Tuesday, July 17, 2012

Who's afraid of inflation?: Part 2

This chart covers the US economy  from 1960 through to the present day. Core inflation is shown in red, and year over year wage growth is shown in blue.

The first point here is that inflation problems go hand in hand with stong wage growth. In the high inflation period of the 1970s, wage growth was never less than 7.5% per year. Strong wage growth in the late 60s preceded the slide into high inflation. Inflation is a problem that tends to appear in the late stages of an economic boom, not when the economy is deeply depressed. Wage growth at present is very low.

The second point is that the Fed's current target for inflation, at 2.5%, is far lower than the 3-5% inflation that prevailed during Reagan's presidency. Nobody saw inflation as a problem at the time, even though it was far above the level which the Fed now regards as acceptable. And job growth in the Reagan recovery was far better than anything which we have seen in the past few years.

Clearly the Bernanke Fed has prioritized low inflation over fighting unemployment. I believe this reflects a lack of accountability to the American public.

Wage growth isn't likely to be a problem any time soon

This chart shows wage growth in blue and the unemployment rate in green. Wages seem to take off when unemployment gets below about 5%. There is no chance of that happening in the near future because unemployment remains far too high. If wage growth stays low, so will inflation.

Saturday, July 14, 2012

Who's afraid of inflation?

Central banks continue to point to fears of inflation as their justification for not doing more to generate growth and fight unemployment. I find their concern about inflation almost impossible to understand and in this post I will explain why.

Inflation: A problem of the past

As this chart shows, inflation has been dormant since the mid-90s. It hasn't been a serious problem for 30 years, since 1982. Inflation is in red, while unemployment is in blue. And unemployment remains far above the 5% level which has sometimes sparked inflation in the past.

Global conditions don't favor inflation

When inflation was last a serious problem, in the 1970s, it wasn't just a US issue. As the next chart shows, it was a global problem. Japan is in red, the UK in green, France in orange and Germany in blue. Japan and the UK had even more serious inflation than the US. Today, global inflation is lower than at any time in the past 50 years.

The bond market isn't worried

The next chart shows the yield on ordinary 10-year Treasuries in green, and on inflation protected bonds in blue. Bond rates are lower than at any time in the past 50 years. Real interest rates are negative. The difference between ordinary and inflation protected bonds gives an implied inflation forecast of 2.5%.

Demand is very weak

The next chart shows housing starts in red, and GDP in blue. In past recoveries, falling interest rates would encourage home building, and that added demand would pull the economy out of recession. The housing market is badly broken, and housing starts remain at very low levels despite very low interest rates. In the past month there have been a few stories indicating an upturn in housing, which is a rare piece of good economic news, but there is a long ways to go to get back to normal levels.

When inflation was a problem, in the 1970s, demand was much stronger, with housing starts running at over 2 million units.  Growth surged to over 5% back then.

Today, growth is extremely weak by comparison with past recoveries. It is below 2.5%, which is unusual for an economy that is not in recession.

Car demand is also unusually weak.

Unemployment in catastrophically bad

Not since the Depression have so many been unemployed for so long, yet Ben Bernanke and the Federal Reserve don't seem to care. The longer people stay unemployed, the more skills they lose.

We have an economy with surplus capital, industrial capacity and labor, and very weak demand. This is not the sort of economy that generates inflation. Yet the Bernanke Fed appears to have given up on its mandate to fight unemployment.

Saturday, July 7, 2012

A divided Europe

The European crisis is often framed in terms of 'wealthy' Northern Europe bailing out 'poor' Southern Europe. Reality is more complicated.

Regional GDP as a percent of EU average (2009 data)

This map shows economic output by region. Dark greens show the regions of highest output, light green shows regions close to the EU average, while the poorest regions are colored pale yellow. The north-south divide runs right through the middle of Italy, and parts of northern Italy and northern Spain have output levels comparable to Germany.

