Streetwise Professor

The good news: Gazprom is under increasing pressure from weak demand in its primary market-Europe-and growing gas production.  A couple of interesting data points.

First, in the first 9 months of 2012, Gazprom paid its European customers $4.4 billion in price adjustments as the result of contract renegotiations.  (h/t @NoGazprom).  Moreover, additional renegotiations are ongoing.  The customers demanded Gazprom refund some money because the oil-linked price in the contracts was well out of line with gas values (as indicated by spot prices).  Although Gazprom continues to cling to the oil linkage, the trend is clearly away from these traditional contracts due to burgeoning spot volumes.  This renders increasingly hollow Gazprom’s claims that spot markets are insufficiently liquid to make spot prices reliable benchmarks in sales contracts.

This is not a trival sum.  It represents about 7 percent of Gazprom’s 9M2012 revenues, and more than 15 percent of its 9M2012 profits.

Second, Norway is rapidly taking away market share from Gazprom.  (Could this have anything to do with Norway’s movement toward spot pricing?)

Norway, Russia’s closest rival in the European gas market, seems to overtaking Russia’s Gazprom. Norway boasted record high exports in 2012, while Gazprom suffered the worst numbers in 10 years.

Norway increased its exports 16% in 2012 to reach 107.6bn cubic metres, according to Europe’s key statistics office Eurostat. This is “a record level, close to the Russian gas exports to Europe,” Michael Korchyomkin, head of East European Gas Analysis, told Kommersant daily.

During the same period, Russia’s gas giant Gazprom cut sales to Europe and Turkey by 8%, according to the company’s head Aleksey Miller. That’s the lowest export level for the last decade, Korchyomkin said.

At the moment Norway is breathing down Russia’s neck in its key European market – Germany. In 2011 Gazprom supplied 30bln cubic meters out of the total 80bn cubic meters of gas Germany consumes annually. Norway sold just a bit less – 28bn cubic meters. Norway’s Statoil accounts for about 70% of the country’s exports and in 2012 signed a 10 year contract to supply gas to Germany’s Wintershall.

These are present pressures.  Future problems potentially loom even larger.  Most notably, the likelihood that world gas supplies will grow dramatically.  Initial hopes for rapid output increases in Poland and Ukraine appear to be overoptimistic, but eventually it is likely that these countries will start producing in commercial quantities.  If political obstacles can be surmounted in the US, large and increasing volumes of LNG exports will be looking for markets-including Gazprom’s current European markets, and the Asian markets it hopes to serve in the future.

One of the potentially most dangerous threats, though, is the huge offshore gas resources in the eastern Mediterranean, off Cyprus, Syria, and Israel.  Some analysts think that gas has the potential to turn Cyprus from financial basketcase into a prosperous and self-sufficient country.

The eastern Med gas is a particular threat to Gazprom because of its proximity to the company’s largest markets-Europe and Turkey.

Which is exactly why Gazprom and Russia have a tremendous incentive to make sure the underwater gas stays underwater.  Russia’s tentacles reach deep into every aspect of Cyprus’s economy and government.  Thus, not only does it have the motive, it has the means to impede Cypriot efforts to develop its gas resources.  Not to mention  that Russia has little incentive for Cyprus to escape basketcasedom.  A financially secure Cyprus would not need to provide a haven for dirty Russian money (but I repeat myself), which is about all that keeps the island afloat right now.  And oligarchs and corrupt  bureaucrats desperately want such a haven.

Given the instability and geopolitical fissures in that region Russia has other levers it can pull to stymie development of gas in Syrian and Israeli waters.  This article from the Economist gives just a few of the geopolitical obstacles in the way of commercializing the offshore gas.  It should be child’s play for Russia to get Turkey, Lebanon, Syria (or even an Alawite rump state conveniently located on the coast), and Israel embroiled in all kinds of squabbles that will delay considerably the development of the gas resources-perhaps forever.  There is plenty of animosity and mistrust to go around, which can easily be manipulated by an opportunistic Russia to ensure that not one molecule of Med methane makes it to mainland Europe.

