The Power and the Money

Renewables are not causing blackouts in Texas

Texas and northern Mexico are in the middle of an astonishing cold snap. Conditions are so bad that the bad weather pops out on a national map of traffic conditions:

The cold snap is also prompting blackouts across Texas and northern Mexico. And, of course, that means that politicians in both places are blaming renewables for the failure. In Texas, exhibit A for the prosecution consists of this figure:

Three things happen once the cold snap kicks in. First, wind generation falls up as turbines freeze. Second, natural gas generation spikes up. Finally, coal generation becomes steady as plants fire up to full capacity and stay there to cope with spiking demand. As a result, many observers are concluding that Texas would be just fine if only it hadn’t reoriented its energy mix around windpower.

That would be a correct conclusion if not for the fact that it’s all wrong.

Let’s take it in turn.

First, more coal would not have helped. Coal is lousy in cold weather. Back in 2014 — it seems so long ago, I know — six coal plants consisting of 1.8 megawatts of generation went down in a cold snap. (Here is the ERCOT after-action report for the ’14 cold snap.) The same thing happened during a freeze in February 2011, when ERCOT (the Texan grid operator) had to impose rolling blackouts. In 2014 (and in 2021) natural gas took up the slack, but in 2011 that didn’t work when power cuts hit compression stations.

Second, on paper Texas has more than enough generating capacity right now to handle demand. The state has 75 GW of natural gas capacity alone, to which you can add another 24 GW of coal. The problem is that the capacity is either down for maintenance, in the wrong place, or offline due to the cold, not that it doesn’t exist. In fact, you can see that Texas handled similar levels of demand this summer. The difference is that people expect summer heat waves in Texas. They don’t expect Minnesota-like weather to suddenly roll in from nowhere.

Finally, let’s put points (1) and (2) together and point out that right now the big problem in Texas is due to fossil fuel plants going offline from to the cold. Wells and pipelines are freezing. How much Texas thermal capacity is out, you ask? Well, I’ll tell you:

Thirty gigawatts.

Thirty gigawatts!

Getting the data isn’t easy, but it isn’t that hard either. Go here. Click on “Hourly Resource Outage Capacity.” You will see a long list of zipped CSV files. Open the top one. Look for the column called “TotalResourceMW.” (It’s the first one after the time.) That tells you how much power is out right now. If you read down in the spreadsheet you’ll see how quickly ERCOT expects that power to come on line. (This includes coal, natural gas, oil, and nuclear; as a practical matter, no nuclear is off-line in Texas.) “TotalIRRResourcesMW” is the amount of renewable power capacity that is not producing (for any reason) and “TotalNewEquipResourceMW” are resources that are being spun up but have not yet started to inject power into the grid. As of 4pm CST on February 15^th, 2021, 29.7 GW of thermal power is offline.

Now, it isn’t fair to say that all 29.7 GW are down because of the cold. Some power is always offline. I called up February 8^th, before temperatures started to drop. And as of 11am on February 8^th, some 13.1 GW of thermal was offline. Which means, as a first estimate, the cold knocked out about 17 gigawatts of thermal capacity, roughly ten nuclear reactors.

To be frank, I’m surprised it isn’t more. Coal operators in Texas right now are performing miracles. You’ve got to use anti-freeze on the coal supplies to stop them from icing up (particularly lignite coal, which is 35% water) and keep the fan blades on your cooling towers ice-free. You’ve also got to tightly pack your coal piles to keep water from seeping in and be prepared to smash ‘em with bulldozers in case that fails. (The only coal plants I’ve visited up-close-and-personal were in Colombia and they didn’t do any of these things, obviously.) The fact that coal generation is holding steady is quite the feat.

But the fact is that Texas is hitting problems because it ain’t ready for the cold. Renewables aren’t the problem. The state has a total capacity of 25.1 GW of wind and 3.8 GW of utility solar, so right now the ERCOT data that I cited above means that about 6.5 GW of renewables are hitting the grid. That is abovethe 6.1 GW that ERCOT expects in the winter.  

What can be done? Well, the simple answer is better planning. The more complicated one is better incentives. Texas should set up a capacity market that will give natural gas operators financial or contractual reasons to keep their plants on-line during cold weather. Ditto insuring that wind farms are prepared for the cold. A few more nuclear reactors (which would relegate more natural gas to peakload) wouldn’t hurt either, but isn’t going to happen.

Total decarbonization will not be easy until storage becomes extremely cheap. You will either need peak plants or massive battery banks to cope with the Great Blizzard of 2054. And the former will mean somehow maintaining the natural gas infrastructure despite an order-of-magnitude less demand. But these are all solvable problems which would exist even if we went hog-crazy for expensive and polluting coal plants.

TLDR: Texas would be in trouble even if it had never built a wind farm.  So think about that and stop pretending that you don’t care about your unborn grandchildren.

What’s the matter with Texas?

Nothing. Texas went purple … ish.  Joe Biden did better than previous Democrats, but still got beat by six points.  Texas is not quite red any more. Call it magenta, or rose. 

But why did it not not go purple, what with the massive turnout?

TLDR: the GOP got a boatload of new voters to turn out in the state’s big cities, suburbs, and exurbs. It wasn’t Mexican-Americans, it wasn’t rural voters.

Here are the basic numbers. Democrats turned out 5.2 million voters, up from 3.9 million in 2016. If Republican turnout had remained around the 4.5-4.7 million that it had been stuck at for most of the 21st century, then the state would have gone blue. Total turnout would have been around the 10.0 million that you would have expected from an exciting election like 2008 and the Democrats would have won. 

We here at TPTM did not expect a blue victory. We expected  the Democrats to up their turnout substantially, but the Republicans would nonetheless manage to get a few hundred thousand new votes and win the election with a bit over 5 million votes. 

But neither scenario is what happened. GOP votes came to 5.9 million. The Democrats turned out out 1.3 million new voters (net) but the GOP almost matched that with 1.2 million new voters. 

For the GOP to beat the super-high Democratic turnout they only needed 533,000 votes, not 1.2 million. They netted 356,000 new votes out of the central counties of Houston, Dallas, Fort Worth, San Antonio, and Austin.  The remainder came out of the northern exurbs of Dallas (100,000 in Collin and Denton counties), the exurbs of Houston (83,000 in Fort Bend and Montgomery), and the northern exurbs of Austin (34,000 in Williamson). Add in another 37,000 in other Houston exurbs and you’ve got more than enough to win the state. The 500,000 people that the GOP got out of smaller cities and rural areas was nice but it wasn’t what won it.

It wasn’t South Texas. There aren’t enough people! The GOP gained only 88,652 votes, against 8,175 for the Democrats.

And it wasn’t Mexican-Americans! The above-right chart graphs the Latino share of the country against the percentage swing towards the Republicans. Outside of South Texas, there wasn’t much of a correlation. This looks really different from Florida, by the way, where it really was Latinos what swung it, not just Cubans. But in Texas, the swingy Latino voter is a Río Grande Valley thing, not a Texan thing. 

I don’t know what the implications are for 2024. Turnout will swing back, but will it swing back more for Republicans or for Democrats? Is persuasion possible? Could Marco Rubio swing some blue voters or might Amy Klobuchar or Andrew Cuomo get some red ones? I have no idea. What I do know, though, is that the Trump campaign energized voters in the big cities and their exurbs. The GOP has to keep them turned out in 2024 and the Democrats have to keep them home.

