Monday, May 23, 2011

Some more on hydrofracking

PNAS published a study on Pennsylvania groundwater contamination from gas wells. The evidence is pretty damning, to be perfectly honest. Something fishy is definitely going on. Let's face it, the empirical data is making me into a regulation advocate, if only to force the short-sighted fools that run drilling operations into doing things properly.

Money graph:

Source: Osborn et al., 2011, as linked above.

Wednesday, May 18, 2011

Lee Kuan Yew Resigns

Singapore has a special place in my heart. I spent a significant amount of time growing up there, and have a lot of fond memories. It also is the reason why I take all of my civil liberties very seriously. Five years in a place that doesn't have them is enough to make you appreciate what you have, a lot. But for the sake of my fond memories, I will always find the time to criticize Singapore because, to paraphrase Baldwin, I love the place.

And inevitably this means that I've got to talk about LKY's resignation from government. On the one hand, I'm not surprised that the grand old man of Singapore is retiring. He said for many years that there was a definite point where he realized that the younger generation needed to take over, and he reiterated that on his farewell. On the other hand, I'm wondering what his departure signals.

Anyone with half a brain knows Singapore isn't a true democracy. Sure it counts its votes fairly, but all credible opposition is sued for defamation into a smoking hole. Vicious self-censorship follows. Candidates that dare run against the old statesmen are ruthlessly attacked by the local media in the name of journalistic integrity while the excesses and failures of the party stalwarts are ignored.

The PAP's support has dropped to 60% of the electorate (despite this, their system of voting rules makes it so that there are maybe 6 opposition candidates that got elected out of 90 voting members). LKY resigned after this relative electoral drubbing (considering that support for the PAP reached 90% in the 80s).

So does LKY's resignation signal that his brand of authoritarianism is coming to a slow and gradual end? Is Singapore moving towards actual accountable democracy? Or is it simply a convenient time for an octogenarian widower statesman to retire and live a quiet life?

I don't know. It's entirely unclear to me what the move symbolizes, even if it is the last of the old guard leaving power. Telling is that LKY is leaving power to his son, the face of the present political dynasty, albeit one that is nominally democratically elected. Additionally, what the PAP has done in the past in response to electoral signals like this is use its formidable majority in parliament to strong-arm through popular programs - not really democratic accountability, but some accountability nonetheless. On the other hand, Singapore has gone through a relatively slow trend of media and electoral liberalization, but whether this is from the aforementioned tendency to placate the plebs is unclear.

Time will tell.


In other news, I finished my thesis this past weekend, and am now going to spend my remaining time in Ithaca with my brother, who is currently passed out on the futon. Our contract is that I cook tasty foods and he stays amusing. It works out well.

Saturday, May 14, 2011

The Beginning of the End

Had my first final today. Risk analysis, and much easier than I'd prepared for - a relief, I suppose. A really interesting subject, all in all, but in the end I think further study in it would not quite be my cup of tea. So long, Professor S, and thanks for all the fish.

One of the most enjoyable aspects of the class for me was some serious study of how people view and process risk - and how the media work it.

It's in this context that I figured I'd share something I found in the Ithaca Journal. As you may or may not know, Tompkins county is currently one of many embroiled in the colossal controversy over hydraulic fracturing, or hydrofracking, extraction of natural gas. It sits on top of one of the largest reserves of gas in the United States, the Marcellus shale, but state and local governments are engaged in a tug-o'-war between advocates of fracking and opponents. In context, opponents of the process are concerned about the impact that it has on unspoiled landscape - wastewater, drilling pads, and possible groundwater contamination - and advocates want it to bring jobs to the chronically depressed rural central upstate region. Also in context, both sides are partially wrong: groundwater contamination is relatively rare, and most of the wealth from exploitation accrues to the landowners with the mineral rights; the gas companies are bringing in their workers from Texas, Louisiana, and other places where fracking was developed.