Which means that the strains on Gazprom have more than economic relevance for Russia.  They have geopolitical ramifications as well. And those ramifications are not good. Russia has a vital economic stake in keeping the Levant in turmoil-and in keeping a client in power there.  It has shown no compunctions in the past about fomenting trouble, or interfering with attempts to solve it, when its economic interests are at stake.  Given the huge dependence of Russia-and the Putin model in particular-on the Gazprom rent stream this is a matter of survival to the Putin regime.  And that’s the bad news: Gazprom’s troubles give it and Russia a strong incentive to make trouble in the Levant.

One of the most ambiguous, and often damning, phrases in a school or performance review is “works to his potential.”  Left unsaid is just what that potential is, and the comparison of performance to personal potential, rather than to the performance of peers, is often a polite way of communicating that that potential is rather low.  The quintessential way to damn with faint praise.

This came to mind when reading about a spat between Medvedev and a high ranking official at the Russian central bank.  Medvedev is pushing for 5 percent growth:

“The government’s main aim is to reach steady economic growth of at least 5% [a year], and achieve stable growth of Russian citizens’ wellbeing,” Mr. Medvedev said

But Central Bank first deputy chairman Alexei Ulyukayev rained on that parade, and delivered the devastating “works to potential” performance review:

We at the central bank of the Russian Federation assume that in Russia… economic growth roughly matches its potential.

That growth, mind you, is in the 3.5 percent range.  4 pct would be a major achievement.

This is rather pathetic for a country at Russia’s stage of development, and is a far cry from the pre-crisis growth rate.  In part, this reflects moribund world economic performance.  Europe is continuing to stall. China is on another sugar high, but the pressing need to transition from an investment-and-export-driven model will result in a decline in growth rates there as well.  The US is bumping along, and the impending Health Care Cliff and continued fiscal policy uncertainty will serve as drags on growth.

But it also reflects Russia-specific factors, and is in fact a damning verdict on Putinism.  Two other speakers at the conference where Medvedev and Ulyukayev spoke, Alexi Kudrin and my friend Sergei Guriev, pointedly said that Russia’s institutional deficit were the major drivers of its mediocre potential:

But Sergei Guriev, an influential economist and government adviser, warned in an op-ed Wednesday in the Vedomosti daily newspaper that the Kremlin is in danger of falling short of its targets for improving the investment environment because of slow progress on privatization and other moves to liberalize the economy.

Former Finance Minister Alexei Kudrin, who was also at the conference, warned that lack of reforms means “there are no grounds to achieve economic growth of more than 4% for the next five to seven years.”

Mr. Kudrin, who lost his job September 2011 over a disagreement with Mr. Medvedev over a sharp rise in social and military spending, blamed the lack of reforms on the government, which prefers “to throw in money to resolve problems and rely on oil prices,” he said.

Putin’s purgatory, indeed.  The mania for stability, the fear of change, the vested interest of the elites in the existing system, and the stasis that inevitably occurs with an aging leadership will conspire to throttle any “moves to liberalize the economy” and to encourage throwing oil money at problems.

Meaning that Russia’s potential for growth is nowhere near 5 percent.

The US Senate s sometimes called the World’s Greatest Deliberative Body.  At times-most times, in fact-it seems that it would be more apt to call it the Deliberative Body With the World’s Greatest Proportion of Room Temperature IQs.  Many notable dimwits come to mind-Barbara Boxer, for instance. But the dearly departed (from the Senate, anyways) Blanche Lincoln was oh-so-special in her dimness.

As a sort of parting gift prior to her electoral rout in 2010, Blanche succeeded in inserting the eponymous Lincoln Amendment into Frankendodd.  This was the “swaps push out” provision, which precluded any “swaps entity” from receiving assistance from the Federal Reserve.  This requires banks to “push out” dealing in derivatives to separately capitalized subsidiaries that have no access to the Fed discount window, or other sources of federal support.

Crucially, the Lincoln Amendment was limited: basically, only equity derivatives, some credit derivatives, and commodity derivatives (with the exception of gold) were pushed out.  Banks were allowed to maintain their bread-and-butter rates derivatives business, as well as some of their credit trading businesses.  I guess the theory was that commodities are scary risky, but banks can’t jeopardize themselves by playing in interest rates.  Or something.

