The record levels that oil price has recently hit is surprising; the fact that oil price has been rising over time, is not. Way back in 1931, the economist Harold Hotelling argued that prices of exhaustible resources should be rising over time. His fundamental equation (in modified form) states that:
Growth rate of net resource price = discount rate.
The net resource price is simply the market price of the resource, less the marginal cost of extraction. The discount rate is the "rate of time preference". It is the amount by which the subjective value of one peso falls if it is received next period, rather than now. This can be proxied by the interest rate. An alternative way to express this is:
Net resource price now = (1 + discount rate) x (Net resource price last period).
Extracting one unit of the resource now rather than a while ago, requires that the net price now exceed the previous net price by the rate of time preference. If the marginal cost of extraction is constant, then the net price will rise only if the market price rises.
Short-run price increases can be explained by rising demand, or rising marginal costs of extraction, or both. Because of this, the oil market appears to have undergone a permanent upward shift in the trend line. Speculative forces also introduce short-term volatility in oil prices. Nevertheless, Hotelling's equation supposedly captures the slope of that long term trend line.
The story however does not end there. Rising prices signal to consumers (and producers) to adjust their activities by searching for relatively cheaper substitutes. Hence the search for renewable energy sources to replace oil, at least at the margin. The price signal - and consequent behavior adjustment - is precisely what averts a "collapse" in consumption as the resource is finally exhausted.
Unfortunately our baser instincts drive us to interfere with this economic process. Through our government, we want those greedy oil companies to profit less. We also accept interventions to impose "energy conservation", like banning this or that "frivolous" use of energy (Christmas lights, driving at the speed limit, etc.) This is a lot of wasted energy (pun intended). And taxing away those profits tells oil companies to shy away from risky ventures like oil exploration - precisely the set of activities needed to keep price growth in check. Ultimately some want the government to own all the oil companies - yeah, like that's gonna work.
I'm not saying that all intervention is bad. Market failures may justify some interventions, say in research and development, setting up infant renewable resource industries, imposing a tax on carbon emissions, and so on. But the distinction between bad and good intervention is subtle. Too often it vanishes in the scramble to appear to do something, anything, against $100 oil. Folks, let that $100 sign tell you what to do.
Showing posts with label Environment and natural resources. Show all posts
Showing posts with label Environment and natural resources. Show all posts
Wednesday, November 14, 2007
Wednesday, November 07, 2007
The scarcity of oil runneth over
Once energy was cheap - cheap enough that the idea of growing plants for their energy seemed absurd. Obviously, plants are grown mostly for food. For thousands of years thus it has been, so shall it ever be.
But now energy is dear - dear enough that some plants in some places can be profitably grown for energy, creating biofuels. This takes space and other resources away from growing plants for food. The old conventions are being abolished. The agricultural landscape has been permanently altered.
Much to the discomfort of many. The idea of farming to feed cars is somehow deplorable compared to farming to put food on the table. But this is knee-jerk alarmism. Consider:
1. If the criterion is getting the most quantity of food out of given farmland, then even now we are not doing it. The reason? We eat animals. And animals need to be fed. Either with plant feed - which often takes away land for growing food for direct consumption - or worse, other animals, which themselves need to eat plants. And the feed conversion ratio is (aside from poultry) is much higher than 1 (reaching up to 8 in the case of ruminants). Anybody complaining about the corn we feed to hogs rather than directly to people?
Come to think of it, everytime we set up a shopping mall, a parking lot, a school, a laboratory, we are taking away land that could be used for farming. Bad for "food security". Tsk, tsk.
2. There are a lot of distortions introduced by policies. Particularly notorious are the biofuels incentives in the US, which artificially makes it profitable for some US farmers to plant for energy rather than food. Take away these incentives and we'll see a lot less of this diversion from food to fuel. Rather other options may be explored, such as growing energy crops on marginal lands. (There is some promise from crops such as sweet sorghum and Jatropha plant for such options.)
3. Food will get more expensive. Bad for consumers. But this is good for farmers. Without deeper analysis, we can't tell whether the net effect is anti-poor.
My best guess is, biofuels will play a role in the overall energy mix, but not a major one (at least within the energy sector). However within the food sector the emergence of biofuels will have long term implications for the trend in future food prices. The era of cheaper and cheaper food is over, as well.
But now energy is dear - dear enough that some plants in some places can be profitably grown for energy, creating biofuels. This takes space and other resources away from growing plants for food. The old conventions are being abolished. The agricultural landscape has been permanently altered.
Much to the discomfort of many. The idea of farming to feed cars is somehow deplorable compared to farming to put food on the table. But this is knee-jerk alarmism. Consider:
1. If the criterion is getting the most quantity of food out of given farmland, then even now we are not doing it. The reason? We eat animals. And animals need to be fed. Either with plant feed - which often takes away land for growing food for direct consumption - or worse, other animals, which themselves need to eat plants. And the feed conversion ratio is (aside from poultry) is much higher than 1 (reaching up to 8 in the case of ruminants). Anybody complaining about the corn we feed to hogs rather than directly to people?
Come to think of it, everytime we set up a shopping mall, a parking lot, a school, a laboratory, we are taking away land that could be used for farming. Bad for "food security". Tsk, tsk.
2. There are a lot of distortions introduced by policies. Particularly notorious are the biofuels incentives in the US, which artificially makes it profitable for some US farmers to plant for energy rather than food. Take away these incentives and we'll see a lot less of this diversion from food to fuel. Rather other options may be explored, such as growing energy crops on marginal lands. (There is some promise from crops such as sweet sorghum and Jatropha plant for such options.)
3. Food will get more expensive. Bad for consumers. But this is good for farmers. Without deeper analysis, we can't tell whether the net effect is anti-poor.
My best guess is, biofuels will play a role in the overall energy mix, but not a major one (at least within the energy sector). However within the food sector the emergence of biofuels will have long term implications for the trend in future food prices. The era of cheaper and cheaper food is over, as well.
Monday, October 09, 2006
Edmund Phelps: Bank of Sweden Winner for 2006
No honor in economics is more prestigious than the Bank of Sweden Prize, a.k.a. the "Nobel" prize in economics.
Winner for 2006 is Edmund Phelps (one of the rare single winners).
Frankly I just dimly recall Phelps from the "Friedman-Phelps" expectations-augmented Phillips curve. Then after reading the press release, I remember his name associated with the "golden rule" of growth theory. To summarize: he won for examining long-run trade-offs, between inflation and unemployment, and between consumption and investment.
For the inflation-unemployment trade-off he said: no such thing in the long run. Rather unemployment is held at the "natural rate" (later defined by Friedman as the unemployment rate "ground out by Walrasian equilibrium"P.
For the consumption-investment trade-off he said: if you don't believe in intergenerational discounting, you can adopt the "golden rule" in which equalized per capita consumption is maximized forever. Neat. This was a direct inspiration of the "sustainable development" idea of current consumption that does not sacrifice future consumption.
Just one problem: Phelps' prize is way overdue, and therefore dated. He could have won with Friedman, or Lucas, or some other monetarist-RBC type; or like Hayek and Myrdal, share it with Taylor or Modigliani (except he shared it with Miller already) or some other Keynesian-type.
The Committee should have been more forward-looking and rewarded recent work. Bhagwati, Krugman (trade), Fama (finance), Roemer (growth), Williamson, Baumol (industrial orgn.) I guess they tired of that already with the past 3 or 4 years of Bank of Sweden prizes.
Nevertheless my warmest congratulations.
Winner for 2006 is Edmund Phelps (one of the rare single winners).
Frankly I just dimly recall Phelps from the "Friedman-Phelps" expectations-augmented Phillips curve. Then after reading the press release, I remember his name associated with the "golden rule" of growth theory. To summarize: he won for examining long-run trade-offs, between inflation and unemployment, and between consumption and investment.
For the inflation-unemployment trade-off he said: no such thing in the long run. Rather unemployment is held at the "natural rate" (later defined by Friedman as the unemployment rate "ground out by Walrasian equilibrium"P.
For the consumption-investment trade-off he said: if you don't believe in intergenerational discounting, you can adopt the "golden rule" in which equalized per capita consumption is maximized forever. Neat. This was a direct inspiration of the "sustainable development" idea of current consumption that does not sacrifice future consumption.
Just one problem: Phelps' prize is way overdue, and therefore dated. He could have won with Friedman, or Lucas, or some other monetarist-RBC type; or like Hayek and Myrdal, share it with Taylor or Modigliani (except he shared it with Miller already) or some other Keynesian-type.
The Committee should have been more forward-looking and rewarded recent work. Bhagwati, Krugman (trade), Fama (finance), Roemer (growth), Williamson, Baumol (industrial orgn.) I guess they tired of that already with the past 3 or 4 years of Bank of Sweden prizes.
Nevertheless my warmest congratulations.
Tuesday, September 19, 2006
Less is more
Here is a column by Federico Pascual from the Philippine Star, about fisheries in the Philippines. Since the Star is not known for permalinking, let me reproduce the column below in full (except for those pesky asterisks).
