It’s time once again for weekend reflections.Feel free to write at greater length than for a standard comment thread. As always, civilised discussion and no coarse language.
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John Quiggin 
Who understands futures contracts and the impact they are having on soaring oil and food prices? I certainly don’t. We are hearing a lot about China and India driving cars and eating meat, and biofuels and so forth, but the price rises in food and fuel have been unusually sudden haven’t they? More sudden than one might expect if these were the only explanatory factors. To what extent is unregulated speculation on commodity markets contributing to the growth of inventories and the tightening of supply? Has there been much research on the relationship between futures prices and actual prices? Or is it just a ridiculous, CT question that would have me laughed out of any room full of respectable economists?
http://www.atimes.com/atimes/Global_Economy/JE24Dj02.html
If you want to assist Americans in making their electoral decision: http://www.dailykos.com/story/2008/5/29/131437/342/899/524884
If you want to assist Americans in becoming better informed about their electoral choices: http://www.dailykos.com/story/2008/5/29/131437/342/899/524884 Given that we cannot vote in their elections or donate to their campaigns, it’s something we can do to help.
I’ve maintained a dignified silence for a while but I’m not an inherently dignified person so I’ll speak up on this topic. But first a quote from the NYT.
“The Dow Chemical Company, the chemical giant, said Wednesday that it would raise its prices by up to 20 percent almost immediately to offset the soaring cost of energy, and the company’s chief executive criticized Washington for failing to develop a sound energy policy.”
This news item is (blackly) amusing on a number of levels. A “leave it all to the magic guiding hand of the market” corporation suddenly starts blaming the government for not solving the energy crisis.
Well actually Dow are right in this case. The U.S. government (and other govts) should have taken action over this issue… starting about 40 years ago.
No doubt financial speculation is now adding some froth to the witches brew we have concocted for ourselves but essentially this new round of inflation stems from energy and resource scarcity.
I have heard the opinion expressed in some quarters that as energy costs are only a small part of manufactured goods costs then energy price rises would not cause significant levels of inflation. To my mind, this missed one major point.
Energy is not a large part of our total living costs but if we can’t buy any energy then we are dead. Don’t forget food is energy too and it takes energy to grow it; lots of energy with industrialised farming. In times of great food scarcity food costs will rocket up to consume most of our income. Plasma TVs and SUVs are just so much junk when you can’t get enough food.
In our economy nothing happens without energy. When energy runs short things will stop happening. Energy must not only be available, it must be available in a convenient and harnessable form and we must have the machines and infrastructure to harness it.
The world faces three compounding crises right now. The food crisis, the oil (energy) crisis and financial crisis. The primary causative crisis is the energy crisis. It is being led off by the oil crisis and we have no immediate alternative to petroleum for our food growing and transport needs.
Global civilization will probably collapse. The process has started. 2008 feels like the watershed year but in fact it was probably 2005 when peak oil production was reached.
Indeed, maybe the key year was 1972 when the Club of Rome report came out with the irrefutable proposition that growth cannot continue indefinitely in a finite system. The report was ridiculed and then ignored.
http://blogs.theaustralian.news.com.au/janetalbrechtsen/index.php/theaustralian/comments/pm_must_treat_%20public_%20servants_with_respect
Am I the only one who finds this whole backlash against Kevin Rudd for being a workaholic confusing? If anyone should be a workaholic, surely its the Prime Minister?
What would we prefer? The kind of guy who ensures he sleeps 8 hours every day regardless of what is happening in the world? The kind of guy who doesn’t read all of the major policy briefings? That’s what Americans vote for, not Australians!
Janet Albrechtson is hardly going to praise Kevin Rudd. If Howard had been working as hard then it would have been praise all the way from Janet.
Having said that, most workaholism stems from greed, ambition, stupidity and narcissism. In my observation, people who work 16 hours a day do less good and less useful work than sensible people who work 8 hours a day.
Exhausted people have negative productivity. They stuff things up that have to be fixed by fresh people. I’ve seen tired programmers take 20 person hrs to do what one fresh programmer can do in an hour.
Workaholism and overwork are productivity killers… and sometimes even people killers.
To make a fetish of over-work is no sign of wisdom. For all his vaunted hours Rudd has done nothing significant. His responses on climate change and energy policy are mere tokenism. In a lot of policy areas he seems to have no ideas at all. He is still following John Howard’s ideas in many cases eg. the “Intervention”. What a policy vacuum he is.
