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The Economist on energy: wishful thinking and outright lies

by Jerome a Paris Sat Jan 13th, 2007 at 10:54:42 AM EST

Predictably, the Economist has an editorial this week on the European Commission's energy package (the unbundling bit, they don't even mention the carbon reduction targets) and on the evil Russian antics against Belarus.

They are even worse than the others, who only repeat the mantra ("more liberalisation is needed"), because they try to present arguments to justify that - which are outright lies or falsehoods.

Here we go again, wading in deep neolib goo.


Do you want Putin's paw on the pipe?

The row with Russia shows how much Europe needs to liberalise its energy markets

ENERGY is so important that it must be treated differently. That is the easy and seductive argument of Europe's “national champions”—firms like E.ON of Germany and EDF of France. Only vertically integrated monopolies, they argue, can guarantee secure supply, by investing enough in local grids and capacity, and by using their might to strike advantageous long-term deals with powerful outside suppliers, like Russia.

Give them credit, at least, for decently presenting the arguments they want to oppose. Apart from the unnecessary adjectives ("easy and seductive"), this is mostly correct.

Energy monopolies and cartels do not like deep, liquid markets that turn energy into a commodity. They like energy islands, which allow them to extract premium prices from consumers. So they do not invest in the vital interconnectors that allow energy to flow from places where it is cheap and plentiful to where it is costly and scarce. That's why it is so hard for gas-poor Germany to import from the neighbouring, gas-rich Netherlands.

The funny thing is that energy is cheap and plentiful in the main continental European market, and more expensive in the "islands", i.e. the peripheries with fewer connections to the main market:

Some of that lack of connection is linked to geographical factors (mountain ranges, sea), and some to sheer lack of planning over the years by the relevant authorities.

And that sentence about Germany and the Netherlands is just weird: Germany has been getting half of Dutch gas exports over the past decade - exports which themselves represent about half of Dutch production. How is it "hard" for Germany to import gas from the Netherlands? It's so hard that Germany even exports some gas back to the Netherlands itself...

So, playing fast and loose with facts, right from the beginning.

Worse, the supposedly secure long-term deals negotiated by the national champions have proved flimsy. Germany, particularly under its previous left-wing government, cultivated embarrassingly close ties with Vladimir Putin's Russia in the name of energy security. But this did not stop the Kremlin casually cutting off oil supplies to Germany (and other European countries) this week as it tried to bring its errant satellite of Belarus to heel in a row over pipeline transit costs (see article). Last winter in a spat with Ukraine it cut the gas off.

There are few long term deals in the oil business - and those that exist are not that constraining - and are usually put in place for the seller to prove that it has a buyer for its oil (a requirement from banks to finance them). Such long term contracts are also quite flexible and a temporary interruption of deliveries for a few days is unlikely to signify a breach of contract.

The fact is, Russia is under no obligation to deliver its oil to us. And Belarus is under no obligation to us to guarantee transit, because there are no long term, all encompassing contracts like on the gas side.

On the gas side, I've written enough about it, but let it be said that Gazprom did not breach its contracts last winter, despite all the hoopla, and has been very careful, over the years, to fulfill their terms. Typically, there's a tolerance for 10-20% variation on the designated volumes, and last year's cut fell easily within that range.

The fact is, despite the prevalent hysteria, it has yet to be proven that the long term contracts with Gazprom proved "flimsy"; GDF and ENI seem to think that they are not, as demonstrated by their recent announcements to extend their existing contracts with Gazprom.

Russia likes to say that it is a reliable partner—and the dispute with Belarus was soon over—but Moscow is reliable only when it wants to be. A combination of political shenanigans and a looming shortage of gas (because of bad management and under-investment) hardly makes Russia look like a dependable partner, especially if you care about consumers, not producers. Cosy deals with Russian energy giants such as Gazprom may suit their Western counterparts; but such murky, inflexible arrangements are bad for customers.

Again, that widely pushed, but little justified idea of a "looming shortage of gas" because (what else?) of bad management and under-investment - with the solution, naturally, being to let Western companies to invest in Russian instead of the obviously incompetent Russians. For a level headed discussion of future Russian gas production, see this paper by Jonathan Stern (THE NEW SECURITY ENVIRONMENT FOR EUROPEAN GAS: WORSENING GEOPOLITICS AND INCREASING GLOBAL COMPETITION FOR LNG (pdf)), who sees the threat to European imports coming more from the fact that Russia's own domestic demand is likely to grow as its economy picks up again, or this more gloomy outlook by *Luis de Sousa* over at the Oil Drum (Natural Gas: How Big is the Problem?), which focuses on total reserves and "peak gas".