But the Democratic Party of Texas should really not be tying itself in knots trying to figure out what happened in the Río Grande Valley. Please stop blaming the election outcome on Mexicans. There’s been enough of that going around the last five years. 

The Purple Rose of Texas is here

All eyes are on Texas.

I love Texas! And I have for a very long time. Maybe this dates back to a trip to Dallas to visit my stepfather back in 1986? Or maybe there’s just something about the state that I like? The food? West Texas? (Yes!) The Germans? (Hell, yes!) The Tejanos? (Double hell yes!) The state’s utterly insane history? The weird way Texans know about their state’s utterly insane history? I can’t say. I know that I’d be happy to live there, and that’s weird for a die-hard New Yorker like myself who only likes Washington because it has a subway system.

So it gives me more satisfaction to imagine Texas turning blue than it would for, say, Georgia. (Although MARTA, hey. And Atlanta does have the best BBQ in America.) It makes me want to believe that things like the below really are astonishing:

Something astonishing is happening in Texas. It's hard to know what it will actually mean for the result, but it's highly likely that the number of early votes will eclipse the *total* number of votes cast in 2016. The tally is already up to a whopping 91% of the total 2016 vote.

— Brian Klaas (@brianklaas) October 29, 2020

The turnout numbers do not yet mean that we have a revolution in the Lone Star State. The polls may mean that we’re seeing a Lone Star revolution, but not one big enough to put Biden over the edge without some luck. But not the turnout data, not yet anyway.

Start with the fact that registrations in Texas are only up from 78.2% of the voting age population in 2016 to 78.5% in 2020. If turnout rises back to 2008 levels (59.0%, versus 56.7% in 2016) then we will see the number of total votes cast rise from 9.0 million to 10.0 million. As of yesterday, the total number of early voters was 9,009,850 . That would be about 90% of our “expected” turnout. (Today is the last day for early voting.) That is way up from the 4,497,431 (or 52%) recorded in 2016. 

But ... we do not know is how many of those voters are new and how many have simply decided to vote early due to Covid fears or because early voting has expanded. It is quite plausible that all those early voters simply means that fewer people are going to show up on Tuesday. If we wind up with a turnout of 10 million voters, then Biden-Harris will need to snag basically all of the 1.0 million “new” voters. 

Is there any good news in the data, then?

Well, one solace is that the Democrats do not really need to snag all of the new voters. Lots of people have either passed away or moved out of the Lone Star State. The actual number of new voters will be larger than 1.0 million. A reasonable back-of-envelop calculation (which assumes that people who die or move out-of-state vote the same as all other Texans) would cut the share of new voters that the Democrats need to win to 70%.  

In other words, it is plausible (but not likely) for Democrats to win the state without a massive turnout surge. Consider the number of votes that major party candidates have attracted over the past 44 years. The number of Republican votes has been basically flat since 2004:

Let me note two weird things in the Texas data. The first is the jump in turnout from 1972 to 1976. First, why was turnout so incredibly low in 1972 and what caused it to spike in ’76? Federal action under the Voting Rights Act? The 26^th Amendment? It’s weird.

The second is the gyrations in the voting-age population (including non-citizens) as a share of the total population. It goes from 73% in 2008 to 69% in 2016 before shooting back up to 74% in 2020. For a state with more than 20 million people that seems like a lot of variation in birthrates or migration. 

TLDR: the turnout surge in Texas means less than you think it does. But even if Texas does not go blue, as is likely, purple Texas is already here. 

The Trump administration is not joining OPEC and the deal will not last

The United States is not joining OPEC. The United States is not leading a cartel to raise oil prices. The United States is, to quote my 5-year-old daughter, “not doing nothing.” The President of the United States is posturing.

Right now, the Trump administration is doing absolutely nothing to jawbone U.S. producers into cutting. In fact, it’s made it clear that U.S. “cuts” will come from market forces. It is remotely possibly that the Texas Railroad Commission (RRC) will order production cuts in Texas, but right now only one of the three commissioners supports the move and hearings about the idea have been contentious, to say the least. Moreover, what would be the point? If a putative 9.7 million bpd cut didn’t move markets, why would anything Texas could do make a difference?

It seems to be true that Trump worked the phones to get the Saudis to accept an agreement. But OPEC has no enforcement power and all the low-cost producers have incentives to cheat. Moreover, the deal is almost a sham. Both Russia and Saudi cut from a baseline level of 11 million bpd (the link goes to the OPEC press release) … but Saudi has never hit that level. The supposed highs of 12 million bpd included sales of stored Saudi crude. Ultimately, Saudi production will be down only 1.2 million bpd.

So good luck with enforcing that deal. As with so much of the Trump administration, this is for show. He gets to show off much he’s in with the Saudis and the Russians, and he gets to tell his backers in the oil industry that he went to bat for them. Good for him, I suppose. But it isn’t much of a cartel and the U.S. government isn’t ordering any production cuts at all. With Covid-19 having destroyed oil demand, prices are not going to go up anytime soon, least because of this deal. 

Covid-19 and American oil production, in gory institutional detail

Oil prices are crashing due to Covid-19. So what happens to American output?

Market reactions first, then political ones.

Well, first the oldest building in Dallas, circa 2019:

Yes, my shoes are bright blue.

Now market reactions to the Covid oil price crash.

Market

The “shut-in prices” is the minimum wellhead price operators need to continue producing from a production well. It’s equal to the amount needed to cover ongoing O&M, including where-necessary pumping and artificial lift, as well as water, gas and steam flooding and other secondary recovery costs.

The first wells to shut down are “stripper wells” nearing the end of their useful life. In the U.S. there are about 400,000 of these wells producing about 720,000 barrels per day. (I said they were small.) They usually rely on pumps to get the stuff out of the ground, meaning those famous mechanical donkeys you can still see in parts of California.

Next to go are wells that depend on secondary recovery. For example, in the Golden State companies inject about 400 million barrels of steam every year to get 161 million barrels of oil. (Governor Newsom has banned new wells using this technique.) These wells are high cost, but when shut down they tend to fill up fast with water. Companies that shut them down risk losing the remaining shut-in oil forever. In addition, companies that shut down wells risk losing their land leases. As a result, these wells don’t close immediately once they start losing money.

After that some wells will start to decline quickly in the absence of new drilling. Tight oil wells in North Dakota decline 65% in the first year and 77% over the first two years. That’s the next to go. In their early phase, however, tight oil wells can be easily shut-in and restarted. So tight oil production will decline in two waves, first by natural decline as new drilling collapses and then again as companies shut wells down. Since you can restart unconventional wells in about a week companies won’t be as reticent to stop production … if not for the fact that most of them are highly indebted and desperate for any sort of cash flow to satisfy demanding creditors.

This chart for tight oil plays in the Eagle Ford region of Texas gives you some idea of just how fast this decline can happen. Without new drilling, production would decline by about 700,000 bpd within a year from this play alone:

But production will decline faster than that, because unconventional wells can be shut-in fairly easily during their first year. 

In other words, the current oil price crash will cause U.S. production to drop, and drop fast. That is, it will if it is sustained. That’s not a given: countries have already begun to reopen their economies. Oil demand will recover as a result, possibly to prices that might keep tight oil production alive and stop the shuttering of stripper wells.

