A Mainstream Economist Recognizes the Finite World

On the day after Christmas, the NY Times published a Paul Krugman column titled "The Finite World."  From that column (all emphasis mine):

Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months....

What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. And America is, for the most part, just a bystander in this story.... 

So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.

 Is Dr. Krugman's prediction that there won't be a collapse, that we'll just gradually adapt our lifestyle, a reasonable one?  Almost 40 years ago, The Limits to Growth made predictions about possible outcomes based on a finite set of resources.  The following chart illustrates the standard run of the world model used in Limits (from The Limits to Growth: The 30-Year Update, used without permission).  The standard run shown in Limits has stood up remarkably well over the nearly 40 years that have passed since it was originally published [1].  The standard run prediction is that there will be a collapse in industrial output, that it should begin in another few years, and that by 2035 or so the global per-capita output will have fallen by more than half.

These two very different views are not necessarily inconsistent.  The Limits view is global, while Dr. Krugman's is specific to the US.  The effects of a collapse are unlikely to be distributed equally around the world.  For example, the US is a very large exporter of food (measured in calories), while almost all countries in Africa are net calorie importers.  Decreased US food production may result in changes in diet, but is unlikely to cause famine in the US (the Krugman prediction).  The corresponding decrease in US exports could, though, leave Africa unable to acquire enough calories to feed its population with widespread famine as the result (the Limits prediction).  This situation would be particularly true if an export-land model effect holds for food as well as other natural resources.  Such an effect would result in US net exports of calories declining at a rate much faster than the decline in production.

Dr. Krugman's prediction also conflicts with the global predictions given in works such as Michael Klare's Resource Wars [2].  In Klare's view, the world will see actual "hot" wars fought over access to resources: oil, water, minerals, etc.  US involvement in such wars seems to me to be unlikely for multiple reasons.  The US still has a robust allocation of natural resources, particularly if we were inclined to manage them better.  The US is relatively isolated from much of the rest of the world: other than Canada, Mexico, and parts of the Caribbean, US involvement has to be across oceans.  And finally, I expect the US people to recognize that the large amounts of resources that are needed to support such long-distance conflict might impact civilian availability to a greater degree than making the effort towards self-sufficiency.  Again, Krugman and Klare's predictions are not necessarily inconsistent on a regional rather than global basis.

I expect all of the predictions mentioned above to be "right" to some degree.  I expect hot wars over natural resources.  And I expect a fairly rapid decline in global food and industrial production.  But I expect the US to stay out of foreign entanglements, and that the decline in production of critical goods and services in the US to be modest, successfully handled by Krugman's "adapting... our lifestyles" approach.  At least for sections of the US; it seems entirely possible to me that areas of the US that have high populations and smaller allocations of natural resources will have problems.  But more on that another day.


[1]  Graham Turner, A Comparison of the Limits to Growth With Thirty Years of Reality, CSIRO, June 2008.

[2]  Michael T. Klare, Resource Wars: The New Landscape of Global Conflict, 2001.

State budget crises consequences

From time to time I leave comments at The Oil Drum based on my experience as a member of the Colorado legislature's budget staff. Recently, Jeffrey Brown (westexas at TOD) asked me to write a piece about the likely outcomes of the current state budget crises. For various reasons, it ended up being posted as a guest piece at Gail Tverberg's Our Finite World blog, and reposted at the Energy Bulletin (Post Carbon Institute). Just to be complete, I'm reposting it here.

Fixing the BCS

This past week, Gordon Gee of Ohio State said publicly that Boise State and Texas Christian have no business playing in the BCS title game.  Gee's complaint is that neither Boise nor TCU play the kind of "murder's row" schedule that the Big 10 and SEC member schools play.  This would seem to be a rather peculiar argument to make at this point in the season, when Ohio State's strength of schedule (SOS) is, according to the Sagarin rankings, somewhere between Boise's and TCU's.  It seems even more peculiar in a year when the Big East, one of the conferences whose champion gets an automatic BCS bid, has only one team in the top 25, West Virginia currently at #24.

The BCS system was set up by the big conferences (and Notre Dame) in order to ensure that they got teams into the big-money bowls.  And it worked well for a considerable time, since teams outside of the anointed groups seldom made it into the upper reaches of the rankings on a consistent basis.  The system could handle the infrequent interloper, buying them off with a big payday as an at-large team.  The possibility that an outside team would achieve sustained success seemed remote.  The "strength of schedule" argument is the last line of defense in that case.  The outside teams only seem to be doing consistently well, the argument says, since they don't have to play a difficult conference schedule during the stretch run of the season.