Spot on Ikon: If Rudd needs advice from four departments on a dud like Fuelwatch,how much advice is he going to need to bring in things like carbon trading. Really if he believes what he says(and who knows what he believes) he should be explaining what he will do in a carbon constrained world.A policy or two in that direction wouldn’t hurt either.
I didnt vote for Rudd so I have no complaints: he is performing as expected.
Ikonoclast seems somewhat bemused by a “leave it all to the magic guiding hand of the marketâ€? corporation suddenly starting to blame the government for not solving the energy crisis. He shouldn’t be when it’s patently obvious to Dow that although they supposedly operate within a ‘free market’, they are only too well aware that the actual market they operate in is a long way from some idealised, frontier free market. They operate within a very strictly and tightly controlled constitutional marketplace(CM), bounded like ours is, largely by all the impacts of the various forms of taxation which constantly steer and guide the players within it. That, coupled with the ‘freedom’ to act within that overarching paradigm, is what produces the results we so readily observe. Dow Corporation like any other players, are only too well aware of that overarching paradigm and are entirely rational in pointing to any of its major shortcomings, just as Ikonoclast goes on to do. Those major shortcomings are now so glaringly apparent to us all that it should be just as obvious now, that tinkering around at the margins of it is an exercise in futility. Nowhere is this more apparent now than pinnacle of hypocrisy going on at a national level with Fuelwatch vs 5c/L price cuts with only Turnbull and Ferguson having the temerity to tell it like it should be. The media are rightly having a field day with the hypocrisy and banality of the positions of the main players now. Given their stance, not to mention the similar discourse internationally over fuel prices and resultant knee-jerk political responses, should spell the death knell of any presumption of tacking some cap and trade/carbon taxing onto our bankrupt, current CM now. It needs a complete rewrite if we are to address those shortcomings and allow higher private pricing of fossil fuels to better reflect their social cost and at the same time address its other glaring shortcomings. That’s exactly what I have been arguing for, essentially a Rawlsian step back to examine here and now our original position, from where our ideal, reasoned CM can be proposed/ outlined and ultimately implemented, albeit via some trial and error political and economic process. As such I am an avowed skeptic that any well intentioned ditherings or incremental science of muddling through can save the fatally flawed CM we find ourselves inheriting now, or fix the obvious shortcomings of the outcomes of free marketeering within its overarching paradigm. That CM and its outcomes now have sorely been overtaken by events and the times.
In outlining the path to the blueptint for a new CM for our times, I have so far addressed partly the carbon question and the question of biodervisity, although more on the latter later. Now let me turn to another second order, but still significant problem with our current CM, namely the quest for capital gain and its unintended consequences. Let me put aside here the diversionary and frivolous pursuit of protecting nominal savings from the predation of central bankers, and their 2-3% inflation targetting. a problem that probably begs the question, why not negative 1% to zero eh chaps? Perhaps they need to look up the word productivity in the dictionary? No we’ll concern ourselves with the quest for real capital gains and its major negative externality nowadays, the housing affordability problem, although it may be hard for us to divorce in our minds eye from the former. Capital gain has some sour connotations for those to the left of centre, largely on this count alone. Why it should be of particular concern in an economic system that necessarily thrives on buying cheaper and selling dearer, is anyone’s guess. After all capital gain is really just a longer horizon time frame than the day to day machinations of all sellers of wares and services in that respect. However, when you try to define and identify income for the purpose of progressively taxing it within a certain time frame, there is a certain inevitability in the outcomes produced by such a task. Welcome to the capital gains taxation bind of their current CM thereby forthcoming. Why should they then complain when that inevitable CM that all individuals are inexorably steered by, then freely produce the market outcomes it demands of them? That’s not a failure of the ‘free market’, but a failure of the CM of their design. Scrap our current income taxation regime driving that and much of the problem would disappear. Furthermore, redirect what’s left of the incentive for real capital gain into an outlet that is much more socially desirable and their bogey of capital gain will have been slain. They could only hope to irritate the beast with a superficial flesh wound, by incremental tinkering with their bankrupt CM now. I’ll leave you with that thought for now and the expectation that my blueprint can easily resolve the overall problem, despite the interference of central bankers cursing us all in such a task
Sorry for the repeated post (#2 and #3), but when I submitted the first one, it did not appear. Maybe it was my browser cache or something.