Full disclosure: I have just written a policy paper on fisheries in the Philippines, for the Economic Policy Reform and Advocacy Project of Ateneo de Manila and the USAID. Plenty of what I've written disagrees with the column. (When I have time I'll revamp my personal site and upload that paper.)
First, a few minor points: The writer blames the depletion of fish resources on "lazy Filipino fisherman." So it's possible to overfish while being lazy? That sounds fishy. The truth is a fisherman's life has usually been hard, because they are competing with other fishers to catch the limited fish. Therein lies the abuse of fish stocks, that is by no means unique, either to Filipino fishers, lazy fishers, or diligent fishers. Also: the net method is limited to small tunas. The large tunas - which is the bulk of tuna catch in the country - are caught by handline (fishing reel and rod) or longline (a long fishing line with a series of hooks).
Okay moving on to something more substantive: market-wise, isn't aquaculture obviously a threat to capture fisheries? This seems to have been completely missed by the writer. Farmed fish and wild-caught fish are substitutes. Now if fishers are able to switch to fish farming, then aquaculture would simply be a continuation (or even improvement) of their livelihoods. In practice though the skills for fishing and for fish farming are very different; one is neither a necessary not a sufficient preparation for the other.
Is fish marketing dominated by powerful traders dictating the price? A study by the ADB suggests that, contrary to this knee jerk opinion (the typical newspaper columnist sees monopoly power always and everywhere), fish trading is a competitive market.
Finally we get to the main point of the article, which has been provoked by a recent rationalization plan (which I have read) for the Department of Agriculture (DA). The plan calls for streamlining the DA bureaucracy as a whole (not specific to the fisheries bureau). That is, the principle is getting the DA out of private sector functions and local government functions. Now in the Philippines, fisheries management of inshore waters (0 - 15 km from the shore) has been delegated to local governments. Furthermore agricultural extension - including for aquaculture - has similarly been devolved. The rationalization simply calls for a structure more consistent with these realities. Moreover the DA will be renamed the Department of Agriculture and Fisheries, the more to emphasize the parity between crops/livestock and fish in the various functions of the reorganized Department.
The writer belongs to the all-too-common school of thought, that "more government" is the answer to every problem. Consider this telling quote: "The way to do it is certainly not to shrink BFAR. On the contrary, we should expand it and assign it food and industry targets commensurate to its upgraded status." Man oh man does that make me wince. Unfortunately this perspective misses the fact that government is often part of the problem. One of the best things that could happen to a society is breaking this culture of control.
**********************************************************
Full disclosure: I have just written a policy paper on fisheries in the Philippines, for the Economic Policy Reform and Advocacy Project of Ateneo de Manila and the USAID. Plenty of what I've written disagrees with the column. (When I have time I'll revamp my personal site and upload that paper.)
First, a few minor points: The writer blames the depletion of fish resources on "lazy Filipino fisherman." So it's possible to overfish while being lazy? That sounds fishy. The truth is a fisherman's life has usually been hard, because they are competing with other fishers to catch the limited fish. Therein lies the abuse of fish stocks, that is by no means unique, either to Filipino fishers, lazy fishers, or diligent fishers. Also: the net method is limited to small tunas. The large tunas - which is the bulk of tuna catch in the country - are caught by handline (fishing reel and rod) or longline (a long fishing line with a series of hooks).
Okay moving on to something more substantive: market-wise, isn't aquaculture obviously a threat to capture fisheries? This seems to have been completely missed by the writer. Farmed fish and wild-caught fish are substitutes. Now if fishers are able to switch to fish farming, then aquaculture would simply be a continuation (or even improvement) of their livelihoods. In practice though the skills for fishing and for fish farming are very different; one is neither a necessary not a sufficient preparation for the other.
Is fish marketing dominated by powerful traders dictating the price? A study by the ADB suggests that, contrary to this knee jerk opinion (the typical newspaper columnist sees monopoly power always and everywhere), fish trading is a competitive market.
Finally we get to the main point of the article, which has been provoked by a recent rationalization plan (which I have read) for the Department of Agriculture (DA). The plan calls for streamlining the DA bureaucracy as a whole (not specific to the fisheries bureau). That is, the principle is getting the DA out of private sector functions and local government functions. Now in the Philippines, fisheries management of inshore waters (0 - 15 km from the shore) has been delegated to local governments. Furthermore agricultural extension - including for aquaculture - has similarly been devolved. The rationalization simply calls for a structure more consistent with these realities. Moreover the DA will be renamed the Department of Agriculture and Fisheries, the more to emphasize the parity between crops/livestock and fish in the various functions of the reorganized Department.
The writer belongs to the all-too-common school of thought, that "more government" is the answer to every problem. Consider this telling quote: "The way to do it is certainly not to shrink BFAR. On the contrary, we should expand it and assign it food and industry targets commensurate to its upgraded status." Man oh man does that make me wince. Unfortunately this perspective misses the fact that government is often part of the problem. One of the best things that could happen to a society is breaking this culture of control.
**********************************************************
Upgrade fisheries bureau to dep't, not downgrade it
BIG JOB AHEAD: Instead of downgrading the Bureau of Fisheries and Aquatic Resources (BFAR) as planned by supposed experts at the agriculture department, the administration should upgrade it into a full-fledged department.
Humanity having despoiled the land, the future of the world’s food supply is the sea. There lie in our waters untapped resources that far exceed the food (among other) requirements of the growing population.
Surrounded by one of the world’s richest marine food banks, and with a rice-and-fish-eating population facing a coastline twice as long as that of the United States, we cannot overemphasize the need to conserve and develop our fisheries and aquatic resources.
The way to do it is certainly not to shrink BFAR. On the contrary, we should expand it and assign it food and industry targets commensurate to its upgraded status.
The Arroyo administration may want to have the distinction of having originated a two-pronged approach to the stubborn food problem -- agriculture (land-based) and aquaculture (water-based).
AQUA VERSION: In agriculture -- as in farming -- we prepare the soil, plant, tend to the crops, wait, then harvest. That takes time, and time is not always an element that we can compress.
Out there in the open sea (at least in those areas still teeming with fish), our fishermen simply go out, throw their nets and pull in the fish. No planting, no waiting.
The simplicity of the operation is probably one of the reasons why many lazy Filipino fishermen had taken the sea for granted and abused it. Now the children of these misguided fishers have to sail out farther to catch anything.
Aquaculture is akin to agriculture in at least one sense: We also prepare a fish farm or aquatic site, choose the seedlings, plant, wait and harvest the fish (or such crustaceans as crabs and shrimps or some shellfish) after caring for them over a certain period.
The fish (used here as a generic term to include crabs, shrimps, shellfish and the like) are taken care of or cultured in man-made cages, pens or ponds or some other controlled enclosure.
The fish farmer operates in a controlled environment that more or less ensures predictable results -- provided no extraneous elements such as pest, poisoning, or such weather disturbances as typhoons wreck the plans.
RIVERS OF TUNA: The case of tuna fishermen is one good argument for giving our fisheries industry the attention and assistance it deserves.
Countless tuna swim together like a giant current, like a surging river, in known paths or patterns in the open sea. Their number is so great it defies counting.
It so happens that that great river of tuna passes right through our territorial waters! Allah is good, indeed!
Our fishermen know where these rivers of tuna pass in an endless current. If properly-equipped, all that our fishermen have to do is go to the site, throw their nets across the passing tuna and haul in as much as their boats can carry.
These fishermen do not have to plant and wait -- like farmers -- before they can harvest to their satisfaction.
But this Pinoy operation is almost primitive from the point of view of modern-day deep-sea fishing. For one, while our fishermen know the sea intimately, they are handicapped by their lack of adequate vessels, gear and marketing network.
A full-time fully-empowered aquaculture department can do wonders in making our fishermen fishers for the region and beyond.
PUEDE NA?: Inland, where we have lakes, rivers and impoundments, we have scattered family-owned farms that raise hito, tilapia, crabs, shrimps and other common species sold in wet markets and served in restaurants.
On their own, they may be “puede na” with their small-scale operation, but there is a dearth of research and development and state assistance that could enable them to improve techniques, increase yield and boost their income.
These small operators do not get the assistance and protection they deserve as contributors to the national food supply. This is just talking from an inward perspective, not yet dreaming of having these producers grow into exporters.
They cannot go into research as there is no time or money for that. Many of them just ask around, attend seminars and generally play it by ear. There should be a better organized government effort to reach out to them so they could become more productive.
LAKE PENS : In Laguna de Bay, the biggest lake in the country and the closest to the national capital, a confusion of fishpens and corrals is choking it.
Small fishermen whose families have depended for generations on the lake for their livelihood have found themselves shunted away from their traditional grounds.
Efforts to remove illegal and improperly built or located fishpens have failed, because some operators are too powerful to be touched.
I do not know if this is still true, but there was a time when even presidential guards were being used by some people close to Malacanang to guard their fishpens.