Meanwhile, parts of eastern Germany have output levels comparable to Greece and southern Spain. Despite 20 years and vast amounts of aid, East Germany is nowhere near matching West Germany's economic performance. East Germany has never really recovered from having an overvalued currency after unification
Chart source: Eurostat

Judging by the very slow improvement of East Germany, it seems very unlikely that the PIGS (Portugal, Ireland, Greece, Spain) will be able to solve their problems by raising competitiveness. German experience with reunification probably explains why Germany is reluctant to give the PIGS large amounts of aid. They tried that with East Germany and it didn't work.

Regional unemployment (2010)

Chart source: Eurostat

In this map dark green shows high levels of unemployment while light yellow shows low unemployment. Southern Germany and Northern Italy are doing very well, while most of Europe struggles.

Given the divergent economic performance, a single currency no longer seems to make sense. Of course the USA also struggles with large regional differences in wealth. However, it is the vast differences in unemployment rates which will probably make the Eurozone unworkable. Salzburg region, Austria has 2.5% unemployment, while Andalucia region, Spain suffers from 30% unemployment.

Source: Eurostat


Sunday, July 1, 2012

Eurofail: Ireland vs Arizona

The financial crisis in Europe just won't seem to go away. While the US is still struggling to get out of the recession that started in 2008, we have at least managed to stabilize our financial system.

There are surprising similarities between Ireland, one of the first European countries to be engulfed by the crisis, and the American state of Arizona. The differences in the way the crisis was handled contain a lot of lessons about what is necessary for a successful currency union.

NamePopulation   2007 GDP per capita (2010$) Homeownership rate (2004)
Arizona 6.3 million $44,200 69%
Ireland4.6 million $46,138 81%

Annual economic growth in Ireland and Arizona was very similar before the crisis
Orange: Arizona, Green: Ireland

Unemployment rates were also very similar before the crisis, but post-crisis Arizona has done much better.
Orange:Arizona, Green:Ireland

Irish house prices have lost half their value from their peak.

House prices in Phoenix have also lost a little over half their peak value. Arizona house prices fell faster, and have now stabilized.

The lesson for Europe

Arizona and Ireland had very similar housing bubbles. Yet Arizona is now on the road to recovery, while Ireland remains stuck with very high unemployment. Both are small economies which are part of much larger currency areas.  In the US, mortgage related losses were dealt with at the Federal level.  Bank failures were dealt with via FDIC. Arizona also benefited from payouts from Federal anti-poverty programs, like unemployment insurance and food stamps.

In Ireland, all these costs had to be borne by the Irish state. The Irish state is now broke.

If the Euro is to have any chance of survival, the cost of cleaning up failed banks needs to be paid at the European level.  Money for programs like unemployment insurance also needs to come from Europe. To pay for all this, some form of European tax system will be needed.

European governments should remain free to raise their own taxes and spend money as required. Arizona doesn't need budget approval from the Federal government in Washington, DC. The  US does not have anything similar to Europe's growth and stability pact.

Wednesday, June 27, 2012

A reason the Euro failed?

The Euro is failing because of chronic current account imbalances between Northern and Southern Europe. But what is the reason for these imbalances?

Below I have plotted the homeownership rate versus the current account balance as a % of GDP for a set of major economies. The data is for 2004/2005, so it is before the crisis struck. There looks to be a reasonable correlation here, with high rates of homeownership predicting trade deficits.

The next chart shows the same data in a different style. Note that Greece, Ireland and Spain have some of the highest rates of homeownership in the OECD, while Germany has one of the lowest.

The question here is why high rates of home ownership go along with trade deficits. It's possible that people who own their own home feel more confident and are more willing to spend. I think it is more likely that easy consumer credit is responsible for both the high rate of home ownership and the excessive consumption that leads to trade deficits.

Another point here is that the Euro brought together diverse countries with different economic cultures. Maybe things would have worked better if there had been a single financial regulator for Europe.