In any case, if we are facing "looming shortages", shouldn't we worry just a tiny bit about controlling our demand? Nah, that's for wimps and losers (or the poor, the same thing in the mind of the people at the Economist).

But even in their logic, I fail to see how the long term deals are bad for consumers. If the big gas companies bought too much gas, than they'll be forced to sell it at lower prices on the market or to their consumers to get rid of the excess, and if they bought too little, well then either them or the consumers can go for alternatives. The consumers are not taking the risk - the big companies are taking a risk, by committing to bulk purchases form Gazprom to guarantee availability. There is a quid pro quo - stable demand for stable supply, which seems to be forgotten by the Economist. But of course, such a contract, which reduces risks for the parties without the need for hedging products form investment banks, has to be labelled 'cosy' instead of 'smart'.

That is why the second leg of the commission's energy strategy, a strategic review also unveiled this week, is so important. It wants to use EU money and political clout to build interconnecting pipelines and power lines, such as electricity hook-ups between Germany, Poland and Lithuania and between France and Spain.

Oh, "EU money"?! you mean, public money?! I thought that markets were best to decide and implement infrastrcture investment?! Of course, no mention that, for instance, the France-Spain connecting lines have been blocked because of local opposition, not because EDF or the French government were against it (quite the opposite) - and I fail to see how the markets or EU clout are going to change anything about that.

But public action is okay, so long as it's not French or German, it would seem - or, more to the point, public money to be used for the benefit of market players.

Even more importantly, the commission underlines the need for diversity of supply. One important new route is the Nabucco pipeline which aims to connect Europe with gasfields in the Middle East, Caucasus and Central Asia via the Balkans and Turkey. That bypasses Russia altogether, greatly strengthening Europe's bargaining position, regardless of how much gas it actually carries. Similarly, Europe needs to build more terminals for the import of liquefied natural gas (LNG).

Diversity of supply is indeed a good thing, but again why should this be pushed by the EU? Can't markets do that on their own? Surely diversification and security of supply have a price?

And I must admit I fail to see the logic of the argument that Nabucco "strengthens Europe's bargaining position" (who is Europe, again, in a market context?) regardless of how much gas it carries. The point precisely is (leaving aside for a moment demand-side measures) that we depend on Russian gas because there are not enough alternative supplies - so the volume of these alternatives is highly relevant in such a context; And i won't even delve into the fact that Nabucco brings gas from Turkey to Central Europe - and that Turkey's main supplier is, again, Gazprom, so we may just end up giving another export route to Gazprom gas...

The best way of achieving this is to have a competitive, liberalised market. It is no coincidence that Britain, which has gone furthest in this respect, has the most diverse supply, the strongest infrastructure (including new LNG terminals) and—over the past decade—the lowest prices.

I am bolding this paragraph because this is where the usual claim about more liberalisation being needed is made, and it is backed here by an incantation to the fabled Uk market- all the components of which are false.

Let's see:

Most diverse supply

From the most recent Energy Trends (pdf) by the UK government, we find this:

In the second quarter of 2006, (...) imports of gas accounted for 16.7 per cent of gas available for consumption, compared to 11.2 per cent one year ago. Thus, overall, the above figures reflect the UK’s growing dependency on gas imports as UKCS gas reserves decline.

(...) Imports to the UK are from Belgium via the interconnector and from Norway via the Statfjord and Vesterled pipelines. In the second quarter of 2006, Norwegian gas accounted for 71.3 per cent of UK natural gas imports, compared to 91.1 per cent a year ago.

So, for the second quarter of 2006, we have the following "diversity of supply":

UK: 83%
Norway: 11%
Belgium/Netherlands: 6%

Now let's have a look at France (using evil monopoly GDF numbers as a proxy)

Strongest infrastructure

This is a map for 1998 (from this 1999 presentation, a good date to compare what investments were made in liberalised markets (the UK) and non liberalised ones (continental Europe):

I see one market with several LNG terminals, pipelines from many different origins (Norway, Algeria, Russia), and one with none of that. Which is which?

Would the difference be whether a market needs imports or not, and the governments act accordingly, including via the creation of strong national companies which focus on ensuring security and diversity of supply?

Sure, the UK is building LNG terminal now (as well as a pipeline form Norway) - but that's linked simply to the fact that domestic gas production is declining and alternative sources are needed, along with the corresponding infrastructure. Market structure has little to do with it.

And storage? That graph, courtesy of the FT, speaks for itself, considering that the UK consumes almost as much gas as Germany, and almost 3 times as much as France...

