Media

I’m planning to write more about what Bob McNally and I have to say in our new article in Foreign Affairs. I’m going to start, though, with a response from both of us to some misunderstandings in Steve LeVine’s post on the article over at ForeignPolicy.com. Here’s LeVine: “Robert McNally and Michael Levi try to plumb the mysteries of oil prices (temporary access to the subscription-only site). They do not get far -- their anti-climactic top-line conclusion is that oil prices are volatile, and will remain so, a deduction that every person on Earth with a driver’s license no doubt made quite some time ago.” Really? Had you polled drivers a year ago, what fraction would have predicted that four dollar a gallon gasoline was possible by this spring? Everyone now thinks crude price gyrations up to the mid-$100 range and down to the low $30s within a few years are the new normal?  LeVine may have figured it out years ago, but we don’t think all the world’s motorists, macro policy officials, airline executives, and investors - not to mention traders - have gotten that memo just yet. LeVine continues with an argument that might explain why he’s confused: “McNally and Levi assert that the ‘economic and national security implications are stark,’ but surely they do not mean as a result of volatility: Volatile low oil prices, say in the $50-$60 a barrel range, are not economic or security threats, at least to consuming nations. So one presumes that, without actually saying so, McNally and Levi actually are predicting relatively high and volatile prices.” We suspect that when LeVine writes that our conclusion is one “that every person on Earth with a driver’s license no doubt made quite some time ago”, he’s assuming that we’re talking about high prices – and indeed many Americans seem to be concluding that higher prices are here to stay. But that’s not what we’re saying. Yes, we note early on that average prices are going to be higher than they’ve been in the past, but we then emphasize that our essay is about something else: we’re talking about swinging prices, which are a different thing. Let’s go a bit deeper. LeVine writes that we “surely… do not mean [that economic and security implications are] a result of volatility”. Actually, we do, as we explain at great length in the essay. Uncertain prices complicate (and tend to defer) investment by individuals and firms, and wreak havoc with monetary policy. These are distinct challenges that high or low prices alone don’t present. The fact that wild price swings result from low spare capacity, a point that’s core to our argument, also means that world economies are more sensitive to geopolitical unrest; hence the stark security implications. If prices were high or low but stable, these geopolitical issues wouldn’t matter. LeVine also writes puzzlingly that “volatile low oil prices, say in the $50-$60 a barrel range, are not economic or security threats”. We can’t say we understand how it’s possible for oil prices to be both in the $50-$60 range and volatile at the same time – that’s a pretty narrow range. LeVine’s post finishes thusly: “Such a forecast [of high prices] would align McNally and Levi with Goldman Sachs and other pure commodities analysts, who do not foresee supply catching up to demand any time soon. On the other hand, a new report by James West at Barclays Capital reports that oil companies around the world are in an explosion of spending on exploration -- Big Oil as well as smaller, independent companies are on course to fork out more than half a trillion dollars on exploration this year ($529 billion to be precise), or 16 percent more than the $458 billion that they spent in 2010. These companies are so spending partly because of the above forecasts of high oil prices. Of course, if they produce too much, prices will again head down.” Exactly. If prices head up (which Barclays, among others, still predicts) and then crash because of overinvestment in supply (which, to be honest, we suspect isn’t likely any time soon), that wouldn’t be a counterpoint to our analysis – it would be evidence for it. Big ups and downs are precisely what an era of swinging oil prices is all about.

There has been no shortage of reporting over the last week on the fight within OPEC over whether to expand oil production. Bob McNally and I have an essay in the forthcoming (July/August) issue of Foreign Affairs in which we argue that OPEC has largely lost the ability to moderate oil price swings. The result is the far more volatile oil market that we’ve been seeing over the past five or so years. This is a fundamentally different world from the one that Americans became used to in the 1980s and 1990s, and will require different responses from policymakers. Here’s the nut of our argument: “Much of OPEC’s influence is gone. Saudi Arabia and its partners no longer consistently hold the large volumes of spare capacity they once did. And there are no ready replacements waiting in the wings. The oil market is in for a rocky ride, with major economic and geopolitical consequences: underinvestment in the development of energy, greater economic sensitivity to geopolitical unrest in oil-producing regions and shipping lanes, and a higher risk of recessions. The United States will find it impossible to eliminate price swings in the coming years, and so it will need to learn to live with them as best it can.” We then discuss the sources of volatility (Saudi Arabia no longer has the same means or motive to stabilize markets that it once did), the potential consequences (more difficult investment decisions for individuals and firms, a trickier climate for monetary and fiscal policy, greater sensitivity to geopolitical unrest), and appropriate policy responses (which need to encourage a mix of robust and dependable supply, decreased demand, and better functioning physical and financial markets). There’s a lot more detail in the piece, some of which I’ll discuss in subsequent posts, but for now, I encourage readers to take a look. (The piece is behind a pay wall, but if you use the link in this post, you’ll get it for free, at least for a while.) I’ll also have something to say in later posts about a few ideas that we didn’t manage to squeeze in.

