stable and transparent system of property rights (thank you, Hernando de Soto); this important fact is also currently overlooked in Venezuela. If the US military protection of the oil fields is necessary to accelerate the Iraqi process of commercializing their assets, then that counts as "for the people", right?

So if the US were to use its military to secure the oil fields, our diplomacy and our rhetoric had better be damn sure to indicate that it's only to secure property rights, and to enable Iraqis to establish commercial operations. And our behavior must be consistent with that, which means Iraqi operation and management, and that we skedaddle when the job's done.

Yes, it's 6:45 here in Chicago and I'm wide awake. I can thank the Lumpen ProletariCAT for that one. Good thing she's cute, she's such a pest.

The comments section of Megan McArdle's post "Whither Iraqi Oil?, which I mentioned yesterday, has had an interesting conversation going on. One of the commenters, Patrick Sullivan, made a crucially important point about both the role of transportation costs and the role of trade in creating prosperity (regardless of whether or not you have lots of natural resource deposits):

Africa's comparative poverty is largely the result of not having navigable rivers and natural harbors (Europe's coastline is actually longer, because of its irregularity, than Africa's).

Knowledge gets exchanged--along with goods--when unlike people trade with one another. Water transport being cheap, civilizations first grew around ports and on rivers. While highland regions were notoriously backward, but that's changing with modern telecommunications and the internet.

The problems with the Middle East are largely that they aren't trading nations. And what trade does go on--oil--is controlled by oligarchs not by private profit maximizing actors. U.S. military intervention can change this, just as it did in 1945 in Japan.

Controlled by oligarchs and not by profit-maximizing actors. Absolutely. Patrick's insights also apply to Venezuela and its current turmoil.

COINCIDENCE? I am trying to stay at arm's length from advocacy for or against going into Iraq (for many reasons, including the deep philosophical conflicts that Will Wilkinson articulated beautifully in this post).

I do, though, keep up with goings-on in oil and natural gas industries, so I have a pretty good idea of who has contracts with whom. When France and Germany opposed further US/UN military activity and encouraged further inspections, I thought "well, that gives France time to suck more oil out of the ground on their existing contracts with the current Iraqi regime." But I didn't think much more about it beyond that.

Then Russia voiced opposition. Russia is the other country with a developed oil industry that has E&D contracts with Iraq, not to mention also being Iraq's largest creditor.

Then, this week, China chimed in with its opposition. China also has contracts with the existing Iraqi regime to develop Iraqi fields, and with such a large population and no domestic oil deposits, they are probably a bit wiggy about securing energy supplies.

Is there a pattern here? Among the opposition, only Germany has little contact with oil processing and production.

Some observers have mentioned this already, both in blogs and in traditional media. David Reinhard's column in today's Oregonian puts is thusly:

It would, of course, be nice to have Germany and France and Russia and China with us. But these nations have their own interests, and we certainly shouldn't give them a veto over U.S. policy. It's telling that anti-warniks who are so ready to infer dark U.S. motives in our clash with Saddam -- oil! -- don't mention the real interests that might explain the German and French stands. Oil and other lucrative contracts -- yes, weapons deals -- as well as their large Islamic populations.

A Tech Central Station column by Duane Freese on 24 January lays out this argument in further detail.

This article from tomorrow's Asia Times highlights the economic relationships between Russia and Iraq, now and historically:

Russia and Iraq are negotiating a 10-year trade agreement that would include 67 agreements in oil, agriculture, transportation, railways and energy, Saleh said. These agreements could be worth more than $40 billion to Russia. ...

Russia and Iraq have a history of trading that goes back to the Cold War days. Iraq owes Russia $7 billion in trade debt. It has sought to repay the arrears partly by granting Russia preferential trading status.

With the world's second largest proven oil reserves estimated at 112.5 billion barrels - 11 percent of the world total - an accessible Iraq is big bounty for Russian oil companies.

Russian oil giants also fear a crash in oil prices if US companies move into Iraq. Iraqi oil is of high quality, and easy to produce. That makes it a formidable competition for Russia's own crude of medium quality, extracted at high cost.

This article from the BBC today describes the commercial relationship between France and Iraq in the oil industry.

This article from the South China Morning News and this one from the Sydney Morning Herald highlight China's energy interests as a role in their position on Iraq. The Sydney Morning Herald reports:

Energy-importer China has a big stake in Iraqi oil, also, having signed long-term contracts with Baghdad that give it virtual ownership of huge undeveloped oil fields in the country.

This National Post (Canada) commentary by Lawrence Solomon summarizes the issue nicely, including a discussion of the Doctrine of Odious Debts.

