While some advocate more spending but others instead favor tax cut as a stimulus to the ailing economy, what is better? What combination is good? I will try to take a qualitative view on the merits of each, leaving to quantitative view to those with established and powerful models.
As written on September 30 and October 12, of the four pillars of the economy, consumption, investment, net exports and government spending, the first 3 are not growing. Let's examine the situation of each sector below:
- In this consumer-led recession, consumption is primarily affected by people losing jobs, the difficulty to borrow, and the fear that things will get worse, so spending is delayed.
(i) For people losing jobs and can't even spend on essentials, tax cuts would not help them directly. Extending unemployment benefits would help them spend on essentials, which helps to keep other people's jobs.
(ii) The difficulty in borrowing stems from (1) financial institutions questioning people's repayment capability and capacity, due to the job cuts or salary cuts as a result of the ailing economy, and (2) the declining asset base on the balance sheet of many financial institutions that make lending less available. (Therefore, capital injection to those institutions on the edge of insolvency, so they could be solvent or buying toxic assets from those healthier so that the market and counterparties have more confidence in investing or deal with them. Otherwise, healthier banks are lumped into the same group as unhealthy banks because outsiders cannot tell which institution is sound. But let's leave that to another discussion.)
(iii) For those with the means to buy, many are holding back because of the fear that things will get worse or that they will lose their jobs (which is a widespread sentiment as reported by recent market surveys). As such, they are either rebuilding their war chest, saving for rainy days down the road, or paying down debt upon realizing the potential dire straits they could be in. A tax cut will not really help, since whatever amount that is retained will likely not be used for purchases. A permanent tax cut will not really help either, since if people lose their jobs, they will not benefit from any permanent tax cuts. Hence, keeping their jobs is key.
On the investment side, housing and business investments are in general not picking up.
(i) On housing, buyers' sentiment is in part similar to consumption in that it is a question of whether they can afford it and whether they should invest now. Of course, the other factor is bank's general reluctance to lend. Of course, if house prices fall enough, more buyers will emerge, but most will still be affected by their outlook on the stability of income going forward.
(ii) On business investment, having a strong current demand and having more certainty about the future (just like consumers) help with the investment appetite. With consumers down the value chain not really spending, investments, in most cases, will unlikely help with spurring demand. Investing in productivity improving equipment and such could help lower cost, which could mean more sales, but it also depends on whether consumers will spend and buy. In addition, in the initial stage of productivity improvement, more workers are not needed unless sales increase to an extent that the current staff cannot effectively handle the increased demand. For taxes, lower interest rates lower the cost of operation in ways similar to a business tax cut, loosely speaking. If long term rates are lowered, as a result of the Federal Reserve buying long-dated treasuries, the longer term cost of capital will be lower as well. Tax cut or not, if the difficulty in borrowing persists or that demand continues to be weak that threaten the survival of companies, a permanent tax cut, will not help company realize this permanent increase of retained earnings.
On the net export side, (i) the stronger dollar, due to weaknesses in other countries and that the USD is considered as a safe haven, (ii) weakness in lending to continue or expand operations, and (iii) the weakness in global demand are all hurting this sector. Factors affecting the business investment side are similarly affecting many businesses in the export sector. In addition, many goods still cost less to produce outside of the U.S., so consumers hoping to save money will more likely opt for cheaper alternatives, produced mostly outside of the U.S. "Buy American" sounds good as a slogan, but how many consumers will pay more in most cases, instead of saving money.
As such, that consumers, investment and net exports are not driving growth, then the government, in this uncertain and down market, is the entity left that could act as one, create jobs (so that people can spend, which in the process helps keep some existing jobs or create new ones.), have a much longer term horizon and have access to a lower cost of capital than other businesses.
Spending helps preserve and/or create jobs. When people, like businesses, have more certainty about their future, they are more willing to buy and invest. Buying helps merchants and their workers. Consumer buying causes businesses to buy from suppliers, all the way down the value-chain and so on.
It is not a surprise that many respected economists on the Republican side, such as Martin Feldstein, are in favor more spending and less tax cuts.