Sudan's Foreign Minister Ali Karti (R) and newly appointed U.S. special envoy Princeton Lyman meet in Khartoum April 6, 2011 (Mohamed Nureldin Abdallah/Courtesy Reuters) Former CFR senior fellow and current U.S. special envoy to Sudan Princeton Lyman has published an excellent article in the Cairo Review of Global Affairs, “Negotiating Peace in Sudan.” In the context of the recent referendum on southern Sudan succession, Ambassador Lyman explores the long and difficult peace process, outlining both successes along the way and the many challenges ahead. He concludes: The CPA was also supposed to usher in a period of political transformation in both north and south, with greater democracy and inclusiveness. That has not happened, and as the time for the referendum grew closer, those issues were put aside to deal with the decisions that existing leaders were in a position to make. These issues will now become more salient. Following the referendum, both north and south will need to develop new constitutions. There are large issues to be decided, on forms of government, methods of participation and inclusiveness, and human rights. These are matters in which the international community will be far less involved. They are domestic and sovereign decisions. But for the sake of both north and south, those decisions will need to be made carefully, with widespread public participation, and dedicated to a democratic outcome. In that way, each can emerge as a strong, viable, and stable state. On another note, the Africa work of the Pulitzer Center on Crisis Reporting was recently brought to my attention. They are supporting some excellent journalists and working to highlight a number of underreported events in the western press. Check out their reporting here.

Nassim Taleb and Mark Blyth have a great article in the new issue of Foreign Affairs that makes the case against government efforts to suppress volatility in the political and economic worlds. Their basic argument, as I read it, works along two lines. The first is pretty common: squeezing volatility out of big slices of any complex system inevitably means shifting it elsewhere, in potentially ugly ways. Banks, for example, found ways of getting steady returns 95% of the time out of what should have been a turbulent housing market – but the price was far more catastrophic consequences when the other 5% hit. The second line of argument strikes me as more interesting. People are bad at preparing for low probability risks, even if they entail high consequences. But they’re actually decent at preparing for higher probability, lower consequence dangers. Moreover, in the process of protecting themselves against these more likely problems, they implicitly protect themselves against the lower likelihood, higher consequence dangers too. Eliminate most but not all of the volatility in the system, and you get a society that’s woefully under-prepared when things get really bad. If you let the volatility show itself more often, things may be a bit more unpleasant most of the time, but society will be much better prepared when the extremes hit. The authors apply this mostly to Middle East politics (and to a lesser extent to economic management), but it’s a great way to think about oil prices. Five dollar gasoline is unlikely but highly consequential. Four dollar gasoline is more likely but somewhat less problematic. If the U.S. government prevented four dollar gasoline (say by managing prices using the strategic petroleum reserve), it would reduce incentives for fuel economy and other behavioral change, as well as for private stockpiling and hedging. If five dollar gasoline actually hit, people and firms would be more exposed, and the consequences would be more extreme. Of course, if the USG felt confident that it could prevent five dollar gasoline too, then this strategy might make sense. But unless the extreme bits of volatility can be completely eliminated, it’s risky to eliminate the milder ones too. Obviously, there are limits to this. One might make the case, for example, that while exposure to some gasoline price volatility is generally useful, it’s a bad thing right now, while the economy is weak. That could be the foundation for an argument in favor of suppressing volatility right now, even if it might leave the economy marginally more exposed later. But this is a slippery slope. It is also a dangerous one, since there is no guarantee that the bigger risks will wait until the economy is healthier to show up. As a general rule, if you can’t banish volatility entirely, it’s risky to try and suppress it only some of the time.

