The week in energy: Regulations' unintended consequences

Stock SectorMay 19, 201820min4


Goodhart’s Law holds that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes”. Originally coined by the economist Charles Goodhart as a critique of the use of money supply measures to guide monetary policy, it has been adopted as a useful concept in many other fields. The general principle is that when any measure is used as a target for policy, it becomes unreliable. It is an observable phenomenon in healthcare, in financial regulation and, it seems, in energy efficiency standards.

When governments set efficiency regulations such as the US Corporate Average Fuel Economy standards for vehicles, they are often what is called “attribute-based”, meaning that the rules take other characteristics into consideration when determining compliance. The Cafe standards, for example, vary according to the “footprint” of the vehicle: the area enclosed by its wheels. In Japan, fuel economy standards are weight-based. Like all regulations, fuel economy standards create incentives to game the system, and where attributes are important, that can mean finding ways to exploit the variations in requirements. There have long been suspicions that the footprint-based Cafe standards would encourage manufacturers to make larger cars for the US market, but a paper this week from Koichiro Ito of the University of Chicago and James Sallee of the University of California Berkeley provided the strongest evidence yet that those fears are likely to be justified.

Mr Ito and Mr Sallee looked at Japan’s experience with weight-based fuel economy standards, which changed in 2009, and concluded that “the Japanese car market has experienced a notable increase in weight in response to attribute-based regulation”. In the US, the Cafe standards create a similar pressure, but expressed in terms of size rather that weight. Mr Ito suggested that in Ford’s decision to end almost all car production in North America to focus on SUVs and trucks, “policy plays a substantial role”. It is not just that manufacturers are focusing on larger models; specific models are also getting bigger. Ford’s move, Mr Ito wrote, should be seen as an “alarm bell” warning of the flaws in the Cafe system. He suggests an alternative framework with a uniform standard and tradeable credits, as a more effective and lower-cost option. With the Trump administration now reviewing fuel economy and emissions standards, and facing challenges from California and many other states, the vehicle manufacturers appear to be in a state of confusion. An elegant idea for preserving plans for improving fuel economy while reducing the cost of compliance could be very welcome.

Crude hits $80

The most effective way to improve fuel economy is to put up the price of fuel. US politicians have generally been reluctant to do that, but over the past year world oil markets have obliged. Brent crude hit $80 a barrel this week for the first time since 2014, driven up by strong global demand, production curbs from Opec and its allies, the collapse of Venezuela’s oil industry, and the prospect that Iran’s exports will be cut following the US decision to withdraw from the international deal over the country’s nuclear programme. It is still uncertain how much Iranian oil will be taken off the market. The European Commission has set out plans to shield EU companies from the impact of renewed US sanctions, including member countries making direct payments for oil to Iran’s central bank. Total of France, which became the largest foreign investor in Iran’s energy sector after sanctions were eased in 2016, this week said it would be forced to pull out of the country unless it could be protected from US penalties. Patrick Pouyanné, Total’s chief executive, said in conversation with Sarah Ladislaw at the Center for Strategic and International Studies in Washington that if the business faced secondary sanctions for operating in Iran, “there is no possibility for us to be a major company, a global company.” He added that he “would not be surprised” to see oil at $100 a barrel in the coming months.

The rise in the price of oil is approaching the point where it is a concern for consumers, and also for some producers. Saudi Arabian officials had been dropping hints that they saw $80 a barrel as a good price for oil, acceptable to both producers and consumers. At $100, demand destruction becomes much more likely, through a combination of improved efficiency and a slowdown in the world economy. Saudi Arabia said Khalid al-Falih, its energy minister, had spoken to Suhail Al Mazrouei, his counterpart from the United Arab Emirates, to express “concern over the fluctuations that marred the market recently following geopolitical incidents despite a supply surplus”. The two ministers were said to have agreed to “co-operate with each other and with other producing countries . . . to guarantee the stability of the market”. Mr Falih tweeted that he had spoken to a number of other ministers as well, to co-ordinate global action to ease oil market anxiety”. He also tweeted that he had spoken to Fatih Birol, executive director of the International Energy Agency, “to reassure him of our commitment to the stability of oil markets and the global economy”.