The shorter Observa- It aint the free market it’s the CM stoopids! Now having said that the total combined effect taxation system largely sets the CM we all find ourselves acting rationally within, you also need to be aware I’m referring to negative taxation (ie subsidies) as well, although to a lesser extent mandatory controls like banning plastic shopping bags impact too. So if you hand out $8000 Federal subsidies and $1500 REC credits, as well as State Govts mandating electricity providers pay me 44c/kwhr for a 2KW solar to the grid system, non-means tested, and the consequent after tax, risk free returns stack up very favourably, have a guess what I’ll do in that CM? Suddenly restrict that largesse to households earning no more than $100k and then have a gues what happens in the CM, when the players have to find $12500 + $450 for a special ETSA meter to participate in both CMs? It aint rocket science!
“Who understands futures contracts and the impact they are having on soaring oil and food prices?”
Well gerard, it’s like this. To have a futures market in any good, you’ll essentially need a specualtor/s and a hedger/s, which are largely defined by the degree of risk taking/aversion of the multitude of players and contracts that will ultimately form the market. The speculator in any future delivery contract is speculating that the price of a good is going to be higher upon delivery date, while the hedger either assumes it won’t or in any case is quite happy locking in that price now in order to guarantee production and delivery by that date. Willing buyer, willing seller = satisfation all round, although that may substantially lessen for one or other come delivery date and the prevaling price then. Now you might say- hang on a minute, any blind freddy can see that oil is going up and hence obviously food so that’s a one way bet for all the speculators here. Fine, go right ahead and join them 20/20 vision freddy, but remember as you speculate up the price/s, that will inevitably call forth more marginal suppliers to lock into your prices, happy with those now profitable returns, thereby increasing supply more rapidly in the long run and presumably, that’s what the market demands. That will have price ameliorating effects too in the long run, so watch your step freddy.
I have to disagree, Ikon. I’m sure that some people are workaholics for the negative reasons you mentioned, but ambition isn’t necessarily a bad thing? I know people, especially ones who love their jobs, who work massive hours because they want to do so much and only have a little time to do it. I’m sure there are examples to support both sides, but I don’t think you can broadly say someone has negative intentions or outcomes just for working hard!
Of course, whether that argument applies to Rudd remains to be seen! But so far, I agree with Hugh – working hard is not a bad thing!
Also Chris, I would answer that Rudd would need much more advice for a Carbon Trading scheme than for Fuel Watch, and much, much more time to receive input from various factions, including community, scientific and industry. This is Australia’s chance to implement a scheme which may be taken up world wide, if we’re successful. Ideally (?), we’d like other countries to adopt similar models to ours so that ultimately there could be a world wide trading system.
Observa, I know we’ve frequently disagreed but #12 is an extremely clear and accurate description of futures markets.
JQ or one of the other economists here may wish to correct me on this but my impression is that most of the empirical evidence suggests futures markets generally reduce rather than increase market volatility.
(Think about this, the oil consumers who bought oil futures at $100 a barrel a year ago have effectively avoided much of the pain of the past year.)
“This is Australia’s chance to implement a scheme which may be taken up world wide, if we’re successful”
Sorry Joel, but the tears are running down my cheeks and my sides are fair splitting. Cap and trade for CO2 emissions is like trying to reduce the use of plastic shopping bags with rubbish bin inspectors running around checking as many bins as they can fit into a relaxed, family friendly working day to fine any miscreants and you want to take such a brilliant scheme world-wide for CO2 emissions. Let’s just say many countries have dubious calibre garbage inspectors, while many reckon they won’t be able to rustle up any at all.
Ian, Obby’s just giving the standard textbook answer. There’s no reason to believe that that answer is sufficient in the current situatation.
I don’t doubt that:
a) some speculators have made money from trading purely in futures contracts,
b) some speculators have made money by storing oil, e.g. in tankers etc.
It seems to me, though, that the real reason for the high prices is that the oil producers have declared a collective “f… you” to the US.
Hey Georgie, you want us to increase production? “F… you”.
You’re going to invade us? Are you serious? “F… you”.
George, you’re killing people that we care about, so, well, “F… you”
Or perhaps less fancifully more akin to this more down to earth policy
http://www.news.com.au/adelaidenow/story/0,22606,23788194-2682,00.html
all the while we skeptical cynics ask- what happens to the status of all the women between taxi ranks Minister?
Well gordon, I’d suggest before you speculate on where oil and food prices are going you speculate on which theoretical underpinning will help you most in your travels, largely from historical experience. Whilst it’s true you can study from the book of Marx SJ is quoting from, and you don’t need to worry about any marks to obtain a degree in the subject (they’ll take all comers), it won’t help you get a job, largely due to its erudite conclusion in these matters, which SJ puts so well. At the very least I’d hedge my bets if I were you.