I have a new piece in Slate that looks at the consequences of moving away from nuclear power. The climate policy analysis has attracted some thoughtful pushback. Let me address a few of the more important concerns. I noted that DOE and EPA simulations of the next couple decades tend to find that a moderate carbon price boost nuclear significantly but does little for other sources. I also observed that we basically have three (not exclusive) options for near zero carbon power generation, which is what we’ll eventually need: nuclear; carbon capture and sequestration (for coal or gas); and renewables with storage. (Over the nearer term – lets say a couple decades – we also have gas without CCS.) I argued that if the United States eventually adopts a serious carbon constraint, the choice will ultimately be “between the devil [we] know and a technological prayer”. The first line of opposition was to the DOE and EPA modeling of the Waxman-Markey bill (which I used as a proxy for a generic price on carbon). In particular, many argue that DOE modeling consistently underestimates plant construction costs. Alan Nogee of the Union of Concerned Scientists posted a helpful chart of DOE nuclear cost assumptions versus actual costs of real nuclear plants. I have a couple thoughts. First, the chart suggests that real costs could be lower or higher than the ones used in EIA 2010, though I’d agree that the high-end risk seems more substantial. Second, as Alan notes elsewhere, the EIA 2011 model is better. Yet the early release of the 2011 AEO suggests that the nuclear projections are similar to those from 2010. (The modelers see five new nuclear plants by 2035 rather than six, though it’s impossible to tell how much of this is due to higher capital costs, and how much is due to the assumption of cheap natural gas.) To really dig into the full consequences of the capital cost updates, of course, you’d need to remodel a carbon price using the 2011 NEMS code. The second line of skepticism came from George Hoberg at the University of British Columbia. (Yes, for those of you who are clicking on these links, I now conduct all of my serious technical debates over twitter.) He flagged a paper from Energy Policy that suggested ways to get all global energy from wind, water, and solar by 2050. That paper does not rely on centralized energy storage to match supply to demand. Instead, it argues that a combination of demand management, hydropower for gap filling, long-distance grid integration, and the use of surplus power to produce electrolytic hydrogen would probably suffice. It also notes that the use of electric vehicle batteries for storage might be necessary – and that centralized energy storage might even be required. Relying on a hydrogen economy to materialize, or betting that centralized energy storage either will be possible or won’t be necessary, strikes me as qualifying for the label “technological prayer”. That is not to say that I dismiss the possibility – far from it – but it’s far from something we can count on. The last challenge comes from David Roberts at Grist, who asks whether, in a world of limited resources, “variety” and “all of the above” are actually real options. (He points me to a thoughtful recent article in which he fleshes out his ideas.)  I have mixed feelings about this. My guess is that the answer depends on a few things. If we have a hard, black and white emissions goal, where if we hit it all will be ok, but if we miss it we’re doomed, we might want to concentrate all our (limited) firepower on one technological bet and hope that it turns out ok. If, on the other hand, various degrees of success all count, we might want to adopt a more resilient investment and innovation strategy, even at the expense to lower odds of delivering a big bang. The answer also depends on exactly how constrained the innovation budget is. And it depends on the timelines we have in mind for steering money into the system: yes, there are increasing returns to scale up to some point, but beyond that, simply pumping more money into one area will yield declining results, and perhaps even backfire through cost inflation. (For more on all that, this paper by Varun Rai and colleagues is great.) Bottom line? I certainly wouldn’t put all my bets on nuclear, but I’d be wary of putting all my bets on some other technology too.

WikiLeaks’ publication of classified foreign policy cables highlights the continued power of traditional news media and the challenges journalists face from online groups that do not share their views on transparency, says media expert C. W. Anderson.

My post last week on the “Jevons Paradox” – the claim that increased energy efficiency actually raises energy consumption – generated a good bit of feedback, both in the comments and in my email. The New Yorker article that inspired my post also spurred several strong rebuttals elsewhere. Since energy efficiency is such a commonly discussed topic in energy policy, it’s worth addressing some of the most important concerns. Here are three that I think matter: We can’t decarbonize economy unless we decarbonize our energy supplies, so how can energy efficiency ever solve our problems? It can’t, alone. But energy efficiency matters when economics and politics collide. Say my monthly electricity bill is $100. If policymakers want to force me to use renewable power, that bill might double – and I might reject such a big increase. Now imagine that energy efficiency has let me cut my bill to $25. I might be more open to the doubling of energy prices, since my bill would now only increase by $25, and still be half of its original amount. Think about this another way: If we can double the efficiency of wind farms or solar panels, we’re thrilled. We should be just as pleased if we can double the efficiency of the things that wind farms and solar panels power. What about the fact that people use more cars/AC/fridges/whatever? People are richer than they used to be. They use more stuff. Yes, the fact that these things have become cheaper (including through lower energy costs) also increases their use. But if you ignore income growth, you’re missing a huge part of the picture. Haven’t you ignored the multiplier effect of energy efficiency savings? In my post, I argued that if I saved $100 on gasoline, and spent it on a broad basket of goods and services, I’d end up cutting into society’s energy savings by about $6-$8, since energy costs are about 6-8% of GDP. Several people pointed out that my $100 of spending can generate more than $100 in increased GDP, since my money can circulate through the economy multiple times. They’re right, and I was wrong: it’s plausible that my $100 of spending could increase GDP by as much as $200-$300. But that would still leave society with only $18-$24 in extra energy costs, and a big net savings in energy consumption. Let me make myself clear: energy efficiency is often oversold as a policy panacea. Many energy efficiency policies that are sold as win-wins aren’t actually so once you account for all the costs. But to argue that promoting energy efficiency invariably undercuts progress toward curbing resource demand and greenhouse gas emissions is wrong.