Lower prices

The Economist hedges its assertion by mentioning the "last decade", so it's not an outright lie, but UK gas prices are no, by far, the lowest and, in fact, have been the fastest increasing...

From the most recent EU data (pdf):

Note that market spot prices for Zeebrugge (the "continental" hub in Belgium) and the UK are very close, whioch suggests that arbitrage between the two markets is actually happening and thus that the UK and continental markets are fully interconnected. So, not only does the UK have access to the wider continental European market, but despite this, its prices are higher! Inefficiencies are not where on would think they are, then?

The same document has similar graphs for electricity, which show a similar picture.

So ALL arguments to say that the liberalised market performs better are actually FALSE. Every single fucking one of them.

I'll spare you a couple of paragraphs sliming Germany because Schröder went to work in the Gazprom-led Baltic pipeline company and skip to the conclusion:

When EU ministers consider the commission's proposals in March, they should remember that energy is indeed important and that governments should indeed treat it differently. But that difference should be in using the state's armoury of powers to take on their own champions, not stifling competition in the name of a bogus security. Otherwise, you had better trust Mr Putin.

You don't need to trust Mr Putin to deal with him, just to understand his interests. And if you don't want to dela with him, well, don't put yourself in a position to need the gas he controls, and don't whine if you do.

**Sigh**

('Sigh' is too kind, of course. Rage is more appropriate, but i lack the proper target to direct it towards.)

Display:
category, I give you this:


Chevron Teams Up With Gazprom

Gazprom Neft and Chevron said Thursday that they had formed a joint venture to develop western Siberian oil fields, marking the U.S. oil major's first foray into the Russian market amid jitters over the foreign investment climate.

(...)

Chevron, one of five foreign firms shut out from the Shtokman field when Gazprom canceled a tender to develop it in October, has long been keen to gain a foothold in the lucrative Russian market.

Gazprom Neft, the oil company formed by state-owned Gazprom after it acquired Sibneft from Roman Abramovich in 2005, lacks the expertise needed to boost lagging oil production, analysts said.

[ahhh... the anonymous analysts that allow you to peddle any kind of crap...]

Following a model that has become standard in the country, Gazprom Neft will gain a controlling stake in the venture, while Chevron will provide most of the financing.

Gazprom Neft currently holds 30 percent of the company, but will boost that amount to more than 50 percent, Gazprom Neft said in a statement. Company spokeswoman Natalya Gyalkina declined to provide details on a potential timeline.

Chevron, the second-largest U.S. oil company, will provide most of the capital for Severnaya Taiga Neftegaz.

(...)

"Gazprom Neft and Chevron have been working jointly on evaluating exploration, appraisal and development opportunities in Russia for some time now, and Chevron is please [sic] with the progress up to date," Chevron spokesman Sergei Kuznetsov said in e-mailed remarks.
(...)

Chevron, which has been sparring with the Kremlin over the Caspian Pipeline Consortium in which they both hold large stakes, has been keen to improve relations with its Russian partners, analysts said.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 13th, 2007 at 11:31:52 AM EST
It's the statue, man. The Statue.
by Metatone (metatone [a|t] gmail (dot) com) on Sat Jan 13th, 2007 at 12:20:49 PM EST
[ Parent ]
you guys need to put the link to the piece of dialogue that generated that sentence.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 13th, 2007 at 01:56:41 PM EST
[ Parent ]
Make it the motto of the site, and display it, hyperlinked, under the site logo.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Sat Jan 13th, 2007 at 05:44:16 PM EST
[ Parent ]
Google Bombing, Eh?

A proper campaign begins with expenditures to the right people.

"When the abyss stares at me, it wets its pants." Brian Hopkins

by EricC on Sat Jan 13th, 2007 at 09:29:57 PM EST
[ Parent ]
On this count, there are long systematic errors. I remember in 90es everyone (including western economic advisors) repeated a mantra "FDI will start flowing as soon as inflation is down". In the end, everyone tired waiting, and after 1998 this connection was simply forgotten. Now, there's a similar wait for a stop to investments. I guess it will prove as long and as fruitless as the previous one... at least until Russia remains relatively stable.
by Sargon on Sat Jan 13th, 2007 at 02:16:02 PM EST
[ Parent ]
The thing is - there are real reasons NOT to invest in Russia (arbitrariness, unstalbe legal framework, etc...), but these can be superseded in some sectors (banking, retail) where the market is juicy enough to take the risk, and ignored altogether in sectors like oil&gas where investors, quite simply, will behave as told by the govenrment as long as they stand a chance of earning anything.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 13th, 2007 at 06:13:28 PM EST
[ Parent ]
Of course you are right on the legal framework and such, but given the low base, mean clearly beats variance for all but the extremely risk averse investors (even pension funds should be in broad Russian indexes now, I believe).  I don't really know which sector I wouldn't invest in right now - even utilities are exciting :) not speaking of telecoms.