Well, that’s true of US banks, anyways.  But due to the meticulous drafting that characterizes Frankendodd, branches of foreign banks cannot avail themselves of the same exemptions.  This includes behemoths like Barclays and Deutsche Bank.

So now the Fed is trying to clean up after Congress, endeavoring to find ways to blunt the effects the provisions of the Lincoln Amendment on foreign banks.  Easier said than done, because despite the fact that “Ms Lincoln called her amendment’s treatment of foreign banks’ uninsured US branches a ‘significant oversight’ that was “unfortunate and clearly unintended. . . . the language of the legislation is clear, regulators are unable to use [Lincoln’s] statements on the Senate floor to unilaterally change the implementation of the law. ”

Good times.  Good times. Just another of the land mines lurking in Frankendodd.  Think of how many more are to be found.  And how many are buried in Obamacare.

Like I said.  Good times.

Proving again that Al will never let consistency of principle stand between him a a big payday, he is walking away from the sale of Current TV (surely you’re eyes are always glued to that, right?) to Al Jazeera with a reported $70 million.  Al Jazeera, of course, is largely funded by the Qatari government.  And Qatar is a major producer of the fossil fuels that Al dreads so much, particularly natural gas.  Indeed, Qatar is the world’s largest exporter of LNG, accounting in 2011 for 75.5 million tons out of a world total of 241.5 MT, far outdistancing number two exporter Malaysia which exports only a third of Qatar’s volumes. Quite impressive, given that Qatar only began LNG production in 1997.

But maybe there is some consistency here.  Al hates fracking.  Qatar hates fracking too.  Increases in output of gas in the US due to the fracking revolution, and the potential migration of that technology to other regions, represents a major threat to Qatari export volumes, and the price it can get from those exports.  Qatar is already cutting back spot volumes trying to lock Asian customers into long term contracts in anticipation of increased competition resulting from increased output of non-conventional gas, as well as gas offshore gas produced in Australia.

Qatar is no doubt looking for ways to crank up the propaganda war on fracking, and Current TV’s prog audience (to the extent it has an audience) is highly receptive to that message.  Need proof of that? New York governor Andrew Cuomo is allegedly spiking a state-commissioned report that demonstrates that fracking does not present a health risk. Why? Well let’s hear it from the horse’s mouth (and yeah, the other end too), the New York Times: “Mr. Cuomo, a Democrat, has long delayed making a decision, unnerved in part by strident opposition on his party’s left.”

So Current, which would not even enter into negotiations to sell to Glenn Beck because “they wanted to sell to someone they are ideologically in line with”, has apparently succeeded in that objective.  They found a fellow fracking foe to buy the network, therefore no doubt easing whatever qualms they have about selling to a network known for Jew hatred, which receives funding from a country that has become notorious of late for being the main arms trafficker for civil wars in Syria, Libya, and now Mali, with many of these weapons allegedly going to Al Qaeda affiliates.

Qatar bears watching.   It is difficult to figure out what its game is.  It is, as just noted, heavily involved in intramural Muslim conflicts in Africa and the Middle East.  Some of this is easy to understand: fighting Syria is a proxy war against arch-foe Iran.  The broader support for radical Islamic elements is far more difficult to understand, and quite troubling.   Is Qatar operating on its own?  Is it a Saudi cutout?  Qatar has also had tempestuous relations with Russia, culminating with a downgrading of relations following the battery of three Russian diplomats including the ambassador at the Doha airport: the fight erupted when Qatari securities and customs personnel attempted to wrest a diplomatic pouch from the ambassador.

But Al apparently doesn’t care about all this.  He has the green, and his green conscience is salved by a transaction with a fracking foe.  Even one whose gas exports account for 206,250,000 tons of CO2 every year, and whose oil production generates another 205,000,000 or so tons, volumes that commenter Green as Grass helpfully points out allow Qatar to claim the title of world’s largest CO2 producer per capita.  There’s an inconvenient truth for you, eh Al?