Political

Of course, state governments can act via a process called “proration,” whereby they can order well-by-well output cuts. Back in the 1930s, Congress passed the Connally Act, which made it illegal to ship oil across state lines in violation of state output quotas. It also created the Interstate Oil Compact Commission (here is the law), which brought representatives together from oil-producing states to hammer out overall quotas, America’s own little mini-OPEC before OPEC. (For whatever reason, Illinois and California never passed proration laws, although the California government sanctioned a quasi-private commission that functioned outside the law.)

The IOCC still exists, but its powers have withered. It no longer makes decisions by majority vote. And it now includes 31 states, five Canadian provinces, two Canadian territories, plus Egypt (W?) and the other Georgia (WT??) and the Bolivarian Republic of Venezuela (WTF???). Plus, while Arkansas, Colorado, Michigan, New Mexico, Oklahoma, and Texas all passed proration laws, only Oklahoma and Texas still exercise the muscles. (The Rail Road Commission of Texas and the Oklahoma Corporation Commission still publish quotas, set above most wells’ maximum production.) Executive agencies function like muscles: use ‘em or lose ‘em. Those states would need to design regulations from scratch to impose quotas, and they would certainly be challenged in court.

Now, Texas is big enough on its own to mandate a production cut. And the Texan authorities are talking about it! But it’s all talk. And there’s no sign of the Trump administration trying to resuscitate the Depression-era laws that let it coordinate oil production cuts, or even coordinating talks among the IOCC states. But production is falling fast, so Trump could claim that he jawboned producers into it.

Hell, he could do that even if production wasn’t falling fast. That’s his M.O.

Conclusion

Which means that the ultimate question is whether OPEC wants to be fooled. If Saudi Arabia thinks that letting Mexico de facto defect while pretending to cooperate will not hurt their cartel agreement, then they’ll accept the bullshit. If they don’t, then they’ll reject the Trump-AMLO bamboozle.  

Godspeed to Houston and some urban policy questions about the flood

I like Houston. I always have. It is a hideous city, way too car-dependent, and has a climate designed to get me to hate it. But I have friends there and I like Texans. I really like Texans. Which is weird, when you think about it. I am from Brooklyn, and somebody just released a (sadly terrible, I can report) movie in which Texas quite literally invades Brooklyn.

Please help, either with your money or your time.

Remember, Texans are American, sometimes despite themselves. I have two very good friends in Houston and many others in greater Austin. One them told me, to my honest shock, that his kids have to say a pledge of allegiance to the State of Texas at school every day. Really, they do, although ironically that only dates back to 2003. Honor the Texas flag; I pledge allegiance to thee, Texas, one state under God, one and indivisible. Should I ever wind up moving to Houston (which I would do if my wife were not utterly opposed) I have to admit that I would insist that my children not say the Texas pledge. 

The U.S. is a republic worth allegiance. Any given state, not so much. Plus, America might be better off if Texas were split up. 

Self-referential intro over, there are two important policy questions about this storm.

The first, of course, is how much it is due to global warming. Right now, it appears as if the flooding has exceeded the 500-year-watermark. 

That implies the storm was unlikely. But it does not tell us how much less unlikely such storms have become as temperatures have risen. Heavy precipitation is up in the United States, but that is circumstantial evidence. What do climate scientists have to say?

The second is whether urban policies have contributed to the disaster. As Market Urbanism has pointed out, there is some very stupid commentary trying to link the disaster to Houston’s lack of zoning. That is dumb. Inasmuch as zoning has anything to do with anything, the lack thereof has allowed for taller structures to be built, which right now is saving lives and property.

But even though Houston is unzoned, American and Texan policies contribute to sprawl and the paving over of open space that might have otherwise absorbed rainfall. For example:

1. Minimum parking requirements;
2. State subsidies for roads and sewer hookups;
3. Property taxes that tax land values and structures at equal rates, discouraging intensive use of land.

And that in addition to the problem that floodplains are a classic example of a public good. Leaving the land open reduces the impact of floods on developed land, but the owner bears the cost while other property owners reap the benefits.

That said, what I do not know is how much policies have contributed to sprawl. Nor do I know how much sprawl has contributed to the damage from flooding. Sure, both have made the storm worse, but significantly worse? I do not know. But if such storms are becoming more common, then there is a lot riding on the answer to those questions.

Does anyone have any evidence?

But for now, while I wait for the internet to point me in the direction of answers (hah) Godspeed to the people of East Texas on their path through this storm. Again, please help, with money or time.

A flickering point of light in the Trump cabinet

There is not a lot to like in the Trump administration’s cabinet picks. But there is one who, jokes aside, might be a reasonably decent pick: Rick Perry.

I know, he wanted to abolish the agency he will run. And most of what Energy does involves nuclear weapons. But hear me out. Short version: Rick Perry has a surprisingly good energy record in Texas, and I speak as a deep green. If he embraces it and pushes it inside the Trump administration, then he will leave a great legacy. Sadly, that is not how I would bet, since the Governor has shied away from his biggest accomplishment.

Long version: Governor Perry has a surprisingly good record in Texas. The centerpiece of his accomplishments is a massive infrastructure plan called CREZ: the “Competitive Renewable Energy Zone.” In 2005, the legislature empowered the Public Utility Commission of Texas (PUCT) to create zones prioritzing the construction of long-distance power lines. The resulting infrastructure allowed the state to blow through all its targets for green energy. It hit its 2025 target in 2009. As of October 2016, wind had generated a bit over 12% of all utility-scale electric power in the state: not too far behind Germany at 17%. In fact, on November 27, windpower supplied 45% of total electricity demand. 

A Texan energy guy I speak to (wind or oil? You guess!) said that Perry was instrumental in finishing CREZ. Perry wasn’t the mastermind of the legislative push — with unanimity in the Senate and 91-14 in the House, and Troy Fraser pushing it in the Senate, that wasn’t the hard part. Rather, the SB 20 was a short act. (The link goes to the text; the legislative analysis is here and the whole legislative history is here.) It instructed PUCT to approve applications for CREZ power lines within 180 days, but that left a host of political and legal obstacles that would have killed the project in many other states. (I’m looking at you, Golden State.) 

What Perry did was, in the words of my acquaintance, “pull together folks from the various agencies, along with members of the House and Senate, and said, ‘All right, here’s a series of challenges that need to be addressed.’” In 2008, for example, it looked like the project was going to stall out, but Perry kept pushing. It got done, one of the most impressive infrastructure projects of the (pathetic) 21st-century United States. 

Could Secretary Perry take this national?

Yes! One of the great unheralded accomplishments of the second Bush administration (along with Medicare Part D) was the Energy Policy Act of 2005. First, it had a decent name rather than one of these stupid cutesy acronyms or idiot propaganda titles. Second, Section 216 empowered the Department of Energy (DOE) to “designate any geographic area experiencing electric energy transmission capacity constraints or congestion that adversely affects consumers as a national interest electric transmission corridor.” The Federal Energy Regulatory Commission (FERC) could then authorize power lines, which would grant the operating utilities the right to exercise eminent domain. 

Now, none of this would be easy.

First, Perry would need to coordinate with Agriculture, Commerce and Interior.

