response to Mark Jones Post

["Ken Hanly" <khanly@xxxxxxxxxxxxxxx>]

This is a response to a recent post (included) by Mark that I sent to my
son, an economist with the Saskatchewan government.

    Cheers, Ken Hanly

Hi,

  I see that Pen-L has
been having an interesting debate on energy.   However, it is difficult to
understand what Mark Jones is trying to say.  Jones jumps dramatically
between each point that he tries to make.   I have heard of at least some of
what he mentions but he doesn't give any context to most of it so it is
difficult to give him a fair response.

The cause of high prices for energy vary from source to source:

i) for electricity it is mostly a local supply issue.  Prices are high when
local supplies are tight and prices are free to move upward.  e.g.
California, Alberta.    They are relatively low where local supplies are not
tight and/or regulated i.e. Manitoba and Quebec, Saskatchewan.
Even in California,  the prices fell in May because the weather was not as
hot as expected and demand was low.  Governor Davis of California got so
nervous at the new low prices, he started to talk about abandoning long-term
contracts at the "great" prices that he had negotiated a few months earlier.
There is no particular reason for a long-term shortage of electricity or
even high prices.

ii) for natural gas, it is a North American issue, supply growth fell behind
demand growth in the previous two years because a little over a year and
half ago natural gas price were at extremely low levels.  In the case of
California, pipeline capacity was also inadequate.  In most parts of the
world there is no particular shortage of natural gas at this time and prices
are low.

iii)  Several years ago growth of new oil supplies was almost non-existent
because prices were in real terms at historical lows.  Shortly after that
OPEC countries acted strategically to control their supply.  Without actions
on the part of OPEC in particular to limit current output and to restrict
investment in their resources, it is doubtful that current prices would be
as high.  Supply responses on the part of non-OPEC countries may in the next
couple of years push down oil prices again.   There are lags in development
of new resources and low prices such as occurred in oil in 1998 and early
1999 had substantial impacts on development of new supplies.   Continued
high prices will accelerate the development of some long-lived resources
such as Alberta's oilsands.  Once oilsand plants begin production they are
unlikely to shut-down unless there is a complete collapse of oil prices.

It might be useful to be more precise what is meant by subsidies.  If  one
is just talking about monetary flows of expenditures and revenues, it is
hard to believe the claims of net subsidies since oil and gas generate huge
revenues for governments.  Over a quarter of the Saskatchewan government
budget comes from oil and gas revenue and Saskatchewan is a relatively
marginal producer.  Countries in the Middle East with low cost resources
generate unbelievable surpluses over costs.   If one wants to look more
closely, at the consumption level governments all over the world generate
massive revenues from gasoline taxes.  Gasoline could represent  user fees
for roads but only the U.S. really uses all of its gas taxes for this
purpose and the U.S has a relatively low gas tax compared to most developed
countries and probably spends the most on roads.    Are their external costs
(externalities) from oil and gas production?  The answer of course is yes.
If one is going to claim that externalities represent a large unrepresented
costs then there needs to be some sort of accounting that has some detailed
logic behind it, otherwise, it is impossible to judge.   For one thing,
externalities don't have directly observeable monetary costs in many
instances.  If there is any value in making the claim that "monetized" costs
of externalities are high and oil prices are too low one has to suggest some
sort of indirect measures of externalities.   I think that the OECD has done
some analysis on the question of whether energy resources are subsidized and
there is a paper out on their web-site.   Most people have argued that some
marginal coal mines (e.g. Cape Breton, France and Germany etc.) have been
subsidized but one might claim quite reasonably that these decisions were
made for social purposes which of course are not illegitimate.

Cheers,

David






----- Original Message -----



>
> ----- Original Message -----
> From: Mark Jones <jones118@xxxxxxxxxxx>
> To: <pen-l@xxxxxxxxxxxxxxxxxxx>
> Sent: Friday, June 22, 2001 7:50 PM
> Subject: [PEN-L:13854] RE: Re: RE: energy prices
>
>
> > Doug Henwood wrote:
> >
> > > how do you
> > > respond to the statistical point, Mark - that oil prices don't
> > > explain that much about growth rates?
> >
> > Hooker doesn't succeed in arguing that. How could he? Oil prices are
> > arbitrary in any case, since there are huge concealed subsidies to the
oil
> > patch and a huge military investment in securing the sealanes, oilfields
> > etc. Naturally Hooker doesn't even consider these issues. It is not just
> > that these hidden overheads almost double the posted price of oil, it's
> that
> > they represent such enormous social investments in procuring energy,
which
> > is of course a basic input into these same activities, that the true
cost
> of
> > energy is literally incalculable in any case, because there is too much
> > circularity. And none of this takes account of the unadmitted
> externalities
> > of the petroleum economy. Odum and others have tried to make these
> > calculations not in economic terms but in physical energy-input terms,
as
> > you know, but they have not succeeded either, because they have not been
> > able to escape the same logical circularity.
> >
> > It is more instructive and it is also feasible, to compare changes in
> > energy-inputs with changes in productivity over time, as Cutler and
> > Cleveland successfully did: what they showed is that almost all
historical
> > improvement in productivity is associated with the change from less to
> more
> > efficient types of energy. This is why the history of capitalism has
> > occurred in the form of cycles in each of which one form of fossil
energy
> > and its derivatives, is replaced by another.
> >
> > What this means is that the 'ingenuity' you laud may have a role in
> > utilising a plentiful supply of energy, when that becomes available, but
> not
> > in making it available in the first place (that depends on accidents of
> > nature). Ingenuity may help in substituting one kind of energy for
another
> > but substitutability is not infinite in the case of energy and so this
> idea
> > ('infinite substitutability') does not apply to energy. Samuelson and
> > Adelman got it wrong. No kind of ingenuity has yet, for example, made
> fusion
> > work or made any type of renewable energy, economically viable compared
to
> > fossil. These are the fundamentals which you ignore at your peril. This
is
> > why your optimism is unfounded: Liebig's Law of the Minimum definitely
> > applies.
> >
> > Incidentally, and also about ingenuity, as Alf Hornborg pointed out, the
> > technical ingenuity of the West did not succeed in creating 'growth'
> except
> > at the price of impoverishing the peripheries: machinery embodies
entropy,
> > which is another thing that neither you nor Yoshie seem to take on
board.
> > Your Panglossian optimism is based on one of the oldest, most cherished
> and
> > most pernicious of bourgeois illusions: the 'trickle-down' idea that
> > 'prosperity' can be shared. It cannot, and on the contrary, capitalist
> > growth has, as Freeman points out, only increased inequality and social
> > injustice on a world scale. It is usual to try to counter this fact by
> > pointing to increased longevity etc in the Third World, but such
arguments
> > are mendacious and cynical, and it is easy to show why.
> >
> > Mark Jones
> >
>
>