Anyway, what I wanted to focus on was a recent piece in the Ithaca Journal that pooh-poohed the idea of supercritical propane fracking. It's a new technology that's designed to fracture underground porous rock without the use of water - basically, use the propane in a supercritical state, retrieve it as a gas with the (mainly methane) you harvest, and since propane at low pressure (i.e. 1-5 atm) can be easily liquefied through some basic refrigeration, you recycle your working fluid. As a technology, I think it's brilliant. In addition to all the benefits that accrue from not using large quantities of wastewater, you also have more strong incentives to stop methane leaks from gas operations, lest you lose your propane, so all-in-all it's a win-win-win. At least, from a technical perspective.

What the Ithaca Journal article did was essentially show a very basic lack of trust. It easily dismissed any claim from the gas companies that supercritical propane fracking would benefit their communities and instead engaged in some half-baked speculation that propane fracking is more dangerous because "we store propane outside in tanks." While from a technical perspective this makes me want to hit my head on a wall, I think that is a good case study on how people view risk and what the gas companies ought to do.

Before I fully begin, I have to admit that I think that the Marcellus shale is too valuable of a resource not to exploit. Unlike most green tech, green energy advocates I take a long view on changing energy infrastructure. It's pretty clear to me that we'll be using gas and coal for well over the next 100 years, and moving into fully renewable energy only after the long and slow process of changing post-industrial infrastructure. In that vein, I think Americans shouldn't just want to exploit shale gas, but that they should recognize that we must exploit it and use the energy from it (~50-200 quads in the Marcellus shale alone) to power our transition into renewables.

Now that my position is in the open, I'll tell you what I think is happening and where the gas companies screwed up. When I think about the start of this process, I think Gasland. Gasland is one of the kind of movies I absolutely hate, because from start to finish it pretty clearly has an propagandistic agenda. It reminded me of documentaries produced by Michael Moore. Regardless, it does a good job of showing growing problems with the gas boom, ones that could be expected: corner-cutting, lax safety, sloppy operations and low professionalism. In terms of the psychology of risk, I'm pretty certain that Gasland served as a so-called signal event, which caused a whole lot of people to evaluate the risk.

As soon as media outlets realized reporting on the fracking controversy realized that they could make money off of reporting on this, they began covering the controversy and every accident in amounts completely out of proportion to the severity and likelihood of the hazard. And of course, since humans assess risk based on an availability heuristic and much of that availability comes from (suprise!) radio, tv, and media, people have pretty much seriously started to overestimate the risk.

Gas companies have made it worse. Instead of treating claims of abuse seriously and instituting visible standards on environmental contamination, gas executives have steadfastly denied their involvement, or offered only basic levels of compensation. Moreover, every single appearance I've seen of an engineer in front of a (mostly hostile) audience has left me with an air of their haughtiness. Men with hard hats or men with suits show diagrams of how the Marcellus shale is far below groundwater reserves and how gas contamination of their water is not possible, but they say it as to a child of five. I can understand where they're coming from, honestly, because I know how hard it is to explain engineering to non-scientists or non-engineers. That still doesn't excuse their later behavior under heavier criticism, which is to circle the wagons, repeat the party line, and heap shit on their opponents for being undereducated.

Small wonder these Tompkins county people, who eye the money but love their land, have lost their trust in gas companies. It's so bad now that people are instinctively mistrusting technologies being brought in to benefit the community.

So what should the gas companies do? Eat humble pie. Acknowledge that even though bad things shouldn't happen, they do - and approach communities hat in hand with compensation and effusive offers to clean up. Increase standards of professionalism, stopping gas leaks and paying compensation for claims against drilling operations. And above all, approach communities as equals rather than the local tribesmen to be placated. Nothing infuriates people more. It'll take a few years, but trust from the people whose land you lease is a commodity worth that time.

Fracking bans are now in the works in France, New York is debating doing something at the state level even past its moratorium, and incorporated towns all over upstate New York are banning the practice already. For gas companies, it's turn around and realize that trust needs to be rebuilt, or lose your shirt. Ball's in their court.