Oddly enough, the situation has become a matter of proposed public policy.  Each year of late there are numerous outcries for Congress to force the NCAA and the BCS schools to do something different.  The most common suggestion is a playoff system similar to that used by the other NCAA divisions.  Such proposals would appear to ignore the important role that the bowl system, with the big games scheduled in a short period of time between semesters or quarters, play in the overall big-time college football picture.  The bowls provide the conferences with additional money (and revenue sharing means that even the poorer schools in the big conferences get a cut).  The bowls are a major recruiting opportunity.  The long lead time for the major bowls give fans time to plan a vacation trip around their team's game.

The problem is, in my mind, not so much that the BCS arrangement with the conferences is a largely closed arrangement, it is that the conferences themselves are closed.  This past summer demonstrated that changing conference membership is quite possible: Nebraska went to the Big 10, Colorado and Utah went to the Pac 10, Boise State went to Mountain West.  The last two make an interesting contrast.  Utah will no longer have to listen to complaints that they didn't play in one of the "tough" conferences.  Boise still will, even though it's pretty easy to make the case that the Mountain West will be superior to the Big East as far as the caliber of its football.

The obvious answer is to make the conferences "open" in the same way that the English Premier soccer league is.  Each year, drop the team with the worst record from the conference (at least for football purposes).  Replace the dropped teams with the highest ranked teams from outside the BCS conferences.  With such an arrangement in place, Gordon Gee's argument would be moot: Boise and TCU would have been added to the big conferences in place of teams like Indiana and Vanderbilt some years ago.  Complaints that such changes would break up tradition are silly.  Teams play four non-conference games each year, and the traditional rivalries could easily be scheduled in those slots.

The post-season part of the BCS system isn't broken.  It serves both the schools and the fans well.  The real problem is that the conference system is broken.  Open the conferences up and let the rising new teams have an opportunity to compete on the "equal" playing field.

Measuring the Volt's mileage

As reported by CNN, the Chevy Volt faces one last government hurdle before it goes on sale to the public.  New cars must have an EPA mileage sticker in order to be sold in the US.  The EPA hasn't figured out how to measure the mileage of a plug-in electric hybrid.  No measurement standard, no sticker, no sales.  This isn't a new issue; GM has been in discussions with the EPA since before September 2008, and the issue remains unresolved.  If you haven't looked recently, the current EPA window sticker for a gas-powered vehicle looks like this:

The case of an all-electric car has also been settled.  The relevant portion of the Tesla Roadster is shown below.  A picture of a stylized battery instead of a stylized gas pump, and the kiloWatt-hours for 100 miles in city and highway conditions instead of the MPG figures.  Of course, there's always the caveat that "actual consumption and range may vary."  Nissan has agreed that the range on a full charge for its new Leaf will vary wildly depending on the conditions: from as high as 138 miles, cruising at 38 MPH and an outside temperature of 68 degrees, to as low as 47 miles in stop-and-go traffic averaging 6 MPH, an outside temperature of 86 degrees, and the air conditioning running.

A plug-in hybrid can be rated in several different ways.  You can measure the gasoline mileage when the vehicle is running on gas, as would be the case for most of an extended highway trip.  The Volt will probably be somewhere in the upper 30s as a straight gasoline vehicle.  You can measure the efficiency as an electric vehicle, in kWh per 100 miles.  The Volt will probably be in the same 30-33 range that the Tesla Roadster and the BMW Mini E get, given similar weights, battery packs, and electric motor efficiency.  But what about the cases where you use both modes?

Assume that the Volt delivers on the 40-mile range from a fully charged battery, and gets 37 MPG on gasoline once the battery is depleted.  A 30-mile trip starting with a fully-charge battery gets infinite gasoline mileage because no gasoline is used.  A 30-mile trip starting with a half-charged battery gets 74 MPG (15 miles on gasoline uses 0.405 gallons, divided into 30 miles).  A 120-mile trip (round trip to my repair something at my daughter's house, say) starting with a fully charged battery get 55 MPG).  One proposed EPA methodology, since discarded, would have given the Volt a rating of 235 MPG for city use.  Working backwards, and using the assumptions above, yields about 47.5 miles driving between charges.