The Doctrine of Odious Debts, though it has been little used, is well known to France, Russia and the United States. The doctrine originated a century ago with the Spanish-American War, when the United States repudiated Cuba's Spanish debts, saying they were "imposed upon the people of Cuba without their consent and by force of arms." Furthermore, the Americans argued successfully, much of the borrowing was designed to crush attempts by the Cuban population to revolt against their domination, and was spent in a manner contrary to their interest.

After the Russian Revolution of 1917, when the Bolsheviks attempted to repudiate Russia's debts indiscriminately, the Doctrine of Odious Debts was developed to determine which debts were legitimate and which illegitimate. This work was conducted by Alexander Nahum Sack, a professor of law in Paris, who authored two major works on the obligations of successor systems and coined the phrase, "dettes odieuses." According to the doctrine, the debts accumulated by despots were "personal" to the despot, giving lenders no recourse: "The creditors have committed a hostile act with regard to the people; they can't therefore expect that a nation freed from a despotic power assume the 'odious' debts, which are personal debts of that power."

Apart from Great Britain v. Costa Rica, where Chief Justice Taft of the U.S. Supreme Court, sitting as an arbitrator, decided in 1923 that loans made by the Royal Bank of Canada to the regime of a Costa Rican dictator were personal, successor states have been reluctant to invoke the Doctrine of Odious Debts, out of fear that international lenders would boycott a fledgling regime. This is the case in South Africa, where a large segment of the population wants to brand apartheid-era debts as "odious," after Desmond Tutu's Truth and Reconciliation Commission endorsed the concept.

The reluctance to use the doctrine may soon change, in part because a proposal by Harvard economists to establish an international body to adjudicate odious debts has caught the attention of the International Monetary Fund, which has been giving the concept official heft by promoting it at an IMF seminar and in the IMF's quarterly journal, Finance and Development. Scholars at the London School of Economics and McGill University have also given the concept credibility, as has its adoption by the world's churches, through the Jubilee debt-relief movement, and citizens' groups throughout the Third World.

Solomon concludes

The Bush administration may soon face vexing choices. Will it attempt to divide the Iraqi spoils among its allies, including Russia and France should they ultimately decide to support a war effort, and thus create cynicism throughout the Middle East and the world? Or will the Bush administration attempt to make Iraq a showcase for responsible government in the Middle East by enabling the Iraqi people to cast off the odious debts brought upon them by an illegitimate regime and by giving the other peoples of the region an inkling of what a future without odious rulers could hold for them.

Then there's this NYT editorial today from Max Boot, claiming that from the US perspective it's not about oil, which I think is largely correct.

The charge has a surface plausibility because Iraq does have the second-largest known reserves in the world. But we certainly don't need to send 250,000 soldiers to get at it. Saddam Hussein would gladly sell us all the oil we wanted. The only thing preventing unlimited sales are the United States-enforced sanctions, which Baghdad (and the big oil companies) would love to see lifted. Washington has refused to go along because Saddam Hussein flouts United Nations resolutions. This suggests that our primary focus is the threat he poses, not the oil he possesses.

It's true that overthrowing Saddam Hussein would lead to the lifting of sanctions and a possible increase in oil exports. But it would take a lot of time and money to rebuild Iraq's dilapidated oil industry, even if the regime didn't torch everything on the way out. A study from the Council on Foreign Relations and the James A. Baker III Institute at Rice University estimated that it would take three years and $5 billion to restore Iraqi production just to its pre-1990 level of 3.5 million barrels a day. That would increase total world production by only 1.3 percent, and might not reduce prices at all if other countries cut output or banded together to keep prices stable. …

Nobody would claim that America's global intentions have always been entirely pure. Still, our foreign policy — from the Barbary war to Kosovo — has usually had a strain of idealism at which the cynical Europeans have scoffed. In the case of Iraq, they just can't seem to accept that we might be acting for, say, the general safety and security of the world. After more than 200 years, Europe still hasn't figured out what makes America tick.

So … is it about oil? If so, for whom is it about oil? The contractual relationships surrounding the oil industry seem to provide a compelling argument that oil profits do play a part in the story, but not the part that many people think.

OIL MARKET DRAMA CONTIUES: Gas prices spike in the Bay Area, home heating oil prices are high due to oil prices and cold weather, and the IEA continues to be worried about short-term oil supplies.

This FT article on the low US crude supplies reiterates much of what I posted yesterday, but it also refers to the fact that the figures reflect a low implied demand.

A recently-released manifesto,spearheaded by UC-Berkeley's Institute of Management, Innovation & Organization, provides another call for market forces in California's electricity industry in the face of increasing regulation and debt-laden utilities and generators.

