What should we do?

I'm on tonight for the Kim Hill moderated debate over at Lincoln University

Caroline Saunders opens for the "we have to have government reorganize our economy to deal with peak stuff" side. I'm after her. Then we move to general debate. With Caroline are Bob Frame from Landcare Research and Graeme Coles. With me are Ruth Richardson and Sharon Buckland (Chevron/Caltex).

Here's what I intend on delivering as opening for my side - I'm allowed 5-10 minutes. Comments and suggestions welcome. And even more welcome would be a few attendees at tonight's event. I'm very much expecting this to be an "away" game; it would be nice to have a few from my home team there in attendance. I expect subsequent debate to hit onto peak oil (futures prices on NYMEX show no evidence of it) and post-oil (Thorium and hydrogen, says me, but that's all a half century away). I've the Hotelling model in my back pocket as well. Here's the draft text.


Wealth, resilience and the environment
Address to the Kim Hill "Hot Energy Debate"; check against delivery.

Some days, it really looks like the world is ready to collapse. Caroline Saunders just gave a reasonable description of a lot of the problems we’re facing. Increased carbon output seems likely to increase global temperatures by a degree or two by the end of the century; sea levels may rise perhaps up to half a metre as consequence. Food price increases have hurt the world’s poorest. And oil supplies may run low sometime in the next fifty years.

And now we have to decide what to do about it all.

And there’s an awful lot we do have to do. But what we have to do depends on who the “we” is.

As individuals, “we” have all already started responding to the challenge. Oil prices have risen substantially over the last fifteen years. I remember when I was a grad student back in the Washington DC suburbs. Oil was a bit under $30 per barrel and petrol cost about $0.90 per gallon. That’s about $0.33 per litre. I drove a ’69 Buick Skylark with a V-8 and a 4-barrel carburetor that got about 12 miles to the US gallon – about eighteen litres per hundred kilometers. Since then, oil prices have risen to about a hundred dollars per barrel and petrol prices here are more than $2.00 per litre. As one of the “we”, I switched to driving a 2000 Honda Stream that uses less than half as much fuel – about 8.5 litres per hundred kilometers. And it isn’t just me – the broad trends are toward more fuel efficient vehicles and away from gas guzzlers. Nobody has had to tell us to do it – it just makes sense for our pocket books and so we have. And nobody’s had to tell Japanese car dealers to send us more of their smaller cars than of their bigger trucks – importers could tell what customers wanted and sorted things out as part of the distributed “we”.

As energy prices rise, “we” have moved to actually start insulating houses in New Zealand. It’s something Kiwis have been reluctant to do – best I can figure, you folks think there’s some kind of moral sanctity in wearing the itchiest woolen sweaters close to the skin; having a cold house gives you an excuse to do that. Well, with an insulated house, you can enjoy the itchy woolen sweaters with fewer space heaters. “We” have been switching to more energy efficient appliances. And “we”, as producers, have started building those more energy efficient appliances.

So the “we” as consumers have been responding to what prices are telling us about the world. Energy has become scarcer, as we can see by the price rises, and so “we” have responded by using less of it. And “we” as producers and entrepreneurs have responded by meeting that demand: coming up with new and better designs for vehicles. The new Boeing 787 Dreamliner uses 20% less fuel than the similarly-sized Boeing 767. And recent designs of double-D framed aircraft – nowhere near production as yet, but we could be there in twenty years – suggest fuel savings of around seventy percent. “We” as entrepreneurial designers and as corporations looking to reduce costs will make these designs a reality as fuel prices rise further.

All of these are things that “we” will do entirely of our own initiative and without any need for grand “master plans”. They’re the kinds of things “we” are doing already and will continue doing, simply by watching price signals.

Let’s think of the next bigger “we” – we as communities, towns, and cities that have to make some collective decisions. Much development from the mid twentieth century onwards was predicated on the idea that people wanted big suburban sections of land with low density use. And so “we” as communities put in place land use regulations preventing densification. Because land use couldn’t become more dense, cities built out. And as city planners got upset about seeing urban sprawl, they started putting in place green belts and metropolitan urban limits.

