Reed Watson, Peter Hill, Shawn Regan, Laura Huggins
Listen as Aaron Flint of "Voices of Montana" talks with Reed Watson, P.J. Hill, Shawn Regan, and Laura Huggins about free market environmentalism.
Imagine if the government were responsible for looking after your best interests. How well would this work? Just ask Native Americans.
What's ahead for global energy markets? How will the U.S. shale revolution affect our energy future? To find out, we asked Stephen Arbogast, an expert with more than thirty years of experience in finance working with the energy sector. As Prof. Arbogast explains, when it comes to global energy markets, the next decade will look very different from the last four decades. Stephen Arbogast is an Executive Professor of Finance at the C.T. Bauer College of Business, University of Houston. In that capacity, he has authored more than 70 case studies on technical and economic aspects of the energy business. He is also the author of the book Resisting Corporate Corruption, now in its second edition. Prof. Arbogast has taught in graduate MBA programs since 1987 and was awarded the Bauer College Payne Teaching Excellence Award in 2008.We thank Prof. Arbogast for taking the time to answer our questions. For more PERC Q&As, visit the series archive.Q: You’ve said that when it comes to the geopolitics of energy, the next decade could look quite different than the last four decades. What do you mean by that?A: The last four decades have been dominated by the operations of the OPEC cartel. With only occasional exceptions, this cartel has determined the general price level for crude oil. This price represents roughly two-thirds of the price of final products to consumers, so it is most consequential for the cost of energy in developed economies. The next decade could be different for two reasons. The first is the shale revolution. Right now, that revolution—unlocking oil and gas from tight rock formations—is catapulting the U.S. back to a position of world’s leading oil producer. What is not known is the extent to which this will spread to other lands. Many non-OPEC countries, including China, have vast shale resources. To the extent production surges outside of OPEC, the cartel’s dominance will certainly decline.The second issue is more ominous and concerns a key OPEC member, Saudi Arabia. For decades the Saudis have operated as OPEC’s flywheel, absorbing production cuts in times of glut and expanding production to combat scarcity. Will Saudi Arabia remain much as it has been in the years ahead? Will it still be ruled by the extensive Royal House of Saud? One looks at Syria, Egypt, Iraq, Libya, and Iran and wonders.Q: How has OPEC shaped oil politics in the past, and where are we headed?A: In 1973, OPEC discovered it could dictate the short-term price of crude oil. The cartel saw that developed nation oil demand is quite inelastic over the near term. This means the cartel could and did dictate price to its customers. The result then was a 400% price increase that brought to the OECD nations. Over time, the cartel also learned that abrupt price hikes sow seeds of reversion. Price hikes to $40/b in 1980 led to a demand bust and price collapse below $10/b in 1986.These experiences led OPEC, under Saudi leadership, to a price targeting strategy. The cartel seeks prices which balance several objectives. First, they must be high enough to generate current revenue to fund the political models in these states. These political models concentrate wealth in the state and purchase political support with generous handouts and subsidies. Second, the prices should not be so high that they trigger demand destruction undermining the price level’s foundation. Finally, they also should not encourage sustained efforts to replace petroleum with alternative fuels.Surveying the history of price levels since 1973, it must be conceded that OPEC largely achieved these objectives. No alternative fuels “silver bullet” has emerged. Demand for petroleum has grown and most forecasts show it growing for decades to come. Only the shale revolution and regional political stability raise the possibility of shaking the cartel’s grip on the energy price.Q: What role does Saudi Arabia play?A: Saudi Arabia plays the role of “swing producer” within the cartel. This means the Saudi’s reduce production in times of glut and increase it during moments of peak demand. Cartels generally require some member willing to play this role—otherwise supply and demand excesses will drive prices to cyclical peaks and troughs.The Saudis have unique characteristics that, alone among OPEC members, allow them to play this role. First, they possess huge oil reserves, estimated to exceed 200 billion barrels. This allows the Saudis to add production capability and maintain the spare capacity needed to cushion demand peaks. Second, the Saudi have a small population. Until recently that population did not exceed 20 million. This meant that the Kingdom could amass large financial reserves during periods of peak demand and prices. These reserves could then be drawn upon to fund domestic spending when slack demand required the Kingdom to cut production.It is not as clear going forward that the Saudis will be able to play this same role. Despite their ample reserves, the Saudis seem to be having difficulty increasing production capacity beyond 12 million barrels per day. Much of their “spare” is less desirable medium and heavy crude that encounters refining bottlenecks during demand peaks. Meanwhile, a larger, more subsidized population has raised the cost of preserving social peace. Indeed, one can detect elements of domestic concern in the current Saudi hard line towards Syria and Iran.All this said, the graveyards are full of people who prematurely forecast the demise of the House of Saud. The shale revolution, ironically, could pose more of a threat than disturbances among their neighbors if it undermines the crude price and pinches the Saudi paternalistic ruling model.