I have provided the press release below, and it is also available at the RPPI website. The full text of the manifesto and its list of signatories is at the Haas School of Business, UC-Berkeley website.

The heavily politicized retreat from real deregulation in California has created a situation that is bad for consumers and for vibrant, dynamic companies that seek to provide California consumers with attractive value propositions in power.

***
Berkeley - A manifesto, signed by an ad hoc group of 20 people -professors from the University of California, Berkeley, UCLA and Stanford University, plus consultants and former regulators - urges policymakers to move swiftly and vigorously toward a market-based restructuring of California's electricity industry.

Failure to reform the industry will only compound California's energy problems, say the manifesto's signatories.

"While wholesale electricity prices have moderated, and California no longer faces the risk of blackouts, in many ways the industry is in worse shape now than it was at the start of 2001," the manifesto says. "Electricity rates today are 40 percent higher than at the start of the industry's restructuring, state regulation is increasing, and once vibrant generators and utilities struggle for solvency."

Since the 2001 electricity crisis, two California utilities have become insolvent, the state has entered long-term contracts to buy electricity at exorbitant rates and the electricity trading industry has gone into near collapse. Meanwhile, the confidence of electricity reformers around the world has been shaken, and initiatives to introduce competition outside California have been delayed, according to the manifesto.

Experts in regulatory and energy economics, who organized under the auspices of UC Berkeley's Institute of Management, Innovation & Organization (IMIO), generated the manifesto.

"It is not easy to get consensus amongst such a disparate group," said David Teece, Mitsubishi Bank Professor of International Business and Finance at UC Berkeley's Haas School of Business and director of IMIO. "We have come together because we are concerned with the conflicting policy directions being pursued for the industry at the state and federal levels. "

This is the second such manifesto from IMIO on the energy crisis. The first manifesto was published in response to severe electricity price hikes and rolling blackouts in January 2001. It strongly recommended against long-term procurement contracts, which Gov. Gray Davis ordered the Department of Water Resources to sign.

"California would be a lot better off today if our advice had been heeded," said Teece.

This latest manifesto proposes that the state take the following steps toward recovery:

• Vigorously develop competitive markets

• Reassemble a functional set of electricity oversight rules and policies

• Limit regulation to those functions the market cannot perform efficiently

• Allow unregulated producers to provide electricity generation

• Clarify the jurisdiction of federal and state agencies to avoid further delays in the restructuring of electricity markets

• Rebuild the commodity market for power, and allow consumers and suppliers to enter into long-term contracts

• Implement real-time pricing of electricity

"We encourage the state to realize that the energy crisis was the consequence of a flawed regulatory design and of misguided decision-making at the time of the crisis, rather than the result of any inherent inability of electricity markets to work," say the manifesto authors.

The signatories of the "2003 Manifesto on the California Electricity Crisis" include Vernon Smith, a Nobel Laureate in economics from George Mason University; professor James Sweeney from Stanford University; professors Harold Demsetz, John Riley and Richard Rumelt from UCLA; professor Pablo Spiller from UC Berkeley; and Mitch Wilk, former president of the California Public Utilities Commission.

According to this Bloomberg Energy story, the Energy Department reports that domestic gasoline inventories are unexpectedly high. The effect of these inventories is depression of oil prices today.

But the story doesn't give any detail on whether or not the increased inventories are due to production increases, consumption declines, or a combination of both. I suspect it's a combination, but an analysis would require data, econometrics, and time, the third of which constrains me away from being able to give a definitive analysis. It would be nice to know what the price elasticity of gasoline demand is like at these prices at this time of year, though.

UPDATE: The story also didn't include the important details included in the rest of the DOE report, such as U.S. crude oil inventories are the lowest since 1975. No wonder oil prices have not fallen on the gasoline inventory news! See also this Chicago Tribune story (registration required).

Megan McArdle has a good post on the future of the Iraqi oil industry and why oil-rich countries tend to be illiberal (my wording, not hers). Both her insights and the comments on her post are worth reading, as is the Washington Post article she references.

Bravo! to Susan Lee for her articulation of the important distinctions between conservatism and libertarianism, particularly in cultural dimensions. An excerpt:

To push my argument further, libertarian thought, with its fluid cultural matrix, offers a better response to some of the knottiest problems of society. It is, especially when contrasted with the conservative cultural matrix, a postmodern attitude. In fact, it is precisely this postmodernism that enrages conservatives who are uncomfortable with a radical acceptance that, in turn, promotes change and unfamiliarity. Yet no matter how scary (or irritating), libertarian tolerance provides a more efficient mechanism in dealing with those places where economics, politics and culture clash so intimately.