Switch to a more efficient car, and you’ll drive a bit more, since extra gasoline now costs you less. This well-known phenomenon is known as the “rebound effect”. In the case of cars, it eats up about ten percent of the fuel savings from greater fuel efficiency. But at the level of economies, many believe, it’s much worse. All the money saved through more efficient automobiles and better refrigerators doesn’t just mean more summer road trips and Sub-Zeros – it means more money pumped into the whole economy, and hence greater emissions overall. That’s a minority view, for good reason: it’s wrong. But in a long essay in the new issue of the New Yorker, David Owen buys it hook, line, and sinker. He’s enamored of the work of 19th century British economist Stanley Jevons, and while Stanford’s Lee Schipper clearly spent oodles of time trying to explain to him why what Jevons wrote doesn’t apply to today’s economy, Owen isn’t believing him for a second. I was planning to go through the article and pick apart every instance of silly logic, but those piled up so high that that goal became unrealistic. Instead, let me focus on two passages that capture the essence of Owen’s mistakes. Here’s the first: “[Energy Secretary] Chu has said that drivers who buy more efficient cars can expect to save thousands of dollars in fuel costs; buy, unless those drivers shred the money and add it to the compost heap, the environment is unlikely to come out ahead, as those dollars will inevitably be spent on goods or activities that involve fuel consumption – say, on increased access to the Internet, which is one of the fastest-growing energy drains in the world…. Schipper told me that economy-wide Jevons [i.e. rebound] effects have ‘never been observed,’ but you can find them almost everywhere you look: they are the history of civilization.” How about we do a little simple math? Every dollar I spend on gasoline is, crudely speaking, a dollar spent on energy. (I say crudely because I’m including money spent on things like marketing and delivery.) On the other hand, as Owen acknowledges in the article, energy spending is equal to only 6-8% of GDP. If I save $100 on gasoline, I’ll spend it roughly the same way that I’d spend any other $100. This means that I’ll spend $6-$8 of my savings on more energy. (The number may be a smidge higher, since I may buy things produced elsewhere, where energy is a bigger fraction of GDP. [UPDATE: It’s actually plausible that the number might be 2-3X higher, since my spending gets multiplied as it flows through the economy. But the qualitative conclusion doesn’t change.]) The net result will be the consumption of $92-$94 less energy; there is a rebound effect, but it doesn’t come anywhere close to wiping out the gains. Schipper basically makes this point to Owen, without the numbers and without confronting this specific example; why Owen can’t see what it says about this particular case is beyond me. Let’s drill down on the Internet bit for a moment, which slides quickly into absurdity. Say I do shift my $100 in savings to increased Internet access, as Owen suggests might happen. For my fuel savings to be wiped out, as Owens thinks will be the case, those Internet services will need to use the same amount of energy that I’ve saved. That will cost my Internet provider $100. (It pays the same rates for energy as I do.) How will it pay for everything else required to give me Internet services? The equipment? The people? The software? Will the provider give all that to me as a gift? Because in Owen’s picture, it’s already spent all my money on fuel. Here’s the second representative passage that I want to look at: “In less than half a century, increased efficiency and declining prices have helped to push access to air-conditioning almost all the way to the bottom of the U.S. income scale – and now those same forces are accelerating its spread all over the world.” Owen repeats this theme over and over – people are using more energy, so how is it possible that efficiency has helped? I have no doubt that “increased efficiency and declining prices” help spread air conditioning. But let’s observe two things. First, declining prices appliance prices have nothing to do with increased efficiency – in fact, everything else being equal, increased efficiency leads to higher prices appliance prices (because the equipment seller captures part of the energy cost savings). Second, Owen is missing something huge: income growth. In fact, my guess is that the spread of air conditioners (as well as cars and other such things) is driven mainly by the facts that people have more money to spend and that the devices are cheaper. The reduced cost of fueling them, I suspect, is a distant third. I don’t mean for this to be a paean to energy efficiency – I’m actually quite skeptical of many energy efficiency policies. But it’s useful to get our facts right.