Wednesday, January 28, 2009
Sunday, January 11, 2009
Implications of a greater and faster push of electric cars
http://online.wsj.com/article/SB123172034731572313.html
This WSJ article is about the new and low cost electric car F3DM by BYD, a Chinese manufacturer. The main hurdle in making electric car practical and cost-effective is the size, weight and capacity of the battery. This new car could enter the market at the end of 2009, earlier than GM's Chevy Volt.
Yet the broader implication of a faster and wider roll out of electric cars is profound, especially in the power market. Aside from the much talked about implications on the environment and oil markets, where there will be less direct pollution from cars, as the combustion of fossil fuel produces various carbon oxides and other particulate matters. Also, the demand growth of petroleum could slow.
In particular, the greater need for offpeak power, where much of that power is produced by nuclear and coal plants, and to some extent in the future by wind, will drive new dynamics in the environmental and fuels markets. But the biggest impact would likely be coming from coal.
[I] Implications on generation fuel mixes:
(The following discussion assumes some technological improvements along the way, but getting a breakthrough sometime somewhere remains an unknown, so let's not rely on it, especially given the efficiency hurdle and physics that governs the conversion of fuel into energy.)
Some power plants run throughout the day, where they are the primary producer of electricity during the so-called offpeak hours. With plug-in vehicles mostly drawing power overnight, there will be a greater need for consistent production of electricity. Most of these plants are hydro, nuclear and coal plants, with wind coming in the future. Let's examine the impact of each of these generation types, as well as natural gas and oil:
- Hydro: Most locations suitable for hydro generation have already been exploited, so it is unlikely to increase generation capacity. The impact will be small.
- Nuclear: Nuclear could form one of the pillars in supporting the increase of offpeak power generation. The nuclear revival could be coming, although the main impediments remain the construction time, cost overruns historically and regulatory approvals. Construction of nuclear plants are plagued by delays throughout its history. A good rule of thumb is that it takes about 10 years to build, at least in the US, with cost overruns. New developments in nuclear reactors where plants will use the same design, unlike the past, could help shave some time off, but it could be hampered by two other factors:
(i) Human capital and regulatory approvals. Nuclear reactors involve highly specialized technologies. Although there are some plants built around the world, none has been built in over 30 years in the US, except some up-rates (ie, increasing generation capacity) of exisiting plant and one unit in the Tennessee Valley Authority. Over these years, there was a significant drop-off in the training of people skilled in nuclear construction and operation. People already working in the industry will approach retirement age by the time many plants are constructed. This talent gap will certainly delay the advent of a large-scale nuclear revival.
(ii) Regulatory approvals could cause substantial delays as well, among them are the siting, where local residents would very likely oppose new constructions, and disposal of spent fuel rods.
- Wind: New installation of wind turbines will help supply part of the power during offpeak hours. But several factors make them less of a contributor than expected.
(i) Places with strong winds are far away from population centers. Even if wind farms were built, transmission lines will have to be erected to transmit power from, say in the U.S., the Plains in the middle of the country to coastal population centers. The permitting and siting of new transmission lines would very likely elicit local oppositions, access right and other legal issues, which are extensive, since these lines will have to transverse a very large distance. Hence, their construction will be delayed.
(ii) Winds are not so consistent, despite improvements in battery technology that can store power. Although wind, whose strength fluctuates a lot within a short time, is typically stronger at night than during the day, if it dies down, their production drops fast. But demand does not respond to this drop in supply. Batteries will remain too expensive to substitute other forms of generation, unless some breakthrough technology comes along. Therefore, some backup generation that can ramp up quickly will be needed. The most likely candidate is natural gas.
(iii) The high frequency of fluctuation in wind generation will cause other backup generation to ramp up much more frequently. The wear-and-tear to these generation facilities and transmission lines, in addition to the reduced stability of the transmission grid, could drive up the hidden cost associated with wind generation.
- Natural gas: Whether it be a backup to the fluctuating wind generation, or simply serving as next fuel of choice after coal, which is cheaper, the greater demand for power will necessitate the new buildout of natural gas plants. As a cleaner burning fuel as well, the global demand for natural gas will increase accordingly. Usual implication to major natural gas countries applies.
- Coal: What I think will be the biggest surprise driver of future energy and environmental policy could be coal.