Data sources: 2004 Homeownership: from OECD
                           2005 Current account balance from OECD

Thursday, April 19, 2012

Will the European economic crisis lead to the rise of new dictatorships?

In the early 1920s Europe was mostly democratic. Germany, Spain, Portugal, Italy and Greece all had democratic systems. They were all doomed to be replaced by dictatorships. The rise of the extremists who overthrew democracy was greatly aided by the Depression. The current downturn in Europe is the worst since the Great Depression. Budget difficulties have lead to austerity, which has lead to high unemployment. Extremists are once again on the march across Europe.

In Greece, support for the centrist parties that have ruled the country since the end of dictatorship in 1974 has collapsed. In 2009 the right-wing New Democracy and the left-wing PASOK won a combined 77% of the vote. The most recent opinion poll for the upcoming election shows these parties have collapsed to 38% of the vote. Voters have rallied to the far left parties like the communists, and anti-immigrant right-wing nationalists. As the New York Times reports, even neo-Nazi parties like Golden Dawn may pick up enough votes to get into Parliament. While illegal immigrants have replaced the Jews as the favored scapegoat, Golden Dawn has the paramilitary wing, fascist ideology and Holocaust denial typical of neo-Nazis.

However, the biggest risks to European peace and stability come from an extremist take over of a major European country.  The German Nazi Party got going amid the economic chaos of the early 1920s. Germany had been humiliated by defeat in World War One, and the Versailles Treaty demanded huge payments be made to the victors. The German government resorted to printing money and wild hyperinflation resulted. In 1924  the Nazis won 6.5% of the vote. Then, in the late 20s, the economy recovered and their appeal faded. In 1928 they won only 2.6% of the vote.

That might have been the end for them. However, in 1929 the Great Depression hit. Chancellor Bruning adopted austerity policies and the German economy suffered terribly. The popularity of extremist parties like the Nazis and the Communists surged. By 1933 the Nazis won 44 % of the vote.  Shortly afterward the Nazis outlawed other political parties and German democracy was dead.

Today in 2012, France is electing a new President and the center parties  are under enormous pressure. Under the euro, France has suffered from years of poor economic performance.  A double dip recession looks possible, with a growth forecast of only 0.4% for 2012. On the far right, the anti-immigrant, anti-euro Front National is lead by Marine Le Pen. They are polling at 16%. However the real story of the election has been the rise of the America hating Jean-Luc Melenchon. The leader of the neo-communist left front is at 16% in the polls. He is sometimes seen as a French version of Venezuela's Hugo Chavez.  Neither Melenchon nor Le Pen will win the first round of voting on April 22nd. However, it looks as if about a third of the vote will go to extremist parties. Their future chances are excellent if economic conditions don't improve.

The first European democracy to fall may well be Hungary. Like Greece, Hungary has a full on neo-Nazi party called Jobbik, which won 12% of the seats in Parliament in the last election. Meanwhile, the ruling Fidesz party is using the old Fascist trick of winning an election, and then changing the Constitution in order to entrench themselves in power. Professor Scheppele of Princeton writes about them here. The changes don't appear to be as far reaching as those pushed through by Mussolini's Fascists in early 1920s Italy or Hitler's Nazis in 1930s Germany, but the reappearance of this tactic is deeply disturbing. 

The European Central Bank, headquartered in Frankfurt, is currently focused on preventing inflation in Germany. To achieve that end, they have been willing to tolerate very high unemployment in the rest of Europe. Unemployment has reached 21% in Greece, 24% in Spain and 10% in France. This is politically dangerous.

It is true that 2012 is not 1930. The humiliation of defeat in World War 1, together with the Treaty of Versailles,  left some Germans wanting revenge. Nobody in today's Europe is interested in fighting another war.  European democracy today is better established today than it was in the 1920s. However, if the European Union, capitalism and democracy fail to deliver jobs, then people will look to other systems.