Observa, I’m certainly not saying that carbon trading will be introduced tomorrow into every country, but it seems pretty likely that most developed countries, and eventually developing countries, are also going to implement a similar system of some sort.
I’m not really sold on the plastic bag analogy 🙂 As for policing the policies, that’s a different kettle of fish to the economic/scientific basis, but no worse than any other law, surely? Is it harder to pump out extra, hidden CO2 than it is to fiddle your books? I don’t know, but I imagine neither are trivial. (And countries that don’t have reputable emissions checking simply won’t be traded with.)
And while I’m by no means an expert, I have heard a number of people I do respect saying that Australia is in a good position to influence the direction that carbon trading takes on a global scale; if we implement a successful model, then other countries are much more likely to reuse it, rather than reinvent the wheel.
I haven’t looked closely, but since a simple supply and demand explanation for the increasing price of oil works well, I don’t see any need to invoke futures markets.
On the other hand, if futures markets worked as well as is commonly claimed, futures prices ought to have risen in advance of the increase of the last few years, rather than in tandem with it.
Joel, my point is largely that if we’re serious about cap and trade, it would be administratively simpler and tighter to apply the cap at the point of extraction of fossil fuels (ie its CO2 equivalent) rather than after the stuff is dug up, shipped all over the planet and then burnt. The fact that cap and traders are ignoring this obvious no-brainer should tell you something important about where they’re really coming from on this, or that deep down they know it’s all a pipe dream but what the hell. Feeling good about being seen to ‘do something’ will do it for them. Why on earth they want to once off auction the rights to eternal carbon taxing to big carbon is a complete mystery to me too. Nevertheless that’s where they’re dragging us all on this. I’m not going under without a fight.
“Joel, my point is largely that if we’re serious about cap and trade, it would be administratively simpler and tighter to apply the cap at the point of extraction of fossil fuels (ie its CO2 equivalent) rather than after the stuff is dug up, shipped all over the planet and then burnt.”
Except of course that some fossil fuels aren’t in fact burnt at all (e.g. natural gas used to make plastics), some are consumed in developing countries not currently including in the cap and trade system and the total greenhouse gas emissions (as opposed to carbon dioxide emissions) from fossil fuel use depend not just on the amount of fossil fuel burnt but how it’s burnt.
gordon, John is right to point out that predicting future prices via futures trading is a little more complex than I outlined. With oil it may simply be that the very act of securing oil supplies a few months ahead on our behalf, is driving up the price here and now. Sudden, unanticipated price rises can have complex results for suppliers too as this report demonstrates here-
http://www.news.com.au/business/story/0,23636,23792605-31037,00.html
Suppliers may act differently in the short term, depending on whether they believe the price spikes are permanent or temporary, simply making more marginal hay while the sun shines. That still has long term supply implications should prices slip back somewhat. Whatever, but nevertheless securing particular quantities of oil now, for your particular market 2 or 3 months ahead means speculating that price will be obtained when you come to sell it then. That price rise, suddenly apparent to all right now, is a clear signal to anyone walking into a showroom now to buy a new car, to do some extra thinking right now. It’s the summation of those ongoing responses that will drive demand in future. In the meantime none of us lies awake at night wondering if there’ll be fuel at the servo next time we’re empty. As for that OS holiday planned for next year, well that’s Qantas’ problem to speculate and hedge on now.
There is a story in The Age “Honda unveil People’s hybrid�
http://www.theage.com.au/articles/2008/05/30/1211654284580.html
Honda plan to have a hybrid version of every model in their line up within two years.
This is exactly why our car industry needs to rapidly change course. Why would anyone buy a local V6 when you could buy a Honda hybrid for the same price? This sort of change will threaten both our local market and the export market for V6s. Our previous industry policy was written as though we lived in a vacuum, where if our local manufacturers didn’t adjust to peak oil neither would anyone else. As the Honda announcement shows, the smarter overseas rivals are not going to do that. I fear our car industry is about to be wiped out within two years unless they make more economical markets very fast.
In my view this is the real short term issue with fuel prices, not some nonsense about 5 cents a litre or no GST. It represents a huge threat to what is left of our now very poorly positioned local car manufacturing sector. I would think there are 10000 jobs at risk in Melbourne and another 5000 in Adelaide.
“Except of course that some fossil fuels aren’t in fact burnt at all (e.g. natural gas used to make plastics),..”
An infinitesimal problem in the big scheme of taxing for CO2e. Simply give these manufacturers a tax credit based on their useage.
