Ceteris Paribus

A common phrase in economics is ceteris paribus, a Latin phrase that essentially translates into “holding all else constant.”  In modeling economic analysis, extraneous factors are abundant.  However, in order to achieve relevance from the resulting conclusions, limitations on the factors must be in place.  By only allowing one factor to change, the direction correlation between the factor and the corresponding output is easily observed.  However, such a clear cut relationship is not always the case in economy.

One of the most overlooked and underplayed factor driving the economy is human will.  Explaining human behavior continues to be a century old challenge.  While the general assumption when studying economics is to either maximize profit or minimize cost, analysis becomes difficult when the parties no longer react in such a rational way. 

Female shoppers have long since been criticized for their compulsion for shoe shopping. Their male counterparts receive equal criticism for their desire for faster, louder cars, snowmobiles, jet skis, or essentially, anything fast and loud.  Simple assumptions do not account for this “irrational” behavior. Neither do these assumptions correctly summarize the entire male and female shopping populations.

But why is this important?  Most of the blog entries so far have focused on renewable energy sources in some facet.  But in reality, the entries have only scratched the surface on entire picture of adjusting from depleteable fossil fuels to cleaner, greener options.  Although graphs and models show an even line with a clear switch point, the reality of the transition will be much more obscure. 

What the entries, and most studies, do not account for is human will.  Although many US citizens support the idea of more environmentally friendly options, many are still not willing to change their consumption habits any times soon.  Eventually the price will be too high for the current energy sources, and price will continue to be an incentive to change behavior.

Caution is needed when using price as the only driving factor, however, in regards to changing behaviors.  Entrepreneurs are continuously looking for opportunities to profit, whether by tweaking current systems slightly, or developing entirely new concepts.  Human ingenuity will continue to play a large part in the transition towards more renewable energy use.  Just as cell phones and home computers where unheard of just a few decades ago, the potential leader in renewable energy may not be discovered yet, at least the technology necessary to efficiently harness our renewable sources. 

Forecasting helps provide insight into future outcomes, yet predicted scenarios do not always come to pass as anticipated.  Malthus argued that the world population would grow past its carry capacity and we could no longer feed our growing population.  As the population double, the farmland did not.  Interestingly enough, the amount of food production more than doubled during that same time, thanks to continuous innovation and technology.

Renewable energy may see a similar story.  Its adoption as the main source may be close in the future or still several decades off.  Whenever the transition, human will and ingenuity will continue to challenge the studies conducted under ceteris paribus.

United States' Energy Usage

After discussing options of renewable energy sources and the impact of oil in our economy, it was suggested to look into what the United States actually consumes energy for.  Residential, commercial, industrial, and transportation are all vital parts of our economy.  They are also markets demanding convenient and reliable energy sources.  But before claiming a new renewable energy source is the answer to less dependence on foreign oil and more environmental sustainably, the breakdown of the United States’ energy demand is necessary.

Surprisingly, the US consumed less energy in 2009 (94.6 quads) than any year since 1999 (97 quads), which was the first year of data the Lawrence Livermore National Laboratory had listed on their site.  The study used quads to measure the energy consumption, with one quad equally the energy produced from burning 36 million tons of coal.   

Even better news is the continued improvements in the renewable energy field.  In fact, according to studies by the Lawrence Livermore National Laboratory, 2009’s energy sources came from more renewable sources than in 2008.  . For example, solar energy increased in that time period from 0.09 quads to 0.11 quads.  Wind energy production also increased from 0.51 quads to 0.70 quads. Finally, the increase in geothermal energy rose from 0.35 quads to 0.37 quads in 2009.  

However, do not let the decreased energy consumption and increased renewable energy production mislead the true impacts of U.S. energy use.  The following chart is from the study conducted by the Lawrence Livermore National Laboratory and US Department of Energy reflecting the 2009 US Energy use.  The most revealing area of the chart is the total amount of energy that is wasted because of inefficiencies.  Theses inefficiencies range from light bulbs, to vehicles, to power plants’ waste heat.  This “rejected energy” counts for almost 55% of the total energy that is produced. 

Overall the United States’ energy efficiency is 42%.  Also, only 1.2% of our total energy consumption comes from solar, wind, and geothermal energy, despite the improvements in these areas.  With petroleum making up 37% of our energy sources, natural gas at 25%, and coal at 21%, the United States is still heavily dependent on exhaustible, nonrenewable sources.  

Incidentally, the largest sector that consumes energy is transportation, almost 40% of all energy consumed.   Residential, commercial, and industrial sectors are around 80% efficient, wasting on 20% of their energy.  Concurrently, the transportation sector is only 25% efficient, wasting 75% of the total energy consume.  The sobering reality is that solar panels and geothermal can help with the energy demands in the residential, commercial, and industrial sectors, but there has been limited progress in developing alternatives for fueling transportation.  

