Peak Oil - scaremongering again

Aljazeera has jumped on the peak oil bandwagon! Their feature "the scourge of peak oil" is alarmist and lacks economic justification. Dahr Jamail and the chaps in Doha did not do their homework this time, drafting a scaremongering senseless piece.

World oil production - 1970-2010

Many of the arguments proposed have long been discredited by economists and the concept is bogus modelling. The Hubbert curve is a mere Malthusian curiosity. We have reserves for decades and as the prices increase, so will reserves, as new exploration is justified and deposits with higher extraction costs become viable. Scarcity of cheap reserves may slowly rise prices, but brings other reserves to the market. New technology changes both supply and demand and substitution cannot be ignored. Economic exhaustion is not anywhere near, and economic exhaustion will precede physical exhaustion.

Anyway, today's prices already include the best available information about the market, so they will not have exponential growth as prophets of doom try to spread to attract followers.

Marion King Hubbert - geoscientist who introduced the Peak Oil concept

India doubles its Uranium reserves

Uranium ore

India's Atomic Energy Commission disclosed a new uranium discovery in Tummalapalle in Kadapa district, state of Andhra Pradesh, with reserves of 150.000 tonnes effectively doubles India's Uranium reserves.

India's nuclear energy programme is under-supplied and the new source is most welcome to keep it viable and limit its dependence from foreign suppliers. On the nuclear weapons front, India's pursuit of a nuclear triad is also increasing demand: soon the first of its Arihant class of nuclear-powered, nuclear-armed submarines will be operational, more will follow.

Clearly good news for India, but may yet prove to be a factor in global instability. India first nuclear weapon was designated PNE, for 'peaceful nuclear explosive', such irony may fail to make its neighbours smile.

Pakistan, although lacking indigenous uranium, may feel compelled to compete. With the country on an uncontrolled downward spiral, some in Islamabad may take less than reasonable decisions, and more seriously we are all wondering when will a Pakistani nuclear warhead reach the wrong hands. China too, may see this as a threat, specially in terms of projected power and rivalry in the oceans, though we shouldn't expect any actions from the People's Republic that defy either prudence or intelligence.

INS Arihant - Indian nuclear submarine under construction (based on the Soviet Akula class)

EU to cap airline greenhouse gas emissions

Contrails of a McDonnell Douglas aircraft (Contrails are just vapour, CO2 is invisible)

As of next year airlines that fly in and out of the European Union must come under the European Union’s Emissions Trading Scheme (ETS). Those based outside the EU can opt out if they prove to abide to similar regulation in their home countries. The entire industry in both Europe and abroad is trying to have the new regulations annulled or at least postponed.

All large polluting sectors in the EU are already subject to the ETS, but the airline industry works in a global way, so subjecting foreign airlines to it will cause all kinds of conflicts and may invite retaliation in several forms. On the other hand, subjecting only EU based airlines to the ETS would make them noncompetitive in routes shared with non-EU competitors.

Charging for carbon emissions is a practical method to reduced them. The debate on price versus quantity instruments in tackling climate change has been on for decades. Abatement costs might change in the future due to: fuel prices, domestic energy demand, energy saving technologies, etc. A carbon tax fixes the marginal cost of abatement, but allows the quantity of abatement to vary with economic conditions. A cap fixes the amount of abatement instead. Trading emissions in a market allows for cuts where they are most efficient, i.e. cheaper. Once a decision is taken by policy makers to tackle emissions both a cap and trade scheme or a carbon taxes are options. Economics theory shows these are equivalent only under certainty. However, certainty is a scarce commodity and cap and trade can lead to high volatility in the markets.

The Economist explains this well (Duffing the Cap, 15/06/2007): "taxes deal more efficiently than do permits with the uncertainty surrounding carbon control. In the neat world of economic theory, carbon reduction makes sense until the marginal cost of cutting carbon emissions is equal to the marginal benefit of cutting carbon emissions. If policymakers knew the exact shape of these cost and benefit curves, it would matter little whether they reached this optimal level by targeting the quantity of emissions (through a cap) or setting the price (through a tax). But in the real world, politicians are fumbling in the dark. And that fumbling favours a tax. If policymakers set a carbon tax too low, too much carbon will be emitted. But since the environmental effect of greenhouse gases builds up over time, a temporary excess will make little difference to the overall path of global warming. Before much damage is done to the environment, the carbon tax can be raised. Misjudging the number of permits, in contrast, could send permit prices either skywards or through the floor, with immediate, and costly, economic consequences. Worse, a fixed allotment of permits makes no adjustment for the business cycle (firms produce and pollute less during a recession). Cap-and-trade schemes cause unnecessary economic damage because the price of permits can be volatile. Both big cap-and-trade schemes in existence today—Europe's Emissions-Trading Scheme for carbon and America's market for trading sulphur-dioxide permits (to reduce acid rain)— suggest this volatility can be acute. America has had tradable permits for SO2 since the mid-1990s. Their price has varied, on average, by more than 40% a year. Given carbon's importance in the economy, similar fluctuations could significantly affect everything from inflation to consumer spending. Extreme price volatility might also deter people from investing in green technology. Even without the volatility, some economists reckon that a cap-and-trade system produces fewer incentives than a carbon tax for climate-friendly innovation. A tax provides a clear price floor for carbon and hence a minimum return for any innovation. Under a cap-and-trade system, in contrast, an invention that reduced the cost of cutting carbon emissions could itself push down the price of permits, reducing investors' returns."