“..some are consumed in developing countries not currently including in the cap and trade system..”
Boy oh boy is that an understatement and what’s more Greece and Quebec are being chastised by the UN right now for not properly determining and policing caps, while Putin says Russia won’t be bound by mandatory caps, etc, etc. Basically cap and trade has Buckleys chance of succeeding, but hey lets do it the hard way anyway and give big carbon whatever taxing powers they can extract from it to boot. You know it makes sense.
“..the total greenhouse gas emissions (as opposed to carbon dioxide emissions) from fossil fuel use depend not just on the amount of fossil fuel burnt but how it’s burnt.”
Stating the obvious really, but then if I were taxing CO2e at its source, I wouldn’t cut any slack for taxing end users that didn’t burn it in the most efficient manner possible. Basically you’ll pay up front per tonne, barrel or cu. metre, depending on its most efficient burn to produce a Kw/hr of electricity, given the CO2e it emits. You want to burn it less efficiently under that regime boyoh, go right ahead.
Those points sound more like features than bugs of a simplest and broadest possible carbon tax to me too, Ian.
Apparently we might be able to leave transport to the ‘free market’ in Garnaut’s brave new CM-
http://www.theaustralian.news.com.au/story/0,25197,23786483-11949,00.html
Socrates wrote:
It definitely needs to change course, but I don’t think trying to reinvent hybrid technology in Australia is the answer. In the short term the local manufacturers could drop a Euro-sourced turbodiesel into their family sixes with relatively little engineering work. The soaring cost of diesel may give them second thoughts however.
In the medium term local car makers should be looking adapting their LPG vehicles to CNG. Australia has a lot of natural gas, and its very clean compared with petrol and diesel.
I think the local motoring press has a lot to answer for. They literally threw COTY awards at the new Commodore (which I think will go down in history as the biggest blunder in Australia’s automotive history) but the year the new Prius was released (2004 I think) it was ignored, and was given to some car we’ve now all forgotten.
Ignoring the first sentence, here’s a pretty good summary of the pot pourri of measures the US has devised to hide the growing stench of cap and trade policies
http://brookesnews.com/080206carbonpolicies.html
Good luck to the battlers coming through intact from that terrifying minefield of economic rent seeking and special pleading. Start singing God save the Green and pass the vaseline now lads!
Carbonsink
I agree we don’t have the technological base here to develop a competitive hybrid any time soon. We need more efficient cars, by whatever means we can most effectively produce them. I was just highlighting what is coming. I’d be happy if we could just make the equivalent of an efficient petrol engined Honda Civic or Toyota Corolla here.
But we shouldn’t be niaive on this. The same article mentioned that Honda was rationed just 900 Civic Hybrids a year to sell in Australia at present. The rest are headed for other markets, mainly USA. So they are not serious about selling hybrids here now. When you compare the US prices at current exchange rates, neither are Toyota.
Both Honda and Toyota are building new hybrid factories now. In a year or two when they have a larger production run to sell, and presumably start trying to mass market affordable hybrids here, what do we do to compete? I fear everyone has forgotten what happened to local market share against Japanses imports during the last oil crisis in the 1970s.
I’m quite sure the current manufacturers haven’t forgotten Socrates, but they’d know they can’t produce small cars like Mitsubishi’s Colt for $16990 retail that rate at 5.6L/100km. They are stuck with producing v6 larger cars like Holden for $36,790 retail and 10.9L/100km. That’s a similar retail to the cheapy version Prius last price at $37,400 and 4.4L/100km. Still at that price Honda and Toyota aren’t going to make big inroads into the Colt, Hyundai Getz and the like market. Well not unless fuel prices go blue sky pronto. Now presumably Toyota and Honda can’t satisfy world demand for Hybrids and hence the new factories, but bear in mind hybrid world demand may simply be a yuppy top end market here, significant though it may be. Holden may be resigned to the fact that it can only produce a top end standard car, so long as demand exists. To be fair they have made inroads into the US pickup market as these previous owners eye Holden’s ute offering as good value, bearing in mind it can get 7.5L/100km on the highway. Horses for courses and hybrids don’t enjoy any advantage on the highway. Australians can already enjoy much cheaper(less CO2) overall motoring in a Colt,etc right now if they choose. They may well do so when it’s trade-in time in future. Higher volumes of hybrids may simply run into increasingly higher cost mineral requirements for their batteries, which carmakers would be aware of. Toyota and Honda may figure their particular niche market will pay as they witness unsatisfied demand now. How large that demand is remains to be seen as they slug it out for market share.