Although libertarians tend toward an annoying optimism, no reasonable observer would venture a prediction on the winner of the conservative-libertarian debate. The outcome depends crucially on where societies ultimately fix the locus of coercion between liberty and authority for politics, and between tolerance and conformity for culture. One can imagine, though, how discouraged F.A. Hayek must have felt in 1944 when he sat down to write "The Road to Serfdom." Now, few doubt that Hayek has won and that the economic argument has been settled in favor of free markets. What remains is the battle over politics and culture. One down, two to go.

This is precisely why I bristle when someone tries to label me "conservative" or "right-wing". I refuse those labels. And it's the lack of toleration and the resistance to dynamism, a la Virginia Postrel's articulation of The Future and its Enemies, that particularly indicates why I am not a conservative.

OPEC PRODUCED MORE IN JANUARY, BUT NOT ENOUGH TO MAKE UP FOR VENEZUELA: Data on OPEC's January production from Platts shows that production went up by 500,000 barrels/day. Not enough to compensate for Venezuela's lack of production, thus the price rise from around $32 to around $35.

MORE FROM THE OED: Upon the completion of her first knitted sock, Bonne Marie Burns asks "what the heck does *gusset* mean anyway?"

gusset n. A triangular piece of material let into a garment to strengthen or to enlarge some part, esp. in order to afford ease in movement.

One of the usage examples they offer is splendid:

c1570 Pride & Lowl. (1841) 35 The woman and the wench were clad in russet..worne so very neere, That ye might see cleane through both sleeve and gusset The naked skinne.

According to the OED:

calyx n. The whorl of leaves (sepals), either separate or grown together, and usually green, forming the outer envelope in which the flower is enclosed while yet in the bud.

corolla n. The whorl of leaves (petals) either separate or grown together, forming the inner envelope of the flower, and generally its most conspicuous part; usually ‘coloured’ (i.e. not green), and of delicate texture. (Called by Grew the foliation. Cf. CALYX.)

Calyx and corolla, outer and inner, green and colored. Fascinating.

CALYX AND COROLLA: I heartily second Megan McArdle's recommendation for Valentine's flowers. I have often bought flowers from Calyx and Corolla for my parents and grandmother. In fact, for her birthday this year I sent my mother a bouquet from another company, but in a lovely Waterford vase, and while she liked it she said that she wouldn't mind if I just got her calla lilies from Calyx and Corolla every year for her birthday! And this from a woman who is incredibly discerning.

I also think Megan's right about roses. Roses schmoses. I'd rather have the money spent on a huge freesia bouquet, or some red ginger and birds of paradise. Matt, are you reading?

BP INVESTS IN RUSSIAN OIL: RUSSIA FRIENDLY FOR FOREIGN INVESTMENT? BP has committed to invest $6.75 billion in a new Russian oil company, the largest foreign investment ever in Russia. This investment, with two Russian partners, will create Russia's third largest oil company, and will complement BP's planned investment over the next five years:

more than $20 billion developing projects in the U.S. Gulf of Mexico, Trinidad, Angola, Azerbaijan and Asia, in a bid to compensate for a decline at aging developments such as in the U.K. North Sea.

Note that none of these countries is either in OPEC or in the Persian Gulf. Azerbaijan is the historical cradle of the Caspian oil industry, and holds a lot of potential to break OPEC's ability to restrict output to raise world oil prices. Gotta love cartel instability!

According to Jason Kenney, an analyst at ING Barings Charterhouse Securities in Edinburgh, Scotland interviewd for this AP story,

"BP's made a very bold move with this deal. It's got a lot of opportunities, but I do think it's long term," ... Kenney compared the deal to the pioneering efforts of oil companies in Europe's North Sea in the 1970s. BP would enjoy advantages — and face the risks — of being a "first mover" in a country that many foreign oil companies still view as a frontier for investment.

I cannot emphasize how important a move this is. It opens the door to foreign investment in Russian oil by investors who are more risk averse, if the BP venture goes well. Putin's legal reforms in Russia have been geared toward precisely this kind of investment -- foreign investment that does not necessarily enrich the domestic oil oligarchs (BP's partners in this venture are not these folks).

WSJ ON VENEZUELAN OIL: Alexi Barrionuevo has written an insightful and informative profile of Venezuela's national oil company in Monday's Wall Street Journal (subscription required). He goes through the history of the company, PdVSA, and how Chavez's opposition to it influenced his initial coup and run for presidential office. An excerpt:

For 30 years, Rogelio Lozada was the sort of dedicated engineer who made Petroleos de Venezuela SA one of the best-run companies in Latin America.