Forcing the rest of Europe to adopt austerity will force change, but it may not be the change that the ECB or Germany seeks.

Greek election opinion polls
French election opinion polls
Frum on the French election

Sunday, March 25, 2012

Is college worth it?

Governments are big winners from college degrees

Politicians are always in favor of more education. The chart below explains why.  A college graduate pays more than twice as much income tax as a high school graduate,  while a professional degree holder is four times as valuable.

(Chart note: I'm counting social security taxes as well as federal and state income taxes )

Notice that while the states bear much of the burden of financing education, the big winner on tax day is the federal government. However, looking at income taxes captures only part of the additional tax revenues from the well educated. Higher earners spend more and buy bigger homes, so they pay more sales and property tax.

Taxes significantly reduce the return on education to students

While college graduates earn more than high school graduates, 36% of the college premium goes to the government in tax. This has to be paid before the student pays for the cost of the degree itself.

For people going on to grad school, 42% of the premium over a BA degree holder goes in tax.

When people in education and the media promote the benefits of a degree, they invariably ignore the fact that a significant fraction of those benefits disappears in tax. And much of the cost of that education has to be paid for out of after tax earnings, reducing the true benefits of college still further.

Relative to other business investments, educational investments are uniquely tax disadvantaged. If a self-employed person invests in a truck for their business, they can reclaim the capital costs of the vehicle out of before tax income. However the cost of investments in education and training have to be paid for out of after tax income.

Government loses when students can't afford college

For every student who doesn't graduate college due to financial reasons, the Federal government will lose up to $6000/year in tax revenue, or up to $240,000 over a working life. For a government who is currently able to borrow extremely cheaply, this is a tremendous missed opportunity. There are powerful social justice arguments for making it possible for people from all social backgrounds to attend college. Even when those are ignored, the prospect for higher future tax revenues justifies financial aid to students who otherwise can't afford college. This is true as long as the students in question are likely to graduate. Government should avoid giving financial aid to students who lack the aptitude for academic work.

This study provides evidence that many academically gifted students from poor families do not complete college. Of students who scored highly on math tests, only 29% achieved a college degree if their family was poor.  High scoring students from wealthy families achieved degrees at a 74% rate.

Further reading:
Reproduction of privilege
Pell grants cover fewer costs
Statistics from the College Board

Saturday, March 17, 2012

How oil shortages could threaten a global economic recovery

Some left-wing columnists are suggesting that opening up new areas to drilling is unnecessary, because we are already having a hydrocarbon boom in the US, which is "reversing a decades long decline in US oil production." On closer examination, the hydrocarbon boom is much less dramatic than it sounds. I've plotted North American crude oil production from 2002 to 2011. This captures falling Mexican production due to the collapse of the super giant Cantarell field, and also includes the impact of the Canadian tar sands.

US crude oil production is doing well. Output for December 2011 is the highest since May 2002.  However much of the shale oil boom is simply offsetting declines in production elsewhere. Mexico lost 1.6 million barrels/day of production from the Cantarell field during the period. They replaced 1 million barrels/day by developing other fields, leaving their production down by 600,000 barrels/day.

My second chart looks at the major changes in North American oil supply and demand from 2007 to 2011. This helps to put the US shale oil boom in context. It shows the impact of different factors in barrels per day. Thanks to fracking, US oil production is up. Fracking has also boosted US natural gas production, which means than more natural gas liquids are being produced. Some natural gas liquids can be blended into gasoline, some are sold as propane, and others are used for plastics production. 

There has been much discussion in the media about the shale oil and shale gas booms. The growth of the Canadian tar sands has also received a lot of coverage. The fall in Mexican production due to the depletion of Cantarell has received much less attention, even though it has cancelled out about half of the oil production growth elsewhere in North America. Another thing that is easy to overlook is the contribution made by surging ethanol output, which added about 800,000 barrels/day to gasoline supplies.