Environment and Natural Resources Secretary Angelo Reyes said days ago he was serious about restoring sanity to the lake, meaning he would remove pens that should not be there. But until we see results, we should treat that as just one of those plans.
LESSONS LEARNED: As in agriculture where most farmers do not have the means to take their produce to the market, small fish farm operators have to depend on middlemen to buy their catch at prices that the merchants dictate.
This is not to say that the government should usurp the role of private middlemen, but there should be some way to enable small operators to develop a marketing network of their own.
A full-blown aquaculture department will be in a better position to devise ways to give small operators access to easy credit, better seedlings (fry), better techniques. A department can help them work out a more efficient marketing scheme.
A new aquaculture department can learn many parallel lessons from the agriculture department under which it now functions.
VILLAFUERTE OBJECTS: In Congress, Camarines Sur Rep. Luis Villafuerte, chairman of the House committee on fisheries and aquaculture, has rejected the plan to downgrade the BFAR, calling the idea “ill-considered and foolish.”
“Our sense is that diminishing BFAR would be highly counterproductive,” the Bicol congressman said. “We may in fact have to eventually upgrade the agency and establish a new, full-grown department dedicated entirely to developing fisheries.”
He added: “Being an archipelago, fishing and allied industries are of strategic importance to the national economy. By our geographical nature, thousands of coastal communities also subsist daily on our marine resources.”
“In fact, in terms of value, fisheries now account for almost 25 percent of our total agricultural output. And going forward, we are counting on the sector to further enlarge its share (of gross agricultural yield).”
Data from the Bureau of Agricultural Statistics indicate that the country’s fisheries production grew rapidly from just 2.6 million metric tons in 1998 to over four million MT in 2005.
BFAR UNITS: Villafuerte pointed out that less and less land is becoming available for farming. “Thus, we really have no choice but to increasingly rely on fisheries and aquatic resources to produce adequate food supply, fight hunger and ease poverty.”
The agriculture department earlier disclosed a plan to lower BFAR from a line to a mere staff bureau, and to transfer its regulatory services to a new, smaller office. Its field offices, now self-operating, would be put directly under DA regional directors.
The Fisheries Code, also known as RA 8850, upgraded BFAR from a staff to a line bureau in 1998.
At present, BFAR also oversees the Fisheries Technology Center, National Freshwater Fisheries Technology Center, National Inland Fisheries Technology Center, National Marine Fisheries Development Center, National Integrated Fisheries Technology and Development Center, National Seaweed Technology and Development Center, Fisheries Biological Center and the Mindanao Freshwater Technology Center.
Friday, September 08, 2006
The bang versus the whimper
There are two ways to die. One is by the gradual deterioration of bodily function in terminal illness or senescence. The other is by suffering a trauma that causes a sudden collapse in bodily functions. The neomalthusian notion of an ecological collapse of modern civilization follows the latter analogy.
The collapse is deemed to be self-induced, hence the related notion of "overshoot": a society is able to exhaust its resource base at high levels of activity and consumption; then exhaustion is reached, leading to a sudden drop in consumption and population size. The standard reference for this phenomenon is still the 1970s work The Limits to Growth , which has recently been updated.
Economic theory isn't very welcoming of the concept of overshoot-collapse. Rather, the price system would ration out a disappearing (exhaustible) resource. As it gets scarcer, it gets harder to extract, so the cost and price go up, making people skimp on it more. More than that: if conditions of scarcity become certain, such that future prices are sure to increase, owners of long-term rights to the resource would (as rational decisionmakers) hold off on extracting a lot today in anticipation of better prices next year (or decade or...)
Think of oil. It is said that the Saudi's are just extracting the oil as fast as they can, to create the illusion of big reserves. Nonsense. If peak oil has been reached then oil prices are on a long term upward trend. The owners would therefore keep their oil extraction in check. (If you held reserves to a trillion barrels of oil, wouldn't you?)
Now two things can happen: either technological change succeeds (under the whip of high resource prices) in finding abundant substitutes; or it fails, and society lives with escalating prices, converging to what would in practice mean zero extraction of the resource. (Think of petrol at US$ 1,000 per liter.) The latter scenario is the whimper version of society's demise - a long slow adjustment back to near pre-industrial levels of production, consumption, and population. (Hey, nearly two billion people in the planet are already at this standard of living!) Interestingly, the whimper version gives a lot of time for society to undertake the social and technological innovations to deal with tightening resource scarcity. The bang version obviously doesn't.
So how will our civilization end?
Between the conception
And the creation
Between the emotion
And the response
Falls the Shadow
Life is very long
Between the desire
And the spasm
Between the potency
And the existence
Between the essence
And the descent
Falls the Shadow
For Thine is the Kingdom
The collapse is deemed to be self-induced, hence the related notion of "overshoot": a society is able to exhaust its resource base at high levels of activity and consumption; then exhaustion is reached, leading to a sudden drop in consumption and population size. The standard reference for this phenomenon is still the 1970s work The Limits to Growth , which has recently been updated.
Economic theory isn't very welcoming of the concept of overshoot-collapse. Rather, the price system would ration out a disappearing (exhaustible) resource. As it gets scarcer, it gets harder to extract, so the cost and price go up, making people skimp on it more. More than that: if conditions of scarcity become certain, such that future prices are sure to increase, owners of long-term rights to the resource would (as rational decisionmakers) hold off on extracting a lot today in anticipation of better prices next year (or decade or...)
Think of oil. It is said that the Saudi's are just extracting the oil as fast as they can, to create the illusion of big reserves. Nonsense. If peak oil has been reached then oil prices are on a long term upward trend. The owners would therefore keep their oil extraction in check. (If you held reserves to a trillion barrels of oil, wouldn't you?)
Now two things can happen: either technological change succeeds (under the whip of high resource prices) in finding abundant substitutes; or it fails, and society lives with escalating prices, converging to what would in practice mean zero extraction of the resource. (Think of petrol at US$ 1,000 per liter.) The latter scenario is the whimper version of society's demise - a long slow adjustment back to near pre-industrial levels of production, consumption, and population. (Hey, nearly two billion people in the planet are already at this standard of living!) Interestingly, the whimper version gives a lot of time for society to undertake the social and technological innovations to deal with tightening resource scarcity. The bang version obviously doesn't.
So how will our civilization end?
Between the conception
And the creation
Between the emotion
And the response
Falls the Shadow
Life is very long
Between the desire
And the spasm
Between the potency
And the existence
Between the essence
And the descent
Falls the Shadow
For Thine is the Kingdom
Tuesday, September 05, 2006
Rehabilitating the neomalthusian nightmare
I'm finally getting around to reading Jared Diamond's Collapse. Unlike his earlier Guns, Germs, and Steel, this one apparently has had mixed reviews from economists. I'm a big fan of the latter, and was drawn in to the former by the same enthralling and deceptively simple style. Now I'll just have to see whether the Diamond's arguments stand firm or fall over. One question: is it a Malthusian book as many decry? Just after reading the first chapter I know it's not that at all.
Thursday, August 31, 2006
Back to the future in energy: biofuels
Bioenergy is obtained from materials originating from living or newly-harvested organisms. These include oils, fats, fibers, residues, wastes, and the like. The International Energy Agency (IAE) points out that two hundred years ago, virtually all energy consumption originated from bio-energy. However this was displaced by a more readily available and low cost source, namely fossil fuels (which originate from long-dead organisms, and are therefore non-renewable, except in a useless sense on a geologic time scale.)
However, recently, rising global demand for energy and all-time high nominal prices for petroleum are causing a large-scale shift towards alternative energy sources. Also driving the search for alternatives is are the numerous environmental problems linked to fossil fuel use, including global climate change.
In Asia, renewable energy accounted for as much as 24% of total energy usage in 2003, over ninety percent of which originated from combustible renewables and waste. The rural poor in developing countries are highly dependent on bioenergy. Four out of five households without electricity are found in rural areas of developing countries (FAO, 2005); such households rely on fuelwood and charcoal for most of their energy needs. Large sections of the rural poor have been bypassed by modern, centralized, energy generation and distribution systems. Bioenergy opens exciting opportunities for more accessible technologies for meeting the energy needs of the poor.
Back in college, for a group paper I and some classmates had a most enjoyable trip to Maya Farms in Rizal, Laguna. (Incidentally, my groupmates were all nice ladies, which played no small role in the recreational value of the experience - at least on my part.) Maya Farms - you may recall seeing its products in the supermarket - is a leader in integrated biogas generation. It is energy self-sufficient, with all its electricity internally produced from pig manure. Not an ounce of excrement flows out to pollute the adjacent river leading into Laguna Lake, unlike so many livestock enterprises (both large and small) dotting the perimeter of the Lake. Now that's a large scale, hi-tech operation. Perhaps small scale options, appropriate for rural communities and households, are feasible for decentralized power distribution among the energy-deficient rural poor. The future may well be in fats, fiber, detritus, and dung.
