What good are economists, including oil and fuel economists?

RobertShillerNobel-Prize winning economist, Dr. Robert Shiller, is one of the top economists in the nation, actually, let’s make him an imperialist, in the world. He is best known, perhaps, as the co-creator of the S&P/Case Shiller Home Price Indices. His books on economic theory and issues populate many college classrooms and personal libraries, including mine. He is an impressive, smart and accomplished intellectual giant.

It’s tough, given Dr. Shiller’s pedigree, to even suggest a bit of criticism. But because I think it’s important to current policy debates concerning economic, energy and transportation fuel policies, I do want to take issue with his recent short piece in Project Syndicate (What Good Are Economists?). In it, he defends economists and their mistakes concerning economic forecasts.

Shiller seems oversensitive to the pervasive criticism of economists in the media and literature. Because of the esteem with which he deservedly is held, his somewhat-thin response may mute a needed dialogue concerning the weaknesses attributed by respected critics of the work of economists. Shiller admits they failed to warn the nation in advance of economic downturns as far back as 1920-1921. By implication, he also suggests that because of this fact economists did not have a major impact or may have even had a negative impact at the policy table and often gave up their places to business and political leaders. Certainly Dr. Lawrence Summers and Alan Greenspan have not escaped criticism for failing to predict both the recent recession and for instituting policies that may have exacerbated the recession itself.

Over the past several years, many Americans have been frustrated by the errors of omission and commission made by respected economists from America’s think tanks and its government institutions, like the EIA, concerning analyses, forecasts and predications of the price of oil and gas as well as, demand for and supply of fuel and the role alternative fuels have and will play in America’s future economy. Their numbers and analyses often seem like the “once a day” or maybe “once a month” variety. Many of you don’t remember the famous (now clearly seen as a sexist) joke by I believe Ilka Chase in the old Reader’s Digest that a “woman’s mind is cleaner than a man’s because she changes it so often.” The comment now fits many energy-related economists. Their minds may be cleaner than those of normal folks because, as seen in many of their energy and fuel forecasts, they change it so often. But by doing so, they present obstacles to government, congressional leaders, industry, academic and environmental officials anxious to develop sound energy and fuel policies and program initiatives.

Can you name — on more than one hand — the economists who predicted the recent significant decline of oil and gasoline prices? Can you find consensus among economists concerning oil and fuel prices in the future? Can you identify economists willing to go out on a limb and describe, other than in generalities, the causes of the current decline in prices? Put two economists in a room and you will get three or more different reasons, most resting on opinion and not on hard data. Paraphrasing, oh, yes, the reason(s) are (or is): the Saudi Kingdom and its unwillingness to limit production and desires to gain market share; another favorite: the American producer’s recent oil shale largess is too good to pass up by slowing down drilling significantly; and don’t forget: the rise of the value of the dollar and the fall off in travel mileages resulting from the global recession. For the politically susceptible and sometimes cynical economists, throw in the genius of American and Saudi foreign policy as a factor. They fail to sleep at night, believing the decline is the purposeful result of the State Department and/or their counterparts in the Kingdom. If you keep prices low, who does it hurt most…Russia, Iran and Venezuela, of course!

There are many theories concerning recent price declines but no real hard answers based on empirical evidence and factor analysis.

Energy and transportation fuel economists, at times, seem to practice art rather than science. Diverse methodologies used to forecast oil and gasoline prices; demand and supply are unable to easily manage or accommodate the likely involved complex economic, technical, geopolitical and behavioral factors. As a result, specific cause and effect relationships among and between independent and dependent variables concerning oil and gas trends are difficult to discern by expert and lay folks alike.

Understandably, American leaders often appear to value what they feel are the good artists among economists, particularly if they lend credence in their speeches and reports to their own views or ideological predilections. Shiller’s question about economists in his piece is not a difficult one to answer. He asks, “If they were unable to foresee something (the 2007-2009 financial crisis and recession) so important to people’s wellbeing, what good are they?”

The best in the profession have provided insights into the economy and what makes it tick or not tick. They, at times, have increased public understanding of corrective public and private-sector actions to right a weak economy. They, again at times, have helped lead to at least temporary consensus concerning options related to fiscal and monetary policy changes and the need for regulations of private sector activities. But Dr. Shiller goes too far when he offers a mea culpa for the profession by comparing its failure to predict economic trends to doctors who fail to predict disease. Doctors probably do suffer more than economists for their mistakes, particularly when their analyses result in increased rates of morbidity and mortality. At least economists can bury their errors in next week’s or next month’s studies or reports; many times doctors can escape their errors only by burying their patients. The article could have been a provocative and an important one, given Dr. Shiller’s justifiable stature. It might have stimulated self examination among some of the best and brightest if it had linked weaknesses in economic forecasts to proposals to strengthen the rigor of methodological approaches. Presently, the brief article regrettably reads as an excuse for professional deficiencies. Res ipsa loquitur.