The combination of density restrictions and urban limits worked to massively inflate land prices and really kill a lot of poorer folks’ dreams of owning their own home. But it did well for suburban middle class folks who could afford a home and who wanted to keep the poor folks out of their neighbourhoods. If petrol prices are likely to rise substantially, “we” as communities are probably going to have to rethink our zoning density regulations.

I know a lot of people are really really keen on public transport solutions ranging from buses to light rail. But while “we” as voters and pontificators seem to like those ideas, “we” as commuters don’t. Except for really high population centres like New York, Boston and Washington DC, light rail and subways are overwhelmingly money sinks – people won’t use them unless they’re heavily subsidized. Why? Because they’re really inconvenient. They’re great for the single guy commuting from his house to his office. But for families who are making multi-point commutes – dropping the kids off at school, going to work, grabbing some groceries, getting the kids then going home – they’re impossible. And so they’re underutilized.

What can “we” do then, as communities, that meshes well with what “we” as individuals want to do? Change zoning to allow greater density and more mixed use. You don’t have to force anybody to do anything. Allow the development, and as people want it as prices move, entrepreneurs will provide it. The more commercial activity is allowed near residences, the more able people are to live near work. Denser housing provides an incentive for grocery stores to come in close to where people live, making for shorter trips to the store. And, this kind of dense, mixed use environment is precisely the kind of community that Jane Jacobs lauded as the most vibrant and liveable kind of place to be. More recently, economist Ed Glaeser has written a lot about how dense urban environments are not only some of the world’s most creative and innovative places – our engines of economic growth – but are also some of our most environmentally friendly places. Residents of downtown New York use far less energy than folks in the suburbs; it costs a lot less to heat an apartment than a suburban house, and folks in dense urban environments don’t need to drive as much.

Our zoning regulations have prevented it, and “we” as activists have worked to kill it by lobbying against rezoning of land in places like the New Brighton pier where densification could have shortened commutes, built communities, and provided additional hubs outside of the CBD that would have given us greater resilience in the face of natural catastrophes like the recent earthquake. The more of these hubs we allow to emerge by easing up on zoning, the more resilient we will be to a wide variety of challenges that might come.

The next bigger “we” is New Zealand as a country. What can “we” do there? The best we can do is to avoid screwing everything up. The further decisions are away from folks on the ground, the more likely everything is to turn pear shaped.

And boy are “we” good at making those kinds of disasters when “we” start acting through national policy. Through the 1990s in the States, folks really worried about the environment, peak oil, and global warming pushed really hard for policies mandating ethanol use in blended gasolines and big subsidies to ethanol production. The result has been the big spike in food prices that Caroline just showed us. Even Al Gore, the Senator who pushed hardest for those policies, has admitted they were a colossal mistake. “We” really need to guard against the damage that “we” can do when we all act together towards something that sounds good.

Caroline put up a slide showing the big increase in atmospheric CO2 concentrations over the last while. Imagine for a moment that a massive earthquake hit tomorrow that submerged New Zealand a mile below the sea, never to return. Now imagine the graph showing CO2 emissions for the next century. Would that graph be any different with the complete elimination of New Zealand as a country. No. The best you could hope for is that global CO2 concentrations might take a day or two longer to reach a given level a century hence. When you think about it that way, it helps to put into perspective what “we” as a country can do to slow global warming.

Now I know somebody’s going to come back at me and say we all have to do our part and that we can be a shining example unto others and the rest of the world will follow our lead. But that’s magical thinking. It’s just not going to happen. Instead, I argue that what “we” should be doing is looking at ways that we can help the rest of the world to reduce total emissions through technological change in areas where New Zealand already has a research advantage. We’re not likely to come up with the next innovative design for fuel saving aircraft. China is miles ahead of us in coming up with the next best source of power generation – Thorium fueled nuclear generators that produce next to no waste and cannot melt down because their reaction is fuelled by a photon beam that, if turned off, stops the reaction. Once China has built those, “we” might do well to allow a few reactors if they’re commercially viable and safe.