However, recently, rising global demand for energy and all-time high nominal prices for petroleum are causing a large-scale shift towards alternative energy sources. Also driving the search for alternatives is are the numerous environmental problems linked to fossil fuel use, including global climate change.
In Asia, renewable energy accounted for as much as 24% of total energy usage in 2003, over ninety percent of which originated from combustible renewables and waste. The rural poor in developing countries are highly dependent on bioenergy. Four out of five households without electricity are found in rural areas of developing countries (FAO, 2005); such households rely on fuelwood and charcoal for most of their energy needs. Large sections of the rural poor have been bypassed by modern, centralized, energy generation and distribution systems. Bioenergy opens exciting opportunities for more accessible technologies for meeting the energy needs of the poor.
Back in college, for a group paper I and some classmates had a most enjoyable trip to Maya Farms in Rizal, Laguna. (Incidentally, my groupmates were all nice ladies, which played no small role in the recreational value of the experience - at least on my part.) Maya Farms - you may recall seeing its products in the supermarket - is a leader in integrated biogas generation. It is energy self-sufficient, with all its electricity internally produced from pig manure. Not an ounce of excrement flows out to pollute the adjacent river leading into Laguna Lake, unlike so many livestock enterprises (both large and small) dotting the perimeter of the Lake. Now that's a large scale, hi-tech operation. Perhaps small scale options, appropriate for rural communities and households, are feasible for decentralized power distribution among the energy-deficient rural poor. The future may well be in fats, fiber, detritus, and dung.
Wednesday, May 10, 2006
Price gouging oil companies redux
When will this ever end? From the Business Mirror:
However, it is not a mystery that legislators would want their names in the news by pandering to popular mythology.
Again some basic economics (this is easier done with graphs, but then I realize some of us may not be that familiar with the use of supply-demand diagrams). A price increase occurs either because either costs go up, or demand goes up. If costs go up, producers pass on the increase in cost to the consumer; however they are not able to do so completely, because consumers cut back on their purchases. In the end their profit falls, even as prices paid by consumers increases. On the other hand, if demand goes up, then consumers are willing to pay more to get extra units of output. The firms are thereby persuaded to increase their production, but of course in the process, the market price goes up. What happens to their profit? Of course, it goes up! The increase in profit is precisely the incentive that is required to increase production and therefore satisfy the extra consumer demand. We should find it a remarkable mystery to observe firms obliging consumers' higher demand, without requiring any extra incentive to do so.
Oil firms’ bottomline unscathed
WHILE consumers grapple with the skyrocketing fuel prices, multinational oil firms have been raking in huge profits as shown by their income statements submitted to the Securities and Exchange Commission (SEC), a senior administration congressman disclosed Tuesday.
Liberal Party Rep. Abraham Mitra of Palawan made public the income documents submitted by Pilipinas Shell and Petron Corporation, two of the country’s biggest oil firms, “not to accuse the oil giants of price gouging or excessive profiteering, but to let the public draw its own conclusion from what the cold numbers present.”
Mitra, vice chairman of the House Committee on Appropriations, said that based on the statements furnished by the SEC, Shell’s net profit jumped by 102 percent in 2005, while Petron’s surged by almost 50 percent in the same period.
Shell reported a net income after tax of P5.672 billion last year, more than double the P2.846-billion profit it pocketed in 2004. As a result, its earnings per share doubled too, from P4.12 to P8.34.
The firm’s net sales jumped 17 percent from P126.7 billion in 2004, to P148.9 billion in 2005.
Petron, which is partly owned by the national government, saw its income after tax surge to P5.765 billion, up from the P3.886 billion profit it reported in 2004. This represents a 48-percent increase in profits.
In its income statement, Petron declared that its gross sales soared to P191.2 billion, up by 29 percent from the P147.5 billion in 2004. With this, Petron’s earning per share improved to 61 centavos from 41 centavos in 2004.
However, it is not a mystery that legislators would want their names in the news by pandering to popular mythology.
Friday, April 28, 2006
The oil price stabilization tax - US version
Amadeo has pointed out in a comment entry in this weblog that some US legislators are also pushing for their version of the oil price stabilization tax. The issue has been picked up by US econobloggers. Manuel Lora of Mises.org is rendered speechless by the plan, which combines a $100 rebate plus stronger anti-price-gouging measures.
James Hamilton has a thoughtful post on the Chief Executive's policies towards the oil price hikes. He says:
There is currently an almost religious conviction by many Americans that the price of oil, rather than being determined by world markets, is controlled by a few big oil companies, as if the 2.5 million barrels of crude oil per day that ExxonMobil produced last year somehow give it the ability to control the price of the other 82 mbd that got sold. The certainty with which people hold this conviction seems directly related to the complete absence of any supportive facts..
Indeed. Even the fact that OPEC countries control 40% of oil exports is no slam dunk case for international "price gouging". OPEC has been around for about thirty years; did they all just get their act together all of a sudden, just when China and US ratcheted up their oil demand? Does not compute.
And:
I think there is an overwhelming political instinct in the current situation to do something huge, drastic, and ultimately quite harmful.
This is exactly how the average grandstanding politician would act. When something this big is going on, one must give the appearance of activity, inasmuch as passivity is the ultimate political crime. Hippocrates was right: a physician confronted with a baffling ailment is tempted to apply all sorts of mysterious nostrums. So he said: First do no harm!
Greg Mankiw also gives advice on how not to deal with higher gas prices. One interesting point: the US deficit is on a unsustainable path, so a tax rebate would be most unhelpful in moving towards fiscal sustainability.
What is a "sustainable deficit", anyway? There are several definitions, but two are most easy to remember: first is the "no Ponzi game" definition. In a Ponzi game, interest payments on debt can only be financed by borrowing. The analogy to pyramid schemes is perfect: in a that scheme/scam, the scammer's promise of high returns can only be met by new investors also chasing high returns. Insidiously, government may be playing a kind of pyramid scam with its deficit management. Second is that the public debt-to-GDP ratio must be constant or decreasing. The idea is that the GDP is the base from which to extract revenue, and therefore service the debt. The debt itself must not grow out of proportion of this tax base. Both these definitions are long run definitions; in the short run some violation of these rules is possible, but these violations cannot be pursued indefinitely. The creditors will eventually wise up, the way scammed pyramid investors do, and the whole thing comes tumbling down. The government becomes insolvent. Or it pays its debt by printing paper - fueling hyperinflation.
This time the message is: between taxes and excessive public borrowing, which one does less harm?
James Hamilton has a thoughtful post on the Chief Executive's policies towards the oil price hikes. He says:
There is currently an almost religious conviction by many Americans that the price of oil, rather than being determined by world markets, is controlled by a few big oil companies, as if the 2.5 million barrels of crude oil per day that ExxonMobil produced last year somehow give it the ability to control the price of the other 82 mbd that got sold. The certainty with which people hold this conviction seems directly related to the complete absence of any supportive facts..
Indeed. Even the fact that OPEC countries control 40% of oil exports is no slam dunk case for international "price gouging". OPEC has been around for about thirty years; did they all just get their act together all of a sudden, just when China and US ratcheted up their oil demand? Does not compute.
And:
I think there is an overwhelming political instinct in the current situation to do something huge, drastic, and ultimately quite harmful.
This is exactly how the average grandstanding politician would act. When something this big is going on, one must give the appearance of activity, inasmuch as passivity is the ultimate political crime. Hippocrates was right: a physician confronted with a baffling ailment is tempted to apply all sorts of mysterious nostrums. So he said: First do no harm!
Greg Mankiw also gives advice on how not to deal with higher gas prices. One interesting point: the US deficit is on a unsustainable path, so a tax rebate would be most unhelpful in moving towards fiscal sustainability.
What is a "sustainable deficit", anyway? There are several definitions, but two are most easy to remember: first is the "no Ponzi game" definition. In a Ponzi game, interest payments on debt can only be financed by borrowing. The analogy to pyramid schemes is perfect: in a that scheme/scam, the scammer's promise of high returns can only be met by new investors also chasing high returns. Insidiously, government may be playing a kind of pyramid scam with its deficit management. Second is that the public debt-to-GDP ratio must be constant or decreasing. The idea is that the GDP is the base from which to extract revenue, and therefore service the debt. The debt itself must not grow out of proportion of this tax base. Both these definitions are long run definitions; in the short run some violation of these rules is possible, but these violations cannot be pursued indefinitely. The creditors will eventually wise up, the way scammed pyramid investors do, and the whole thing comes tumbling down. The government becomes insolvent. Or it pays its debt by printing paper - fueling hyperinflation.
This time the message is: between taxes and excessive public borrowing, which one does less harm?
Tuesday, April 25, 2006
Oil Price Stabilization Tax
What's going on? As oil prices go up, legislators in the Philippines are again calling for suspension of the value added tax on petroleum, which is 12%.