I hold out little hope that the EPA will be able to boil things down to a single tidy window sticker that is useful to consumers.  They can provide the basic information: likely battery-pack range, kWh per 100 miles, and gasoline mileage.  But it's going to be up to the individual consumer to know their driving habits in order to determine how much of the time they can operate in electric mode and how much in gasoline.  If Chevy sales staff are going to be helpful, they're going to need some training so that they can sit down with potential customers and help them work through the details.

To use myself as an example:  I currently drive about 7,000 miles per year.  1,000 of that is a single round-trip to my mother's each summer, another 1,000 is probably on days with between 40 and 120 miles driven, and 5,000 is on days less than 40.  On the other hand, Colorado has recently adopted new electric tariffs so that the incremental electricity used to charge a plug-in vehicle would likely be billed at a higher rate in the summer but not in the winter.  Do I drive more in the summer or winter?  To be honest, excluding the trip to my mother's (which would be almost all gasoline anyway), I have no idea.  And I'd be willing to bet most other people don't either.

In the long run, electric cars make sense because that's how you can burn coal, nuclear, hydro, wind, or solar power in your personal transportation system.

IEA 2010 World Energy Outlook

The International Energy Agency (IEA) released their 2010 World Energy Outlook this week.  The freely available key graphs file contains two that seem particularly interesting from a macro view.  The first shows their forecast for global oil production:

There are a number of things worth noting from this forecast.  First, they show that currently producing crude oil fields, taken together, are in terminal decline.  There's an implication there that enhanced recovery techniques are not going to save us.  Second, total crude production stays almost perfectly level for the next 25 years; by 2035, production from fields we already know about, but are not currently producing, will still be increasing; and fields yet to be found will be producing over 30% of the total conventional crude.  I'll say something about how unlikely I find that in a few days.  The fact that new production almost exactly offsets the decline in current fields seems suspicious.  Finally, total liquids production increases to over 95 million bbl/day, with the increase all coming from natural gas liquids and unconventional sources.

The second graph is the one for the forecast of coal use for generating electricity:

 

China is forecast to increase their electricity production from coal by almost 50%, driving a global increase of 25% over 2010 levels.  You have to think about where the increased production is going to come from.  Generation will probably become more efficient, assuming that new plants use supercritical and ultracritical steam cycles, but a substantial increase in coal production will still be necessary.  It seems to me that such an increase is at least problematic.

If you are a believer in climate change caused by increasing levels of CO₂ in the atmosphere, these two graphs together are extremely discouraging.  Unless you believe that China is going to capture and store the emissions from its coal-fired power plants, the graphs tell a story of steadily increasing emission levels, not the rapidly declining levels that would be necessary to stabilize the CO₂ levels already present.

Interpreting Declining Productivity Trends

A week or so ago, Stuart Staniford wrote a piece regarding declining productivity gains in the US economy.  I draw different conclusions.  Stuart's chart of the data is shown here, and he concludes that there is a long-term trend of decreasing productivity gains, which will have serious consequences in the not-too-distant future.



Before fitting a simple linear regression to this data, there may be adjustments that have to be made. In this case, the quarterly data is strongly autocorrelated; the growth rate in one quarter tends to reflect the growth rate of the previous quarter.  This type of data problem has been recognized for a long time: it was part of the time series course I took in graduate school in the 1970s.

With an adjustment for autocorrelation made, the decline in productivity growth looks much less drastic.  My version of the chart is shown here.  While the trend line ends up in about the same place, it starts from a much lower level in 1950 (my chart starts from the beginning of the data in 1947; Stuart discarded the first couple of years of data for innocuous reasons; including the earlier data does make a difference).  While the negative trend is not as steep as Stuart's graph suggests, it is still statistically significant.



But that's not the end of the story.  Suppose that you asked the same question -- is there a statistically significant long-term negative trend -- at different points in time.  In particular, suppose you asked that as each quarter's data was added over the last 30 years.  The next plot shows an answer to that.  Each bar represents the calculated linear trend, with adjustment for autocorrelation, using all data from 1947 to that point, but only if the t-value for the coefficient is significant at a reasonable level.  What this appears to show is that during and following most recessions¹, the long-term trend looks like it has a negative non-zero coefficient; except for those periods, the linear trend coefficient is not significantly different from zero².  In effect, what we see is a variation on Friedman's "plucking" model for business cycles and long-term growth, originally published in 1964.