Actually, it's exactly the legal problems that create wonderful growth opportunities - as transparency goes up, demand for Russian assets skyrockets in sector after sector, accompanied by cries from the Economist... boy, I loved last year's early January - watching value of my investments and reading all that blah blah blah from the Western media!

by Sargon on Sun Jan 14th, 2007 at 07:27:04 AM EST
[ Parent ]
Aargh! Stupid neoliberal Economist! And ordinary reasonable people who do not happen to study energy issues in detail will off course fall for it all.

Someone please remind me why stopped having ideologues shot?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Jan 13th, 2007 at 05:29:23 PM EST
[ Parent ]
One thing puzzles me. Why is Gazprom letting Chevron in on the deal? It's not exactly like they need investment capital. And as you pointed out, Gazprom has plenty of expertise.
by richardk (richard kulisz gmail) on Sun Jan 14th, 2007 at 08:15:13 PM EST
[ Parent ]
  • cheap funding
  • a way to share risk on a difficult project
  • some specific technical or commercial expertise
  • it's inherited from the previous management (Sibneft) and they considered it was not worth creating a big scandal to kill it


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Jan 15th, 2007 at 02:53:12 AM EST
[ Parent ]
... and the fact that they repeat the same mistake over and over and over again means that their analysis can be seen as a credible for anyone who is not wise to the mistake.

And that mistake is simple: presuming the markets have capabilities that they do not have. Markets cannot plan ahead. Markets cannot design complex systems. Therefore, expecting markets to solve a problem that requires planning ahead to design a complex system is like expecting my cat to spell check my prose. I can expect it all I want, but it just aint going to happen.

Take what we know about commodity markets: they have volatile prices and go through extended boom periods and extended bust periods based on periods of excess production capacity and periods of excess demand.

Then turn around and ask any energy-sensitive business firm building a new production facility whether the opportunity of an unexpected 10% drop in total production costs due to a drop in energy costs and the risk of an unexpected 10% increase in total production costs due to a rise in energy costs are two possibilities that cancel out. And they will tell you, no, they do not ... the uncertainty itself is equivalent to an additional cost of doing business.

The Economist implicitly "solves" that problem in the standard neoclassical trick of begging the question ... assuming that a competitive commodity market will over time act as a commodity market is predicted to act in the long run. This ignores the fact that each and every future date will introduce new short run events and new volatility, so that the "long run trend" conditions are, in fact, almost never encountered in the real world.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jan 13th, 2007 at 03:14:59 PM EST
It has been proven 57 different ways the historical price movements of commodities have no affect on future price movements of commodities.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sat Jan 13th, 2007 at 04:01:25 PM EST
[ Parent ]
And that is, after all, precisely what we would expect in a competitive flex-price market. If all available information is incorporated into the price, then the last price movement was incorporating and therefore exhausting new information, and therefore the next price movement is as likely to be in the opposite direction as in the same direction.

Its in fix-price markets, where price movements do not exhaust all available information, that the last price change can help to predict the next price change.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jan 13th, 2007 at 04:08:47 PM EST
[ Parent ]
Agree.  

(Which is boring ;-) so let me add.)

The danger in a fix-price market is new information that should move the price not being incorporated.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Jan 13th, 2007 at 05:32:45 PM EST
[ Parent ]
So it's like the flip of the coin - which has no memory?

You can't be me, I'm taken
by Sven Triloqvist on Sat Jan 13th, 2007 at 04:52:41 PM EST
[ Parent ]
Only if you want to explain things so it is easy to understand.  (laughing)

Essentially ... Yes.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Jan 13th, 2007 at 05:28:52 PM EST
[ Parent ]
Of course I want it to be easy to understand - what else is there?

You can't be me, I'm taken
by Sven Triloqvist on Sat Jan 13th, 2007 at 07:09:13 PM EST
[ Parent ]
That is the theory. According to the theory, neither hedge funds nor warren buffet  can make money, pretty much by definition.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Sat Jan 13th, 2007 at 05:47:11 PM EST
[ Parent ]
A good metaphor, if perhaps not an exact analogy. More precisely, the current price reflects everything that the market remembers up to this point, so the next change will be based on the stuff we don't know yet.