I remember the good old days of the Oil Price Stabilization Fund. (This is what passes for sarcasm among economists.) It worked as a variable subsidy: at a given domestic price, when the foreign price went up, the oil firms would be subsidized by the fund; when the foreign price went down, oil firms would put money back into the fund. Well it might work if the regulated domestic price equalled the long run equilibrium price. It doesn't take an ijit to guess that the regulated price was set way lower than that, so that the "fund" was perpetually in the red, burning holes through government coffers.
What the legislators are proposing is in effect a variable levy. Foreign price up: suspend tax; foreign price down: impose tax. It is more feasible to implement because government doesn't actually have to cough up financing for a subsidy. But the idea is as flawed as the Stabilization Fund, and the effects are more insidious.
First, does anyone really know the long run trend in the world price of oil? Is US$ 65 per barrel it, as Rep. Salceda is guessing? Nobody knows. If anyone did, they would make a killing in the futures market. (If it were different, that is.) Suppose the oil price hold steady at today's high levels. Does anybody seriously think this tax can be reimposed?
Which brings us to the second point: suspension of the tax would forego, by some preliminary estimates, revenue of about 40 billion pesos. Representative Salceda recommends restrictions on spending and the scrapping of the rationalization program. But these are truly lousy ways of meeting government borrowing targets.
How about the "hardship to the people"? Well excessive government borrowing, or restrictions on public spending, are themselves sources of "hardship to the people." I am pleasantly surprised with Senator Recto, who shows lots of good sense, by claiming that the suspension would hurt people more.
Another way to approach the problem is this: suppose you are foregoing 40 billion in tax revenue anyway. Compared to repealing the VAT on oil, is there a better way to structure the tax system? My (very preliminary) simulations with the updated PhilCGE suggest there is. For example, halving the sales tax rate on petroleum products has about the same revenue loss as removing 5% off the sales tax rate across-the-board. However the latter involves a welfare improvement of about 30% more. This confirms that a more uniform tax structure tends to be less distortionary on the economy. Unfortunately the suspension of the EVAT moves towards a less uniform (and more distortionary) tax regime.
The de facto oil price stabilization tax is only good for one thing: political mileage. Yep, I can hear 'em downshifting to high gear all over.
I remember the good old days of the Oil Price Stabilization Fund. (This is what passes for sarcasm among economists.) It worked as a variable subsidy: at a given domestic price, when the foreign price went up, the oil firms would be subsidized by the fund; when the foreign price went down, oil firms would put money back into the fund. Well it might work if the regulated domestic price equalled the long run equilibrium price. It doesn't take an ijit to guess that the regulated price was set way lower than that, so that the "fund" was perpetually in the red, burning holes through government coffers.
What the legislators are proposing is in effect a variable levy. Foreign price up: suspend tax; foreign price down: impose tax. It is more feasible to implement because government doesn't actually have to cough up financing for a subsidy. But the idea is as flawed as the Stabilization Fund, and the effects are more insidious.
First, does anyone really know the long run trend in the world price of oil? Is US$ 65 per barrel it, as Rep. Salceda is guessing? Nobody knows. If anyone did, they would make a killing in the futures market. (If it were different, that is.) Suppose the oil price hold steady at today's high levels. Does anybody seriously think this tax can be reimposed?
Which brings us to the second point: suspension of the tax would forego, by some preliminary estimates, revenue of about 40 billion pesos. Representative Salceda recommends restrictions on spending and the scrapping of the rationalization program. But these are truly lousy ways of meeting government borrowing targets.
How about the "hardship to the people"? Well excessive government borrowing, or restrictions on public spending, are themselves sources of "hardship to the people." I am pleasantly surprised with Senator Recto, who shows lots of good sense, by claiming that the suspension would hurt people more.
Another way to approach the problem is this: suppose you are foregoing 40 billion in tax revenue anyway. Compared to repealing the VAT on oil, is there a better way to structure the tax system? My (very preliminary) simulations with the updated PhilCGE suggest there is. For example, halving the sales tax rate on petroleum products has about the same revenue loss as removing 5% off the sales tax rate across-the-board. However the latter involves a welfare improvement of about 30% more. This confirms that a more uniform tax structure tends to be less distortionary on the economy. Unfortunately the suspension of the EVAT moves towards a less uniform (and more distortionary) tax regime.
The de facto oil price stabilization tax is only good for one thing: political mileage. Yep, I can hear 'em downshifting to high gear all over.
Wednesday, April 19, 2006
Energy prices up again
Much has happened while I was missing in action beating a couple of deadlines: the Thaksin problem in Thailand has been resolved; in the Philippines, local governments are pushing for Constitutional reforms, while the President suspends all executions; but the global development I'd like to flag for now is the recent uptick in oil prices. In the past month, prices have gone up by 16%, with Brent crude exceeding US$ 71 per barrel.
While many analysts (cited in the article) point to uncertainties with respect to Iran as a proximate cause, James Hamilton thinks it's still a prosaic supply-demand story: oil production in the US is down, as well as in Nigeria (due to their political problems). "And demand remains strong, with U.S. economic growth resuming at a faster pace than some of us had anticipated, and Chinese use of petroleum continuing to climb. If demand is up and supply is stagnant, small wonder if we see the price continue to rise."
For the Philippines, what is the impact of this? Suppose a high crude price is sustained yearlong, leading to an increase in prices of petroleum products, within the range of say 20%. In 2005 the country's total imports was US$ 44.9 billion, of which about US$ 6.1 billion was in the form of mineral fuels, lubricants, and related products (except coke and coal). This accounts for about 13.6%. Hence the average import price (assuming constant shares) would rise by about 13.5% x 0.2 = 2.72%. For good measure I raised this to a worse scenario of 5%, and ran this average price increase scenario into a macroeconomic forecasting model I am currently working on. Voila, what did I get? The price increase shaves off a little over a percentge point off our GDP growth in 2006. So if the forecast is 5.2% growth for the year, then with the shock, growth is only around 4.2% or so. Interestingly, even if the average import cost was permanently higher, growth would recover to its unshocked trend already by 2007!
So the bad news: higher energy costs are a serious drag on growth. Good news: the economy is not going into a tailspin.
More good news: notice that demand remains a key reason for fuel prices rising, and China and the US remain a major source of this demand boost. And how is that good news? But that's for another post.
While many analysts (cited in the article) point to uncertainties with respect to Iran as a proximate cause, James Hamilton thinks it's still a prosaic supply-demand story: oil production in the US is down, as well as in Nigeria (due to their political problems). "And demand remains strong, with U.S. economic growth resuming at a faster pace than some of us had anticipated, and Chinese use of petroleum continuing to climb. If demand is up and supply is stagnant, small wonder if we see the price continue to rise."
For the Philippines, what is the impact of this? Suppose a high crude price is sustained yearlong, leading to an increase in prices of petroleum products, within the range of say 20%. In 2005 the country's total imports was US$ 44.9 billion, of which about US$ 6.1 billion was in the form of mineral fuels, lubricants, and related products (except coke and coal). This accounts for about 13.6%. Hence the average import price (assuming constant shares) would rise by about 13.5% x 0.2 = 2.72%. For good measure I raised this to a worse scenario of 5%, and ran this average price increase scenario into a macroeconomic forecasting model I am currently working on. Voila, what did I get? The price increase shaves off a little over a percentge point off our GDP growth in 2006. So if the forecast is 5.2% growth for the year, then with the shock, growth is only around 4.2% or so. Interestingly, even if the average import cost was permanently higher, growth would recover to its unshocked trend already by 2007!
So the bad news: higher energy costs are a serious drag on growth. Good news: the economy is not going into a tailspin.
More good news: notice that demand remains a key reason for fuel prices rising, and China and the US remain a major source of this demand boost. And how is that good news? But that's for another post.
Wednesday, March 22, 2006
Fish - one of the most active sectors in agriculture today
Fish is an important source of food and livelihoods in Southeast Asia. Fish provides a large share of animal protein intake, from 40% in the Philippines and Thailand to 57% in Indonesia and Cambodia. Low value fish in particular is a major component of the diets of the poor. Fisheries are also a significant source of livelihoods for communities on coasts, riverbanks, and floodplains, which cover a large bulk of the populations of Southeast Asia.
Recently the fisheries sector has been undergoing unprecedented changes: production in the region has grown rapidly, averaging 4.2% average annual growth from 1980-2003, compared to a 2.7% average annual growth over the same period for all other agricultural products. Fish has spearheaded the globalization of agriculture, following the reduction in import barriers and duties and the harmonization of food safety standards under the World Trade Organization (WTO) Agreements. The share of fish all agricultural exports reached 20% in 2003, compared to only 6% in 1980. The value of fish exports in 2003 (US$ 8.6 billion) is far in excess of exports of fruits and vegetables (US$3.5 billion), cereals (US$ 2.7 billion), coffee, tea, and cocoa (US$ 2.3 billion), and poultry (US$ 1.2 billion). For example, Vietnam is well-known as a coffee and rice exporter: however the export value of these two crops combined was less than US$ 1 billion in 2003, compared to fish exports of US$ 2.4 billion in the same year.
