Energy

Notes toward what will become my chapter 16.

1. speculative bubble in crude oil
a. spring and early summer -- Masters' testimony
b. late summer and fall -- why the bust?
c. what policy consequences?
2. history of ethanol subsidies
a. broad coalition forms by 2010
b. Grover Norquist
3. peak oil? plateau oil? abiogenic oil?
4. realities and fantasies

Back to 1a above.

There was a bubble in crude oil prices in the summer of 2008. Some observers thought this may have tipped the US into the financial crisis of that autumn. Let's discuss this.

One school of thought in May 2008 (expressed by witnesses in hearings that month before the Senate Committee on Homeland Security and Governmental Affairs) was thgat institutional investors and commodity-price indexes had just recently become important factors in the determination of commodity prices, including those for food and fuels.

The chain of cause and effect would then be this. Various Wall Street entities such as Dow Jones, Goldman Sachs, Standard & Poors, created innovative commodity futures indexes. This allowed people or institutions to bet on an increase in commodity prices without actually having to buy something specific like cotton, or to trade even in specific derivatives such as cotton futures. No, the "index speculators" preferred to bet on the whole asset class at once, seeing it as "uncorrelated" with either bonds or stocks, and thus as a valuable addition to the portfolio.

As Michael W. Master, managing member of a long/short hedge fund, told the Homeland Security Committee, what was new about the index speculators was that they weren't concerned with traditional notions such as price per unit. They had made a portfolio allocation decision, and would "buy as many futures contracts as they need[ed], at whatever price [was] necessary," until all of the portion of their money that they had allocated to the commodities asset class was at work there. Thus, this was a form of demand separate from physical or commercial demand/supply calculations.

On January 2007 the Commodity Futures Tradings Commission changed the way it broke down its "commitment of trader" numbers, creating a new category for the newly-prominent index funds.

It is possible, then, that the sharp rise in certain prices beginning that spring owed something to the new indexes and to the rise of a new class of index speculator.

It is also possible, and I suspect probable, that the sharp rise combined a small effect from the rise of index speculators and a larger rise from old-fashioned directional speculators who thought that the index speculators would be a huge factor and who wanted to be on the same side as them.


But ... what about the sudden decline?

A Consequence of the Second Law

"The second law [of thermodynamics] establishes that the amount of useful work you can get out of a furnace depends on how much hotter things are in the furnace than on the cold side of the engine -- the cold side being the condenser, cooling tower, or whatever else is at hand to use as a dumping ground for the inevitable (and virtuous) waste....So all the gains in thermodynamic efficiency have to come from making the hot side hotter. Which means that you want to burn your fuel -- your coal, uranium, gas, oil, or whatever else may be at hand -- not just hot, but hotter, fiercely hot, as hot as you can possibly make it without melting down or blowing up all your expensive hardware."

- Peter W. Huber and Mark P. Mills, The Bottomless Well (2005).

2d-Generation Ethanol: Comments and Reply

I recently submitted to AOL Daily Finance a story about the distinctions between corn-based and cellulose-based ethanol production.

I'm happy to say that the story received a lot of hits and generated a spirited exchange in the comments section.

Instead of wading into said comments section myself, I'll reply here to some of the more persistent themes.

First, a lot of the commentors complain of what I didn't write. There's nothing there about hydrogen, or nuclear power plants, or natural gas, or shuttles to the moon to mine the resources there. The only answer is the obvious one: I did not set out to write a treatise on The Future of Fuel or anything so all-encompassing. I sought to contribute a small piece to a lot of broader puzzles. There exists a circle of investors and entrepreneurs who are confident a cellulosic ethanol breakthrough is near, and I tried to give them a voice, to encapsulate their way of viewing their market and prospects.

Second, some of the commentors were unhappy about the fact that the second-generation ethanol industry, like its precursor, is in search of public subsidies. To the cry, "No subsidies to anybody!" I am entirely in sympathy. Yet in the meantime, we live in the world "that is the case," as a great philosopher put it. My own view is that some subsidies are worse then others. Some are just plain stupid. A public subsidy that encourages some people to burn what might otherwise be other people's food is in the stupid category.

Third, some of the commentors quarreled with the idea that the creation of corn ethanol raises the price of corn as food. On this point, let me note that the distinction between corn for direct human consumption and corn for livestock consumption hardly matters. The latter simply throws an extra link into the segment of the food chain under examination. Presumably, unnecessary price increases of corn intended for either purpose is a bad thing for the ultimate consumers.