But what can “we” do that would have global benefit? Fund agricultural research into crops and livestock that produce less methane. We’ve already made a great start. The most we can hope for with our emission trading scheme is that our emissions reduce to zero – and that won’t make any difference in the grand scheme of things. But if we could take the resources that we’ve devoted to the emissions trading scheme and instead use them to fuel development of new agricultural technologies, and then give those technologies for free to anybody in the world who could use them – that could make a difference on a global scale. That’s where we should be looking if we want to make a real difference rather than just feel good about ourselves for making minor reductions in GHG emissions with a trading scheme. When a Canterbury guy tells you that the best we can do is give more money to Lincoln, you probably should listen.

Finally, “we” as a country can work hard to pursue policies that allow us to become wealthy. Global warming and “peak” whatever are not the only problems that can emerge. We’ve figured that out pretty well in the last six months or so. Whatever challenges emerge, the richer we are and the stronger economic base we have, the better placed we are to deal with whatever might come. If sea levels rise by more than we expect, we can build seawalls and move people to higher ground if we’re richer; we can’t if we decide that growth is a bad thing. We don’t know what challenges might come. But we’ll do better facing them if “we” don’t decide to hobble economic growth.

Masochism

I'm to be part of a debate end-March over at Lincoln University as part of their lead-up to Earth Hour. Kim Hill is to moderate. Caroline Saunders, Bob Frame and Steve Wratten are to be on the enviro side; I'm to be on the other side with Ruth Richardson and someone from Chevron Oil. I'm told Ruth requested me for her side; I hope I don't disappoint.

Caroline's work on food miles, showing the concept largely to be nonsense, has been very good. But I'm sure that the organizers will find a topic such that we can disagree.

I spent Earth Hour two years ago building a new power box for our circuit board. Figured that the best time to use a bunch of power tools was when electricity demand had a downward spike. The expressive benefits of paying homage to electricity by building it a new home were purely coincidental and inframarginal. Otherwise, we tend just to ignore the enviros' special day.

Tierney wins another

John Tierney wins another of his bets, this time against Matthew Simmons.

Alex Tabarrok reminded us that Julian Simon's hypothesis was really about increased human welfare:

Resource prices were easy to observe so the famous bet was made in terms of prices. Simon understood, however, that prices are not a measure of welfare or even of scarcity (quantities would have been a better metric but these are much more difficult to observe).

As Tyler notes, catch-up growth may mean that demand will increase faster than supply at least for some periods thereby driving up prices. But here is the key point, increased demand with a non-decreasing supply means an increase in social welfare. If tomorrow we discover that cold fusion actually does work, the price of palladium will increase dramatically, perhaps never to fall again. Nevertheless, human welfare would dramatically rise not fall.

And so when I offered David Round the bet about half a year ago, I specified two separate parts: one on commodity prices and one on worldwide per capita GDP growth. David's still not provided me his preferred commodity bundle. I'll take this to mean he's been too busy over the last half year rather than that he's reconsidered his position on the likelihood of the world collapsing.

Peak helium?

At the ACT regional conference a while back David Round argued that we need to be seriously preparing for peak-everything, with the prices of oil and other commodities set to go through the roof and disastrous consequences sure to follow. As I was the speaker immediately after him, I opened by offering him there a bet:

Wager 1: If the price of a bundle of 20 commodities, chosen by David Round, grows in value by more than the S&P 500 over the next 20 years, Eric owes David $500. If not, David owes Eric $500. We will take the value of the bundle and of the S&P averaged over the five-year periods 2006-2010 and 2026-2030.

Wager 2: If world per capita GDP increases by less than 15% in real terms over the next twenty years, Eric owes David $500; otherwise, David owes Eric $500.

David is still choosing his bundle of commodities; I'll look forward to blogging the full details when things are settled.

But he might worry about adding helium to his portfolio. BK Drinkwater explains nicely:

And this brings me to the first in an occasional series: BK's Investment Tips.

Today's tip is: Helium! It's a lock!