“, but then if I were taxing CO2e at its source, I wouldn’t cut any slack for taxing end users that didn’t burn it in the most efficient manner possible. Basically you’ll pay up front per tonne, barrel or cu. metre, depending on its most efficient burn to produce a Kw/hr of electricity, given the CO2e it emits. You want to burn it less efficiently under that regime boyoh, go right ahead.”
So basically rather than requiring power stations and steel makers report their emissions to the government you’ll make them report them to each of their coal suppliers who will calculate the appropriate tax, add it to the purchase price then collect it and pass the money on to the government.
And you think this will promote efficiency.
Socrates. in the short term the local industry will be protected by the sheer inability of hybrid manufacturers to meet demand.
Australian consumers will be well down the totem pole behind North American, Japanese and European buyers.
In the longer term, Holden motor works is probably pretty safe since it seems they’ll be upgraded to produce hybrid power trains for export.
Peopel are talking hewre abotu the Australian car industry as if it existed in vaccuu.
The Australian industry doesn’t need to re-invent hybrid technology because the Australian industry wholly owned by the US and Japanese manufacturers and has access to their technology.
The question is whether the foreign parent companies think its in their interests to continue manufacturing here.
The current level of the Australian dollar is a much more significant threat to the industry than fuel prices.
jquggin: “futures prices ought to have risen in advance of the increase of the last few years, rather than in tandem with it.”
Would futures really work that way for a commodity where producers have a large but finite reserve, some ability to stockpile, and the product itself is not perishable?
It seems to me arbitrage will pull the future price towards the current price or vice versa. If a producer knows that the price will be substantially higher next year, they should either stockpile production or cut back the rate of production. I would expect there is a fair amount of friction in any one producer increasing or decreasing production but it may average out over all.
http://en.wikipedia.org/wiki/Contango
the reason that I’m not sure that simple supply/demand explanation for the spike in fuel/food prices is totally adequate is that it has just been so sudden! Has there really been a correspondingly sudden uptake in real-time demand and decrease in real-time supply? There are a lot of explanatory factors, but what makes me interested in the idea of price speculation as an additional culprit is the timing of this sudden, unforeseen crisis. with the credit crisis making stock-markets and residential investment much less attractive, the world capital-glut is looking for places to park their cash – and perhaps this might account for the boom in commodities futures. The interesting thing – and here my understanding falls short – is the feedback between futures prices and present prices. When enough people buy futures prices at higher than present prices, commodities have to be placed in reserve, which reduces supply and drives up present prices, which in turn drives up futures prices. The financial institutions that issue these futures contracts have an interest in talking up future prices – as long as the actual prices don’t actually catch up to the talked-up expectations. But then, whether or not futures pay off could turn out in large part to be related to the demand for further futures!! And so on – one of these weird, unregulated, speculative feedback processes that just like other sorts of financial instruments, have the potential to wind up distorting economies and creating mischief. I guess the question is – this sort of thing probably couldn’t perpetuate itself during a time of soft demand and easy supply, but when things are already tight, and especially when other investments are looking even shakier, it might be able to turn a gradual price increase into something much more rapid and deadly. I might just be confusing myself, but it seems glib to just dimiss the possibility out of hand. At any rate, it sounds like a gnarly problem for an econometrician. Especially considering whole parts of the world’s population are looking at being ‘priced’ into a malthusian catastrophe – or should I say, ‘equilibrium’.
“the reason that I’m not sure that simple supply/demand explanation for the spike in fuel/food prices is totally adequate is that it has just been so sudden! Has there really been a correspondingly sudden uptake in real-time demand and decrease in real-time supply? There are a lot of explanatory factors, but what makes me interested in the idea of price speculation as an additional culprit is the timing of this sudden, unforeseen crisis.”
Food reserves were getting tight for the past several years and oil prices have been rising for around 5 years now.
The crisis didn’t develop abruptly, the media finally woke up to what was going on and decided to make a story out of it.
“So basically rather than requiring power stations and steel makers report their emissions to the government you’ll make them report them to each of their coal suppliers who will calculate the appropriate tax, add it to the purchase price then collect it and pass the money on to the government.”