Transatlantic tensions also emerged this week over gas supplies. President Donald Trump is pressing Germany to drop its support for the planned Nord Stream 2 gas pipeline from Russia, in exchange for the US starting talks with the EU on a new trade deal, the Wall Street Journal reported. Sandra Oudkirk, the US deputy assistant secretary of state for energy diplomacy, added to the pressure, saying the project raised concerns because it created opportunities for Russia to put new listening systems in the Baltic Sea. Lower Russian gas sales to Germany and other EU countries could mean greater opportunities for US LNG exporters. The US Commodity Futures Trading Commission this week issued an analysis arguing that as the global LNG market continued to grow, US exports would have “the most rapid growth rate and a competitive price advantage”. Peter Altmaier, the German economy minister who is a close ally of Chancellor Angela Merkel, accused the US of wanting to block Nord Stream 2 because it was “looking for markets”.

One of the biggest blind spots for international energy policy is air-conditioning, the IEA warned this week. A fascinating report from the agency on the future of cooling suggested that unless governments encourage consumers towards more efficient equipment, the increase in electricity generation needed to power all the new air-conditioning systems installed by 2050 could equal the entire consumption of the US, the EU and Japan today. A quick look at the variation in air-conditioning use between countries gives an idea of how much demand could grow in countries such as Indonesia, South Africa and India.

There were 10.3m people employed in renewable energy worldwide last year, up about 5 per cent from 2016, according to the International Renewable Energy Agency.

The Piper Alpha disaster in the North Sea was the worst accident in the history of the offshore oil industry, killing 167 people. Its 30th anniversary will be commemorated at a service in Aberdeen on July 6.

Estimates of the electricity used by the bitcoin network have varied widely, but suggestions that its consumption is not significant seem increasingly difficult to maintain. A new study, described as “the first rigorously peer-reviewed article” on the subject, puts it at a minimum of 2.55 gigawatts, or about the same as the power consumption of Ireland. It is rising fast, roughly doubling in the past six months, and is expected to double again by the end of the year. If growth continues at that rate, by the end of next year the cryptocurrency could be consuming 1.8 per cent of the world’s electricity, or more than all the world’s solar panels produce today.

And finally: Gas-rich Qatar has for almost a year been under an embargo from four Arab states — Saudi Arabia, the United Arab Emirates, Bahrain and Egypt — and has been trying a number of different ways to win support in the US. Its latest move this week has been to help pay for keeping the Washington subway running later than usual so hockey fans could take the train home from the Washington Capitals’ playoff game against Tampa Bay Lightning on Thursday night. The gesture, worth about $100,000, was less of a PR coup than it might have been, however: the home team lost the game 4-2.

Other views

Nick Butler — How to make sense of the volatile natural gas market

John Kemp — Rising oil prices herald next phase in cycle

David Roberts — California’s rooftop solar panel mandate: the case for and against

Michael Shellenberger — If renewables are so great for the environment, why do they keep destroying it?

Konrad Szymanski — Russia’s Nord Stream 2 pipeline should not be built

John Engle — The Tesla Semi is dead

Robin Mills — Iran oil and sanctions

Dan Reicher — The Department of Energy’s Loan Guarantee Program presents a crucial opportunity to fund U.S. infrastructure

Quote of the week

“Today evening held detailed discussions over telephone with Saudi Oil Minister @Khalid_AlFalih; reviewed bilateral energy co-operation and in particular the current oil market situation . . . I expressed my concern about rising prices of crude oil & its negative impact on consumers and the Indian economy; reiterated the need for stable and moderate crude oil prices” — Dharmendra Pradhan, India’s minister of petroleum and natural gas, uses Twitter to highlight his country’s concern about the impact of rising fuel prices.

Chart of the week

As concerns grow over the prospect of some of Iran’s oil being taken off world markets, the US Energy Information Administration had a useful reminder of just how important the country is for long-term crude supplies.

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