What the mainstream media has missed is the sharp fall in demand for oil products in North America since 2007. Demand is down about 10%, and this factor outweighs everything else. This is the main reason why US fuel imports are dropping and refineries are shutting down. Much of this is due to the great recession which started in 2008, throwing millions out of work and reducing the need for transportation. Some of it is due to fuel switching to natural gas, and some is due to ongoing efforts to improve the efficiency of cars, trucks and planes.

What happens when the economy recovers?

Oil demand fell by 2.3 million barrels/day in North America when the recession hit. OPEC allegedly has 2.8 million barrels/day of usable spare capacity. A rapid US economic recovery would stress global oil supplies. If Europe economies recovered as well oil supplies would be stretched to the limit. There may very well not be enough oil production capacity to fuel simultaneous economic recoveries in the US and Europe.

Returning US and European demand to 2007 levels would require an additional 3.2 million barrels/day of oil. That can't happen, because there isn't enough spare oil production capacity. Full economic recovery will depend on efficiency improvements in oil use.

There is  debate over how much of OPEC's claimed spare capacity is actually real. There is no doubt that much of it consists of undesirable, hard to process oils.  However, any economic recovery is highly likely to be derailed by a spike in oil prices.

Things get much worse if we end up in a war with Iran. Iran exports a little over 2 million barrels/day, so most of the usable OPEC spare capacity would disappear overnight. We can either have an economic recovery or a prolonged conflict with Iran, but not both.

Employment impact?

Paul Krugman pointed out  in a recent column that employment in oil and gas extraction has only increased by 70,000 jobs since the middle of the last decade. He went on to claim that drill, baby, drill wasn't a serious jobs program.

However, if the global economy runs up against the limits of oil production capacity, job losses are likely to be in the millions.  From 2007 to 2009 US employment fell by 6.2 million while US oil demand declined by 1.9 million barrels/day.  This suggests that a shortfall of 1 million barrels/day in US supplies could cost 3.3 million jobs.

On the other hand, simply dividing current US employment of 140 million by current US oil demand yields an estimate of 7.5 million jobs lost per 1 million barrels/day shortfall.

Either way, it is a big impact.

(Data from US Energy Information Administration and IEA Oil Market report)

Friday, March 9, 2012

How the California coast is blighted by oil drilling

To listen to environmentalists, you would think that offshore drilling causes enormous environmental damage. It is so bad, enviromentalists say, that it should be prohibited even if it 200 miles out to sea. It pollutes the air, fouls the water, and kills all wildlife for miles. It must be banned off America's coastline, except for the National Sacrifice Zone known as the Gulf Coast.

You might be forgiven for thinking that a beach a mere five miles from an offshore oilfield would be an environmental ruin that nobody in their right mind would want to visit. You might be forgiven for thinking that such a beach could not possibly exist in the enviro-republic of California.

You would be wrong.

A few years ago I was looking for campsites and drove into Refugio State Beach on the California coast. When I arrived it was foggy, and I quickly noticed a few unusual looking bumps on the horizon. I knew I was looking at one of Southern California's offshore oilfields. As I walked along the beach I looked for signs of tar or pollution in the water.  The beach was littered with seaweed and driftwood, but there was no sign of oil. The water looked clean, and the waves were calm and safe. After a while the fog started to lift, and I snapped this picture.

What about those hideous eyesores otherwise known as offshore platforms? It turns out that even though the platforms were only five miles away, they made little impression on the scenic beauty of the spot. I had to use the zoom on my camera to get a decent picture of the platforms, so the only picture I have of them greatly exaggerates the impact they have on the view.

These platforms are part of the Hondo oilfield, which is one of the largest offshore fields on the Californian coast. Those little bumps on the horizon have produced oil worth over $20 billion at today's prices. I think it is debateable if oil development should be allowed this close to the coast or this close to the major urban areas of Los Angeles and Santa Barbara. A Deepwater Horizon style spill could oil the beaches of Malibu and Santa Monica, and the national media would go into hysterics. However, spills are very rare, and as long as nothing goes wrong, the impact of the oil industry on Refugio Beach seems modest. The region of the coast which the oil industry would like to develop in future is more remote and further offshore, and  I see no good reason to oppose it.

