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.