Bike paths, ethanol plants, and flex-fuel vehicles have all attempted to decrease the amount of pollution and nonrenewable energy use throughout the transportation sector.  However, more work is needed, especially in rural areas, extreme weather climates, or sprawling suburbs, where peddling over 50 miles to the nearest grocery store is not a feasible or desirable option.  The path to increased renewable energy will continue to be one of innovation and adaptation.

Oil Influences

A century has passed since the Standard Oil conglomerate was abolished under the Sherman Antitrust Act.  Incidentally, America’s economy uses a variety of sources to fill its energy quota.  However, even with a push for more renewable energy, the US economy is still driven by oil.  Cotton may have been king in the South, but the price of oil remains a dominating factor in many sectors of our economy.  

Agricultural producers are extremely sensitive to any rise in the price of oil.  Although their demand does not decrease from the spike, higher oil prices translate into tighter margins.  In an industry that already operates at near the margin levels, a rise in oil could mean the difference between making a profit and barely breaking even.  Equipment has to run to get the crops planted in the spring, harvested in the fall, and finally, shipped to market.  Incidentally, all of this takes fuel, and fuel prices have continued to rise. 

Oil is a traded commodity, similar to our agricultural products, and is subject to similar market volatility from supply and demand forces.  What makes oil unique from other commodities are the organizations involved in monitoring and even limiting production.

The key player in oil is no longer the infamous Standard Oil, but the Organization of Petroleum Exporting Countries, commonly referred to as OPEC.  Founded in 1960, OPEC consists of leading oil producing countries: Algeria, Qatar, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia and United Arab Emirates, Venezuela.  However, it was not until 1971 that OPEC realized its power in controlling world oil production. 

Up until then, the pricing power laid in the US, mainly with the Texas Railroad Commission.  When the Texas Railroad Commission allowed 100% production, producers in Texas, Oklahoma, and Louisiana were no longer restricted in their output.  Restricted output means less supply, which translates into higher prices.  Higher prices translate into higher profits when the commodities demand is relatively inelastic.  And there are only few substitutes in the market for oil. 

The following charts from WRTG Economics “Oil Price History and Analysis” provide a visual guide behind some of the volatility in oil prices.

Note that the Texas Railroad Commission and OPEC are not the only factors driving the price of oil.  Also, OPEC has not always been successful in controlling market prices. Unless there are methods to enforce guidelines, individual countries have an incentive to cheat, producing more than their quota and then capturing higher returns.  However, if every countries overproduces, the supply will increase, lowering price, and likewise, lowering returns. Because of the incentive to cheat, OPEC has experienced varied success in controlling oil prices.  

As rising oil prices continue to influence the market, and concerns on oil scarcity grow, the demand for other energy sources will also grow.  The current energy consumption is an intricate combination of various sources; time will tell how long the combination will use oil as the main component.

Availability of Options

Renewable energy is promising.  After looking into the types of renewable energy, the availability and feasibility of these sources must also be considered.   While most of these sources are still in the developmental stages, it is still important to observe the abundance of the resources throughout the United States in order to determine if enough of a supply exists to satisfy the growing energy appetite.    Also, the location of the resource may actually lead to a regional renewable energy source, versus a national “brand”.  For example, hydroelectric power is already commonly used in the northwest United States, with many hydroelectric dams placed in their rapid rivers.  Also, numerous ethanol pumps are available in the Corn Belt, the same region that is able to abundantly produce the current corn ethanol input.  We will look into the resource distribution of geothermal, wind and solar sources.

Geothermal is not a new resource for renewable energy and has been used to generate electricity since 1904 by an Italian power plant. Utilizing the earth’s own heat to create energy has resulted in geothermal energy to become an available and trustworthy source of energy.  Qualifications for a geothermal site include available water, high temperatures close to the surface, and rock formations to keep the heated water within a controlled area.  Because of the mandatory conditions, geothermal is not a viable option everywhere.  Citing Black & Veatch’s “Renewable Energy Options” again, they provided valuable graphics displaying the availability of geothermal energy across the US.

Another concern regarding resource availability is wind energy.  While traveling to Orlando, Florida last March, the meteorologists warned us of a windy day with gusts up to 15 miles per hour.  Normally, that may qualify as a breeze in South Dakota.  Understandably, different areas receive different winds speeds.  Furthermore, many areas are not suited for wind energy because of dense populations or environmental concerns.  The following chart, also from the Black & Veatch source, accounts all of these factors in displaying the availability of wind energy. Note: South Dakota boasts large potential, while Florida is out of the picture.

