September 26, 2011

WordPress appears to be publishing my draft posts without my consent, which when they’re unfinished is pretty bad. Naughty WordPress.

Shilling for Shale

September 26, 2011

Economic blogger Tim Worstall has been getting very excited about shale gas. Cuadrilla Energy, a company set up to explore for unconventional gas in the UK, are reporting the discovery of 200 trillion cubic feet of the stuff under Lancashire. Tim is positively cock-a-hoop at the prospect of sufficient reserves of fossil fuels to allow us to without ‘damn windmills’ entirely.

I read Tim’s blog on a regular basis, for its amusing deconstruction of left-wing economic tropes, and I am disappointed that Tim hasn’t applied his usual economic rigour here. Shale gas appears to have become something of a magic bullet for certain sections of the Right, but as Tim would normally be the first to say, if your magic bullet is made of platinum and a thousand regular bullets do the same job, it’s probably not worth bothering with.

Tim appears to be putting himself in a box with some rather mad fellow travellers, like James Delingpole and Christopher Booker, perhaps to get a similar Telegraph gig. Let me try to summarise this shared position:

  • Renewables are bad, because they require space in a countryside that must be locked into a sepia-tinted version of the 1950s for the rest of time, are very clearly associated with hippies and filthy left-wingers, and above all are expensive. Tim is currently only espousing the last of these points.
  • A far better way of securing our energy sources is to rely on unsubsidised fossil fuels, which human ingenuity will guarantee cheap and plentiful supplies of for the foreseeable future.

It’s this question of cost that’s at the heart of the current debate, and rightly so – we need to decarbonise our economy, but we need to do it in the most cost-effective way possible. The key question, therefore, is how much shale gas actually costs, rather than how much Tim, James and Christopher think it costs.

To do so we’ll look at some research carried out by the Oxford Institute for Energy Studies. The OIES is partly funded by those well-known opponents of the oil and gas industry, the oil and gas industry. The paper we’ll look at is called ‘Can Unconventional Gas be a Game Changer in European Gas Markets?by Florence Gény.

The paper can be summarised as ‘No, Europe is different, and it’s not clear that shale gas is as profitable and productive in the US as its advocates claim’. The section relevant to our question here is from Chapter 4:

“Although gas production has continued to increase in 2009 and 2010 despite lower prices than in the previous years, there is a big question mark about current well economics. Many public sources estimate that the average price required for shale gas wells to be economic is around $6/mcf. Averages are a very poor measure to use in the case of shale plays, as every play is different, and within plays, core areas and non-core areas yield very different results, but the fact that by late 2010, gas prices had not reached $6/mcf for two years suggests that the commercial viability of many wells drilled, and so the financial solidity of many independents, could be very weak. We believe it is only a question of time before costs drive up prices, or drilling slows downs significantly and production falls. However many independents get financial protection against low gas prices through hedging strategies, so the cash impact of non commercial drilling is mitigated.”

The reduction in the price of gas in the US appears to have been caused by a broader range of drivers, not least the economic downturn and a significant increase in the number of gas processing plants, which convert unprocessed gas into dry natural gas suitable for injection into the gas grid. It’s not clear that shale is the primary cause of lower gas prices – or indeed whether shale gas suppliers can make money out of it when gas prices are low. Certainly, one of the strongest advocates of shale gas production in the US, Chesapeake Energy, made a significant loss in 2009, although they appear to have since climbed out of the hole, primarily by selling off shale gas assets. Cuadrilla doesn’t appear to have ever made a profit, although as a start-up that’s not really a consideration.

What does this mean for ‘damn windmills’? We can plug the $6/mcf figure into the costings report produced by Mott Macdonald for DECC last year. It models a range of gas prices. $6/mcf translates to about 37p per therm. The lower boundary of prices in the Mott Macdonald report is 34p per therm. Looks good for shale, right?