Second, the courts have hamstrung the Act, holding that FERC cannot overturn a state refusal to permit a transmission line. (There is some pin-dancing, of course: that interpretation hinges on what Congress meant by the phrase  “withheld approval.” See page 96.) So Perry would need to get Justice on his side and make some persuasive legal arguments. Or he would need to get the President back a new Energy Policy Act clarifying federal authority. That would not be unprecedented: the Natural Gas Act of 1938 gives FERC the power to use eminent domain to build interstate pipelines. The Energy Policy Act of 2005 did the same for LNG terminals. 

Now, one might imagine that the current President-elect would be open to this sort of thing. Call them the Trumplines, hand out tax credits, use eminent domain with abandon, limit court appeals. Back to the 1930s! Green energy but with cronyism! What is not to like? 

Well ...

... third, Governor Perry hasn’t exactly owned his accomplishments. In the words of Tom Smith, director of the Texas office of Public Citizen, speaking in 2014: “Perry is bipolar on wind. He plugged into when he saw he could get a political benefit. And now that the winds have changed in the Republican Party, he’s unplugged himself from one of his greatest environmental victories.” In fact, there are now serious moves in Texas to end the CREZ: Troy Fraser himself pushed to repeal the legislation, just as a new expansion of power lines is needed. (Luckily, it failed.) 

To conclude: Governor Perry has a great energy infrastructure record in Texas. He could take that national, get a lot of power lines built and greatly expand wind and solar without ever uttering a word about global warming or carbon emissions or whatever. And it would be an approach that his chief executive should like. Moreover, there is not a whole lot that Perry could or would do at DOE to hurt renewables. So consider it an upside bet.

A far-fetched one, considering that taking his legacy national would require political courage that Perry has never (AFAIK) demonstrated. But who knows? Hope springs eternal. And unlike some of the other cabinet picks, this one at least will probably do no harm. 

Relaxing zoning in California would not shrink Texas by 40%

I seem to lack Twitter-fu, because my questions to people on that platform go unanswered. And so, I pose the question here. 

Matt Kahn now claims that freeing up California housing markets would have caused Texas population to fall by 40%. His evidence? Uh ... well, I do not see any, save that there is a lot of migration into Texas from the West Coast. 

I went to the same IRS data source he used. In 2014-15, net migration into Texas from the rest of the U.S. came to about 59,000. Net migration from both inside and outside the U.S. was around 64,000. Of that total net inflow, about 19% came from California. Californians who moved to Texas earned about $71,000 per family; Texans who moved to California earned about $61,000. Both, interestingly, earned less than the $77,000 average income of Texan families who stayed put. 

How can you use that data to estimate a counterfactual population for Texas? I have no idea! Kahn did not say.

But he ended with a challenge. “My critics must answer the counter-factual of; what would be the population of Texas if it were easy to build in progressive coastal states?”

Challenge accepted!

So let’s stress-test the hypothesis that alt-Texas would have a population of 15.4 million in 2010, rather than 25.3 million.

In 1970 the state had a population of 11.2 million. If its population growth plunged to the national average and stayed there from that point on, Texas in 2010 would have 17.0 million. That is more than 15.4 million, but in the ballpark

How likely is it that an open California housing market would have pulled all those people out of Texas? Well, if Californian development restrictions were biting, then one would expect housing costs in California to rise dramatically relative to Texas during this period. The census measure of median rent is flawed, but it is easy to find. Assuming it measures housing costs reasonably well, what does movement in the California-Texas ratio tell us?

  

Well, that it is unlikely that the migrants to Texas were choosing to go there because California was too expensive. Certainly not during the 1970s or 1990s, at least. By 2000, Texas already had a population of 20.9 million.

In other words, unless something is wrong with the measure of housing costs, it is unlikely that the migrants pulled into a zoning-free California would have come from Texas, at least not before the year 2000. 

My answer to the question “What would be the [2010] population of Texas if it were easy to build in progressive coastal states?” is: at least 20.9 million (the 2000 population), plausibly 23.0 million (no net migration to Texas after 2000), and most likely exactly the same 25.1 million that it actually is. 

Bad journalism

 Last night I watched with horror as the Dallas massacre unfolded live on television. At first, the coverage was good. But then along came Brian Williams to take over as anchor. We were then treated to headlines proclaiming “Civil War” and a parade of commentators likening a sniper situation to Gulf War 2-like insurgent tactics. They wanted to make it seem like Dallas was at war.

I was disgusted.

Shame on the New York Post but more shame on Brian Williams and whoever the “expert” was he had on his show. What happened to the actual ex-cops providing actual wisdom who’d been on earlier? Too boring for Williams?

Why the cartel wars do not cross into America, version 6,493

 Donald Trump has managed to resurrect the fear that Mexican cartels are just waiting, any second now, to extend their murderous rampage into the United States.

Except these guys can’t even carry out a simple hit in Texas without getting caught. And after two years of planning! John Gotti is grave-spinning. 

Sadly, the headline gets the attention; how American law enforcement wrapped it all up rather less. I do wish The Bridge had gone another season.

How big is the threat that oil exports will be seized in a Venezuelan default?

 It is pretty clear that oil exports could be attached if PDVSA defaulted on its bonds. It would work as follows. PDVSA would sell oil to a refinery in the United States. Creditors would sue. The refinery would still get the oil, but a U.S. court would attach its payment to PDVSA and transfer it to the creditors. PDVSA, therefore, would get nothing from its exports.

If the Venezuelan government defaulted, however, the legality would get a bit dicier. It is possible that American courts would “pierce the corporate veil” and conclude that PDVSA is an instrumentality of the Bolivarian Republic, but that is not certain. Still, it is the way many investors and lawyers (inclduing myself) would bet. 

So in theory sovereign default would lead to a fall in oil prices, as exporting countries with state-owned companies cast around for alternative markets.

In practice, however, the courts are slow and (as mentioned above) the legalities are far from certain. It is quite possible that a defaulting country would merrily continue selling oil while its buyers merrily continued buying. After all, the buyers might not care. They would still get the oil; what do they care if the seller wouldn’t get its money?

But the seller would still want its money. It would likely therefore sell to middlemen who would demand a discount and then resell the oil at some legal risk to themselves. In other words, the price of oil exports would certainly go down.

The empirical question, however, given all the legal uncertainties, is how quickly it would go down. It is quite plausible that the export price of a country’s oil would not be affected by default for months or years.

Well, Ecuador provides a nice test of that question!

Let me walk you through the data. This is going to be a little chart heavy, so I ask readers to comment if it is ever unclear or you lose the chain of the argument.

Ecuadorean oil generally trades a discount to the WTI benchmark price. That is because its oil is heavier than WTI and needs to travel from Ecuadorean fields to (mostly) Californian refineries. The below chart shows the percentage discount on Ecuadorean oil between the start of 2006 and the end of 2009. It shows a very steep fall in November 2008.

That seems convincing, until you add a control. Mexico also exports heavy oil to the United States. Its discount on WTI also widened in November 2008, although Mexico did not default.

Still, the increase in the discount on Ecuadorean oil was greater than the discount on Mexican oil. Might that have something to do with the default? Certainly! But to be sure of that, you need to also account for the fact that Ecuador and Mexico sell into two different geographic markets. Ecuadorean oil goes primarily to refineries in California, whereas Mexican oil goes overwhelmingly to the Gulf Coast of the United States. The price of crude oil can vary by several dollars per barrel between the two locations, given transport costs and varying demand conditions. 