Finally, solar energy.  After capture’s the sun’s rays, the energy can be converted into thermal or electrical energy.  Converting the sun’s energy into electrical energy, or solar photovoltaic, is believed to be one of the most environmentally friendly renewable resources since there is minimal noise or emissions.  While solar energy is available across the US, often there is not enough sunlight to meet a large energy demand.  The downfall of solar energy is the immense amount of sunlight needed to obtain copious amounts to meet commercial scale demand.  The southwestern US appears to be the ideal location for such commercial production.

In conclusion, the US energy demand is not one size fits all and our renewable energy options may not be either.  By creating solar systems in California, Utah Arizona and Nevada, wind farms in Texas to North Dakota and Illinois to Montana, and geothermal west of the Mississippi, the United States may be able to capitalize on our diverse renewable energy sources to create a synergy able of decreasing our dependence of foreign energy.

Renewable Resources Reviewed

While ethanol is an often discussed venture in agriculture and energy industries, ethanol is only one of numerous options of renewable energy.  The concept of using non-depleteable resources to meet our energy needs has been around for decades.  The challenge arises in harnessing those renewable resources into viable forms of energy. 

A 2008 publication by Black & Veatch holding company entitled “Renewable Energy Options” breaks down renewable energy into five different forms.  Biomass is the area that ethanol falls under, and includes deriving energy from organic matter.  Geothermal is using the heat extracted from the earth as energy.  Solar energy is harnessed from the sun’s rays.  Water creates energy from its movement, either in ocean waves or rivers.  The final category is wind, which capitalizes on the movement of air. 

There is a common perception that renewable energy sources are more sustainable and environmentally friendly than their fossil fuel counterparts.  However, this is not always the case. For example, clear-cutting a rainforest for biofuels does more harm than it does good.  Only when the renewable resources are gathered in a sustainable way, are these renewable options beneficial.  Furthermore, that is when using renewable energy sources will actually help decrease our overall carbon footprint. 

The Kyoto Protocol was an international agreement to lower carbon emissions for 37 developed countries.  Since the industrialized nations are primarily responsible for the majority of carbon emissions, the responsibility of lowering these emissions is also placed on them.  The Kyoto Protocol was adopted in 1997 in Japan, and the agreeing countries are to report to their carbon emissions to UN Climate Change Secretariat in Bonn, Germany. 

The United States never agreed to the Kyoto Protocol.  Interestingly enough however, the U.S. is the leader in overall renewable-energy use.  The following study gives a numerical breakdown in electrical use. (Note: the study does not reflect using renewable energy for non-electrical uses, like biofuels).  The 2005 global electricity demand was derived from the following sources: 40.2% coal, 19.7% natural gas, 16.4% hydroelectric, 15.1% nuclear, 6.6% petroleum, and 2.1% of non-hydro renewable resources.  Of that 2.1% in other sources, 1.2% comes from biomass, 0.55% wind, 0.31% geothermal, and 0.01% solar (Black & Veatch).  The U.S. demand used more coal (49.7%) and nuclear (19.3%), similar natural gas (19.1%) and non-hydro renewable (2.3%), and less hydroelectric (6.5%) and petroleum (3%).  

Following the U.S. in renewable energy use are Germany, Denmark, and Spain.  Germany is currently the world leader in solar energy.  Germany is located in the northern part of the northern hemisphere, so the abundant use of solar power in their country may not be intuitively explained by their geography.  Similar to the United State’s subsidies for the ethanol industry, Germany leads the way in solar energy because of their high solar subsides, not because of the strength of sun they receive. 

The Black & Veatch report concludes that the development of renewable energy is a result from the high government programs, not the actual abundance of the energy sources, or any other economic factor.  Time will tell of the current structure will be beneficial in utilizing biomass, geothermal, solar, water, and wind to meet the growing energy needs of the growing world population. 

Corn Ethanol Concerns

Last week’s blog covered possible options regarding different sources for ethanol production.  This week, the current use of corn ethanol will be discussed.  According to the U.S. Department of Energy, half of the gasoline sold in the United States last year contained ten percent ethanol.  Ethanol is advocated as a cleaner fuel than burning straight gasoline, helping meet the clean air standards that were federally mandated several years ago.  The ethanol use in current vehicles is enough to decrease greenhouse gas emissions, especially carbon monoxide emissions, by 30 percent of standard gasoline emissions.

Some limiting factors regarding the current use of ethanol in the United States is the location of E85 vehicles (vehicles designed to use a blended fuel containing 85 percent ethanol), also known as flex fuel vehicles.  There are currently 8 million flex-fuel vehicles on the road, while most of the fuel stations offering E85 fuel are located in the Midwest, especially in the U.S. Corn Belt.  The concentrated location of the E85 fuel limits the ability for the flex-fuel vehicle to take advantage of the cleaner fuel choice, ethanol.  This helps explain the limited about of information regarding the effects of ethanol on a vehicles engine, especially any long term costs or benefits from ethanol use. 