Terry Anderson, Shawn Regan
In the Wall Street Journal, Terry Anderson and Shawn Regan explain how Washington rules prevent tribes from developing resources that could help lift them out of poverty.
The death this week of Ronald Coase, one of the world's most-cited economists, comes at a time when there is lively debate about the very issue he raised: why neither markets nor government are panaceas.
The existence of “externalities” — effects (costs or benefits) of market transactions that are not experienced by those involved in the transaction, but are instead experienced by others, those “external” to the transaction — is routinely proffered as a justification fo
Tribes that can resist the temptation to extract wealth at the expense of future growth have the best hope of overcoming poverty and becoming truly sovereign.
James M. Buchanan, the Nobel laureate in economics and father of public choice theory, has passed away at the age of 93. Buchanan's work formed the foundation for PERC's early research on environmental issues.
PERC begins a colloquium this week on property rights and liberty in Native American societies. The program focuses on the historical emergence of property rights and how these rights have impacted Native Americans.
PERC's workshop, "Tackling the Global Fisheries Challenge," took place last week. Fisheries specialist for the World Bank, Michael Arbuckle, discusses rights-based fisheries reform in developing countries.
Denis and Barbara Prager fear the day that hydraulic fracturing takes place on their land in the Shields Valley of Montana.
The physical world lost a great scholar last week with the passing of Elinor Ostrom, a 2009 Nobel Laureate
For the past ten days PERC's Jonathan Adler been one of the guest bloggers on Megan McArdle’s blog on The Atlantic‘s website.
Today the House of Representatives is expected to vote on the REINS Act, a bill to enhance political accountability over regulatory decisions. The bill has two essential features.
There has been plenty of confusion surrounding
The link between natural resources, institutions, and economic prosperity is nowhere more apparent than on American Indian reservations.
Global population is believed to top 7 billion. Is this a problem? Does 7 billion people constitute “overpopulation”? Nicholas Eberstadt doesn’t think so.
Though known for millennium that nature provides multiple benefits, the idea of ecosystem services and payments for these services has become more prominent in the last two decades.
by Andrew Balthrop, a PhD student in economics at Georgia State University and 2011 PERC Graduate Fellow.
Common law legal actions can easily handle the simple case in which one property owner causes obvious harm to another, what about the not-so-simple case?.
Is seven billion too many people on earth or not enough?
When children play games they often make up the rules as they go. This can work with patient participants but often leads to an argument that overtakes the game. A parent or teacher may need to come in and act as referee to calm the situation.
Don't miss PERC senior fellow Bruce Yandle’s article in the latest issue of Regulation magazine.
PERC's Terry Anderson made an appearance on Stossel Friday night to discuss the causes of American Indian poverty. The video is here:
PERC's Terry Anderson will be on Stossel on the Fox Business Channel tonight to discuss property rights on Indian reservations.
Cross-posted at Grist.A recent post on Grist attempted to dismantle the intellectual foundations of free market environmentalism—the application of markets and property rights to solve environmental problems. But far from toppling a burgeoning movement within modern environmentalism, it succeeded only in misrepresenting the subject.To recap: Clark Williams-Derry claimed that while free market environmentalism may be effective in some areas of the environment (e.g., fisheries management), its reliance upon unrealistic assumptions about the real world largely relegates it to useless intellectual theorizing. In particular, the Coase theorem—an important component of market-based environmentalism named for Nobel Prize-winning economist Ronald Coase—amounts to “a quirky but not particularly relevant bit of theoretical math.”While there is certainly much more to free market environmentalism than the work of Coase (see Terry Anderson and Donald Leal’s book Free Market Environmentalism for more details), I focus here mostly on the misinformed critique of Coase that has been used to discredit free market environmentalism.So, who is Coase, what is his theorem, and what does it have to do with free market environmentalism?
Paul Ehrlich has had quite a career.
