Chocolate and Gold Coins

Thursday, May 25, 2006

A Gaur

Here is a picture of a Gaur:

It is a very large relative of the domestic cow - it is not so closely related to buffalos and such.

Friday, May 19, 2006

OPEC Loses Control Again

Last August I wrote:

OPEC, the oil cartel, has temporarily lost control of world oil production. I say temporarily because I have no doubt that OPEC could quickly increase production by simply drilling more oil wells and sucking the oil out more rapidly.

But this raises a question: “If OPEC is making more money with the higher price, why would they want to increase production and reduce the price?” The answer is that letting the price of oil rise is like taking a submarine down to see how far it will go before the water pressure crushes it. It is a highly dangerous game. I think that OPEC must be very concerned that they might just spawn a monster of an alternative fuel technology.

If you control the world oil production and you want to maximize the present value of your total net revenue stream, then how do you set your price? The answer is that you would want to set the price just below the price where it becomes profitable for others to invest in alternative energy sources. If you set the price too high for too long, you run the risk that some exciting new energy alterative will come along and then you would be force to sell your oil at a discount later.

I went on to predict that the price of oil would soon be under $60 a barrel.

Well, at first, it seemed like I was right. The price of oil fell and gasoline prices came way down. It seemed like the spike in price was just an aberration and OPEC still controlled the price.

But the price of oil has headed steadily upwards lately. Today I read this.

I wonder if perhaps the assumption that OPEC still has 10 to 15 years of reserves is correct. Perhaps they have less. This might be like the slog overs of a cricket match: dwindling resources leads to a “go for broke” attitude. If you have only 5 years of oil left then why not get as much out of that as you can? By the time some exciting technology comes in and takes over, you made your money.

Another possibility is that it might be worthwhile to purposefully let the price spike and fall many times. During the spikes, you make large profits. During the falls, you put any competing technology out of business. Investors prefer to invest in venture with more certain returns. Creating uncertainty helps scare off investments in alternative energy.

I’m not convinced about this argument. I think that the longer the price stays above $60 a barrel the bigger the risk that oil will be replaced by something. But I cannot deny the possibility that the price of oil might spike at over $100 a barrel. But I still think that OPEC will bring the price back down under $60 soon. But it will be interesting to see what happens in the next two months.

Tuesday, May 16, 2006

Public Goods – Who Should Pay?

My family saw a silly children’s movie on Sunday: Hoot. It is about some teenagers who fight to protect a group of endangered owls from an evil developer.

The movie was not as bad as you might first think. It was really pretty funny for the most part. In typical children’s movie style, all of the adults are nitwits or comic villains and only the children act like ordinary people. It feeds the ego of children to see other children as more capable than adults.

But the plot of the story was not only a cliché but a dangerous economic lesson as well. The evil developer ignores the protected wildlife that they are endangering by developing the land. In the climax, the villain faced with the prospect of loosing his land to the owls threatens to bulldoze a group of citizens assembled for the groundbreaking ceremony. It doesn’t sound funny, and although it is played for laughs it really isn’t all that funny.

But the message is unmistakable: corporations are basically evil organizations with tons of money that they greedily amass and should be forced to pay for the good of the community. Now, it is true that corporations really don’t care for the environment or any other public good (unless it is built into their profit function) and so they might have incentive to break the law to avoid paying a big fine or, in this case, to avoid loosing their land. But I wonder how many people watching the movie wondered if the law – by forcing the entire burden of protecting the owls on the landowner – might create criminals who otherwise might be honest.

Protecting the environment is a pure public good. Who should pay for that good? A simple and fair method would be to make those who benefit most from that good pay for it. If one could know how much each person was willing to pay for the public good, then taxing each person in proportion to his or her benefit would be fair. Of course, it is difficult to impossible to get people to reveal how much they are willing to pay because they cannot be excluded from the good after it is bought. But it is reasonable that most people’s willingness to pay would be close to the same fraction of income. If the community votes to tax each person’s income (or home value) by a fix amount to pay for the good, then the outcome will be roughly fair.

Why then do people think it is fair that only those unlucky enough to have protected animals on their property should have to pay the entire burden of protecting these animals? It is exactly like a community confiscating a person’s home for building a school or a road and not even paying fair market value as compensation. How is that fair?

I used to think that such a confiscation was a bummer for the homeowner but not necessarily economically inefficient. But I realize now that if you place too high a tax burden on a few, they will have incentive to waste precious time and resources to shift that burden onto others. They will also have much more than the ordinary incentive to break the law.

People support these laws because they enjoy the benefits of the environment without having to pay for it. They like to think that it is fair because the only ones who suffer are “evil corporations”. But isn’t getting a benefit without paying for it basically evil?