The below chart, therefore, compared the export price of the two countries’ blends to the price paid by refineries in California and the Gulf Coast (60% in Texas), respectively. Once you account for the fact that the price of oil in California fell more than the price of oil on the Gulf Coast, then the oil price dynamics in the two countries look pretty similar between 2006 and the end of 2008. This chart compares the price received by the exporting countries and the price paid by their primary customers:

 

The dynamics look similar when you express the discounts in dollar terms, rather than as percentages of the sale price. The stark increases in November 2008 go away completely, as artifacts of the general fall in oil prices. Mexican crude is a bit more volatile in the lead-up to November, but otherwise looks similar to Ecuadorean:

It is true that Mexican oil recovered faster than Ecuadorean oil. In fact, after January ‘09, Pemex managed to sell its oil for roughly the average price paid by all Gulf Coast refineries, elimating a long-standing discount. PetroEcuador also managed to improve its position relative to the pre-crisis era, but it took rather longer. 

I do not know what happened in the Gulf Coast oil market. There are two hypotheses to explain the Ecuadorean recovery, however. One is that the Ecuador announced the form of its default in mid-2009 — a form brilliantly and perfectly designed to leave creditors without legal recourse. Freed of fears of attachment, therefore, the discount fell.

The other is that May is around when PetroEcuador began selling its oil to state-owned Chinese middlemen at a significant premium. The discount on Ecuadorean oil fell because Chinese companies absorbed it. 

It is still possible, of course, that without the default Ecuadorean oil prices would have bounced back in January 2009 like Mexican ones and without the need to involve the People’s Republic of China. But there is no direct evidence for that story.

The next thing to do would be to nail down an explanation for the disappearance of the Mexican discount in January 2009. If an explanation for that can be found that Ecuador could not possibly have replicated, then the hypothesis that the Ecuadorean default affected the export price of its oil is likely incorrect. On the other hand, if the strategy employed by Pemex was one that Ecuador was prevented from using because it was in default, then the default cost Ecuador.

To be frank, my prior is that whatever happened to Mexican oil in January 2009 was likely idiosyncratic. I doubt that Ecuador suffered in oil markets for its big sovereign default.

Now, this is not to say that default would be costless for Venezuela. It could prove very costly! Eventually, Venezuelan receivables would probably be attached; sooner if PDVSA debt goes into default rather than Venezuelan sovereign debt. But in both cases Venezuela could continue to sell oil.

In short, the evidence from the Ecuadorean default of 2008 is not completely clear-cut ... but the preponderance of the evidence seems to be that any fall in oil prices will take some time to manifest.

Sources tell me that Venezuelan ministers fervently believe that default will lead to cut off in immediate oil exports, or at least a drastic fall in realized oil prices. I suspect that they are wrong ... but it is a good thing for creditors that they do not know that they are wrong.

Fear of a Black Canada, part 2

 I am working on a research project with that title. Genesis can be found here. And a (not particularly deep) look at the topic (that misses the most interesting parts) just appeared here.

The second link discusses, of course, Americans thinking about moving to Canada if the Donald wins the upcoming election. No one will, of course. But that didn’t stop people at a San Diego airport bar from talking about it on Saturday afternoon. (I was on my way back from a conference.)

The bartender said that his wife wanted them to move to Canada, so he proposed northern Washington as “almost Canada.” He was joking (I think, his delivery was drier than the surface of Mars) but the nice white Texans from Austin to my left and right were not. (My flight home went through Dallas.) Well, their tone was not joking. The substance, not as much. One woman had a son at U.T. and a daughter starting her first job in Houston; I have trouble imagining her packing up for Canada. A young man had a daughter of his own on the way and a good job as an animal trainer. Maybe that is the sort of career where you can just pack up and jump international borders ... but I have some doubts. A third Texan, to my right, could have been Californian: his affect was totally SoCal bro. But he was studying petroleum engineering. And while Alberta isn’t quite in free-fall, Texas is doing rather better. 

I really wish liberals would stop it with the whole  “I’m to moving to Canada” schtick. It’s only slightly less annoying than the conservative “time to secede from the Union” crap. 

Although, really, it is weird that there are any labor market restrictions between the U.S. and Canada at all, no? 

What is bad for oil could be good for natural gas

 Natural gas prices in the United States have been below estimated production costs for quite some time. Why then has production remained so high?

Much of the answer has to do with what is called casinghead gas. (Aka “associated” gas.) That is, natural gas produced as part of oil drilling operations, and separated at the casing head. I do not know of good national figures for this, but Texas keeps good records. You can see from the below chart how natural gas production has declined with low prices, but the boom in unconventional oil has caused casinghead gas production to skyrocket. The end result has been stability in total output despite the low prices:

What happens if oil prices stay low for a prolonged period of time? New oil drilling will fall off — this has already happened. If prices remain low for more than a year or two, then production oil will fall. Associated gas will fall along with it. And that will drive gas prices up.

In short, a prolonged period of low oil prices will cause natural gas prices to rise.

The problem is that all this operates with long and uncertain lags. Which means that I cannot predict when prices will rise or how long they will remain high. What I can predict is that low oil prices mean more volatility in the natural gas market. 

Buckle your seat belts!

Yet even more evidence that the oil price slump will be prolonged

 The new EIA projections show that even with falling rig counts, production will stay high. They have a great chart attached:

It is hard to see, but the new wells have very high depletion rates. Consider the dark brown band: wells that will be drilled in the first quarter of this year. Their production is estimated to fall by 54% in their first year and then another 38% in their second, for a total two-year decline of 71%. Yet production is still expected to rise, because we are getting much better at drilling: initial production is going up. Consider the Bakken in North Dakota:

Or the Eagle Ford in South Texas:

Or my favorite, the Permian in West Texas:

Of course, rig counts could go lower. How low would they need to go? Well, once again the indispensable bureaucrats at the EIA have done the work:

In other words, we have a long way to go before American production starts to fall. You heard it here.

And let me say that if I know this, then the very good technical people at Saudi Aramco also know this! Saudi oil strategy is not about trying to kill American unconventional production, no matter how much they head fake. It is, as we said here, about trying to kill substitutes for oil, including conservation.

And I am gratified to see that story make the front page of the Washington Post today!

A bad argument about the causes of the Civil War

 As mentioned in my last post, Dave Evans of Georgia took issue with my characterization of the Confederate flag as the “slaveowning banner.”

I should point out that Mr. Evans isn’t alone in thinking this. Even comparatively-normal Texas has this completely backwards monument to the Southern Confederacy on the lawn of the Capitol. “Confederate dead,” it says, “Died for state rights guaranteed under the Constitution. The people of the South, animated by the spirit of 1776, to preserve their rights, withdrew from the federal compact in 1861. The North resorted to coercion. The South, against overwhelming numbers and resources, fought until exhausted.”

So it is a common belief that the war was about something other than preserving the abomination of slavery. But Mr. Evans presents one of the silliest possible arguments in favor of that proposition. Over to him:

If it really had been “all about” slavery then why did Lincoln endorse and get the Northern dominated Congress to pass the Corwin Amendment which would have enshrined slavery in the US constitution making it irrevocable? Why did the original 7 seceding states not readily agree to re-enter the union with irrevocable slavery protected by the US Constitution?

The Corwin Amendment was a strange constitutional amendment that made it out of Congress in the dying days of the Buchanan Administration. A last ditch effort to prevent secession, it banned any future constitutional amendments to alter slavery: “No amendment shall be made to the Constitution which will authorize or give to Congress the power to abolish or interfere, within any state, with the domestic institutions thereof, including that of persons held to labor or service by the laws of said state.”