Enemy Combatants and More on Higher Ed

The Economist's Will Wilkinson wrote a rather impassioned article on how he thought that America's operation against Osama bin Laden was dubious because it was conducted on foreign soil without notifying the host country (national sovereignty) and because bin Laden was unarmed.I'm going to go ahead with my gut feeling and say that he's wrong on both counts.

Back when I dabbled in philosophy, there was a special emphasis people put on gut feeling, if only because what feels right is usually indicative of some higher moral sense. Well, now I have to justify it, don't I.

From a moral perspective, the idea of killing an unarmed man is what a philosopher would call "problematic." I have a more nuanced view than most because I don't support the death penalty but have had no sympathy for bin Laden's situation. I suppose the difference is the manner and time and place of a killing. The death penalty is an execution. Its victim is someone who has already submitted to or been compelled to submit to state power. In that kind of situation, where the prisoner poses no thread, there is no reason to kill an unarmed, helpless man.

In bin Laden's situation, even if he was unarmed he did have armed men guarding him. He was actively participating in trying to harm others. No matter what he was doing at any given time, bin Laden was a threat to somebody. That he didn't fight back was more likely due to the fact that he had no opportunity to do so than anything else. And moreover, there's an argument to be made that whereas a typical wrongdoer's capture does nothing, bin Laden's life serves as a standard for other loss of life.

War in the traditional sense of nation-states fighting hasn't existed for bin Laden. But there is no doubt that he was at war with the United States (does that mean he was a sovereign over his organization? maybe). I think there is also good reason to think that the death of bin Laden would be any bit as justified as the shooting down of Admiral Yamamoto during WWII or a raid on an enemy headquarters. It's war. Whereas I'm not comfortable with classifying Guantanamo detainees as "enemy combatants" unless they actually did bear arms against the US, with bin Laden I think there's no moral trouble.

And re: sovereignty of Pakistan, let's just say Pakistan hasn't had the teeth to enforce its authority over its own territory for a while now. This is a diplomatic problem, not a moral one.

As an aside on higher education, it was brought to my attention that my focus on cost-benefit analysis is probably best put another way. There are many reasons that someone goes to college - bandwagoning, the "thing to do," actually liking learning, wanting to become a specific profession regardless of income, etc. But I think it's a pretty safe bet to apply a cost-benefit analysis to one major: Business. There's really no reason to major in business other than to make a whole lot of money. I think this is the real reason why it's less problematic of a proposition to use cost-benefit analysis for business education (as Schumpeter has) rather than higher education in general.

Tuesday, May 10, 2011

The Price of Oil Drops

Between Wednesday and Thursday of last week, the price of oil dropped precipitously. WTI spot prices dropped below $100 a barrel from a high of close to $115, though it's now again above $100. This is a pretty darned huge drop. It came pretty close on the heels of Osama bin Laden's death, too.

To me this suggests that the price rises in oil over the past couple of months have been largely speculation driven, though not necessarily for the reasons you may think. It's certainly not demand or supply driven. Supplies in Libya may have contracted, but they provided maybe 2% of world supply. It's pretty much certain that the price elasticity of supply for crude isn't that extreme. Though Libya does provide a significantly larger amount of the world's remaining light sweet crude (i.e., the good stuff), on a macro scale enough refineries are configured to run heavy sour crude nowadays that it shouldn't have affected supply overmuch anywhere except Italy, where the hapless refineries are configured to accept high-quality deliveries from Ras Lanuf. It also wasn't demand. While China has continued growing at a blazing rate, it is difficult to believe that global demand grew enough to increase prices 15% over the course of 2 months. That's a pretty derpy suggestion, in fact; spikes like that are only seen during some pretty extreme cases, like wartime.

So what we have is, I think, pretty clearly a short-term, speculative increase in the price of oil. It's pretty obvious that there were distinct triggering and ending events - rebellion in Libya and assassination of bin Laden, respectively. That doesn't necessarily mean that each phase was sustained by the triggers, however. I think there were other structural factors keeping the speculative capital in the market.