Well, no. The prices in the Mott Macdonald report are ‘burner tip’ prices – i.e. the cost to generators per therm at combustion. The $6/mcf price is the wellhead price, which is typically around $1-2 below the wholesale price. Factoring in the need for shale gas suppliers to make a profit, the burner-tip price of shale gas is going to look a lot more like DECC’s medium case. Under this case, onshore wind turbines will be the cheapest source of electricity by the end of this decade, when the carbon cost of gas is factored in. The latter won’t be a consideration for those who find the very concept of science an affront to their all-knowing egos like Delingpole and Booker, but for Tim, who acknowledges science as a worthwhile field, it will be.

If Tim had written ‘damn tidal mills’ he would’ve been correct. Different types of renewable energy generators will become economically viable at different times. A combination of onshore wind and combined-cycle gas turbines will be the cheapest way of replacing the quarter of our electricity generators that are being shut down over the course of this decade. I don’t mind admitting that, as a fervent supporter of capitalism, I’ve put my money into this solution. I too believe in the power of human ingenuity to provide solutions to our energy problems; I just don’t think it only applies to fossil fuels.

I would also point out that because of the long lead-time on making new sources of energy economically viable, subsidies can be a sensible policy option. For example, in 1980, the US Government brought in ‘The Alternative Fuel Production Credit’ to provide incentives to invest in non-traditional sources of energy. One of those was shale gas.

Blogging has been light, as I’ve started a new job and have no time to put my head into the Internet, but having been pointed to a fascinating debate by Left Outside on the relationship between economics and ‘evidence’, I just can’t resist.

Let me summarise what’s been going on. An anthropologist named David Graeber has had the temerity to point out that one of economics’ just-so stories, namely that currency arose from bartering economies in which people got frustrated with not always being able to swap their pigs for their favourite type of lifestock, never actually happened. Primitive systems of exchange don’t seem to be based on bartering at all. Rather, exchange takes place in the form of a kind of social ritual, in which the exchange itself is largely incidental to the fun. For example:

‘In the 1940s, an anthropologist, Ronald Berndt, described one dzamalag ritual, where one group in possession of imported cloth swapped their wares with another, noted for the manufacture of serrated spears. Here too it begins as strangers, after initial negotiations, are invited to the hosts’ camp, and the men begin singing and dancing, in this case accompanied by a didjeridu. Women from the hosts’ side then come, pick out one of the men, give him a piece of cloth, and then start punching him and pulling off his clothes, finally dragging him off to the surrounding bush to have sex, while he feigns reluctance, whereon the man gives her a small gift of beads or tobacco. Gradually, all the women select partners, their husbands urging them on, whereupon the women from the other side start the process in reverse, re-obtaining many of the beads and tobacco obtained by their own husbands. The entire ceremony culminates as the visitors’ men-folk perform a coordinated dance, pretending to threaten their hosts with the spears, but finally, instead, handing the spears over to the hosts’ womenfolk, declaring: “We do not need to spear you, since we already have!”’

The crucial point here is that the actual value of the goods being exchanged is incidental to the exchange itself, within rather fuzzy limits. This primitive exchange serves a quite separate social function to the sort of value-agreement exercise that bartering is typically understood to involve.

However, that’s not to say that bartering cannot arise in more developed societies, so Graeber looks at how the first currencies actually arose in Mesopotamia. Silver, as a common trade good, was stockpiled in the non-state communities known as temples. It was traded with external partners in a system of fixed equivalences for other goods, without any bartering being involved. Temples, as early bureaucracies, needed a method of keeping accounts of the rewards to be granted to members of their communities for their work in various fields – fishing, hunting, pottery and so on. Given the status of silver as a trade good, it was indexed to the value of a given number of bushels of grain, and used as currency in this context.

Graeber makes the very strong claim that currencies have never arisen from bartering societies of the type described by the likes of Adam Smith; indeed, on the examples he provides, it is hard to see how they could.

Naturally, this claim has caused a significant amount of debate amongst economists – not least those of the Austrian School, an approach to economics which, if one were being unkind, could describe as exclusively involving  these kinds of just-so stories.

They have retaliated, and their argument boils down claiming that Graeber’s evidence really supports their theories. The argument runs as follows. All that’s required for Austrian assumptions to hold true is that there is a period of bartering in which one good which is more easily tradeable (‘marketable’) than others emerges as the dominant medium of exchange. This bartering happens during the period when the fixed equivalences for long-distance trade are being set – a very brief period of initial haggling, seemingly, is enough for the Austrian theory to hold true.