Currently most subsidies are received by ethanol producers, in an effort to provide incentives to invest in this alternative energy source. Retailers and distributors would like to see these subsidies expanded to them as well, with the intention of minimizing the costs associated with offering ethanol products.   Increasing subsidies to more stages of the production and distribution chain would help bring more E85 pumps to areas with an abundance of flex-fuel vehicles.  With the increased access, there would be more opportunity data available on the actual wear and tear resulting from ethanol use.

 Subsidies are just one of the tools that governments implement to encourage specific behaviors.  The United State is looking at developing more renewable energy sources, and U.S. taxpayers are paying the price for this technology to be developed.    While providing subsidies to encourage ethanol production and research are current trends, thorough analysis of the industry is still needed.  Consequently, subsidizing ethanol is not a long run equilibrium, and many are wondering if the current corn ethanol will ever be self-sustainable without government support. 

A Cornell professor, named David Pimental, studied the energy efficiency of our current ethanol production system.  According to his results, a gallon of ethanol produces 77,000 BTU of energy.  However, the amount it takes to actually produce a gallon of corn ethanol is 131,000 BTU of energy.  With a negative net energy return, corn ethanol does not appear to hold much promise for future energy independence.  The same article estimates that 11 acres of corn would be needed to fuel a single vehicle for an entire year, the same amount of acres that would feed 7 people (Business Ethics, June 2010).

With increased data regarding ethanol production, there will be time spent looking into developing systems for other sources, like those mentioned in last week’s post.  Until then, the U.S. will have to decide if the cost of valuable tax-dollars is worth the investment into corn ethanol. 

Ethanol Options

Several years ago during a tour of a ethanol plant in Aurora, South Dakota, corn ethanol was hailed as the “it” technology.  As fuel prices continue to rise, concerns about greenhouses gasses grew, and hybrid vehicles became a hit, corn ethanol looked to be the solution to numerous problems.  However, as new technology has developed, the murmur of using other sources like switchgrass or sugarcane has grown into a loud roar. 

Although ethanol is a relatively new form of energy production, numerous studies have been conducted regarding the actual efficiency of ethanol production. “Ethanol and the Local Community,” a 2002 study from AUS Consultants stated that construction of an ethanol plant would cost $60 million, while growing the local economy by $110 million annually.  The study also concluded that the estimated annual local and state government tax revenue would increase by $1.2 million because of ethanol production.  U.S. ethanol production sounds promising.

Where the ethanol problem arises is in the current source used for ethanol production in the United States.  Corn, a vital feed stuff for livestock industries, dominates ethanol production.  As a result, feed prices have skyrocketed for livestock producers, putting more pressure on already slim profit margins faced by the agricultural industry.  The demand for corn had grown exponentially in the last decade, and marginal farm land has been put into production to produce the resource intensive crop.  Most of the added corn acres are from land that is better suited for less nutrient demanding crops or from wildlife habitats.  Ethanol is a competitive price option at the pump due to the high amount of government subsidizes received by the ethanol industries.  Consequently, many renewable advocates have realized that corn may not be the best source for ethanol production.

Current research is being devoted to developing cellulosic ethanol technology, reducing the costly corn ethanol.  Possible sources for cellulosic ethanol include wheat straw, corn stalks and husks, algae, sugarcane, and switchgrass.  Regardless of the source used, corn ethanol and cellulosic ethanol have identical chemical components.

The Living History Farm of York, Nebraska (www.livinghistoryfarm.org), has an excellent article regarding the difference ethanol sources.  Figure 1 shows a picture of the large root system in switchgrass that stores the necessary sugars needed for ethanol production. Figure 2 is a picture of developing algae in El Paso, Texas, as another possible source for ethanol production.  The largest issue concerning cellulosic ethanol is utilizing enzymes capable of converting the carbohydrates into actual alcohol.  Consequently, American Coalition for Ethanol states that cellulosic ethanol is only in the developmental stages of commercial use in the U.S.  . 

Figure 1: Switchgrass from “Future Sources of Ethanol,” Living History Farm, York, NE.

Figure 2: Algae from “Future Sources of Ethanol,” Living History Farm, York, NE.

Although cellulosic ethanol is still in the early stages of development in the U.S., other countries, like Brazil, have already seem positive results in their use of sugarcane to produce ethanol.  Corn ethanol provided a start renewable fuel, but will begin to be replaced by other sources that are less energy intensive to grow and harvest.