Neoclassical economics gets around the problem of intrinsic uncertainty by pretending that the information exists but is just hidden. Since, after all, once there is true uncertainty, then the present "long run" tells us nothing very useful about the long term future, and we fall into the whole analytically intractible mess of historical time and Keynesian economies.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jan 13th, 2007 at 08:07:41 PM EST
[ Parent ]
But that's only the lesser kind of mistake.

The most egregious one is their refusal to admit - despite actually printing the numbers that prove it - that prices can be lower in a well run non-deregulated market (France) than in a well run deregulated market (the UK).

The mistake you mentionis okay for them to admit. The one I flag goes agaisnt every tenant of their belief system (market vs whatever, UK vs France)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 13th, 2007 at 04:09:23 PM EST
[ Parent ]
A tenant pays you rent, and a tenet you pay homage to.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Sat Jan 13th, 2007 at 05:48:09 PM EST
[ Parent ]


You can't be me, I'm taken
by Sven Triloqvist on Sat Jan 13th, 2007 at 07:11:20 PM EST
[ Parent ]
The fact that all discussion of "the market" designing or planning is just organization planning or designing in the guise of corporate governance rather than democratic governance ... they may recognize that, but they certainly won't come out and say it. Providing "the intelligence" (in the 'military intelligence' sense) for corporate governance to have its way in spite of wishes of democratic governance to the contrary is, after all, part of their main stock in trade.

The fact that a market outcome subordinated to democratic governance planning ahead and designing a complex system can deliver lower prices and superior benefit to business than "unfettered" markets, which must wait upon the event to react to them ... I don't think they can really see that. I reckon they have so completely reified "the market" that they cannot help but think of it as an actual actor in the system. They have indoctrinated themselves so thoroughly that they are simply unable to see that it has no more intelligence than an ameoba.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jan 13th, 2007 at 08:02:53 PM EST
[ Parent ]
<Note: Econmist argument edited for clarity>

Premise:  the commission... wants to use EU money and political clout to build interconnecting pipelines and power lines

Premise:  the commission underlines the need for diversity of supply AND Europe needs to build more terminals for the import of liquefied natural gas

Conclusion:  The best way of achieving this is to have a competitive, liberalised market

This is a great example of the Fallacy of Irrelevance also called the Fallacy of Non Sequitur.  Simply, in these Fallacies the Conclusion has bugger-all to do with the Premises. Specifically, shown above is an example of Drawing the Wrong Conclusion, wherein the evidence presented in the argument (Premises) is tossed when stating the Conclusion.

This is illustrated as soon as we make the equation:
'liberalized market' = 'removal of goverment action in the Market' and substitute for the pronoun (this), viz

Restated Conclusion:  The best way of achieving '[the] use EU money and political clout to build interconnecting pipelines and power lines' is to have a competitive, 'removal of goverment action in the Market' market.

And we see another problem: combining p AND ¬ p in the same logical sentence is a Formal Error invalidating the entire argument.  Why?  'Cause that's what Formal Fallacies do.

So not only does this illustrate the obvious Informal Fallacy a Formal Fallacy is hidden in the verbage as well.

A suspicious mind might consider extra-argumentive reasons ($) for these Fallacies (€), the hidden one (£) especially.  But, I am sure, no one at the Economist would be an intellectual whore merely for monetary gain.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Jan 13th, 2007 at 03:51:01 PM EST
Do youi know this name? If not - get googling

You can't be me, I'm taken
by Sven Triloqvist on Sat Jan 13th, 2007 at 07:13:32 PM EST
[ Parent ]
to help elect Jérôme to be the energy minister for Europe

You can't be me, I'm taken
by Sven Triloqvist on Sat Jan 13th, 2007 at 04:56:06 PM EST
Sorry, you will have to wait.  

We want him for Secretary of Energy in the U.S.

by Plan9 on Sun Jan 14th, 2007 at 02:44:58 PM EST
[ Parent ]
http://www.dailykos.com/story/2007/1/13/183238/672

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 13th, 2007 at 07:22:24 PM EST
I love the blog that you have. I was wondering if you would link my blog to yours and in return I would do the same for your blog. If you want to, my site name is American Legends and the URL is:

www.americanlegends.blogspot.com

If you want to do this just go to my blog and in one of the comments just write your blog name and the URL and I will add it to my site.

Thanks,
Mark

www.americanlegends.blogspot.com

by JMEnglish (JMEnglish@gmail.com) on Sat Jan 13th, 2007 at 10:05:19 PM EST


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