Econbrowser had some interesting analysis on the subject ( Broadly, I'd agree with the conclusion that the precipitous price drop is also a function of the fact that after almost stagnating production for the past couple of years, supply is starting to exceed demand, albeit just a little bit. This is starting to impact inventories, driving the price down.

Obviously I don't have enough experience to know what the phase lag in between sustainably higher oil prices and supply increases ought to be, but a gap between world supply and world demand has been ridiculously high from 2001-2008. It follows from my perspective, at least, that supply is only now responding to higher price signals and driving the prices down because of one of two reasons. The first might be the lack of skilled drillers and drilling equipment, or other exogenous supply bottleneck. The second is that it's just getting harder to find enough oil to sustain production. I think both apply. It's important to note that the first bit is a problem that's been around for a while, but that it's gotten more severe as larger oil finds have been rarer and rarer.

As an aside, I went ahead and checked on something else. Unsurprisingly for me, it seems that the Brent-WTI price differential hasn't changed. The structural factors that are keeping buyers at Brent trading at higher prices than in Cushing haven't changed, and aren't likely to. Oh, the joys of a landlocked oil port with too much supply coming from Canada.

I was also thinking of talking about other oil supply trends here, but that might have to wait because I'm going to work on my thesis now.

Monday, May 9, 2011

Rent Seeking in Higher Ed

The Economist's Schumpeter columnist is having a lot of fun awakening the grumpy, overfed dragons of academia and getting them to gnash their teeth. Simply put, he's got a whole lot of people riled up about a possible "bubble" in tertiary education. The argument has a lot of different threads; also, being a business columnist, he focuses on business education. The comment threads are really amusing as they tend to involve exchanges between professionals who agree that undergrad b school education sucks and indignant b school students who drink on weeknights.

One of the reasons Schumpeter is so concerned about a possible bubble is cost inflation. Everyone knows college has gotten a whole lot more expensive in real terms. Inflation in the price of a college since 1978 has outpaced currency inflation by over 400%. A big question for me is, how the hell are colleges able to pull that off? For-profit colleges like the University of Phoenix are making a killing and not necessarily providing the best service - after all, a degree from MIT costs the same as one from U of Phoenix. Why are costs increasing so much, even at non-research, for-profit universities?

It's not a trivial question to answer. People keep going to college and paying the fees, regardless of their actual ability to pay at that time. The average college student is charged $23k a year, and much of that is taken out in loans. Student loans are non-forgivable, even in bankruptcy. There are cases emerging now of thirtysomethings with liens on their salaries to repay delinquent student debt, even as they work at minimum wage jobs.

When I think about the fundamentals of this question, I think of consumer surplus. Is the student getting more value out of a college degree than they are paying? For the past 50 years, the answer has almost certainly been yes. But now I'm not so sure. Costs are high enough that I'm wondering whether the arbitrage condition has been exceeded. But back to value.

The value of a college degree comes in the signalling value of the degree itself and the education you receive. The former comes in handy for obtaining employment, probably partially due to the reputation of your college and partially for the certification in your major (whatever it is) that it implies. The latter will save you some grief at work and give you intellectual satisfaction. Both of these, I think, are falling, while tuition costs are consistently rising. However, I think the real monetary value of the degree comes with the signalling value - let's face it, few people study for the sake of knowledge anymore.

The signal of a college degree has historically been that the bearer of ye olde diploma was
  • able to do a decent amount of work
  • certified in whatever discipline they had on the diploma
  • sharp enough to get through college
The second point is really only relevant to engineering, science, and other professional-oriented disciplines, and I don't think it's much of a problem. Any employer worth his or her salt can simply look up the accreditation of a college's program to figure out if the degree means anything. The first and third points are more interesting, however, if viewed from a historical perspective. For one thing, it's somewhat true that college has become easier. I don't mean any specific college, but college in the aggregate. For another, it's definitely true that you no longer have to be the sharpest tool in the shed to get through college. This I think is the result of a demographic trend.