However rising global demand for fish has placed tremendous pressures on aquatic ecosystems and wild stocks. The "live reef food fish trade" is a case in point: consisting mostly of groupers, snappers, and wrasses, this trade involves exports of reef fish mostly to Hong Kong - China to meet a nearly insatiable demand for live fish. Unfortunately extraction of reef fish is both too heavy, and often done in an unsustainable manner (e.g. reliance on cyanide fishing).
What is the future of global fish trade, given rising demand and dwindling stocks? Not so bright - higher prices are in the offing, including for fish consumed heavily by the poor. (And there are ways to project the magnitude of these price increases, and even the impact of these future trends on economic well-being). But while gloomy, the situation is not hopeless. Yet. (I think.)
Recently the fisheries sector has been undergoing unprecedented changes: production in the region has grown rapidly, averaging 4.2% average annual growth from 1980-2003, compared to a 2.7% average annual growth over the same period for all other agricultural products. Fish has spearheaded the globalization of agriculture, following the reduction in import barriers and duties and the harmonization of food safety standards under the World Trade Organization (WTO) Agreements. The share of fish all agricultural exports reached 20% in 2003, compared to only 6% in 1980. The value of fish exports in 2003 (US$ 8.6 billion) is far in excess of exports of fruits and vegetables (US$3.5 billion), cereals (US$ 2.7 billion), coffee, tea, and cocoa (US$ 2.3 billion), and poultry (US$ 1.2 billion). For example, Vietnam is well-known as a coffee and rice exporter: however the export value of these two crops combined was less than US$ 1 billion in 2003, compared to fish exports of US$ 2.4 billion in the same year.
However rising global demand for fish has placed tremendous pressures on aquatic ecosystems and wild stocks. The "live reef food fish trade" is a case in point: consisting mostly of groupers, snappers, and wrasses, this trade involves exports of reef fish mostly to Hong Kong - China to meet a nearly insatiable demand for live fish. Unfortunately extraction of reef fish is both too heavy, and often done in an unsustainable manner (e.g. reliance on cyanide fishing).
What is the future of global fish trade, given rising demand and dwindling stocks? Not so bright - higher prices are in the offing, including for fish consumed heavily by the poor. (And there are ways to project the magnitude of these price increases, and even the impact of these future trends on economic well-being). But while gloomy, the situation is not hopeless. Yet. (I think.)
Friday, March 03, 2006
Economic growth - forever
Many environmentally-minded people have the impression that fixed natural resources, in principle, makes perpetual economic growth impossible. This seems to make sense from an input-output perspective: growing output requires growing input (true); however some of the required inputs are fixed (true); hence output must stop growing eventually.
However the mistake is this: growing output requires at least one growing input. If the growing input can substitute for the non-growing inputs, then it is mathematically possible for the limiting point (zero natural resources) to be reached at time infinity - with economic growth happening all along the way.
What can be this perpetually growing input? In human history, economic growth has typically been driven by technology. Technology ultimately is based on human intelligence, or information processing.
It seems that the ability to discover new stuff is limitless. That is, it seems that humans will also be able to discover new things that the market values. This is the crucial point: economic growth is not just a matter of piling up new stuff by weight. Then certainly economic growth is limited. Economic growth is a matter of piling up new stuff by market value, based on subjective assessment of individuals, collectively summed up in the market price. This process holds the key to perpetual economic growth.
Scattalaxis has another way of putting it. In addition to the economic sphere and the biosphere is the "noosphere" (was this originated by de Chardin?) The products of the noosphere appear to be limitless, as valued by the noosphere itself.
Now all of these are possibilities are based on theory. On the other hand perhaps humans will run out of innovations, or perhaps inventions are not as substitutable with natural resources as we think. For example, perhaps it is not possible to find a cheap substitute for oil-powered transportation.
In the long run, my money is on the human mind.
However the mistake is this: growing output requires at least one growing input. If the growing input can substitute for the non-growing inputs, then it is mathematically possible for the limiting point (zero natural resources) to be reached at time infinity - with economic growth happening all along the way.
What can be this perpetually growing input? In human history, economic growth has typically been driven by technology. Technology ultimately is based on human intelligence, or information processing.
It seems that the ability to discover new stuff is limitless. That is, it seems that humans will also be able to discover new things that the market values. This is the crucial point: economic growth is not just a matter of piling up new stuff by weight. Then certainly economic growth is limited. Economic growth is a matter of piling up new stuff by market value, based on subjective assessment of individuals, collectively summed up in the market price. This process holds the key to perpetual economic growth.
Scattalaxis has another way of putting it. In addition to the economic sphere and the biosphere is the "noosphere" (was this originated by de Chardin?) The products of the noosphere appear to be limitless, as valued by the noosphere itself.
Now all of these are possibilities are based on theory. On the other hand perhaps humans will run out of innovations, or perhaps inventions are not as substitutable with natural resources as we think. For example, perhaps it is not possible to find a cheap substitute for oil-powered transportation.
In the long run, my money is on the human mind.
Wednesday, February 22, 2006
Dilbert and Dogbert talk about forecasting and oil
This has been making rounds among econobloggers. Didn't know that Dogbert was the economist in this strip.
But then his parody of making bad business assumptions here, here, and here are hilarious. Terrific reminder for making business plans, and in general any kind of forecasting.
ASIDE on the oil thing, Dilbert could have argued thus with Dogbert -
Dilbert: "But if enough of us buy fuel-efficient cars then that might overall help reduce the price of oil, which could ultimately squeezes oil revenues for whichever states that sponsor terrorism."
Dogbert:"If, might, could, and whichever."
But then his parody of making bad business assumptions here, here, and here are hilarious. Terrific reminder for making business plans, and in general any kind of forecasting.
ASIDE on the oil thing, Dilbert could have argued thus with Dogbert -
Dilbert: "But if enough of us buy fuel-efficient cars then that might overall help reduce the price of oil, which could ultimately squeezes oil revenues for whichever states that sponsor terrorism."
Dogbert:"If, might, could, and whichever."
Friday, January 06, 2006
The national patrimony and foreigners: the fear factor
The Philippines is undergoing a process of Charter change. A Constitutional Commission was convened and their proposed revisions have been submitted to the President. Many changes are suggested, including federalization, and a shift to a unicameral parliament. Here I will limit myself with the repeal of current Constitutional limits on foreign ownership of natural resources
Objectors claim that evil foreign corporations will exhaust the mineral and other resurces of the country for profit, and leave the country poorer than ever.
Let's think about this: Suppose a local company does the extraction for profit. Would it be any better? Profiteering is profiteering - you need government to make sure that the private company does not abuse its privilege, foreign or local.
But I suppose what the naysayers really object to is any private company exploiting our natural resources. Foreign companies are just better at it, ratcheting up the fear factor. So they would rather have government get all the minerals and stuff out. Better, isn't it, cause then that's all revenues for the public welfare?
Really, some people need to go down from their left-leaving ivory tower, and get dirty in the real world. Plenty of investments up front are needed to get to all that precious stuff. One can easily make a mistake and dig up a dud. All that investment - using taxpayers money, if the government were to do it. Experience has shown that government is very very good at spending taxpayer's money, but very very bad at getting good returns from it.
So you're back to the private company. Now remember - the private company does not have the initial right to the resource - the State does. So the State strikes a deal with the company - give me your exploitation expertise, and here's a share for you as a payment for your investment and risk-taking. The exact terms and conditions will depend on a particular negotiation. So whether it's a foreign or local company the government is bargaining with, if it ends up with a bad deal, it only has itself to blame.
Nice thing about allowing foreigners is that the locals will have plenty of competition. Locals who would only offer a 70-30 sharing may have to soften up if an efficient foreign company comes around and offers 60-40.
The repeal makes perfect sense, whatever our gut reaction to foreigners "owning" the "national patrimony." As with the show, overcoming our gut reaction is necessary to win the prize.
(Download the Concom Report from this site).
Objectors claim that evil foreign corporations will exhaust the mineral and other resurces of the country for profit, and leave the country poorer than ever.
Let's think about this: Suppose a local company does the extraction for profit. Would it be any better? Profiteering is profiteering - you need government to make sure that the private company does not abuse its privilege, foreign or local.
But I suppose what the naysayers really object to is any private company exploiting our natural resources. Foreign companies are just better at it, ratcheting up the fear factor. So they would rather have government get all the minerals and stuff out. Better, isn't it, cause then that's all revenues for the public welfare?
Really, some people need to go down from their left-leaving ivory tower, and get dirty in the real world. Plenty of investments up front are needed to get to all that precious stuff. One can easily make a mistake and dig up a dud. All that investment - using taxpayers money, if the government were to do it. Experience has shown that government is very very good at spending taxpayer's money, but very very bad at getting good returns from it.