No bloody fear I wouldn’t Ian. You’d tax every barrel, tonne, cu.m. at its extraction source, based on world’s best practice for turning the particular source fuel into a KWhr of electricity, setting the relativity of tax based on CO2e outcomes. Clearly then a tonne of brown coal cops more CO2e tax than a tonne of black coal comparitively speaking. What the users do with the taxed product after that is entirely their business, bearing in mind their lowest tax cost is to seek world’s best practice in burning it. That bar and hence the comparitive tax rating could be moved from time to time as world’s best practice moves. Let’s take a hypothetical example. Suppose it takes 0.5 tonne of Hunter Valley black to produce 1Kw/hr of power emitting 0.5 tonne of CO2 at the most efficient power station yet it takes 1 tonne of Leigh Creek brown to do the same at Pt Augusta, producing 1 tonne of Co2 in the process. Leigh Creek brown cops 4 times the tax penalty per tonne than a tonne of Hunter Valley black and so on with gas and oil. This is simply a technical testing issue for various grades of fossil fuels to levy the tax at the mine or well-head. What end users do with it after that is their business, just like we’re not going to fit CO2 meters to Al Gore’s Hummer and my wife’s Colt after all the oil has presunmably been capped and traded. Or are you suggesting carbon credit cards with a fixed allowance for everyone on the planet? That’s cap and trade nirvana apparently.
“the reason that I’m not sure that simple supply/demand explanation for the spike in fuel/food prices is totally adequate is that it has just been so sudden!”
You’re right to be suspicious that something else has been going on for a long time gerard and suddenly the music has stopped. I’ll let Gerry Jackson explain it to you-
“..monetary expansion has been dramatic: from March 1996 to December 2007 currency rose by 110 per cent, bank deposits by 178 per cent and M1 by 163 per cent (Bulletin Statistical Tables, Liabilities and Assets – Monthly – A1). For the same period the Reserve’s assets zoomed by 163 per cent. These are shocking figures, the ramifications of which have not even registered with the economic commentariat let alone Mr Stevens.
Recent monetary figures are now signalling an economic contraction. Currency peaked at 40 last December: for bank deposits and M1 the figures are 191.3 and 231.3 respectively. While currency is stuck at the December figure, bank deposits and M1 started to contract, falling to 186.7 and 226.1 in January, and then to 181.4 and 220.7 in March.”
Unfortunately that scenario has been repeated around the world compliments of the collective wisdom of central bankers. Such a pyramid scheme with funny money fuelling it was always going to have serious ramifications when the penny finally dropped and rising assett prices stalled. Now there’s a mad scramble to turn all that funny money into commodity money, or the next best thing, commodity streams. Austrian economists would say we told you so and now you all have to wear the unwinding of the malinvestments all that largesse has caused for so long. Either short, sharp and horrible, or long slow and painful. Which would you prefer? Mind you, it might all be out of those central bankers hands to control now.
“No bloody fear I wouldn’t Ian. You’d tax every barrel, tonne, cu.m. at its extraction source, based on world’s best practice for turning the particular source fuel into a KWhr of electricity,”
Ah so if two power plants by coal from the source and use it less efficiently they’ll actually pay less per tonne of carbon dioxide emitted.
Yes that’s much more rational.
That should read:
“Ah so if two power plants by coal from the source and one uses it less efficiently than the other they’ll actually pay less per tonne of carbon dioxide emitted.”
“Ah so if two power plants by coal from the source and use it less efficiently they’ll actually pay less per tonne of carbon dioxide emitted.”
No, I don’t think you quite get the picture, albeit a tonne of coal hopefully produces more than a Kw/hr of electricity, given current peak costs. However let’s stick with example here, with 2 power stations using Hunter black, normal cost say $100/tonne but paying an extra CO2 tax of $100/tonne, an input cost of $200/T all up. Now if station A produces worlds best that costs them 0.5 x $200=$100.00 for a Kwhr. OTOH if station B is 10% less efficient(ie using 10% more coal) that costs them 0.55 x $200=$110 for their KWhr. Station A can sell cheaper and gain market share, unless station B owners get up to pace. That’s the normal state of play anyway with any supplier. There is an increased incentive to get more efficient (ie emit less CO2), just like there is skipping the Hummer for a Colt. True you might have to wear out the Hummer a bit more first, just like existing power stations, but unfortunately we all start from here.
Furthermore if you take the Leigh Ck brown example and they’re at world’s best but suppose their coal only costs $50/T now. Notice that incurs a CO2e tax of $200/tonne, an all up cost of $250 for their Kw/hr. They’d be hoping there’s a large tyranny of distance between them and an interconnector for both Hunter stations, despite their world’s best practices, but notice the tax has reduced that distance substantially.
Ian, at some point in wandering about teh intranets, you’ve probably come across the acronym “DNFTT”.
Please consider applying the strategy that the acronym suggests.