(i) With the generation cost of natural gas plants in general higher than coal, coal would have to remain a major fuel that supports the growth in power supply.
(ii) Coal plants are faster to construct than nuclear. To meet demand needs, investors might have to return to constructing coal plants and delaying retirement of old ones.
(iii) The freight business that transports coal will flourish, as coal will be transported from major coal producing countries to consuming countries.
(iv) The drive to mine more coal could test safety standards, when producers would seek to produce more at dangerous places and keep cost low. People's lives are at stake.
(iv) *Most important, the delayed retirement of existing coal plants and higher buildout of new ones will drive up future emission prices. While higher emission prices will add to the marginal cost of coal generation, making natural gas generation more competitive, that coal would remain the backbone power generation will increase emissions, which impacts policy.
-- If the objective to reduce emission is to be held fast, then emission prices (be it a tax or permit) will increase substantially and increase the cost of operations across sectors, which could slow growth. If governments succumb to pressure to lower energy prices and, by extension, emission prices, emission will likely be going up. "Dirty" scenarios in climate change predictions could come true. Rest of the "dirty" scenarios will apply.
- Oil: Oil-fired plants are usually too expensive. With their combustion technology, they are polluting as well, so they are unlikely to help.
- Other renewables: Solar will likely remain expensive; biomass could run into multitude of problems. First generation biofuels, such as those that use corn, will compete with food supply. Another consideration is possibly the rate of regeneration of biofuel sources - ie, how much can be burned and how fast can they be regenerated? Can they meet demand like other fossil generation such as coal and natural gas?
[II] Implication on prices
The load factor, which compares the offpeak load with peak load, will also flatten. It is because the peak load, say at mid-day on a hot summer day, will continue to be driven by factors such as cooling demand (or heating demand in cold winter days), but offpeak power prices will be higher as well, since the demand for electricity due to charges will be higher. Having wind as a major component of power generation will cause spikes in power prices, as a dying down of wind will require higher cost generation to quickly substitute. Net-net, the average power price will increase.
Essentially the above is a brief description of the energy supply picture.
Solution? With these supply-side dynamics, maybe the only good way out of the run-away growth would have to be conservation...
This WSJ article is about the new and low cost electric car F3DM by BYD, a Chinese manufacturer. The main hurdle in making electric car practical and cost-effective is the size, weight and capacity of the battery. This new car could enter the market at the end of 2009, earlier than GM's Chevy Volt.
Yet the broader implication of a faster and wider roll out of electric cars is profound, especially in the power market. Aside from the much talked about implications on the environment and oil markets, where there will be less direct pollution from cars, as the combustion of fossil fuel produces various carbon oxides and other particulate matters. Also, the demand growth of petroleum could slow.
In particular, the greater need for offpeak power, where much of that power is produced by nuclear and coal plants, and to some extent in the future by wind, will drive new dynamics in the environmental and fuels markets. But the biggest impact would likely be coming from coal.
[I] Implications on generation fuel mixes:
(The following discussion assumes some technological improvements along the way, but getting a breakthrough sometime somewhere remains an unknown, so let's not rely on it, especially given the efficiency hurdle and physics that governs the conversion of fuel into energy.)
Some power plants run throughout the day, where they are the primary producer of electricity during the so-called offpeak hours. With plug-in vehicles mostly drawing power overnight, there will be a greater need for consistent production of electricity. Most of these plants are hydro, nuclear and coal plants, with wind coming in the future. Let's examine the impact of each of these generation types, as well as natural gas and oil:
- Hydro: Most locations suitable for hydro generation have already been exploited, so it is unlikely to increase generation capacity. The impact will be small.
- Nuclear: Nuclear could form one of the pillars in supporting the increase of offpeak power generation. The nuclear revival could be coming, although the main impediments remain the construction time, cost overruns historically and regulatory approvals. Construction of nuclear plants are plagued by delays throughout its history. A good rule of thumb is that it takes about 10 years to build, at least in the US, with cost overruns. New developments in nuclear reactors where plants will use the same design, unlike the past, could help shave some time off, but it could be hampered by two other factors:
(i) Human capital and regulatory approvals. Nuclear reactors involve highly specialized technologies. Although there are some plants built around the world, none has been built in over 30 years in the US, except some up-rates (ie, increasing generation capacity) of exisiting plant and one unit in the Tennessee Valley Authority. Over these years, there was a significant drop-off in the training of people skilled in nuclear construction and operation. People already working in the industry will approach retirement age by the time many plants are constructed. This talent gap will certainly delay the advent of a large-scale nuclear revival.