However, Graeber’s examples of primitive tribes seem to demonstrate that it’s not necessarily the case that this attempt to determine the relative market values of goods occurs at all. Indeed, the only evidence they cite in favour of this occurring is ‘economic logic’, which is rather circular: if economic logic requires a particular foundational event, then citing it as a reason why that foundation took place is quite pointless. Certainly, Graeber provides evidence and reasoning to suggest reasons why it would not – not least that the hazards inherent in long-distance travel in ancient times would’ve made merchants much less likely to even consider negotiating. It’s not clear that those long distance-traders were utility maximisers in manner in which certain types of economic theory would require. Without that certainty, it’s impossible to make the claim that bartering must have taken place, and so impossible to rely on premises based upon it.

There is a broader lesson here: you can’t get intellectual premises for free. With this in mind, I’m going to do some reading around the Austrian School’s concept of praxeology, which this debate has drawn my attention to.

Lib Dem Voice has a consultation up on the review of the AV campaign being carried out centrally. I thought I’d put my response to it up here:

1. Did you do any telephone canvassing? Did you enjoy it? If not why not? If so, how would you improve the process?

I undertook many telephone canvassing sessions. Generally, they were positive, however when the campaign decided to abandon persuasive canvassing on legal grounds, they became less so. Focusing on telephone canvassing was a strategic mistake; we should’ve been out on the doorsteps from September onwards. ‘Grassroots’ means ‘where people actually live’, which means ‘doorsteps’.

2. How would you have improved the literature?

The design was generally to a high standard, however many elements of the messaging were poor. I would in particular focus on ‘Make your MP work harder’ message, which was rather opaque. The focus groups that gave rise to this message were flawed: those groups were educated in advance about how AV works, which allowed a complex message to resonate more strongly than would otherwise have been the case. The connection wasn’t clear to someone without a fairly in-depth grasp of how electoral politics works in practice, which unfortunately is not the case for the majority of the population.

We got some fantastic leaflets towards the end, which lumped the supporters of the Yes vote against the No-supporting parties, and asked the public to decide whose side they were on. Given that the BNP was urging a ‘no’ vote, these should’ve been widely distributed in BME areas. That they weren’t was seemingly a result of what I can only describe as ‘wets’ being nervous about reverse dog-whistle politics.

3. How was your relationship with activists from other political parties?

Mixed. The local Labour Party was fiercely opposed to a Yes vote, and we only received support from individual activists – even though the head of Labour Yes was a councillor in the borough. Anecdotally she was forbidden from campaigning in Islington by her fellow councillors.

The Greens were very supportive, and we worked well with them. I abetted this relationship by taking an ostensibly apolitical stance for the entirety of the campaign; I judged this campaign to be too important to allow any party loyalties to interfere with its delivery. Besides, following the tuition fees debacle it was reasonably easy to not feel like being a Lib Dem.

We had no idea who the local UKIP branch was at all, despite efforts to find out. This is a broader criticism of the campaign – we should’ve reached out to the only right-wing party backing a Yes vote. That we did not I lay at the feet of the trendy lefties in the centre, who did not understand how to build a political consensus.

4. Did the Yes campaign marshal activists in your area effectively? If not how could it have been improved?

I was the local organiser for the campaign, and have been relentlessly self-critical about the number of people we got out onto the streets, even though we won and had plenty of people out on the day and the weeks before. I failed to:

– Make enough phone calls to get people out for campaigning events

– Give up on street stalls and phone banking early enough in favour of door-knocking, when it became clear that the former wasn’t attracting enough support and the latter was a pointless waste of time in the absence of a proper GOTV operation.

– Bully the centre sufficiently into providing us with enough high-quality ‘out’ leaflets for doorknocking. We ran out on several occasions, which disheartened some of our activists who felt that knocking on empty houses without them was a waste of time.

– Carry out more ‘one-to-one’ briefing sessions with key activists, which I found to be a very effective way of engaging people in the campaign.