Two things on “speculators” and “hoarding”:
– the reason the text book answer (that speculation smooths prices) is usually right in practice is that in order to make money speculating you must buy cheap and sell dear. When you buy cheap you’re pushing the price up, when you sell dear you’re pushing it down. It’s an insight popularised in the profession by Milton Friedman.
– if in fact suppliers are hoarding oil because they have strictly limited reserves and want to sell those reserves for the best price, they’re doing us a favour. The alternative is for them to flog it to us cheaply now and then have none at all to flog when it runs out. That would be far more disruptive to us than the hoarding.
Slower, simpler maths and one more time for you to troll through SJ. IF a tonne of brown and black coal, a barrel of oil and a cu.m. of gas produced a KWhr of electricity all under best burn practice and all produce X amount of CO2 in the process bar the brown coal which produces say 2X in the process and we tax them based on $100 per X of CO2 then they all increase in price to the potential user by $100 per barrel, tonne, cu.m, except for brown coal which increases by $200/T, irrespective of their current costs. Presumably we are all interested in reducing the CO2 externality here and taxing via that method will aid that purpose. If you think doing that analysis on fossil fuels and taxing at the point of extraction is all too hard, explain to this simple fellow the ease of ‘capping’ or taxing the eventual CO2, after it’s dug up, blended and shipped all over the globe and pouring from every stack and exhaust pipe. You could of course cap and trade at the mine and well head, but for some strange reason the cap fans don’t want to do that. Perhaps it’s because they don’t know what the price could skyrocket to as they screw down the caps and want a bit of wriggle room? No they want to cap the smokestacks at Pt Augusta and the Hunter which is a lot more problematic for Pt Augusta A&B than Hunter A,B,C.. no doubt. Actually more a problem for Media Mike’s working families’ power bills and desal water bills in the Saudi Arabia of uranium, but a triumvirate of enterprising fellows might have some clever suggestions to whisper in his ear about that big conundrum. Forget pricewatchers Mike. What about we sell PA’s cap and replace it with nukes with the money Mike and we can make a little more on the side selling that burnable dirt to the Chinese? Whaddya reckon Mike, or should we be talking to the Opposition? At least the Chinese would be paying this KISS troll his carbon tax while you doff your tinfoil caps to them.
Slower, simpler maths and one more time for you to troll through SJ. IF a tonne of brown and black coal, a barrel of oil and a cu.m. of gas produced a KWhr of electricity all under best burn practice and all produce X amount of CO2 in the process bar the brown coal which produces say 2X in the process and we tax them based on $100 per X of CO2 emitted then they all increase in price to the potential user by $100 per barrel, tonne, cu.m, except for brown coal which increases by $200/T, irrespective of their current costs. Presumably we are all interested in reducing the CO2 externality here and taxing via that method will aid that purpose. If you think doing that analysis on various grades and types of fossil fuels and taxing at the point of extraction is all too hard, explain to this simple fellow the ease of ‘capping’ or taxing the eventual CO2, after it’s dug up, blended and shipped all over the globe and pouring from every stack and exhaust pipe. You could of course cap and trade at the mine and well head, but for some strange reason the cap fans don’t want to do that. Perhaps it’s because they don’t know what the price could skyrocket to as they screw down the caps and want a fair bit of wriggle room? No they want to cap the smokestacks at Pt Augusta and the Hunter which is a lot more problematic for Pt Augusta A&B than Hunter A,B,C.. no doubt. Actually more a problem for Media Mike’s working families’ power bills and desal water bills in the Saudi Arabia of uranium, but a triumvirate of enterprising fellows might have some clever suggestions to whisper in his ear about that big conundrum. Forget Pricewatchers Mike. What about we sell PA’s juicy cap and replace it with nukes with the money Mike and we can make a little more on the side selling that burnable dirt to the Chinese? Whaddya reckon Mike? Or should we be talking to the Opposition? At least the Chinese would be paying this KISS troll his carbon tax while you, ever so politely, doff your tinfoil caps to them.
Of course the only thing more befitting these amenable genuflecters, would be for our enterprising trio to reward such a scintillating show of good manners, by a partnership with one of Chairman Mao’s sovereign wealth funds. Priceless!
And here’s a sample of big corpora positively salivating at the thought of it all lefties-
http://www.efinancialnews.com/usedition/index/content/2450714697
http://www.efinancialnews.com/usedition/index/content/2449266665
You go right ahead and give them all that certainty and get them in on the ground floor real quick now fellers- for the planet and the little bloke of course.