But in recent weeks, Mr. Lozada, the manager of the oil company's El Palito refinery near here, has taken on a new mission: ousting President Hugo Chavez. Like thousands of his colleagues, the 55-year-old engineer fears Mr. Chavez is dragging Venezuela toward a Cuba-style dictatorship and in the process tearing the state-owned oil company apart.

...

Late last November, 2,500 PdVSA managers signed a petition demanding the resignation of Mr. Perez, the internal policeman. Nothing came of it. But on Monday Dec. 2, the general strike was launched. A few days later, many of El Palito's operators abandoned their posts. President Chavez ordered National Guard troops to seize control of the plant. Some 300 soldiers surrounded the plant and wouldn't let operators leave, even after some were on the job for 30 hours or more.

By Saturday, shift superintendent Romulo Chirinos had been working for 31 hours when he called his supervisor Luis Cuauro at home, begging for relief, according to both men. "Boss, what do I do?" Mr. Chirinos sobbed to Mr. Cuauro. "When are they going to get us out of here?" Mr. Rodriguez eventually agreed to let Mr. Lozada and his crew shut down the plant.

Since then the government has tried in vain to restart the plant, a crucial supplier of gasoline to the central part of the country, including a key industrial zone in Valencia that is home to local operations of DaimlerChrysler AG, Coca-Cola Co., DuPont and other multinational firms. Over the weekend Mr. Ramirez, the energy minister, responding to the reappearance of huge gasoline lines in Caracas, declared in a public statement that the government would reactivate El Palito by month's end and resolve the nation's gasoline shortages. To try to restart the plant, the government has hired retired workers and local volunteers. It has replaced Mr. Lozada as the plant's general manager with a former maintenance superintendent named Astrubel Chavez, who is a cousin of President Chavez. Astrubel Chavez didn't make himself available for interviews and has generally avoided the media. Mr. Rodriguez says the government will begin importing refining specialists from around the world, if necessary.

Many PdVSA employees are continuing the strike, in protest against their elected despot.

OIL INVESTMENT IN A POST-SADDAM IRAQ: According to this Reuters story from 1 February, the Iraqi opposition is thinking about how to encourage investment in Iraq's oil industry if Saddam Hussein is deposed. An excerpt:

While Iraq has huge oil reserves, they remain under-developed because U.N.-imposed sanctions have blocked the foreign investment needed to exploit them at full capacity.

The group discussed the problems that a future Iraqi government would face in rehabilitating and modernizing its oil sector, and examined energy policy options.

"A stable political environment with attractive investment opportunities, that are in line with international norms and practices, are needed in a post-Saddam Iraq," the group said.

In its statement, the group did not say if current contracts that foreign oil companies, especially those from Russia, have with Saddam to develop Iraq's oil fields should be renegotiated by a new Iraqi government.

The working group is expected to come up with formal recommendations at a later meeting on how to run Iraq's energy sector that would be eventually be presented to a new Iraqi transitional government.

While foreign investment will be needed, the group emphasized that the Iraqi energy sector "will continue to be managed by Iraqis for the benefit of the Iraqi people."

Here are some recent articles on oil and gasoline price increases due to the cold weather and anticipated military action in Iraq, from Forbes, Oil and Gas Journal, CNN, and the Houston Chronicle.

MORE ON FUEL SUBSTITUTABILITY AND ALTERNATE FUELS: This Rigzone article from Friday does a nice job of summarizing what in economics is known as the substitution and income effects of price increases. In plain English instead of econ-geek-speak, when the price of a (normal) good goes up, all other things equal, the change in its price relative to substitutes for it induces people to shift from consuming the good to consuming its substitute. Also, the price increase decreases your real purchasing power, so part of the reason you decrease your consumption is the feeling of income loss. Thus substitution and income effects. The article's abstract captures that idea nicely for fossil fuels and alternate fuels:

High oil and gas prices, currently increasing the profits of petroleum producers, may result in more competition down the road as products from alternative fuel developers become more attractive on a cost basis while still carrying a 'green' cachet.

The economic content of this simple sentence is fabulous. First, oil and gas prices are currently high for various reasons. Because of income and substitution effects, those high prices encourage consumers to shift to substitutes. In the short run, those substitutes are things like taking public transportation, walking, biking, carpooling, telecommuting, etc. But in the long run, opportunistic suppliers see this as a profit opportunity and invest in the substitutes for oil and gas. That is a market mechanism behind the impetus to invest in alternate fuels. The first sentence of this article puts it right out there:

High oil and gas prices, while pinching the wallets of millions of North American businesses and consumers, are creating opportunities for companies trying to come up with alternative fuels.

Thus the dynamics of innovation. And, of course, as this innovation takes place and its fruits are commercialized, demand shifts away from oil and gas, and prices fall, and capital flows away from oil and gas and into its substitutes, until we reach some kind of equilibrium or something else induces us to either change more quickly toward alternate fuels, or to move back toward oil and gas (such as finding new deposits).