An impending shortage means prices will go up. So stock up now while the Federal Helium Reserve keeps selling the stuff to you at Before Peak Helium rates. Those suckers are so stupid, they don't even realize that it's vital for the world's governments to stock up on non-renewable resources so as to ensure they never get used. All you have to do to profit: buy helium today at today's rates, and hold onto it until Peak Helium, when prices will skyrocket and you'll be richer than Rockefeller.

Of course, there are a few practical difficulties.

If you believe in Peak Helium, you should probably invest now, before everyone else catches on and drives the price up. Since everyone else should be doing the same, we should have seen some movement in the market already. We haven't. That kinda suggests you're out on your own.

There's no clearing house that covers helium futures, so you're going to have to go over the counter with Uncle Sam. I'm guessing that if you believe in Peak Helium, you're also convinced that the United States is a substantial default risk.

And since we're talking forwards now rather than futures, it might be a good idea to give some thought to where you might stick all that helium when it's delivered. If you can't think of anything, I have suggestions.

My point? Don't talk to me about Peak Helium, or Peak Metal, or Peak Oil, or Peak Anything Else until you've put your money where your mouth is. More gently, and paraphrasing a billboard on my street: there's probably no Peak [Insert Commodity Here], so stop worrying and enjoy your life.

The lock was a particularly nice touch.

Peak Everything

Denis Dutton today reminds me of the Tierney bet with Matthew Simmons, which ought to pay off in Tierney's favour by the end of the year. Simmons reckoned peak oil meant a fair odds line on 2010 average daily oil prices, inflation adjusted, of $200 per barrel. Barring the complete meltdown of the US dollar, that's not going to happen, and even in that case, a fair bit of the price rise would be knocked back by inflation adjustment. And so Tierney will be $10,000 richer come year end...Happy New Year!

Colby Cosh weighs in on Peak Everything in a beautiful post that tries to find an element that hasn't peaked:

How about peak lithium? Surely not… wait, yep, there’s a peak lithium guy. Helium? C’mon, helium makes up a quarter of the goddamn universe! Sorry, peaked. Phosphorus too. You may be under the impression that we’re all swimming around in a sea of nitrogen but turns out that’s peaked. And you may be certain thatlong-passed, purely local peaks of many resources represent rehearsals for more intractable global limits, and cannot possibly just mean that the Republic of So-and-So found better things to do than mining arsenic. Pretty much everything’s peaking, all at once. Very soon now we’ll all be scurrying like ants across an eight-thousand-mile celestial object that looks suspiciously like an apple core.

If you haven't already subscribed to his RSS feed, hit the link and do it now...

Peak oil

TVHE has a couple of worries about peak oil. First, oil prices will go up and this could have negative economic consequences. Second, it's a non-renewable resource so we're eating up a capital stock.

It's hard for me to see severe consequences from peak oil.

Hotelling's work on pricing of non-renewable resources remains as salient now as when he wrote it almost 80 years ago. If he's right, we ought just to expect oil prices to rise approximately in line with interest rates, with adjustment upwards if demand is rising faster than that and downwards if technology makes extraction more efficient.

The best case I can think of for breaking Hotelling is that property rights over many oilfields are insecure, or that the ruling juntas in the mid-east have shorter time horizons dictated by keeping political power in the medium term, leading to inefficiently-fast extraction. The best counterargument I can think of is that OPEC seems to work to restrain production, keeping supply now lower than it would otherwise be, and that we're not seeing the big oil companies deciding to just sit on reserves in anticipation of big ramp-ups in prices once the mid-east slows down. If some folks with current rights over oilfields have insecure tenure leading to high discount rates, this leads to locational distortion of production rather than to intertemporal distortion unless those kinds of fields wind up being the whole of the market. And best I can tell, oilfields in the US and Canada are still pumping: if folks expected a big drop in Saudi production, they'd be holding those fields back in anticipation of big price increases to come.

So we shouldn't see sharp spikes upwards as supply dwindles; rather, our best expectation ought to be a steady rise in price. And those kinds of things don't cause big problems.