More importantly, a straightforward understanding of supply and demand would indicate that corn prices should have been rising as the use of corn for the production of ethanol moved, as it has in recent years, to 15 percent of the world's total corn supply. Empirical evidence supports this expectation. Indeed, biofuel subsidies may increase the price even of foods that aren't used to make ethanol. If some consumers switch from corn meal to wheat bread as a result of the increase in the price of the former, this increases demand and thus the price of the latter.

The OECD has estimated that "[C]urrent biofuel support measures alone [would] increase average wheat prices by about 5 percent, maize by around 7 percent and vegetable oil by about 19 percent over the next 10 years."

That's just sad.

Finally, some of the commenters (like bnordq) have understood my article and in fact proven generous in their praise of it. They have my gratitude.

The double slit experiment

Here's a fun link to an explanation of the classic two slit experiment, courtesy of the University of Colorado.

Start there, click on the green button to see the pattern, then follow the explanation as you're directed to next panel.

The gist of it is that we have to think of electrons as waves in order to make any sense of the interference pattern.

Here's another link, to another "take" on the older form of the same experiment, using light waves (or particles known as "photons") rather than matter.

"Modern photodetectors (which exploit the photoelectric effect explained by Einstein) can show individual photons plinking against the screen behind the slits in a particular spot at a particular time-just like particles. But as the photons continue striking the screen, the interference pattern gradually emerges,a sure sign that each individual photon went through both slits, like a wave."

So the same wave/particle duality appears in both matter and energy. So what? Didn't I learn this at school, decades ago, and mentally shrug it off like everybody else?

Yes, but I was callow. Here is the point. As Horgan stresses, paraphrasing John Wheeler of Princeton, it is a "physicist's choice of apparatus" that "forces the photon [or the electron] to choose" whether it is acting at a given moment as a wave or a particle. Think about that. A mindful creature, a conscious experimenter, determines the nature of the building blocks of reality by the way in which the experimenter seeks to measure said blocks.

This is fatal to reductionism. It is simply incoherent to say that A is "nothing but" B unless B itself can be understood without reference to A. What if we string them together? A is nothing but B, which is nothing but C, which is nothing but D. This string becomes incoherent if we end up using A-dependent terms in our discussion of D.

Yet that is exactly the situation we face in the relations among the sciences. If we say "mind is nothing but a particular manifestation of life, life is nothing but a particular manifestation of matter, matter is nothing but the way certain very tiny particles interact," then we ought in principle to discuss the interactions of those tiny particles without intrusive talk about "decisions" or "knowledge" or other mind stuff. Yet we can't. We end up saying things like this (Horgan quoting a scientist at the University of Rochester), "The quantum state reflects not only what we know about the system but what is in principle knowable."

Since this epistemic circle plainly does exist, the once-dreamt-of reduction has failed, and it is the case that there is more to this world than particles bouncing around and various manifestations thereof. We are of course free to speculate about the nature of that "more."

Recommended Reading

Just a quick link for today.

On getting Beyond Enron in our understanding of energy derivatives trading.

The authors of that piece cite an article of mine in a footnote, so they're to be commended for their good taste.

Plastic into Oil

"Just one word, Benjamin. Plastics."

That line from The Graduate has acquired new meaning in recent days, as a start-up company has claimed to have invented a gizmo involving high-frequency microwaves that will turn plastics into 20% diesel oil and 80% combustible gas. To learn more, see their SEC filings.

http://www.globalresourcecorp.com/Investor%20Relations%20SEC%20Filings.html

The Hawk-10, as they call it, is so far a very rudimentary non-market-ready thing, but the idea is both to reduce the amount of trash in landfills and numbers of abandoned junk piles, as well as to a lessor extent, provide some diesel oil.

By itself, you might well say, "big deal" to this bit of news. There are lots of companies founded on bright ideas which, for a variety of reasons, never come to fruition. In this case, the bright idea has some irony to it. Taking the crude oil, turning some of it into plastics, then when its life as a kitchen utensil is done and its ready for a landfill, turning some of it into diesel oil, losing ground to the law of entropy at each stage, sounds like an expensive way to get some oil.

Wouldn't it almost always be easier to recycle something plastic into something else plastic, rather than recycle the plastic itself into oil?

The only reason this came to my attention is because some right wingnuts have decided that this is yet more proof of a liberal media conspiracy. The Hawk-10, you see, hasn't been getting blaring head-lines, which proves that the press doesn't want good news, only wants to spread environmental alarmism etc.

http://newsbusters.org/node/13842

Sure it does. And my trip to Dublin last month proves that I'm an overgrown leprechaun.

Sur'en I'm a wishing the top o' the mornin to all the wingnuts, an' normal folk too.