NOW FOR A KNITTING RANT As long as I'm feeling ranty this weekend ... on 28 January, in the Personal Journal section of the Wall Street Journal, the Cranky Consumer (Elizabeth Schatz) explored different ways to learn to knit: book, group class at a yarn store, cd-rom, and video. Picking up on the increasing trendiness of knitting (which is good news and bad news for us long-time knitters), she delved into these different teaching methods to compare their efficacy. The Cranky Consumer was definitely cranky with each and every one of these methods of learning to knit, finding that learning to knit is neither easy nor relaxing. Plus, it's expensive, and if you frequent those fancy schmancy yarn stores, you end up spending gobs of money on a hobby that is not relaxing or easy.

Hmmmm, where do I start ... ?

As you can probably tell from scrolling down my links, I am a knitter, and have been for almost six years (which is apparently an eternity relative to this trend). Few things in life make me happier than wearing a chunky turtleneck sweater, so it's a natural fit.

Knitting is also the perfect hobby for an economist.

What??? you say. Knitting involves not only the sybaritic pleasures of the yarn against your skin and the feeling of accomplishment from having a practical hobby, but also the intellectual stimulation and challenge of learning new techniques, and lots of algebra and geometry. The non-mathematical knitters whom I know don't knit for these reasons, but the economist knitters I know all groove on the spatial logic and mathematical skills that make both knitting and economics fun and gratifying. Not to mention the orders-of-magnitude increase in my patience since I started knitting. No wonder so many knitters call it fiber therapy.

The Cranky Consumer is constrained, of course, to reviewing products, which have become increasingly irrelevant in the process of learning to knit. I thought the Cranky Consumer's attempts to learn to knit were generally superficial and obsolete, for the following reasons.

1. Aptitudes and learning styles vary dramatically, so don't throw the yarn out with the handwash water. Knitting is not for everyone, everyone has different ways and speeds of learning new things, and if she did not pick it up and groove on it after spending 14 hours with various types of knitting instruction, perhaps knitting is not a good fit for her. So be it. However, knitting is one of those things that, like riding a bike, becomes automatic and unconscious in a very nonlinear fashion -- you struggle and struggle, and then bammo! you get it without necessarily being able to point consciously to why it just clicked. And it's a never-ending learning process, in which different knitters can do the same things in different ways. For example, I had evolved a way of doing purl bind-off that I thought was imminently clever, and last year I was taking a class at one of my local yarn stores, and the owner had never seen anyone use my technique and she started to adopt it.

In this way I also find knitting very Hayekian, full of evolution, tacit knowledge, experiential utility from the process, etc.

2. Group class teaching skills will vary, so you have to both choose carefully and be assertive in getting taught in a way that you can actually learn. The Cranky Consumer took a class at a super yarn store in New York called Yarn Co., which is a super-swish, uber-trendy store chock full of fabulous and luxurious yarns. The owners also have a wonderful book of patterns out called Yarn Girls' Guide to Simple Knits, which starts (as do most pattern books) with a good, clear overview of knit, purl, cast on, bind off, increases, decreases, and picking up stitches, so you can learn or refresh basic skills from the book.

Just because the owners are good businesswomen and have a great eye for color and style, that does not mean that they (or other knitters whom they may hire as instructors, for that matter) will be good teachers. The Cranky Consumer complained that the instructor "often did our work for us" to save time. That happens. But that's a problem with the instructor, and if I were the student I would have asked her to stop and to watch what I was doing instead, and to place her hands over mine so that my hands could experience what the instructor was trying to get me to do. Be confident enough to get the value for the money you are spending for a class, and if she doesn't have the time during the class, then ask her to show you afterward. You're the consumer.

3. Most folks knit for the decadent and sybaritic pleasures of the yarn and creating unique garments, not to save money. If I want to save money on sweaters I go with the economies of scale that the Banana Republic-Gap-Old Navy corporate conspiracy enjoys. If I want to look like I didn't just stroll into Banana Republic, buy what's on the mannequin and walk out, I spend for the good yarn and get so much utility out of thinking about what the yarn will ultimately be, out of working with it and feeling its luxury against my fingers, and out of wearing my unique sweater/scarf/hat/totebag and knowing that it looks good. Quality inputs matter. That's why stores like Yarn Co. exist; also, the froo-froo yarn stores typically give a discount (usually 10-15%) on yarns purchased either for a class or while you are enrolled in a class.

I would have like to see the Cranky Consumer focus more on this aspect of knitting, with more of a "if you want to look distinctive and give distinctive gifts, it's worth the money and the learning effort."