The U.S. and China on methanol: Two roads converge

Nobel-Prize-winning chemist George Olah recently put methanol front and center again with a powerful Wall Street Journal editorial arguing for the conversion of carbon dioxide emissions from coal plants into methanol for use as a gasoline substitute in our car engines. Co-writing with University of Southern California trustee Chris Cox, Olah noted, “Thanks to recent developments in chemistry, a new way to convert carbon dioxide into methanol — a simple alcohol now used primarily by industry but increasingly attracting attention as transportation fuel — can now make it profitable for America and the world to reduce carbon-dioxide emissions.”

The authors argued that President Obama’s recently announced policy of mandating carbon sequestration for emissions from coal plants wastes a potentially valuable resource. “At laboratories such as the University of Southern California’s Loker Hydrocarbon Research Institute [founded by Olah], researchers have discovered how to produce methanol at significantly lower cost than gasoline directly from carbon dioxide. So instead of capturing and “sequestering” carbon dioxide — the Obama administration’s current plan is to bury it — this environmental pariah can be recycled into fuel for autos, trucks and ships.”

Olah, of course, has been the principal advocates of methanol since his publication of “Beyond Oil and Gas: The Methanol Economy,” in 2006.

To date, he has been recommending our growing natural gas supplies as the principal feedstock for a methanol economy. But the emissions from the nation’s coal plants offer another possibility.

This is particularly important since indications are that the Environmental Protection’s Agency’s assumption that a regulatory initiative will “force” the development of carbon-sequestering technology may be mistaken. A recent report from Australia’s Global CCS Institute said that, despite widespread anticipation that carbon capture will play a leading role in reducing carbon emission, experimental efforts have actually been declining.

The problem is the laborious task of storing endless amounts of carbon dioxide in huge underground repositories plus the potential dangers of accidental releases, which have aroused public opposition. Olah and Cox write, “By placing the burden of expensive new carbon capture and sequestration technology on the U.S. alone, and potentially requiring steep cuts in domestic energy to conform to carbon caps, the proposal could send the U.S. economy into shock without making a significant dent in global emissions… In place of expensive mandates and wasteful subsidies, what is needed are powerful economic incentives. These incentives should operate not just in the U.S., but in other countries as well.”

All this brings into stark relief the diverging paths that China and the United States have taken in trying to find some alcohol-based fuels to substitute in gas tanks. While Olah has been advocating a transformation to a methanol economy in this country, China is actually much further down the road to developing its own methanol economy. There are now more than a million methanol cars on the road in China and estimates show the fuel substitutes for 5-8% of gasoline consumption — about the same proportion that corn ethanol provides in this country.

In this country, the proposal has been that we derive methanol from our now-abundant supplies of natural gas. California had 15,000 methanol cars on the road in 2003 but curtailed its experiment because gas supplies appeared to be too scarce and expensive! Instead, the main emphasis has been on tax incentives and mandates to promote corn ethanol.

China has vast shale gas supplies and could benefit from America’s fracking technology. We could benefit strongly from China’s greater experience in developing methanol cars. The pieces of the puzzle are all there. Perhaps Olah’s proposal may be the catalyst that puts them all together.

Ironically, all this began with a Chinese-American collaboration in 1996. At the time, China had little knowledge or interest in methanol but was persuaded by American scientists to give it a try. Ford provided a methanol engine and China began ramping up its methanol industry and substituting it for gasoline. As a result, China is now the world’s largest producer of methanol, with about one-quarter of the market.

A year ago the Chinese national government was about to mandate a 15% percent methanol standard for gasoline when it ran into opposition from executives in its oil industry. Those leaders have since been deposed, however, and the 15% mandate may go ahead this year. In the meantime, provincial governments  have developed their own standards, with the Shanxi province west of Beijing in the lead.

Ironically, because methanol is only half the price of gasoline, many local gas stations are diluting their gasoline with methanol anyway in order to shave their costs. As a 2011 Energy Policy article by Chi-jen Yang and Robert B. Jackson of Duke University’s Nicholas School of the Environment reported, Private gasoline stations often blend methanol in gasoline without consumers’ knowledge… In fact, its illegal status makes methanol blending more profitable than it would be with legal standards. Illegally blended methanol content is sold at the same price as gasoline. If legalized, standard methanol gasoline would be required to be properly labeled and sold at a lower price than regular gasoline because of its reduced energy content. Such unannounced blending is now common in China.”

So both countries are feeling their way toward a methanol economy. As Olah points out, the problem in the U.S. is that the various advantages given to ethanol have not been extended to methanol.One means of addressing this inequity would be for Congress to pass the bipartisan Open Fuel Standard Act of 2013, which would put methanol, natural gas, and biodiesel on the same footing as ethanol (but without subsidies and without telling consumers which one to choose) for use in flex-fuel cars.

In China, the concern is about coal supplies but this could be alleviated with help from America’s fracking industry or by implementing Olah’s new technology for tapping coal exhausts.

Either way, the pieces are all there. It may be time to start putting them together.