It’s been known for centuries that comparative advantage and relative factor endowments should drive trade patterns.   The fracking revolution has led to a dramatic change in US comparative advantage and factor endowments.  Basic economics tells us that this should drive a change in trading patterns, and in particular, it makes it efficient for the US to export natural gas, once the requisite infrastructure is in place.

Prices tell the story.  There is a a yawning gap between prices in Europe and Asia, and prices in the US.  Price signals are screaming: invest in export infrastructure, and export gas.

But politicians are deaf to basic economics, and to policies that promote efficiency.  They listen to the importuning of organized interests, and these interests are often diametrically opposed to economic efficiency.

Natural gas is a case in point.  Rep. Ed Markey (D-MA) has long been beating the drum to restrict natural gas exports.  And now he has company, Senator Ron Wyden (D-OR):

New discoveries of natural gas are beginning to transform the U.S. economy, and energy companies say exporting it is the next logical step. But a call for restraint is coming from Sen. Ron Wyden.

The Oregon Democrat, who will have a powerful perch in Congress to influence the debate, has been fielding substantial home-state opposition to such exports. The brewing fight illustrates how energy abundance can be just as divisive in Washington as a shortage, a theme likely to play out in coming years as the U.S. deals with growing energy supplies.

. . . .

Hours after the report came out, Mr. Wyden was sitting at Bistro Cacao, a French restaurant a few blocks from the Capitol, with Andrew Liveris, chief executive of Dow Chemical Co.,  one of the largest natural-gas-consuming companies in the U.S.

. . . .

“I want to make sure we look for the opportunities…to the greatest extent possible, to export value-added products rather than the raw material,” the senator said in a recent interview.

“Natural gas is a strategic American advantage,” he added. “We’ve got it. The whole world wants it.”

And the market is the best way to determine the most efficient way to exploit that advantage. But Sen. Wyden, thinks he is Goldilocks, and knows the price that is just right:

That is one reason Mr. Wyden hasn’t proposed an outright energy export ban. Instead, he suggests softer restrictions such as a cap. “How can policy makers look to find a sweet spot where you can allow exports to keep wells in production without letting exports drive prices so high that they hurt the American manufacturers?” he said.

This is an illustration of the Peltzman-Becker theory of regulation in action.  Politicians buy political support by balancing between competing interests.  Wyden is trying to buy support from domestic gas consumers by proposing to restrict exports, thereby keeping prices lower.  But he doesn’t want prices too low, because that would lead to fierce opposition from energy producers.  So he is looking for “softer restrictions.” He wants to take, but not too much.

How generous of him.  But it’s not generosity, really.  It is the logic of the stationary bandit, and the optimizing politician balancing support and opposition.

Distributive effects drive politics and regulation, not efficiency.  Efficiency is not irrelevant, because politicians like to have a bigger pie to divvy out, but they are willing to incur substantial efficiency penalties in order to achieve distributive goals.  Here, Wyden is proposing to deliver a big gift to Dow and other chemical producers (and other major industrial consumers of gas).  But for every dollar Dow gets, somebody else loses a dollar, and crucially, some cents are destroyed.  There will be deadweight losses.   Too little gas will be produced.  Too little gas will be exported.  Too much will be consumed domestically.

This is just one example of how politics and regulation destroys wealth.  Multiply this thousands of time over, in just about every good and service you can think of.  Everything from haircuts to energy to medicine.  These things kill income and growth, by a thousand cuts.

The amazing-and disturbing-thing about the Wyden article is the very matter-of-fact treatment Wyden’s threatened intervention gets in the article.  It’s the natural order of things that a senator can just arrogate to himself the power to shift around billions at a whim.

And the whim part is important.  Any investment, and plan, is vulnerable to the whims of politicians looking to redistribute wealth to favored interests.  You do something that creates a substantial amount of wealth, you attract those who believe it is their God given right to redistribute it.  In essence, politicians have an option on innovation and the fruits of hard work: tails you lose, heads you share .   This uncertainty, this risk, and the innovators’ short option position are drags on investment and hence growth.  Moreover, management of this risk involves the direction of valuable resources-including the time of top management-into rent seeking activities.  More waste, another drag on growth.

