Tuesday, May 21, 2013

A subsidy by any other name

One of the most self-serving fallacies I've ever seen is the idea that a subsidy can only exist on the spending side of the ledger.  I see this argument popping up more and more, and it annoys the crap out of me.

The fundamental definition of a subsidy is any form of government support that allows a firm or product to be sold at below the efficient, market-clearing rate.  Exactly what that market clearing rate is can be up for debate, depending on how many externalities one takes into account.  However, it's a decent proxy to say that a subsidy is any type of explicit government support, where one type of firm or product is intentionally favored where no favoritism existed before - this definition, at least, avoids any debate over what the market clearing price level is given that most goods and services are taxed, regulated, etc. away from an efficient market rate.

The argument I've heard from certain GOP* commentators is that a subsidy can only be a government payment, soft loan, or other type of spending support.  Rather than engaging the economics directly, they tend to focus attention on one of two arguments.

Thursday, May 9, 2013


There ain't no such thing as carbon neutrality.

Or, at least, exceptions to that rule are few and far between.

Besides scarcity, greenhouse gas emissions are the second major concern with our current sources of energy.  But one of the most frequent fallacies I encounter is the contention that if any alternative source also produces a greenhouse gas at all, or does not have a negative carbon balance,  it is somehow not "green" or is just as bad as using fossil fuels.

Convergence, or, energy is a high yielding investment until it isn't

This will be a rambling post just to help me get some thoughts down. 

With the recent announcement that Chevron is essentially pulling out of all biofuels and renewables, I think it's worth noting some of the unrealistic expectations that Chevron placed on clean technology.  Most notably, Chevron placed clean tech processes in direct competition for investment money with its oil exploration projects.  Thanks to some of my work in graduate school from some of the best industrial practitioner educators I've ever had, I know that the IRR for a typical conventional oil exploration project is on the order of 20%. 

The corresponding number for a bio-renewables project is much lower, on the order of 3-7% for the very best.  This is much more typical of what you would see in agriculture.  Placing investment money for bio-renewables projects in competition with oil projects, it's easy to see why bio-renewables lost out.

Besides making me profoundly disappointed in Chevron, this kind of news, to me, points to where the future of energy will go.  If you accept that the world cannot indefinitely continue to power itself with petroleum-based transportation fuels, then eventually the IRRs of bio-renewable projects (or other types of renewable energy) must approach those of oil.  This can happen in one of three different ways.

On the side of petroleum, either the number of opportunities for highly profitable ventures will decrease (a supply-driven slump) or there will not be enough demand to sustain these ventures at a high level of profit (a demand-driven slump). 

On the other hand, a second option is for bio-renewables to decrease their costs, increase their IRRs and compete with petroleum on its own terms.

I've staked out my position on demand destruction before, and I still believe that the structural changes that might cause fuels demand to decrease in the same way the IEA and others claim will take decades longer than they predict.  That environment means that high prices will continue, and supplier costs will increase as profitable opportunities for exploiting petroleum become depleted - in short, a petroleum supply driven argument.   Something like a carbon tax would also help that along, by seriously affecting the economics of bitumen (somewhat less for other forms of unconventional oil, such as tight oil). 

As for bio-renewables, after seven years of active work in the area, two of them professionally, realistically I can't see the IRR of any project improving much beyond that 3 to 7% level.  Making a low-value product like a fuel just doesn't pay, not when there is the opportunity to avoid the cost of gathering your energy source (i.e. the sun, collected on land) by going with petroleum.

In the end, there will be convergence at some point, when a bio-rewables project and slurping up dead dinosaurs become equally attractive.  However, there are too many physical limits to bio-renewable feedstocks to make them more competitive.  Instead, the point at which convergence will occur will be when energy as we've known it for the past three quarters of a century is no longer a high yielding investment.