4.More and more people learn to knit from friends, Stitch & Bitch groups, and weblogs, not from cd-roms and videos. Books and classes are very important, especially if you are particularly conscious of how you learn and make the choices that fit that learning style. For me, I had a 10-page "How To Knit" book that you can get at almost every yarn store in the country, a simple sweater pattern (yes, I started with a turtleneck sweater, not a scarf; I like a challenge!), and a demonstration from the shop owner of how to cast on. In the process of learning to knit I had to rip out and start over more than a couple of times, but the repetition and the mistakes reinforced the lessons, so my learning curve was steep. I knew this would work because I learn by doing, not by reading or by watching someone else do, so I had to dive in and make mistakes and start over.

Informal groups of friends and organized groups like Stitch-n-Bitch in Chicago and other cities provide the ideal combination of learning and social activity. Typically held at a coffeehouse or some other "third place", these groups satisfy lots of knitting needs -- learning, teaching, showing off finished objects, seeing what others are working on and incorporating their ideas into your knitting, and coffee and desserts! These groups have mushroomed in the past two years, I would argue precisely because of this combination of benefits. Unfortunately, I've been too busy to attend, but it sure is fun.

Weblogs and online knitting instruction sites are another source of learning and inspiration. There are currently 189 knitting weblogs, with more daily. One of the best is my fellow Chicagoan Bonne Marie Burns' ChicKnits, where she offers humor, style, and technique advice. There are also technique websites, such as learntoknit.com and Vogue Knitting's Learn to Knit. You can even learn to knit socks using two circular needles.

Why am I so moved to rant about this? Knitting symbolizes a lot of what I think is important in how information and technology interact with human nature. We learn by repetition. We all learn differently. Learning is nonlinear. Applying our learning to a productive end, and in a social context like Stitch-n-Bitch, is as important for broader issues of economic growth as it is for knitting. And we all get different things out of the experience.

And then, of course, there's the math ...

FROM STRUNK AND WHITE ON "THAT" AND "WHICH": While I'm on a rant ... according to Strunk and White:

That is the defining, or restrictive, pronoun, which the nondefining, or nonrestrictive.

The lawn mower that is broken is in the garage (tells which one)

The lawn mower, which is broken, is in the garage (adds a fact only about the mower in question)

...

The careful writer, watchful for small conveniences, goes which-hunting, removes the defining whiches, and by so doing improves his work.

LANGUAGE POLICE: Picking up on a theme from Eugene Volokh, I too am a language pedant in many ways. My biggest pet peeve is those who fail to recognize the distinction between restrictive and unrestrictive clauses, and therefore use "which" when they should use "that". The British usage of "which" particularly gets under my skin.

Again yesterday on Fox News, someone (I can't recall whether reporter or guest) discussing Saddam Hussein's reactions to the United Nations predicted grave consequences if Saddam "continues to flaunt [emphasis added] UN resolutions."

AAAARGH!!!! Clearly the speaker meant "flout".

According to the American Heritage Dictionary:

flaunt 1. To exhibit ostentatiously; show off 2. Non-standard To flout.

See that? Non-standard! There's a perfectly good substitute for using "flaunt" to mean "flout": flout!!! (NOTE: this is the same argument I use for why one should not use "impact" as a verb substitute for "effect")

flout 1. To show contempt for; scorn.

If you mean flout, say flout, not flaunt. Be precise to be more persuasive.

Gee, can you tell that I'm a professor ;->?

UPDATE: According to the Oxford English Dictionary, the uber-reference (with the historical usage citations deleted):

flaunt, v.
1. intr. Of plumes, banners, etc.: To wave gaily or proudly. Of plants: To wave so as to display their beauty.
2. a. Of persons: To walk or move about so as to display one's finery; to display oneself in unbecomingly splendid or gaudy attire; to obtrude oneself boastfully, impudently, or defiantly on the public view. Often quasi-trans. to flaunt it (away, out, forth). b. Of things: To be extravagantly gaudy or glaringly conspicuous in appearance.
3. trans. To display ostentatiously or obtrusively; to flourish, parade, show off.

flout, v.
1. trans. a. To mock, jeer, insult; to express contempt for, either in word or action. Also to flout (a person) out of (something). b. To quote or recite with sarcastic purpose.
2. intr. To behave with disdain or contumely, to mock, jeer, scoff; to express contempt either by action or speech. Also dial. to scold. Const. at; whence in indirect passive.

Thus according to the OED, for my money the final arbiter in usage here (they are even good on "that" and "which"), "flaunt" is not even a non-standard synonym for "flout".

Q.E.D.