All the yammering over the “fiscal cliff” is a distraction, a near irrelevance.  All the fear mongering is predicated on Keynesian mumbo jumbo, so it will be more of a pothole than a cliff.  The real threat is the accumulation of interventions like those that Wyden is proposing, that collectively serve to reduce wealth and income, and sap growth.   That is the real cliff we have to worry about.  All of the budgetary and fiscal issues become far more more intractable, the lower is growth.   The sclerosis that results from the overbearing interventions in matters large and small will make a fiscal crisis far more likely, because our ability to create wealth will not be able to accommodate the insatiable demands of the entitlement state.

One of the stock lines of a movie mafia don is the veiled threat, all wrapped up in an apparent expression of good will.  “Nice little business (or family) you have here.  Would be a tragedy if something happened to it.”

Don Vladimir played this role to the hilt in his End of the World press conference.  (When it got to the 3 hour mark, I imagine that most of the people in attendance were thinking the end of the world  sounded like a good idea.)

His first target: the AAR group of oligarchs, now flush with cash from their sale of  their stake in TNK-BP:

Putin said the TNK billionaires won’t be forced to invest the sale proceeds in Russia. “If we recognize the lawful, legitimate owners, if they earned their money legally, then it’s their business where they invest,” Putin said.

Government officials and executives from several Russian companies are in talks with “some participants in this deal” about investing the TNK-BP (TNBP) proceeds in the Russian economy, Putin said. “I hope they’ll decide in favor of investing in the Russian economy.”

“If we [who is this we?] recognize”?  “If they earned their money legally”?  Had there been any previous suggestion of illegality?  These guys have been in business since the 90s, with virtually no interference from the government.  Only now is the legality of their previous activities is questionable?

No.  The message is clear.  Invest in Russia.  Or else.  The else being “we” (i.e., Putin and Sechin et al) will find some reason in Fridman et al‘s past conduct to take away their money.   The most likely something being traceable to “loans for shares” in the Yeltsin years.

But he promises these measures will be “careful, civilized.”  I’ll bet.  Like the measures used against Khodorkovsky.

Speaking of whom, Khodorkovsky was the “beneficiary” of a truly creepy expression of Putin’s “goodwill.”

President Vladimir Putin today wished Khodorkovsky “good health” after his release and said he hadn’t influenced the courts on the former billionaire Yukos Oil Co. owner’s case. Khodorkovsky and his business partner, Platon Lebedev, had their terms cut to 11 years from 13 years by the Moscow City Court.

I mean, that is right out of the mouth of a movie mafiosi.  Translation: if you want to keep your health, keep your mouth shut and your money out of politics.

It’s pathetic, really (though in a different way than Medvedev is pathetic).  Putin is becoming a self-caricature.   This is another symptom of stasis, Putin’s purgatory.

By “they” I mean Gazprom, and by “it” I mean pricing long term European gas contracts off of a spot gas index, rather than an oil index:

Norway’s Statoil ASA signed a 10-year gas supply deal with Germany’s Wintershall AG, based on spot gas prices that challenged Russian gas export monopoly OAO Gazprom, which insists on oil-linked prices despite European Union opposition.

Statoil agreed on Tuesday to supply Wintershall, the natural gas unit of chemicals firm BASF SE, with 45 billion cubic metres of gas worth $17.4-billion (U.S.) at current prices, in a deal aimed at creating a flexible gas market in northwestern Europe.

“This is the first contract of such magnitude and length in continental Europe,” Statoil executive vice-president Eldar Saetre told Reuters.

Government-controlled Statoil, Europe’s second biggest gas supplier after Gazprom, is now selling about half of its gas under spot terms, including more than 40 per cent of its European gas, Mr. Saetre said.

As I’ve often written, there will be a positive feedback effect here.  More index-linked pricing will enhance the liquidity of the spot market and the spot indices, making gas hub indexed pricing more viable, and on and on.  Note this:

Analysts at SocGen said oil-indexation was already down to 55 per cent of total volumes of gas sales in Europe, and that spot indexation would be the dominant form of pricing by 2014.