(ii) Regulatory approvals could cause substantial delays as well, among them are the siting, where local residents would very likely oppose new constructions, and disposal of spent fuel rods.
- Wind: New installation of wind turbines will help supply part of the power during offpeak hours. But several factors make them less of a contributor than expected.
(i) Places with strong winds are far away from population centers. Even if wind farms were built, transmission lines will have to be erected to transmit power from, say in the U.S., the Plains in the middle of the country to coastal population centers. The permitting and siting of new transmission lines would very likely elicit local oppositions, access right and other legal issues, which are extensive, since these lines will have to transverse a very large distance. Hence, their construction will be delayed.
(ii) Winds are not so consistent, despite improvements in battery technology that can store power. Although wind, whose strength fluctuates a lot within a short time, is typically stronger at night than during the day, if it dies down, their production drops fast. But demand does not respond to this drop in supply. Batteries will remain too expensive to substitute other forms of generation, unless some breakthrough technology comes along. Therefore, some backup generation that can ramp up quickly will be needed. The most likely candidate is natural gas.
(iii) The high frequency of fluctuation in wind generation will cause other backup generation to ramp up much more frequently. The wear-and-tear to these generation facilities and transmission lines, in addition to the reduced stability of the transmission grid, could drive up the hidden cost associated with wind generation.
- Natural gas: Whether it be a backup to the fluctuating wind generation, or simply serving as next fuel of choice after coal, which is cheaper, the greater demand for power will necessitate the new buildout of natural gas plants. As a cleaner burning fuel as well, the global demand for natural gas will increase accordingly. Usual implication to major natural gas countries applies.
- Coal: What I think will be the biggest surprise driver of future energy and environmental policy could be coal.
(i) With the generation cost of natural gas plants in general higher than coal, coal would have to remain a major fuel that supports the growth in power supply.
(ii) Coal plants are faster to construct than nuclear. To meet demand needs, investors might have to return to constructing coal plants and delaying retirement of old ones.
(iii) The freight business that transports coal will flourish, as coal will be transported from major coal producing countries to consuming countries.
(iv) The drive to mine more coal could test safety standards, when producers would seek to produce more at dangerous places and keep cost low. People's lives are at stake.
(iv) *Most important, the delayed retirement of existing coal plants and higher buildout of new ones will drive up future emission prices. While higher emission prices will add to the marginal cost of coal generation, making natural gas generation more competitive, that coal would remain the backbone power generation will increase emissions, which impacts policy.
-- If the objective to reduce emission is to be held fast, then emission prices (be it a tax or permit) will increase substantially and increase the cost of operations across sectors, which could slow growth. If governments succumb to pressure to lower energy prices and, by extension, emission prices, emission will likely be going up. "Dirty" scenarios in climate change predictions could come true. Rest of the "dirty" scenarios will apply.
- Oil: Oil-fired plants are usually too expensive. With their combustion technology, they are polluting as well, so they are unlikely to help.
- Other renewables: Solar will likely remain expensive; biomass could run into multitude of problems. First generation biofuels, such as those that use corn, will compete with food supply. Another consideration is possibly the rate of regeneration of biofuel sources - ie, how much can be burned and how fast can they be regenerated? Can they meet demand like other fossil generation such as coal and natural gas?
[II] Implication on prices
The load factor, which compares the offpeak load with peak load, will also flatten. It is because the peak load, say at mid-day on a hot summer day, will continue to be driven by factors such as cooling demand (or heating demand in cold winter days), but offpeak power prices will be higher as well, since the demand for electricity due to charges will be higher. Having wind as a major component of power generation will cause spikes in power prices, as a dying down of wind will require higher cost generation to quickly substitute. Net-net, the average power price will increase.
Essentially the above is a brief description of the energy supply picture.
Solution? With these supply-side dynamics, maybe the only good way out of the run-away growth would have to be conservation...
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