In the postwar baby boomer years, the people who went to college were pretty much at the top. I don't remember and am unwilling to look up the proportion, but it was under 30% of the population. Fast forward to post-GenX, and almost 50% of the population is going to college. As the population of collegiate students has increased, the number of colleges has increased. Most of these are not community colleges. Call me elitist, but I don't think that the 50% of people who go to college today are as intelligent, on average, as the >30% who went before. It stands to reason then that a whole proliferation of second- and third-tier colleges have now sprung up to cater to these demographics. Not only do they provide lower quality education for those students who are presumably less mature, less intelligent and less motivated, but they also give degrees to them that are in many ways indistinguishable from what might be issued by a genuinely good institution. Both of these results are making a degree less worth it. Employers are beginning to catch on.

So bringing this back to the big picture, we can say two things that gave a degree value in 1950 no longer really apply. First, it's no longer a good measure of innate ability, maturity, or motivation, because the pool of graduates has been so diluted. Second, it's no longer a good signal of "this person won't need that much on-the-job training."

Now look at this from the modern student's perspective, using an unrealistically simplistic thought experiment. When s/he makes the decision to go to college, consciously or unconsciously s/he tries to factor in the benefit that could accrue. However, the historical data on the value of the college degree that the student reviews is flawed: the value of the college degree in the past (in terms of income increase, etc.) encompassed the returns both to superior ability and good education, two things which do not necessarily exist today. Furthermore, the superior ability bit applies after college too, and often cannot be isolated from the income increase data at all. So the prospective frosh goes ahead and merrily assumes a value for a college degree that is unrealistically inflated.

All that speaks to one reason I think colleges have been able to get away with providing shitty service (or virtually the same service) for such a high price: Rent-seeking. I'd be disingenuous to suggest that it's the only reason, but I'd wager its the primary driver of scams like U of Phoenix. Basically, the idea would be to keep adding the price increases to capture as many returns from people's expectations of the value of a college degree as possible. That's how so many universities can get away with this.

Of course, I think that MIT, Harvard, and others don't have this reasoning at all. Their growth in tuition is probably driven by the desire to Do More Research rather than educate, and expand at a rate beyond what their alums can provide in donations. I think that other shittier places are using the top-tier schools' price increases as a signal that they can move up too, to capture more rents.

This is just one small part of the higher education bubble argument. I'd really recommend that anyone interested in this argument go ahead and read Schumpeter's column in The Economist, but I'm going to go ahead and say that I buy it. Most of the evidence I have is anecdotal, but I have a strong suspicion that Schumpeter is right and that some time in the next decade or two college prices are going to collapse.

The other implication of this is, I think, that colleges will try harder to develop a brand to improve the signalling value of their own degrees to put themselves above the languishing generics. I predict more screwing of mildly undesirable students and more shameless self-promotion from all. Ugh.


I suppose that when someone starts a blog, it's for some combination of three reasons. The first reason is that they might want to make money off of it. Simple enough, I suppose. The second reason is that they want to keep in touch with their friends. The third is that a blog appeals to the inner sense of narcissism deep within. The method by which you titillate that sense can vary.

This of course begs the question of why I am starting a blog. I won't kid you, it's not the first time I've attempted to make an online scribble book. What's usually ended up happening with it is that I cared too much about who was reading and never found the time to write more. So this blog is going to be about me, for me, and for whoever else feels like listening in. By and large, it will only marginally be about my life and more often concerned with whatever I feel like writing about, if only to develop my own ideas. I wouldn't mind if other people read, but whatever.

So there you have it - my reason for starting this blog fall somewhere in the 2D space defined by reasons two and three above.

I'm just going to experiment with this for a while. I'm kinda sorta entering a new life stage here. In three weeks, I eclose from my pupal shell, and move to my first real job. In the mean time, I have to finish my thesis, wrap things up here, and somehow still enjoy the last few weeks of freedom from responsibility that I have. Not that I won't be working, or spending some of my time thinking about pipe materials, philosophy, or whatever else comes to mind... and that's where this comes in. I figure if I can quit rambling and get my thoughts out in writing, it beats navel gazing. Also if I post enough, I'll share this with my friends and they can all tell me what a retard I am.

Okay, enough talk. Here goes.