The tipping point is nigh.  So Gazprom can hold its breath insisting on oil linked pricing until it turns blue, but competitive pressure and the insistence of buyers and the increasingly evident absurdity of its denigration of gas index pricing will eventually force it to capitulate.

This is one source of trouble for Gazprom.  Another source is the shale gas revolution.  It’s not right to say that there’s gas under every rock, but it’s not too much of an exaggeration to say there’s gas in every rock, and becoming easier to access every day.  Like in Algeria.

Other sources of trouble are closer to home.  Like Ukraine (“Little Sovok”) threatening to cut purchases of gas from Russia (“Great Sovok”).

And as Anders Aslund points out, at home proper-through an insane investment program pushed by Putin.  Even though North Stream is operating below capacity, it is plunging ahead with South Stream (gas supplies to be named later) and adding additional capacity on North Stream at a combined cost in the $50 billion range.  It is also moving forward on a massive greenfield production and LNG project in Siberia (cost-$40-$65 billion) to supply China.  You know, that big Asian country that Russia has failed to negotiate a deal with for traditional piped gas despite 5 (or is it 6?) years of bargaining: but hey, they’ve agreed on everything but price!

So, Gazprom is supposed to complete a gargantuan production and LNG project on spec, and negotiate the terms with the Chinese later, after the investment is sunk?  How do you say “holdup” in Russian?  And did I mention that Gazprom has never delivered on an LNG project?

That makes sense how, exactly?

The only way it makes sense is as a means of tunneling resources out of Gazprom into well connected pockets from steel pipe makers to Putin.  But that’s the epitome of good sense in Russia.

Aslund is right that the world’s most malign company-Gazprom-is in desperate straits.  Indeed, the splurge suggests that they know the game is up and are tunneling while the tunneling is good.  Maybe Putin realizes the game is up, and as Aslund suggests, is putting his chips on Rosneft instead, and in the meantime is directing an insane capital investment program to move as much money out of Gazprom as possible.  (Sechin’s ascendence is bad news for Gazprom as well: the bad blood between him and Gazprom is well known.  Thinking of which also reminds me of how insane BP was to go to Sechin to help them out with their Kovytka problem with Gazprom.  What could they have been thinking?)

This is all quite encouraging.

Who says there’s no good news?

In the futures pits, the bane of traders’ existences was an outtrade-when a trade was submitted for clearing but the buyer and seller couldn’t be matched.  An outtrade could be due to a difference or price or quantity.  The worst kind was when both parties thought they were on the same side of the trade.  Another kind of scary outtrade was when a trader said he bought, but there was no matching sale, or the reverse.

Ukraine and a Spanish company have such an outtrade apparently.  To the tune of $1.1 billion:

Ukraine, keen to show it is weaning itself off Russian gas, announced on Monday it had created a consortium to build a $1.1 billion liquefied natural gas plant, but its reported partner, Gas Natural of Spain, swiftly denied any involvement.

Ukraine said it would build the first LNG regasification terminal within its borders, in partnership with Gas Natural, which would allow it to import gas from all over the world, breaking its dependence on Russia.

But Gas Natural flatly denied signing any deal with Ukraine.

“Gas Natural has not signed any contract to invest in an LNG plant in the Ukraine, nor are we leading any consortium to develop such a terminal… nor are we studying anything along these lines,” the company said in a statement. [Sounds pretty definitive!  No ‘effing way I traded with you lot. I didn’t even think about trading with you lot.]

. . . .

Even after the official denial by Gas Natural, Ukraine’s state investment agency insisted the deal had been signed and said it was looking into the report stating otherwise.

“There must have been some miscommunication,” a spokeswoman for the agency said.

A miscommunication.  Over $1.1 billion.  It could happen to anyone!

As sometime commenter Elmer says, Ukraine is sovok.  It shows, and maybe this is an example of that.  But I wonder if sovok central-Russia-put the word in a Spanish ear.

Apropos my visit to Germany: Bloomberg reproduced a piece from InsideClimateNews.com titled “Can the US Create Its Own German-Style Energy Revolution.”  It is a paean to Germany’s Energiewende. Indeed, it is the capstone to a 6 part series (available as an Amazon eBook!) plus a slide show that is one big slobbering wet kiss to Germany’s top-down policies designed at controlling how energy is produced and consumed.  And of course, German top-down social control policies have always worked out so well.