It was strongly backed by William Seward and President-elect Lincoln endorsed it in a letter. Why would they do that if they hated slavery?

Simple: they knew the Corwin Amendment would be toothless. In 1861 there were 15 slave states. That was enough to do a pretty good job of preventing any anti-slavery amendments to the Constitution, at least until the number of free states hit 45 ... which was not going to happen anytime soon. (There were 19 free states at the beginning of the war.) Even you think that Delaware and Maryland were going to abolish slavery in the immediate future, then the abomination of slavery would still be safe from constitutional amendments until the number of free states reached 39, even without the Corwin Amendment.

In other words, the Corwin amendment was complete bullshit. It prevented Congress and the states from doing what the current constitutional set-up already prevented them from doing. Devoted abolitionists knew that they were giving away precisely nothing by endorsing it. What it was, was a political Hail Mary pass ... maybe the secessionists would be dumb enough to be conciliated, even though it did nothing to guarantee the expansion of slavery and it did nothing to prevent Congress and the free states from continuing to whittle away at forced labor short of changing the Constitution. 

The South did not fall for it.

There was a real “compromise” proposal out there that would have satisfied the South: the Crittenden compromise. It allowed for the expansion of slavery and insured that escaped slaves would not become automatically free in the North. The Republicans were not having any of that. So it foundered.

Note what nobody offered to try to make peace: a deal to reduce tariffs. Not even an agreement to, say, turn over tariff revenues to state governments rather than fund internal improvements. That is because secession had nothing to do with trade policy or infrastructure spending. 

I doubt that much of this is new, although most of the easily accessible stuff fails to point out why the Corwin Amendment conceded nothing to the South. So I hope that I have added at least a little value. If not, enjoy the pictures of Austin!

Further thoughts always welcome.

More reasons that the price of oil will stay low for a while

 It will be a while. We have stated some of the reasons, but there are two more to consider. First, just like the Mexican government, many U.S. firms are hedged. The price they face will not fall below $70 in 2015. Second, many U.S. firms are indebted: they need to keep generating cash flow. Ergo.

Plus the other stuff. How long is a while? Make me an offer and I might tell you. ☺

More seriously, if you can figure out a way to go long on oil and have a reasonably low discount rate, then you should do it. The price will rise and rise a lot. But it will not be this year. Nor would I bet on next year, unless you can afford a loss.

Falling into the coverage gap

 I am on my way back from Mexico City to my family in D.C. United has a direct flight, but it goes to Dulles. Since my wife can’t pick me up, I’m flying American through Dallas. The trip to Mexico was good, albeit crazy busy.

There is something ridiculous about coming back from Mexico City and getting a shoeshine in Dallas. My excuse is that I was run ragged in the D.F. and never got around to getting a shine. Moreover, in my defense, the shoeshine booths are far rarer than they were back in, say, 2000. Mexico has been following the rest of Latin America into downright American levels of slovenliness, and the number of people who wear leather shoes (or care how they look if they do) has been in precipitous decline. The occasional boleador will still come by if you’re sitting outside in a Condesa restaurant and offer a shine, but they seem a lot more desperate than they used to.

I didn’t get to Condesa this trip and the Insurgentes glorieta (where I would normally get a shine) was mysteriously full of tents selling ... something. I’d never seen that before. Why were they there? Is this a permanent thing? It seemed to be a combination yuppie knick-knack market and jobs fair, if you can imagine such a thing. Either way, the tents displaced the boleadores, which meant that I wasn’t about to grab a random shoeshine during a transfer from Line 1 of the metro and the Metrobus. 

So I got my shoes shined in DFW, while changing planes. The cost is $8, about four times what it costs to hire a boleador in Mexico City. But don’t envy Mexico. Pity the United States. Especially Texas.

I had a long discussion with the guy shining my shoes. He’s a little older than me, with five kids, four still at home. (The fifth is married and recently gave birth to his first grandchild.) He was happy to see me, since he’d had only six customers all day. (Meaning me walking by around 1pm after he’d been on-duty for seven hours.) He enjoyed the work but he did not enjoy the working conditions. The firm paid him $6 an hour. Now, that is below the federal minimum wage, but because shoeshiners used to be expected to receive tips, the standard minimum does not apply to them. The problem? Most customers don’t tip. So while his salary is more than $12,000 per year, it’s not much more than $12,000 per year. Rather, it’s a bit south of $18,000. 

So far, so awful ... I made $12 an hour at a northern California gym back in 1994, around $18.40 today. I was 24. But it gets worse. When you add in the fact that grandma lives with him, his total family income between his wife and him is less than $31,970. Which means (click the link) that he does not qulaify for Obamacare subsidies.

In D.C. or Maryland, his family would qualify for Medicaid. In Texas, not so much. 

Yes, that gives his wife and him strong incentives to find better-paying jobs. So far, said jobs have resolutely failed to materialize. It is hard for me to believe that someone spending 10 hours a day shining shoes — and has a family to insure — lacks motivation.

So he is looking for a new job with benefits. He seemed optimistic.

It is a travesty. Anyone want to defend Texas’ decision to reject the Medicaid expansion? Because it is beyond me. All the more so in a country where parents in the computerized 21st-century computerized  earn barely a little more than third of the income I sleep-walked into 20 years ago. 

Not terrible news from Texas

 Fracking! It’s in the news all the time. The controversy never seems to dim.

There are a lot of false fears about fracking ... but three very real ones. The first is that when the frack fluid gushes back out of the ground it is a lot nastier than when it went in and the “flowback” needs to be disposed of somehow. The second is that it uses a lot of water. The third is earthquakes. (I doubt this is a surprise to most readers, but you never know.)

In fact, the earthquake problem is really a subset of the flowback disposal problem. Fracking production wells does not (we think) trigger earthquakes. But pumping the flowback back underground into abandoned old wells does lubricate the rocks and cause them to slip. The result is myriad small quakes. (Although a Richter 3 tremor can knock down poorly-built brickwork.) 

And now  Texas and New Mexico are starting to deal with the last two issues. The Texas Railroad Commission just ruled that disposal well operators must go back 100 years through U.S. Geological Survey data within a 5½-mile radius. If geologists judge that the well caused a quake, the TRC will shut it down.

Meanwhile, New Mexico is looking to imitate Texas in encouraging the reuse of flowback in new fracking operations, thus saving on the amount of freshwater needed. (“Encourage” may be too strong a word; Texas simply allowed companies to reuse frack fluid without a permit if they own a lease.) 

So, not terrible news from Texas.

Global warming denial is alive and well, except in quiet rooms

The U.S. Chamber of Commerce just issued its new energy plan, an update to its 2008 plan. The 2008 document was favorable to hydrocarbons, but it included a call for reducing the environmental impact of energy consumption and investing more in climate science, as well as a call for the U.S. to lead on climate change.

The new plan, not so much. In fact, not at all. And why not? Well, Karen Harbert, CEO of the Chamber’s Institute for 21st Century Energy: “It is a different world in 2014 than it [was] in 2008: We are dealing from a hand of strength.”

At least she’s honest.

But it is strange, considering as the New York Times let the cat out of the bag: the big energy companies all assume a price on carbon emissions when assessing new projects. If the projects don’t make sense with a carbon price, then they don’t happen. In other words, they all assume a carbon tax, cap-and-trade system, or costly command-and-control regulation is coming.