From Hernando de Soto in yesterday's WSJ:
by Pete GeddesI have several hockey-playing friends who simply cannot understand my opposition to government subsidies for “green” energy. They question my belief that the market process is likely to generate environmentally and ethically superior results and default to describing me as a “market fundamentalist.” If you find yourself in a similar situation, I’d like to offer the following for your consideration.In addition to several empirical arguments against government intervention, I think it's important to explain the philosophical underpinnings for my preference for markets over mandates. I start with these insights from 1974 Nobel Laureate F.A.Hayek:The knowledge problem In modern societies, knowledge of time- and place-specific conditions is dispersed among millions of individuals. Consumers and producers communicate their desires through prices. Markets then allocate resources -- labor, capital, and human ingenuity -- in a manner that can’t be anticipated or mimicked by a central plan (or planner.)This fundamental insight is found in Hayek’s essay “The Use of Knowledge in Society." What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. This piece explains why large scale economic planning fails. It is because the social world does not consist of physical objects governed by simple laws of causality, but is a ‘kaleidic’ world inhabited by individuals with minds, whose inner recesses are inaccessible to the external observer, where knowledge is not ‘fixed’ and available to a single person or institution. (Another essential critique is found in the work of János Kornai.)Here's an example from the American West: Between 1933 and 1938 the Columbia Basin Project (CBP) impounded water behind the Grand Coulee Dam. It was to provide irrigation and power to 100,000 family farms, and turn the desert of eastern Washington into lush farmland. Two generations later, only a few thousand farmers and corporations work the irrigated land--at great cost to taxpayers and the environment. What was the problem? Planners designed policies for an unknown future, the only kind we have. The CBP plans did not anticipate changes in technology such as the replacement of horses by tractors. The tractors, tillers, and harvesters all became much, much larger and faster. This led to huge consolidation rather than 40-acre farms. Social preferences are even more difficult to predict (e.g., for healthy runs of wild salmon instead of more dams for irrigation).“Product of human action but not human design…”My progressive friends are firm believers in the theory of evolution and are highly dismissive of alternative explains, except when considering social policy. I find this intriguing, but not surprising.The idea that things exist in the world that are the product of human action but not human design is highly unintuitive. In Hayek’s 1967 essay, “The Principles of a Liberal Social Order,” he explores this:
by Shawn Regan Over at Forbes.com, Art Carden pens this gem of a poem that retells Dr. Suess's classic "How the Grinch Stole Christmas" using property rights, Pigouvian taxes, and the Coase theorem--important concepts in environmental economics: How Economics Saved Christmas by Art Carden Every Who down in Whoville liked Christmas a lot.But the Grinch, who lived just north of Whoville, DID NOT.He stood and he hated the Whos and their noiseHe hated the shrieks of the Who girls and boysFor fifty-three years he’d put up with it now—He had to stop Christmas from coming, somehow.He asked and he questioned the whole thing’s legalityThen his eyes brightened: he screamed “externality!”He reached for his textbooks; he knew what to doHe’d fight them with ideas from A.C. PigouThis idea has merit, he thought in the frostA tax that was equal to external costAt the margin, would give all the Who girls and boysAn incentive to stop all their screaming and noiseFailing that, an injunction to make them all ceaseAnd they’d have to pay him to have their Roast Beast.
by Pete Geddes
Some economic histories are valuable because they provide insights into events and places previously not fully explored, while others contribute through a well-formulated test of economic propositions. In Commerce by a Frozen Sea, Ann M. Carlos and Frank D. Lewis have given us a marvelous melding of the two. The authors have written a carefully researched and well-organized discussion of the early fur trade in the very northern reaches of North America as well as a fascinating use of basic economic theory. The book extends our understanding of the overall extent of the trade and the interaction between the European traders -- primarily the French and British -- and indigenous tribes. Europe wanted furs, primarily beaver, and the resident tribal groups valued the commodities available from the more economically-developed countries.When Adam Smith published his Wealth of Nations in 1776, he devoted a bit more than a page to the Hudson Bay Company, which was over a hundred years old at that point, having been created by royal charter in 1670. Smith places his discussion of the Company in his section discussing the costs and benefits of joint stock companies, and thinks the Hudson Bay Company probably had a reasonable level of profits, despite some of the principal-agent problems inherent in such organization.Smith could have made the Company and its relations with the Native Americans in the region around Hudson Bay a prime example of one of his basic assumptions about human nature, “the propensity to truck, barter, and exchange one thing for another.” He also argued that the division of labor is limited by the extent of the market and he would have found in the activities of the Hudson Bay company a surprisingly robust case study of entrepreneurial efforts to further extend the market and hence the division of labor.Commerce by a Frozen Sea is, at its core, an account of the gains from trade when two very different cultures with very different resources and productive abilities come into contact. And that contact itself was not exogenous, but driven by farsighted individuals who were able to organize trade across thousands of miles in the most difficult of circumstances. The Hudson Bay was frozen for most of the year, so the outposts or “factories” along the edges of the Bay depended upon the yearly vessel that would bring rations for the Europeans stationed at the factory as well as trade goods. These goods were often ordered specifically by the Indians the year before. The ship would then load the furs that had accumulated at the trading post for the return trip to Europe.
Last week, PERC was featured on the Fox Business Channel's Stossel program for a Thanksgiving special giving thanks to property righ