While I may disagree with Stuart's statistics, I don't disagree with his concern about declining productivity growth.  There are a number of reasons to believe that productivity growth will slow in the future, and that such a slowing will have consequences (eg, see here).  It's a critically important topic, particularly in an era with declining energy availability.  But I don't believe that the data show that it's happening just yet.

¹ The recession of 1991-2 was, according to most measures, a very modest one. The trend coefficient estimate was negative during that period, but was not significant.

² There are a few quarters where the estimate for the coefficient is positive rather than negative. However, none of those estimates are statistically significant at the level used.

Colorado's Fiscal Future

A non-energy topic today.

I live in Colorado, a state where it is easy for citizens to place issues on the ballot.  It is equally easy to put proposed statutes and proposed amendments to the state constitution on the ballot, so we see a lot of proposed amendments.  After all, why bother with a mere statute, which might be revised by the General Assembly at some point, when you can put what you want into the constitution where it is beyond the legislature’s reach?  I want to talk about three of the proposals that have been approved for inclusion on the 2010 ballot: amendment 60, amendment 61, and proposition 101.  The text of the proposals is available here.  The changes would be phased in over a period of years.

Taken together, these three would substantially reduce tax rates and fees at both the state and local level, and drastically restrict all levels of government’s ability to borrow.  Further, the state would be required to backfill, from its General Fund, the decreased revenues that K-12 school districts would see as a result of property tax rate reductions.

Every voter receives a copy of the “blue book,” an explanation of the effects of each ballot issue.  The blue book is prepared by legislative staff, and the final language is approved by the Legislative Council Committee, a group of 18 of the legislature’s majority and minority leadership.  The analysis is required to include arguments both for and against the proposal, and staff’s estimate of its fiscal impact.  The staff’s cumulative analysis if all three proposals pass suggests that 99% of the state General Fund would be transferred to local K-12 school districts, leaving about $38 million for other programs such as prisons, higher education, and human services.

A majority of the Republican members of the legislature have signed a letter against passage of these proposals.  County Commissioners all over the state have come out in opposition.  So have a variety of Chambers of Commerce.  Opponents of the proposals have raised $4.1 million in funding so far.  But a recent poll indicated that the for/against numbers are currently 51/33 for proposition 101, 36/34 for amendment 61, and 32/45 for amendment 60.  It is worth asking whether these measures have any real chance of passing.

In 2005, the Colorado ballot included Referendum C, a measure which allowed the state government to retain revenue that would have otherwise been returned to taxpayers.  As a referred measure, two-thirds of each chamber of the Republican-controlled General Assembly approved the measure.  Then-Governor Bill Owens campaigned actively for the measure.  Business organizations all over the state supported the measure.  Proponents spent almost $8 million dollars.  The final tally, though, was 52.1% for and 47.9% against.  Referendum D, a separate measure that would have allowed the state to borrow money for a variety of projects, was narrowly defeated.

Colorado has a peculiar electorate.  We probably have as large a share of voters who are simply opposed to government on general principles as any state.  We have an inordinate number of newcomers -- the Front Range area population has increased by over a million in the last 20 years, and is forecast to add another million in 15 -- who have not put down real roots.  As a result, we don’t give much to charity -- a 2007 study found that the state ranked 5th nationally in personal income, but ranked 36th in charitable giving.  Many of the newcomers are young and/or single, with little interest yet in the quality of the local schools.  A disproportionate number of our college-educated got that education before they moved to Colorado, and so have little attachment to the local institutes of higher education.

I always figure that an anti-tax proposal will always draw at least 40% approval.  In tough economic times, when many are worried about their houses (for the last couple of years, Colorado has pretty consistently been in the top 10 for percent of houses with negative equity, and for foreclosures), the percentage is probably a couple of points higher.  Proponents need only convince another 8% or so of the voters in order to get the measures passed.  I predict that all three will draw at least 45% in November, and that at least one will pass.

What are the probable consequences if one or more pass?  Colorado will, over the next several years, become a much less pleasant place to live if you are poor, disabled, looking for higher education opportunities, or any combination of those.