The main issue with the place is too few campsites and too many RVs.

Monday, February 13, 2012

Why China trade is bad for America

I've argued for a while that free trade with China has been a disaster for the US.  The US has been running massive trade deficits with China for years. We are told that Americans need to work harder or study more to improve our competitiveness. We are told that China's trade surplus is due to very low wages, and that low skilled jobs will inevitably move there. We are told that globalization is inevitable.

What the defenders of free trade miss is that US - China trade is abnormally unbalanced. For 2011 the ratio of imports from China to exports to China was 3.8:1  I don't believe this is the result of lazy American workers or cheap Chinese wages. The charts below cover countries which account for 78% of US imports.  Many of our trade relationships are reasonably close to balance, but something is very wrong with China and Russia. They simply don't buy American goods. These are both former centrally planned economies, and I believe their trade surpluses are the result of deliberate government policy.

Some people claim that China's surpluses are the result of low wages. However, India also has very low wages, and our trade with the Indians is far more balanced.

When I started this, I thought that Venezuela and Saudi Arabia's surpluses were simply the result of high oil prices. Oil prices have risen enormously in the past ten years, so I thought that if I went back to 2001 I would find that Venezuela and Saudi were running trade deficits with the US. Here is the same chart with 2001 data.

That's odd! Venezuela and Saudi Arabia were running trade surpluses with the US even when oil prices were far lower.  Most of export ratios don't seem to have changed very much. Brazil was still the only country with which we had a trade surplus, and China was still dreadful. What happens if I go back another ten years to 1991?

Well, the data series for Russia and the European Union don't go back that far. The other ratios have changed far less than I would have expected. Canada, Mexico, Brazil and South Korea have all kept their trade with the US close to balance.  China was a dreadful trade partner 20 years ago, and that hasn't changed even as the volume of trade has swelled 20-fold.

I personally find it very surprising that the ratio of imports to exports for most countries has stayed relatively constant  over the past 20 years even though the volume of trade has expanded enormously. My economics textbook says that imbalances in trade should be corrected by shifts in exchange rates. The surplus country's currency is supposed to rise, making its exports more expensive and eliminating its trade surplus. Unfortunately for my textbook, this never seems to happen in the real world.

What if textbook economics is wrong? A trade deficit has to be financed by borrowing.  If it goes on long enough, debt levels will eventually become unsustainable and a massive financial crisis will result. This is what has happened to Greece.  Will the same thing eventually happen to America?


China and Russia's trade surpluses with the US in 2011 are so far out of balance that I think they must be the result of deliberate government planning. Both are former Communist economies and I think that enough of the old central planning machinery has survived to allow both nations to 'manage' their trade with the US. Manipulation of their currency is a key element of this. Introducing a broad based tariff on all of their exports is the only way for the US to restore balanced trade.

However I also fear that our modern system of globalisation and free trade may contain the seeds of its own destruction. Trade imbalances seem to be baked into the structure of the global economy. They don't seem to correct in the way that economists say they should. In the long run a widespread abandonment of free trade might be necessary to avoid a global debt crisis.

Sunday, February 12, 2012

Why the opponents of Keystone XL are wrong

I believe the fight against the Keystone XL pipeline is one of the dumbest environmental causes to come along in a long time. What is most shocking to me is how badly informed the opponents of the project are. There seem to be three main arguments against the project.

Spills from the pipeline represent an environmental hazard?

As this graphic shows, the US is already covered by thousands of miles of crude oil pipelines. They were mostly built to carry Texas and Rocky Mountain oil to the Midwest.