So you're back to the private company. Now remember - the private company does not have the initial right to the resource - the State does. So the State strikes a deal with the company - give me your exploitation expertise, and here's a share for you as a payment for your investment and risk-taking. The exact terms and conditions will depend on a particular negotiation. So whether it's a foreign or local company the government is bargaining with, if it ends up with a bad deal, it only has itself to blame.
Nice thing about allowing foreigners is that the locals will have plenty of competition. Locals who would only offer a 70-30 sharing may have to soften up if an efficient foreign company comes around and offers 60-40.
The repeal makes perfect sense, whatever our gut reaction to foreigners "owning" the "national patrimony." As with the show, overcoming our gut reaction is necessary to win the prize.
(Download the Concom Report from this site).
Thursday, November 17, 2005
Biological models
I am very pleased to have been part of a conference-workshop of biologists and oceanographers centering around a biophysical ocean-fisheries model, called NEMURO. Somehow I got invited to it by virtue of my attendance last year in a conference on "Economics of Small Pelagics", where I presented a paper on the economic implications of climate change impacting on fisheries of small pelagics. ("Pelagics" are fish that dwell at upper levels of the water column, hence they tend to be mobile fish; their bottom-dwelling counterpart are the "demersals".) This was pretty hardcore stuff, based on the physics and chemistry of the ocean (currents, nutrient flows, etc.) as well as fish ecology (growth dynamics, food web interactions, etc.) Needless to say, I contributed trivially to that part of the discussion. I did learn something (as in, not nothing) in an osmotic sort of way - in the sense that, hearing "bioenergetics" would evoke in me some faint glimmer of recognition.
I knew enough though to see that in their model, fishing mortality (% of fish that die from being caught by humans) is constant - a black box, as it were. Of course it can be adjusted by the modeler to examine impact on the fish abundance and behavior, but it in itself it is left unexplained. I argued that a complete model needs to account for adjustments in fishing pressure, which is largely explained by economics. In short, the amount caught depends not only on the available fish (biophysical component), but also on the fishing effort (economic component). More to the point, the two affect each other - the fish catch depends partly on effort, and partly on the quantity of available fish, and vice-versa, the quantity of fish depends on fishing mortality. To be fair, economists in the market forecasting business likewise treat available fish populations as a black box, or at most adjusted by modeler's discretion. I presented a paper sketching a practical way in which a grand synthesis of economics and biology (and, in principle, oceanography) can be done, in practical terms.
I think they were definitely interested in such a disciplinary interface. As a modeler, I caught on their sentiment that incorporating added complexity (economics) was far past their immediate interest - which was combining biological and physical systems. It turns out that such biophysical models are on the research frontier. My value added I believe was my assurance that for now, economic behavior can be left well enough alone. (Knowing what not to do can sometimes be as important as knowing what to do!)
Modelers proceed by an accretion of complexity, rather than attacking all the important problems at the same time. So at least economics is on this group's radar screen, perhaps as a future agendum for collaboration. I do believe that interdisciplinary work is crucial; contrary to common belief however, scientists appreciate this. They are after all people whose job is to think, which they do very well - the group I was with is a fine exemplar of that. Cross-disciplinary work is however very difficult; even scientists in allied fields have a hard time collaborating, let alone specialists in entirely different fields. Scientist-bashers tend to be very critical, mainly because of their lack of appreciation of the constraints and complexities involved (charges of "comparmentalization!" "reductionism"! "Not holistic"! can get tiresome). Trust me, we're groping towards that interdisciplinary ideal.
I knew enough though to see that in their model, fishing mortality (% of fish that die from being caught by humans) is constant - a black box, as it were. Of course it can be adjusted by the modeler to examine impact on the fish abundance and behavior, but it in itself it is left unexplained. I argued that a complete model needs to account for adjustments in fishing pressure, which is largely explained by economics. In short, the amount caught depends not only on the available fish (biophysical component), but also on the fishing effort (economic component). More to the point, the two affect each other - the fish catch depends partly on effort, and partly on the quantity of available fish, and vice-versa, the quantity of fish depends on fishing mortality. To be fair, economists in the market forecasting business likewise treat available fish populations as a black box, or at most adjusted by modeler's discretion. I presented a paper sketching a practical way in which a grand synthesis of economics and biology (and, in principle, oceanography) can be done, in practical terms.
I think they were definitely interested in such a disciplinary interface. As a modeler, I caught on their sentiment that incorporating added complexity (economics) was far past their immediate interest - which was combining biological and physical systems. It turns out that such biophysical models are on the research frontier. My value added I believe was my assurance that for now, economic behavior can be left well enough alone. (Knowing what not to do can sometimes be as important as knowing what to do!)
Modelers proceed by an accretion of complexity, rather than attacking all the important problems at the same time. So at least economics is on this group's radar screen, perhaps as a future agendum for collaboration. I do believe that interdisciplinary work is crucial; contrary to common belief however, scientists appreciate this. They are after all people whose job is to think, which they do very well - the group I was with is a fine exemplar of that. Cross-disciplinary work is however very difficult; even scientists in allied fields have a hard time collaborating, let alone specialists in entirely different fields. Scientist-bashers tend to be very critical, mainly because of their lack of appreciation of the constraints and complexities involved (charges of "comparmentalization!" "reductionism"! "Not holistic"! can get tiresome). Trust me, we're groping towards that interdisciplinary ideal.
Saturday, November 12, 2005
Bioeconomic supply-demand
The SEARCA conference ended yesterday. I caught one more paper presentation, Balisacan and Fuwa's literature survey on poverty and vulnerability. But I'm going back-to-back: I'm attending a workshop, this time on ""Global comparison of sardine, anchovy and other small pelagics ? building towards a multi-species model", in Tokyo. As the only economist in attendance, I feel like a fish out of water. (Unforgivable pun intended.) As I flounder about these arcane (to me) ecosystem models, I'll be presenting a paper that integrates simple ecological population dynamics into a standard economic supply-demand model. (When I have time I'll discuss the whys and the hows - in nonspecialist language - of this fascinating interdisciplinary synthesis. Don't ask me about its importance - I'm on the "pioneering breakthrough!!!" delusionary stage.)
Next week, I'm not sure I can keep up with regular blogging (Monday, Wednesday, and Friday, in case you haven't noticed) Try my best though.
Next week, I'm not sure I can keep up with regular blogging (Monday, Wednesday, and Friday, in case you haven't noticed) Try my best though.
Wednesday, November 02, 2005
Privatizing the commons: the case of fisheries
The "tragedy of the commons" is directly responsible for the global fishery crisis. Few experts would agree that direct state regulation (command-and-control) is capable of ending this tragedy. The direct and more effective approach is to dec-commonize the commons, i.e. to assign property rights to fisheries. The question is at what level.
Tim Worstall argues that property rights should be assigned to individual fishers. In his sanguine view:
This is however a bit too sweeping. Certainly in some contexts individual transferrable quotas (ITQs) would address the overfishing problem. However as shown by some research cited in a a World Bank study on saving fisheries, there are some situations where ITQs may not work. For example, in tropical fisheries in the developign world, the following preclude effective implementation of ITQ regimes:
First, the fishery is multispecies, considerably complicating the definition of total allowable catch;
Second, fishers are numerous (much more so than in the industrial fisheries in which ITQs were successfully implemented); monitoring and enforcement of individual quotas is difficult.
Third, social and market infrastructure is underdeveloped or absent. It is difficult to imagine how to set up a market for ITQs in say Batangas Bay or the Java sea.
In these cases, the second option is perhaps more appropriate: assigning property rights at the level of groups (or "community-based management"). How group rights are defined, and how groups are to operate, is however not a simple matter - Ostrom and others have studied numerous traditional and modern institutions for collective management of the commons. As with almost anything else, one can juxtapose success stories with cautionary tales. Identifying some general principles for a well-functioning collective management of the fisheries in the developing countries remains an open research problem, in which social scientists are just beginning to make headway.
Tim Worstall argues that property rights should be assigned to individual fishers. In his sanguine view:
We actually know how to solve this problem. Seriously, we do, we know how to solve the biggest of the short term environmental problems on the planet (the only larger one is climate change which is much longer term).
This is however a bit too sweeping. Certainly in some contexts individual transferrable quotas (ITQs) would address the overfishing problem. However as shown by some research cited in a a World Bank study on saving fisheries, there are some situations where ITQs may not work. For example, in tropical fisheries in the developign world, the following preclude effective implementation of ITQ regimes:
First, the fishery is multispecies, considerably complicating the definition of total allowable catch;
Second, fishers are numerous (much more so than in the industrial fisheries in which ITQs were successfully implemented); monitoring and enforcement of individual quotas is difficult.
Third, social and market infrastructure is underdeveloped or absent. It is difficult to imagine how to set up a market for ITQs in say Batangas Bay or the Java sea.