The piece is a classic in the genre.  It measures “progress” in alternative energy purely by outputs.  How many MWs generated by wind.  How many generated by solar.  The cost of these MWs as compared to alternatives is not even mentioned, except obliquely.  And that oblique reference illustrates the absurdity of the whole exercise, not that the author of the piece notices:

For Tunnicliff, who works in natural resource management, adopting native landscape was a logical choice in a desert climate. Bolted to his roof was another rational choice: a solar photovoltaic system that supplies most of his family’s electricity needs. He installed the system even though he estimates it will take 12 years to break even on the investment.

“That is the future of energy,” he said, pointing to the dark blue panels on his roof.

12 years to break even on solar.  In Phoenix.  If that’s the future, we’re screwed.

Interestingly-but not surprisingly-the piece fails to mention any of the problems with Energiewende, in particular the huge costs of implementing the policy-costs that are far larger than originally estimated, and which are causing unease even in the relatively docile German populace as electricity tariffs are skyrocketing.  It also fails to mention the degradation in electricity quality that results from a reliance on solar and wind, which are vulnerable to the vagaries of the weather.

But there is one paragraph in the piece that should be sufficient to convince any American that this is a crack-brained idea:

The absurdity of the U.S. impasse over energy reform was highlighted when the primary author of the Germany law, Hans-Josef Fell, told me what I already had heard from other German leaders—that he was inspired to write the act by what today seems like an unlikely source.

“Your President Jimmy Carter was the first politician to promote an industrial revolution with renewables,” Fell said when we met in his Berlin office in April. “I looked to the USA in the 1970s. There was wind power in California and solar power on the White House. I thought, ‘Oh, this is wonderful! Why can’t we have this in Germany?'”

Jimmy Carter thought it was a great idea.  That’s all you need to know.

We don’t need energy revolutions.  We need energy evolution that is driven by balancing costs and benefits.  Costs and benefits that are highly unpredictable, and which can change rapidly in short periods due to technological, economic, and political shocks.   Exactly the circumstances in which top-down, socially planned, command-and-control-type approaches are extraordinarily inefficient, and prone to creating economic havoc.

I think Germany will come to regret Energiewende when it moves beyond dreaming about the environmental benefits and actually has to pay to costs of achieving them.  So let’s hope that the US doesn’t smuggle in Jimmy Carter’s energy policies using Germany as a cutout.

In an effort to defend Obama’s debate #2 defense of his energy policy, Ed Markey, Dim-I mean Dem-MA is scandalized that 20 million acres of leases in the Gulf of Mexico are not being drilled.  (H/T Jim O.)  This part is priceless:

Markey’s study added that about half of the leases have been idle for at least five years and that 80 percent of the idle leases were purchased for less than $300 an acre.

So Ed is mystified that the really cheap leases are disproportionately idle.  I guess he would also be Shocked! Shocked! that deep out-of-the-money stock options are not exercised: why would someone buy a call on Apple struck at $2000 and not exercise it?

But that’s exactly what’s going on here.  The cheap leases are the marginal properties.  The way out-of-the-money development options.  Buyers are willing to pay a little for such properties, on the outside chance that either market developments (e.g., a huge rise in oil prices), or a technological shock (a new drilling method that makes previously inaccessible properties economic to develop), or a new piece of information about the property itself will make it economical to drill on it.

Voyaging into Ed’s head-a rather frightening journey, but anything for you loyal readers!-I imagine he thinks that the companies who leased these properties got a steal.  Hey-they’re cheap! Only $300!  Why don’t they drill?

Memo to Ed: cheap is cheap.   Note that 131 companies compete to lease in the GOM.  Given that competition, the price paid for leases is about the best estimate of value you can get.  That price reflects the option value, and the deep out-of-the-money drilling options will command a low price-and will be developed with very low probability.

But Ed knows better.  And O does too.

Yup.  The clueless presume  rule us, and do so with an infuriating amalgam of ignorance and arrogance.