My colleague Evan Feigenbaum hopes that China is embarrassed by North Korea’s recent unprovoked shelling of a South Korean island near the two countries’ border. The attack left several South Korean soldiers dead and injured more than a dozen civilians. I hope that China’s leaders are more than embarrassed; with the sinking of the Cheonan still fresh in everyone’s minds, this second North Korean attack should force a strategic rethink in Beijing. Thus far, the message from Beijing has been mixed. China’s foreign policy officials seem locked in a time warp, urging calm and restraint and a return to the six party talks. Indeed, at least publicly, they are more critical of the United States and South Korea for their peaceful joint military exercises than of North Korea for its acts of aggression. Yet a quick look outside official statements to some Chinese media reports and it is possible to see reason emerging. Global Times, which for the most part offers opinions well within government say-so, had a series of editorials reflecting some marginally disparate views. One argued that fault rested primarily with the poverty and insecurity of North Korea; a second suggested that North Korea is "drinking poison to curb its thirst…it is running head long down a road that leads to nowhere;" while a third opines that it is necessary that northeast asia “fix North Korea’s sense of insecurity” but that the “US has no such strategic desire.” Further outside the band of political correctness, an opinion piece by a lawyer, Si Weijiang, in Caixin online, asks,“Why do we still help North Korea?” Si questions both the economic costs of supporting North Korea as well as the implicit belief that China needs North Korea as a buffer state. Analogizing to a dog and its owner, Si caustically remarks: "When the Latin American sons of b-----s grew fat next to Roosevelt’s side, they were passed down to the succeeding Presidents who were inexperienced in dog-feeding techniques. This encouraged defiance, and sometimes they bit their masters. Well, they deserve those wounds." He concludes by arguing: "At the very least, significant assistance to a rogue nation like North Korea is decidedly not in the core interests of China, regardless of values or economic interest and, needless to say, the North Koreans." Presumably someone in Beijing’s upper echelons of power has learned the same history lessons as Si and is trying—at the very least—to get the dog back on its leash and help it learn how to behave. Photo courtesy Reuters/Grace Liang

Just four months after launching their 24-hour global news network, CNC, Chinese media officials are in the midst of a strategic rethink. Selling China "Chinese-style" hasn’t quite worked out. The problem is less about getting the news—CNC has access to 130 news bureaus globally—than it is about getting people to watch. While they haven’t publicized their global viewership, total daily viewers in Hong Kong, China’s most globalized hometown, average only 5,000. After promising that CNC would provide "international and China news with a Chinese perspective to global audiences," CNC President Wu Jincai has changed his tune. He has decided that CNC needs to rid itself of typical Chinese sloganeering, insisting that CNC is a "news channel and not a propaganda station." He is now telling his editors, "Do not watch CCTV [Chinese state television] and watch Phoenix [Hong Kong television] even less, but watch more of CNN and BBC." He has even suggested that they watch Taiwanese news. One of Wu’s deputies, Ren Libo, says the network needs to adopt an "international ideology and way of thinking." The fact that CNC is reportedy half privately-financed may be responsible for Wu’s turn West; as he has noted, "A system financially backed by the government, in any country, is always a waste with problems of inefficiency. But in a market system its scale is adjusted. It creates a very good pattern." Wu might also be one of the many Chinese journalists and media officials who find value in a free and open media; even more importantly, he is one of the few who has the wherewithal to do something about it. It’s not clear how well this is going to go over with Beijing and how much things will really change. After all, in the words of one propaganda department official, the whole point of starting up CNC and investing billions of dollars in a PRC world-wide media blitz was to "initiate targeted international public opinion battles and create an international public opinion environment that is objective, beneficial and friendly to us." Whatever the reason behind Wu’s awakening, a Chinese news channel operating on the principles of CNN and the BBC may well turn out to be less of an export to the West than an import to China.