Many thanks to Glenn Reynolds for linking to Betsy's Page, which in addition to being full of insightful commentary has a fantastic color scheme! Including my favorite shades of green.

Yesterday the crawl on Fox News said that new intelligence indicates that if military action occurs against Iraq, Saddam Hussein would ignite Iraqi oil fields. Some take this as evidence of Saddam’s irrationality or spitefulness.

Perhaps it is. But it could also be another example of the tradeoffs among bad alternatives that we have seen throughout 20th century history. Anyone who knows any war history knows that oil wells are typically blocked or ignited when an area is under threat. When the British left Southeast Asia in 1941, for example, they made the painful decision to ignite the wells that they had spent so much time and money constructing. Why? Because the alternative was having them fall into the hands of the Japanese, who were waging war precisely because they felt threatened by their lack of access to oil. The British chose to destroy their fields because having them fall into Japanese hands would prolong the war and reduce the probability of Allied victory.

As another example of this behavior, consider another World War II example. In the runup to World War II the British put cement plugs into their oil wells in many Middle East locations, in case the Germans took control of the region. The economic calculation is this: you incur a cost of foregone production, as well as a cost of re-opening the well at the end of the war if you have retained control of the area. In return for that, you forestall the potential of your enemy extending the war, or even winning, because of access to your oil wells.

All sounds pretty logical to me, if you consider the risks, timeframes, and costs involved. Not spiteful and not irrational.

By the way, if examples like this interest you, check out Daniel Yergin’s superb book The Prize: The Epic Quest for Oil, Money and Power. I'll have more to say about lessons from oil history when I have more time to put fingertips to keys.

Recent news stories on US military strategy relative to securing Iraqi oil fields include this AP article from Thursday and this Fox News story from 31 January.

CAT ANTICS: My husband and I have an 8-year old tabby cat named Coco, after the pioneering French fashion designer Coco Chanel. At the time we adopted her from the shelter, she was one year old, lean, lithe, elegant, and beautiful. Thus the name.

Of course, she was lean because she had kennel cold, and as soon as we got her home she needed pink antibiotics and lots of TLC. After that she became a happy and healthy DSH (that's domestic short hair for you non-cat owners). This meant weight gain, as most DSHs experience when they are housecats, as is our spoiled little lovely. She now weighs in at a hefty 12.5 pounds, and although she is muscular she does still have the typical DSH pot belly that swings a bit from side to side when she galumphs around the house. She's no thumper, but she's not petite either. She is also more like a dog in that she does not pace her eating; we feed her at night all in one meal (to aid in keeping us asleep at 5 AM), and she chows it all down within about 15 minutes.

Over time my husband and I evolved a habit of coming up with funny nicknames for Coco, like LMW (Little Miss Wonderful) and others that are too goofy to mention. Last week my husband came up with the best nickname yet:

Notorious P.I.G.

Complete with a hip-hop lyric wondering why her tail's not curly.

This week it's been really cold here, and her cute behavior of the week has been to curl up in a tight little (well, not THAT little) ball under the comforter on the bed and sleep all day. Last night when I came home from work and she was in that same position, where I had left her that morning, I came up with the new nickname of the week:

Lumpen ProletariCAT

Which has, of course, led to all kinds of discussions about how we exploit her (typically involving lack of food), most of which would have Karl spinning in his grave.

CHA CHING, TIME TO EXPLORE: Not surprisingly, oil prices cracked $34/barrel this morning. Also not surprisingly, Marathon Oil has announced that it will increase its exploration efforts in the upcoming year.

This increase in capital investment in exploration is the logical outcome of a period of sustained high oil prices; high prices encourage either existing firms to increase their capacity or new firms to enter the industry. Given that entering the oil production industry is pretty darn costly, and a big commitment in a volatile industry, existing firms will benefit from increased exploration and increasing their production capacity.

And consumers benefit too, through lower prices as supply increases.

Kevin Spacey reviving the Old Vic theatre in London as director of its new permanent program, very cool. Sounds like a good excuse for a trip ... after I just kvetched about traveling too much last month!

BUSY, BUSY January was a killer month for me -- three trips, the beginning of a quarter in which I'm teaching two classes, and the unfortunate concatenation of these events with annual doctor's appointments.

I am teaching two classes from which I always learn a great deal -- Environmental Economics and History of Economic Thought. Not many people can teach history of thought, but I love teaching it because it's incredibly intellectually gratifying to see the progression of economic methodology, and to get a chance to read primary sources. I largely teach the class from primary sources.

We've just had our midterms here, so now hopefully things will slow down a little for me (in at least one of my two jobs!), and I'll have time to post more. I've got a backlog of technology items on which I'd like to comment, so that's coming.