But none of them want to admit that they plan for a carbon price! One colleague of mine recently completed a case on a large hydrocarbon project. The company refuses to release the case unless he removes all references to the fact that the company builds a carbon price into all its financial analyses ... even though the cat is out of the bag on the fact that all the major energy companies (and a lot of other ones) do just that.

WTF, you may ask? Well, the answer is simple. The Times is incorrect when it writes that the use of carbon pricing in boardrooms is part of “a deeper rift in the [Republican] party, as business-friendly establishment Republicans clash with the Tea Party.” It is not.

Rather, it represents the fact that the energy companies do not believe that the odds are against then in the fight against carbon emission restrictions ... but that they also believe that there is a chance that they win. Publicizing their internal use of a carbon price gives aid to their enemies who want to impose one. But ignoring the likelihood that one is coming will only hurt their shareholders. Thus, they build one in.

The similarity to the quiet rooms in which Mitt Romney believed that income inequality should be discussed is not a coincidence.

P.S. One implication that should not be drawn, however, is that a carbon price (or regulation) won’t affect CO2 production if companies are already taking it into account. There are two reasons why it will still matter. (1) The big companies aren’t the only CO2 emitters. (2) The big companies will only invest if the projects make sense with a carbon price; nonetheless, those projects will produce less if carbon prices or regulation raise the cost of their product.

A brief recap of the politics of energy (read: hydrocarbon) reform in Mexico

Mexico’s three parties split three ways on constitutional reform.

1. The PRI wants a modest reform that will let Pemex sign joint ventures to develop offshore fields and possibly expand gas and tight oil production on land.
2. The PRD wants no constitutional reform, but wants to cut taxes on Pemex and turn it into a fully autonomous profit-driven corporation. (Or so they say.)
3. The PAN wants to throw open the Mexican hydrocarbon sector, making it look more like Brazil or Colombia. It also wants to reform the way the federal government profits from the sector, imposing a scheme that looks almost exactly like the Alaska Permanent Fund, only with the profits going to the government rather than to individuals.

Interestingly, the PAN introduced its reform before the President, moving on July 31, 2013. President Peña sent his proposal to the Senate on August 12. (The PRD published its relatively vague statement a week after the President, on August 19.) 

Public opinion is at best unclear.  In September, polls showed 52% of the population in favor of the President’s proposal, but only 15% “strongly” favored the reforms. Moreover, 61% opposed allowing Pemex to sign profit-sharing contracts with private companies. 

So how is the battle shaking out? First, the PRI and PAN wound up at loggerheads over a new tax bill. The PAN walked out over last-minute provisions raising the top income tax bracket from 30% to 35%, a hike in the border state VAT to 16% from 11%, and a 5% tax on junk food. (The maquiladora industry also screamed that they would now have to apply for a VAT rebate rather than simply not paying it.) The final bill had to be passed with PRD support.

Now the PAN insists that it will only support energy reform if the PRI agrees to a series of political reforms. (You can find the detailed constitutional proposal at this link. Among much else, it includes the re-election of senators (once) and deputies (3x) and a run-off presidential election should nobody garner 40%+ of the vote. President Peña got 39% last year.)

With PRD support off the table, there are two possibilities. The first is that the PRI holds firm against political reform, but swings right on energy. We wind up with more radical reform akin to the one in the previous paragraph. The second is that the PRI relents on political reform, figuring that it still will (a) have a good shot at the presidency; and (b) be able to maintain control over its congressional delegation even with term-limited re-election. 

My prediction is the second. The PAN reform is still a large bone for public opinion to swallow. It could easily trigger mass demonstrations, or worse. Moreover, the benefits would be limited, at least in petroleum. Foreign companies will still likely want to form joint-ventures with Pemex in the deepwater, and onshore development is likely to move slowly even under a new PAN regime.

Moreover, from the point of view of your average Mexican, it does not matter if the PAN is correct! Let’s assume that its reforms trigger a massive tight oil boom in northern Mexico, a veritable explosion of hydrocarbons. After all, the northern range is an extension of the Eagle Ford shale. Well, estimated breakevens in the Eagle Ford are $75-$85 per barrel. Many of the big companies have failed to make it work in South Texas. The implication is that even if production explodes, there will not be huge windfalls to tax away. Now, gas production could be a different story. Mexico needs natural gas. But the faster and easier way to decrease gas prices in Mexico is to import more from the United States.

That means that the PAN reform will be, in the short-term, all political cost and no benefit. It is hard to see the PRI signing on to that, especially since it is not clear that the PRI shares the long-term vision.

The most probable outcome is something like the PRI reform, tied to political reform. The less likely outcome is that the PRI tacks right to give us a radical Panista reform. It is also possible that nothing will happen, and we will get something like the PRD reform.

Call me in a few months, tell me how I did.

From space, everyone can see you flare

Bakken oil development requires a lot of use of trucks and railroads. A typical horizontal well in North Dakota requires 1,100 inbound truck trips. Then you gotta move the stuff out. It is possible to build gathering facilities, of course, but trucks remain viable for short hauls. Over longer distances, railroads can be competitive. In short, you can have fast oil development without making much investment in specialized infrastructure.

The above is not true for natural gas. For natural gas, pipelines are the only game in town. You build gathering pipelines and processing plants or you don’t produce. No one will build a gathering infrastructure, of course, until they have some idea of how much gas it will carry.

Tight oil wells in the Bakken also produce associated natural gas. The problem, of course, is that you cannot know how much associated gas will be produced from a group of wells until oil production starts. So you need to start oil production before a gas infrastructure is in place.

Of course, if you have wells producing oil, you still need to do something with the associated gas. You could just vent it, but methane is nasty stuff on both the local and global level. So you set it on fire. That gives you CO2 –fine locally, but bad globally, albeit less bad than just venting methane.

In short, there is a chicken-and-egg problem: in an oil play, you need to waste a lot of natural gas before anyone will build the infrastructure needed to use it. In Texas, there is a lot of new drilling, but it is in places that have been drilled before and where a gas infrastructure exists. Texan oil producers, therefore, flare only 0.5% of their associated gas. (It is, however, getting bad in the Eagle Ford.)

In North Dakota, they flare 32% of the gas. That is why it suddenly looks from space as if a major new megalopolis has sprouted in North Dakota.

How big a problem is this? In economic terms, not that much. Losses from Bakken flaring came to $196 million in 2011, or 1.4% of the value of production.(In Texas the economic losses are even less, although you can also see the flaring in that arc running along the south of Texas below the San Antonio-Austin double plex.)

The CO2 problem is more serious, but as you can see below, the Financial Times estimates that Bakken oil is no worse than oil imported from Saudi Arabia:

In short, the flaring problem looks more dramatic than it is, in both economic and environmental terms. That is not a brief for doing nothing, either by private industry or government regulation ... there is money being left around on the table and this is a source of CO2 that is easy to fix. It is a brief for stating that compared to the Canadian tar sands there is nothing to see here. Well, there is ... but only from space. From Washington, not so much.

The market for stolen oil

 “In a reversal of the classic Western movie, Mexican criminals have sought refuge with their ill-gotten gains by crossing the Rio Grande to the North, where the Mexican government has no authority to follow.”