Kinder-Morgan's Platte pipeline already moves 145,000 bbl a day across Nebraska, right across the Ogallala aquifer. Somebody has given the environmentalists the idea that an oil pipeline would present a huge threat to the aquifer. They seem to be totally unaware that there has been an oil pipeline operating trouble free in the region for over 60 years.

The oil will all be exported?

This is wrong. As of 2010, the US was a net importer of petroleum products, to the tune of 269,000 barrels a day, which represents 1.4% of domestic demand. It is true that US refineries, particularly those on the Gulf Coast, do export some products like diesel.   The graphic shows the nine largest net buyers of oil products from the US. It turns out that a lot of US net products exports are going back to the countries that sold us the crude oil in the first place.

 The US has many of the world's most sophisticated refineries, and they can handle heavy, high sulfur and/or acidic crude oils which most refineries won't touch. Mexico in particular produces a lot of high sulfur heavy crude from their Cantarell field. They send it to the US for refining, and then buy back some of the gasoline, diesel and jet fuel produced. Why don't the Mexicans build their own refineries? Because producing oil is far more profitable than refining it!

What about places like Singapore? It turns out almost all of their purchases are fuel oil. This is a nasty substance which is only used by power plants and large ships. Our electricity generators are moving away from it because natural gas is now much cheaper.

80% of what Japan buys is petroleum coke. This is a coal-like byproduct of the refining process, which the Japanese use in cement furnaces. Almost all of what Holland imports is diesel. These exports are offset by imports of gasoline from other parts of Europe. Diesel cars are very popular in Europe, so they have a surplus of gasoline.

That leaves Panama and Chile as the only regions actually taking energy out of the US market. Both countries have strong trade links with the US and neither has any oil of their own.

In the past year US product exports has gone up, and in November 2011 the US had net exports of  778,000 barrels/day, or 4% of domestic demand. This was due to surging fuel demand from Latin America, especially Mexico. China also started importing our petroleum coke, which they will use as a coal substitute.

The bottom line here is that very little of the gasoline, diesel and jet fuel produced from the oil delivered by Keystone XL is likely to be exported. US product exports are mostly either exports of refining services or of low value products that we don't need.

We need to stop the pipeline in order to stop tar sands development?

Is this likely to work? No! With oil at $100 / barrel, the Canadians have many export options. They can build pipelines to the west or east, or they can ship by rail. What makes Keystone XL unique, is that it sends the oil and the benefits to the US. The tar sands oil is very similar to the crude that Mexico produces from Cantarell. The Cantarell field is in steep decline, and Mexican exports to the US have declined by half a million barrels/day over the past 6 years. This decline is expected to continue. Keystone XL will provide a replacement for the Mexican oil.

What about global warming?

While researching this issue I noticed something else. US consumption of oil products fell nearly 8% between 2005 and 2010, a reduction of 1.6 million barrels a day. Some of that is due to the recession, but I think that there is a real efficiency improvement as well.

Environmentalists and the Obama Administration have pushed through steep increases in auto fuel efficiency standards, so this decline is likely to continue. US coal consumption is also down about 10% over the same period. As a result, US greenhouse gas emissions are slowly moving in the right direction.

If people want to reduce greenhouse gas emissions, they need to focus on things that might work. Stopping Keystone XL will hurt the US while doing absolutely nothing to stop global warming. The Keystone XL fight is a waste of time and money for the environmental movement. Global warming is a global problem and needs a global effort lead by the US and China.

Environmentalists need to work out how to move both countries away from coal, which is cheap but has many disadvantages as a fuel. Low US natural gas prices offer an opportunity here. Enormous budget deficits in the US may offer an opportunity for introducing a carbon tax. Environmental groups also need to do a far better job of defending the science against politically motivated attack.

EIA US net imports by country and product
Lincoln, Nebraska newspaper article about the existing oil pipeline crossing Nebraska
Energy blogger Rob Rapier's case for Keystone XL
Nocera column one
Nocera column two