Having said that, I have one very major criticism of local activist ‘marshalling’ that had nothing to do with me. I was not allowed access to the mailing list of local people who signed up by the national website, which remained with the regional staff. This meant I was frequently unable to get emails, like event reminders, sent out to supporters because they were going out on the same day as national emails, and the centre was worried about spamming. There is no other way to describe this decision than stupid.

5. Did you find channels of communication with the Yes Campaign hierarchy open or closed?

While the regional organisers deserve to be commended for the amount of time they spent sending my complaints back to the centre, what actually happened at the centre was almost entirely opaque. Decision-making seemed largely capricious, and the final decision to focus on doorknocking I could only interpret as the centre finally catching on to their error in focusing on telecanvassing.

6. With the benefit of hindsight, how would you have liked to have seen the Yes campaignin your area run?

My ideal campaign begins in September 2010 with a relentless focus on grassroots organising, via a series of large group meetings of everyone on the various databases that became the Yes supporters database, followed up by one-to-ones with as many key activists as possible. Explanatory leaflets on AV start going out in November, with one per month till February. Doorknocking starts once-weekly in September, and moves to twice-weekly in the New Year. We develop a proper relationship with the local press in the New Year, selling in a package about why activists are devoting so much of their time to voting reform. Our leaflets contain simple messages that do not rely on an understanding of AV to be effective. We target particular groups, including BME people and students assiduously. We have a small local budget we use for our events and for particular leaflets focused on local issues. We have a proper cross-party forum for discussion of campaigning tactics.

This is all mostly textbook stuff, with the exception of the community organising elements. This is what I thought a grassroots campaign would look like. The Yes campaign did not run a grassroots campaign; they ran what people who’ve worked in NGOs their entire lives think a grassroots campaign looks like.

7. And nationally, how could the Yes campaign have been improved?

The list is too long to go into, but Andy May’s now famous document is a good start. I’d like to pick up on a few points from it:

– Actually sending out a Freepost mailing to every house in the country. The person who made the decision to not do this should never work in politics, campaigns or communications ever again. This is unforgiveable.

– Not hiring quite so many expensive consultants and managing the ones that you do hire properly.

– Reach out to all your supporters, including the ones you personally find distasteful. It’s a measure of your commitment to an issue that you’re willing to work with people you ostensibly despise in order to achieve it; the issue is more important than the fact you don’t like UKIP.

– In fact, this extends beyond UKIP. Labour Yes barely talked to the central campaign at all. All the party Yes groups should’ve been round the same table at least once a fortnight.

– Not being afraid to engage in reverse dog-whistle politics. I would’ve put up billboards with two pictures on them: Nick Clegg and Nick Griffin, and asked the public which Nick they preferred. That the Yes campaign did not do this meant the No campaign was free to use Clegg against them.

– Perhaps most importantly, celebrities are not people, they’re artificial media contrivances. Eddie Izzard was never going to change the mind of a granny who lives on an estate. Someone knocking on her door might have done. A ‘peoples’ campaign should involve as many people as possible making their own decisions about how to effectively campaign.

8. Could the Liberal Democrats have fed into the Yes campaign better?

Yes. We could’ve not put John Sharkey in charge of it. I’ve yet to see a response by him to Andy May’s allegations. Not making that response is a tacit acceptance of their truth.

9. What did the Yes campaign do well?

The elements of community organising they brought in at the start – I’d like to particularly cite George Gabriel here – were excellent and a breath of fresh air. It’s a pity they then decided to ignore them entirely in favour of the mixed bag of centralised control and cock-ups they tried next.

10. How would you fight a future referendum campaign on electoral reform differently?

I’ve covered much of this already above, but there’s one important principle I’d like to raise here. I’m in favour of electoral reform because I believe a government over which people have more real influence is a better government. Similarly, I believe a campaign for electoral reform over which all of its participants have real influence is a better campaign.

A grassroots campaign involves ceding as much power and decision-making as possible to the grassroots. Some of them might cock up. Some of them might perform brilliantly. However, they’ll demonstrate that the freedom to have influence, when distributed as widely as possible, can achieve great things.