In these cases, the second option is perhaps more appropriate: assigning property rights at the level of groups (or "community-based management"). How group rights are defined, and how groups are to operate, is however not a simple matter - Ostrom and others have studied numerous traditional and modern institutions for collective management of the commons. As with almost anything else, one can juxtapose success stories with cautionary tales. Identifying some general principles for a well-functioning collective management of the fisheries in the developing countries remains an open research problem, in which social scientists are just beginning to make headway.
Monday, October 31, 2005
Fish kill
"Overfishing" has been blamed for the decimation of wild fish populations worldwide. When we say "over" it should be with respect to some criterion. The popular norm is maximum sustainable yield (MSY), the maximum harvest per period that can be consistently obtained from a fishery. (Economists have an even more conservative norm, but MSY is sufficient for the following.) The typical fishery is harvested at levels way in excess of even just MSY; that means "less" is literally "more", i.e. at the industry level, reduced fishing increases catch.
The reason for this is the well-known "tragedy of the commons": nobody owns the wild fish stock. Nobody can stop another fisher from fishing. Hence nobody has any incentive to keep the fish stock from being overexploited. Keeping the stock higher may increase everybody's catch now and in the future - but if just a few fishers refrain from fishing, they catch less.
Overfishing implies either of two scenarios:
1. Catch can be maintained, but it can be higher.
2. Catch is declining.
Scenario 2 can be further subdivided into two:
2.1. Catch will continue declining at a gradual to moderate pace.
2.2. The decline in catch will accelerate into a full-blown "collapse".
World marine fisheries peaked in the early 90s, and seemed to hold steady since then. So it seems that scenario 1 is happening. Not so, warns many marine biologists. At least three trends are cause for worry:
a. Wherever they are measured, marine fish is much less abundant than they used to be. Large predatory fish populations are down to just one-tenth of pre-industrial fishing levels.
b. Fishing is moving "down the food web". Predator fish are being taken out first, followed by their prey, and their prey, and so on. Biodiversity is rapidly vanishing.
c. Actually fish catch worldwide is declining when we take into account estimated overfishing in China, which accounts for a big share of world marine catch.
At the global level therefore we have observed the start of a gradual decline in catch. I don't know yet whether Scenario 2.1 or 2.2. will materialize. Some biologists are convinced though that the latter is inevitable. They just don't know how soon. Preventing this requires a massive reduction in fishing activity.
If fish stocks could be held privately (just like farmlands), the problem could be solved. Sounds strange? It does, but recall that ownership permits the owner to restrict fishing activity. Then the owner can maintain the stock at commercially appropriate levels, not for environmental reasons, but for the sake of current and future profit. As argued earlier, the way the fisheries are being depleted now does not make commercial sense.
This solution though is moot as it is infeasible. The alternative is state regulation - licensing, catch limits, limits on the fishing equipment used, etc. This too has failed, obviously. Unless alternatives are found soon, we are headed for that bio-simplified fish menu of carp-tilapia. With a few jellyfish on the side.
The reason for this is the well-known "tragedy of the commons": nobody owns the wild fish stock. Nobody can stop another fisher from fishing. Hence nobody has any incentive to keep the fish stock from being overexploited. Keeping the stock higher may increase everybody's catch now and in the future - but if just a few fishers refrain from fishing, they catch less.
Overfishing implies either of two scenarios:
1. Catch can be maintained, but it can be higher.
2. Catch is declining.
Scenario 2 can be further subdivided into two:
2.1. Catch will continue declining at a gradual to moderate pace.
2.2. The decline in catch will accelerate into a full-blown "collapse".
World marine fisheries peaked in the early 90s, and seemed to hold steady since then. So it seems that scenario 1 is happening. Not so, warns many marine biologists. At least three trends are cause for worry:
a. Wherever they are measured, marine fish is much less abundant than they used to be. Large predatory fish populations are down to just one-tenth of pre-industrial fishing levels.
b. Fishing is moving "down the food web". Predator fish are being taken out first, followed by their prey, and their prey, and so on. Biodiversity is rapidly vanishing.
c. Actually fish catch worldwide is declining when we take into account estimated overfishing in China, which accounts for a big share of world marine catch.
At the global level therefore we have observed the start of a gradual decline in catch. I don't know yet whether Scenario 2.1 or 2.2. will materialize. Some biologists are convinced though that the latter is inevitable. They just don't know how soon. Preventing this requires a massive reduction in fishing activity.
If fish stocks could be held privately (just like farmlands), the problem could be solved. Sounds strange? It does, but recall that ownership permits the owner to restrict fishing activity. Then the owner can maintain the stock at commercially appropriate levels, not for environmental reasons, but for the sake of current and future profit. As argued earlier, the way the fisheries are being depleted now does not make commercial sense.
This solution though is moot as it is infeasible. The alternative is state regulation - licensing, catch limits, limits on the fishing equipment used, etc. This too has failed, obviously. Unless alternatives are found soon, we are headed for that bio-simplified fish menu of carp-tilapia. With a few jellyfish on the side.
Friday, October 28, 2005
The future fish menu
If you're a young person, your grandchildren will probably sample marine fish and shrimp as a rare delicacy (like venison). The common fish will be carp, tilapia, and a few other freshwater fish. Marine fish will all go the way of other animals we humans have hunted to extinction. Contrary to popular opinion, this is not a recent development - even in prehistoric times hunter-scavenger societies have wiped out delectable species, especially the bigger ones. Diamond's Guns,Germs, and Steel argues that the big animals of Australia and North America - the giant kangaroo, cow-size marsupials, the mammoth -were annihilated by humans. That makes Homo sapiens the unsurpassed predator ever. We'd have made dinner out of the dinosaurs had we evolved at the same time.
(Why the big animals? Plain economics - they provide the most food per unit of hunting effort. Rats, say, are abundant because they're too costly to hunt for food.)
Nowadays the last frontier of hunting is the sea and inland water bodies. Clearly we are repeating the pattern of terrestrial destruction, a fact that has been known for years. We are reminded of this by a NY times article, and picked up by the Environmental Economics blog.
So: looks like the we're turning our oceans, lakes, and rivers, into a haven for plankton and other inedibles. (That list doesn't even include jellyfish anymore - just check out a Chinese restaurant menu.) What about tuna, roundscad (galunggong), mackarel (alumahan), sardines (tunsoy), anchovy (dilis)? Gone from the dinner table. Maybe available in a pricey restaurant, or a five-star hotel. (Imagine, the galunggong ...)
Don't worry. There's still going to be fish - only they are all going to be farmed. And not the tasty marine fish and crustaceans either, like salmon and prawn - they need to eat smaller fish. It's going to be omnivores and herbivores - good old trusty carp (not familiar in the Philippines, but very popular worldwide), tilapia, etc. All freshwater species, by the way - I know of no farmed herbivorous marine fish.
It turns out that farming fish - like farming any other animal - is hard work, and has been successful with only few species. Domesticating animals (land or water) is a tough job, involving lots of research and selective breeding. "Closing the life cycle" - i.e. figuring out how to rear and reproduce an animal entirely in the farm - is tougher still. For example, the Tiger prawn (the most common farmed shrimp for export) has so far defied efforts of determined researchers to breed it in commercial quantities in captivity.
Freakonomics has also picked up the NYT article, if only to cite this BBC report on a method of extrapolating back to past fish stocks using old restaurant menus. Pretty freaky. We'll I've just shown you the future fish menu. Care to order?
(Why the big animals? Plain economics - they provide the most food per unit of hunting effort. Rats, say, are abundant because they're too costly to hunt for food.)
Nowadays the last frontier of hunting is the sea and inland water bodies. Clearly we are repeating the pattern of terrestrial destruction, a fact that has been known for years. We are reminded of this by a NY times article, and picked up by the Environmental Economics blog.
So: looks like the we're turning our oceans, lakes, and rivers, into a haven for plankton and other inedibles. (That list doesn't even include jellyfish anymore - just check out a Chinese restaurant menu.) What about tuna, roundscad (galunggong), mackarel (alumahan), sardines (tunsoy), anchovy (dilis)? Gone from the dinner table. Maybe available in a pricey restaurant, or a five-star hotel. (Imagine, the galunggong ...)
Don't worry. There's still going to be fish - only they are all going to be farmed. And not the tasty marine fish and crustaceans either, like salmon and prawn - they need to eat smaller fish. It's going to be omnivores and herbivores - good old trusty carp (not familiar in the Philippines, but very popular worldwide), tilapia, etc. All freshwater species, by the way - I know of no farmed herbivorous marine fish.
It turns out that farming fish - like farming any other animal - is hard work, and has been successful with only few species. Domesticating animals (land or water) is a tough job, involving lots of research and selective breeding. "Closing the life cycle" - i.e. figuring out how to rear and reproduce an animal entirely in the farm - is tougher still. For example, the Tiger prawn (the most common farmed shrimp for export) has so far defied efforts of determined researchers to breed it in commercial quantities in captivity.
Freakonomics has also picked up the NYT article, if only to cite this BBC report on a method of extrapolating back to past fish stocks using old restaurant menus. Pretty freaky. We'll I've just shown you the future fish menu. Care to order?
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