Though some Economics disagree, Pindyck in his 2006 paper 'Uncertainty in Environmental Economics', states: "Weitzman (1974) [...] showed that in the presence of cost uncertainty, whether a price-based instrument or a quantity-based instrument is best depends on the relative slopes of the marginal benefit function and marginal cost function. If the marginal benefit function is steeply sloped but the marginal cost function is relatively flat, a quantity-based instrument (e.g., an emissions quota) is preferable: an error in the amount of emissions can be quite costly, but not so for an error in the cost of the emissions reduction. The opposite would be the case if the marginal cost function is steeply sloped and the marginal benefit function is flat. Of course in a world of certainty, either instrument will be equally effective. [emphasis added] If there is substantial uncertainty and the slopes of the marginal benefit and cost functions differ considerably, the choice of instrument can be crucial."

Anyway, in the big picture airlines only account for about 2% of greenhouse gases emissions, so maybe we could focus on more serious culprits, remember the Pareto principle?

Leon Panetta: 'slightly' late

Leon Panetta and the Flag of al-Qaeda

The new US secretary of defense, Leon Panetta, didn't waste time in Arlington, VA or across the Potomac river and was quickly on the ground in Afghanistan.

Furthermore he seems to have a strategy against Al-Qaeda!

Panetta says that the defeat of al-Qaeda is within reach. For this goal to be achieved he gathers killing or capturing "around 10 to 20 key leaders" of Al-Qaeda and its branches will suffice.

All very well, but did Panetta look at the calendar lately?

This strategy is almost 10 years late! Such actions should have been done long ago, before any invasion, when Al-Qaeda was still emerging.

The misguided decision to declare war on terror opened a huge Pandora box with many sub-compartments. Full scale warfare created more more enemies of the West than it eliminated, while sacrificing the moral high-ground  in places like Guantanamo bay. The declaration of war made a rag-tag bunch of Islamic militants once financed, armed and trained by the US feel that they could fight a war with the West on equal terms. This empowerment was fundamental for Al-Quaeda. Should an approach based on intelligence, the judiciary and the modern tools of special-ops have been used from the start, terrorists would never have been given the glamour and glorification they got, they would be simple criminals and we would be re-assured of our values.

The acts of the US government since 9/11 have resulted in the alienation of the Muslim world against the west. Every Muslim can become a Jihadist by his own decision at any moment, Al-Quaeda is now a personal affair and an organized framework in not a requirement. This is now almost irreversible. If 10 or 20 leaders are killed, the odds are even more will take their place.

Still it is good to see that someone with a background in intelligence, justifies the word. A clever Sicilian-American, probably signore Panetta has preached this gospel before (in his CIA hat), to deaf ears and empty brains in DC. Probably this idea entered presidential circle "brains" only after the Abbottabad raid.

We are not optimistic, but we sincerely wish Mr Panetta, the best of luck!
His luck is also the luck of the Western world.

South Sudan: welcome to the world

A bit of Africa that manages to escape the Islamic sphere!
That is worth celebrating!
Not since the liberation of East-Timor from Indonesia have we seen such an event!
Lets home some decent governance will follow...

Best wishes for South-Sudan!

... and don't forget: make it simple for visitors, e.g. visas on arrival at Juba airport would be a good sign!
A few tourists won't harm the economy, or do you intend to live only from oil and food aid?

man holds a Southern Sudan Flag

The Japanese find vast deposits of Rare Earths in the Pacific

With China enjoying a near monopoly over Rare Earths' production, news of alternative sources are very welcome.

The deposits we located following a survey by a team from the University of Tokyo. The Rare Earths are in the bottom of the Pacific, in international waters east and west of Hawaii, and east of French Polynesia, at depths of 3,500 to 6,000 metres.

However finding new reserves means nothing if their recovery costs are not competitive, as vast other sources exist on shore that are not being exploited (because both costs and environmental issues). Technology for recovery of such deposits is in its early stages, so cost are bound to be non-competitive with the prices offer by the People's Republic.

Anyway in a crisis situation, where like last year, China imposed a short lived embargo on Japan, alternative sources may be the only sources, so there is on more backstop solution.

Furthermore the scale of the discovery may be a game changer in terms of physical scarcity considerations: the University of Tokyo estimates these deposits to contain 80 to 100 billion tonnes of Rare Earths, while current viable reserves are about 110 billion tonnes (USGS). Nevertheless one major issue is still unclear: exactly which elements were found.

As time progresses we'll see how important this discovery will be, but as usual in Economics, the "crisis" will probably solve itself. Prices are rising, and less competitive mines will be competitive again entering the positive rents area. Molycorp is already restarting operations at the Mountain Pass mine in California, certainly others will follow. No physical scarcity is in sight!

table of rare earth elements

See this older post for more on rare earths.