—Pemex, in a suit before the U.S. District Court for the Southern District of Texas

So, stolen oil from Pemex makes its way to the United States. How, you ask? It’s a reasonable question. Oil has a high value-to-weight ratio, but cocaine it isn’t. You can’t smuggle economically-viable quantities in jerrycans. Plus, if you’re moving crude oil or natural gas condensate, you can’t then flog it on a streetcorner. You need to sell it to a refinery.

The answer: give the refineries plausible deniability. Fake paperwork to get it over the border, then sell it to a reputable middleman. How did this work?

On May 29, 2011, we got the answer, when Pemex filed a federal lawsuit in the southern district of Texas against a group of American refineries for knowingly buying stolen natural gas condensate.

Here’s the value chain. The condensate is produced in Mexico’s Burgos gas field, located near the U.S. border across the northern stretch of Tamaulipas, Nuevo León, and a little bit of Coahuila. Pemex produces gas from 2,827 wells in the field. It then pumps the gas to 150 collection stations. Pipelines then transport the gas and condensate (the liquid byproduct from gas production, which can be used in oil refineries) from these 150 collection stations to 52 transfer and delivery systems, which are basically small pipeline networks. After collection at the transfer systems, Pemex transports the condensate by pipeline or tanker truck to a storage facility near Reynosa, Tamaulipas. From there, the condensate goes by pipeline to the Burgos gas processing center or tanker truck to a refinery in Cadereyta, Nuevo León.

The Zetas intercept the oil in one of three ways. The major one is to simply tap into the transfer and delivery systems. (To do this, the Zetas needed to build their own pipelines, a pretty impressive accomplishment.) The secondary one is to hold-up the tanker trucks on their way to Reynosa. The final one is to kidnap Pemex officials and force them to divert condensate.

Now, the Zetas can easily fence refined products inside Mexico, but they can’t sell condensate: Pemex operates the only refineries! So they have to move it to the U.S. According to the lawsuit, the stolen condensate was moved by tanker truck (think about that for a moment) to the border. Before crossing, however, the Zetas transferred the stuff to newer trucks that meet U.S. regulations. The drivers then presented forged export documents, sometimes mischaracterizing the condensate as naphtha. They would then sell the stuff to the U.S. defendants.

Big Star and F&M Transportation bought the oil from Ygriega Energy Corporation of Edinburg, Texas, whose owner, Arnaldo Maldonado, has already pled guilty to felony conspiracy to receive and sell stolen goods. F&M transported the condensate, in addition to buying it. Superior Crude also transported stolen condensate, and brokered sales of the stuff. (Pemex fingered Superior because a man named Donald Schroeder coordinated the shipments ... who has also pleaded guilty to felony conspiracy to receive and sell stolen property, specifically Mexican condensate, in his role as president of a company called Trammo Petroleum.) Finally, TransMontaigne operated the storage facilities in Brownsville which the stolen condensate passed through on its way to the final buyers. Finally, Western Refining bought condensate from companies like Continental Fuels, whose president confessed to trafficking in stolen goods.

In other words, according to Pemex, Big Star, Superior Crude and F&M “actively and knowingly participated in a conspiracy to import and market the stolen condensate in the United States.” TransMontaigne, meanwhile, stands accused of negligent participation, since Pemex claims that they should have realized that the goods passing through their hands were illegitimate. Western Refining is accused of no wrongdoing, but Pemex says that it is liable for all its transactions involving Mexican condensate. Recently the company has moved to add subsidiaries of ConocoPhillips and Shell to the lawsuit.

Now here’s the good news: on the U.S. side of the border, several people are going to jail and the rest of the companies involved in buying the stuff are facing a serious civil suit. In short, it is likely that the United States legal system will soon enough shut down the export of stolen Mexican crude and condensate.

But there’s also bad news: there is money to made in stealing refined products and selling them inside Mexico. Lots of money. In fact, as Patrick Corcoran has pointed out, the fact that pipeline-siphoning is shifting to Sinaloa (where the lines carry refined products) is a sign that other groups besides the Zetas are getting into the act. (In this case, likely El Chapo’s people.) The U.S. government can and will help. But it can’t change the fact that Mexico is now a lucrative market for its own petroleum production. Keeping organized crime from taking more of that market is something that Mexico will have to solve on its own.

David Shields got the solution to the problem of internal oil theft right when he wrote:

“It’s very easy to solve this. Total control over the tanker trucks. Total control over every liter of gasoline from the refinery to the gasoline station. That’s the way it was 15 years ago. You move the army in and take control over all the distributors by making sure they have a contract for every single movement of gasoline around the country.”

Where I would disagree with Mr. Shields is that the solution he proposes is far from easy.

Invade Mexico?

 I’ve heard second and third-generation Mexican-Americans in Manhattan call in frustration for the United States to invade northern Mexico. I did not expect to hear it from the Governor of Texas. (Hat tip: Gancho.) This is the same guy who has called for secession, and in the linked interview he doesn’t, well, come across all that well. “Shermanesque? Help me on that one,” said Governor Perry. When told that it meant that if nominated he wouldn't run, and if elected he wouldn't serve, he came back with, “How about Perryesque?”

 

But Governor Perry’s record of odd statements doesn’t make the idea less worth debunking. First, the U.S. is not menaced by what’s happening across the border. Second, while the U.S. Army is increasingly designed around counterinsurgency, that is not quite the same thing as policing, and it is hard to see what the soldiers would actually do. Conduct investigations? Arrest malefactors? Patrol streets? I’d favor allowing U.S. law enforcement personnel to operate in Mexico, but when Perry says “Any means we can to run these people off our border and to save Americans’ lives, we have to be engaged in,” you get the impression that he means something more expansive. Like a free-fire zone? It isn’t clear. Finally, well, Perry didn’t call for American troops to help reduce violence; he called on them to “defeat” the cartels. What does that mean? The complete disappearance of organized crime in northern Mexico? Well, by that yardstick, organized crime is undefeated in Texas.

In short, a non-threat, fought with unclear tactics, for a vague goal.

The privatization of American government

 Texas can be a truly awful place. A reservist serving his year in Iraq lost his paid-off house for two missed dues payments of $250, because the homeowner’s association foreclosed on it. Under Texas law, the courts never entered into the process. A municipal government couldn’t foreclose that quickly, but the de facto private governments calling themselves “associations” easily can. (Hat tip: Andrew Reeves.)

The Texas story gets better. The association sold the house for $3,500 to somebody who flipped it for $135,000. I strongly suspect that the flipper was connected to the association. Perhaps I am too cynical about the way human beings behave when the state refuses to police them.

When New London, Connecticut, seized a private home (with full compensation) in order to aid the construction of a new downtown, it provoked a national outcry. Any takers on the reaction to this Texas outrage? And can somebody explain to me the philosophical difference between a homeowner’s association and a municipal government? Because I can’t for the life of me see one.

Really unbecoming American sensitivity

 Most of the (few) readers of this blog are certainly aware that in 1978 the United States agreed to transfer full control the Panama Canal back to Panama in 1999.  (I'll discuss the reasons benind that agreement that in another post, if anyone's interested.)  The resulting treaties were controversial.  Most Americans forgot about it right quick, but the Texas Republican party continued to rant about it until 2003.  From their old platform: 

“The Party urges Congress to support HJR 77, the Panama and America Security Act, which declare the Carter-Torrijos Treaty null and void. We support re-establishing United States control over the Canal in order to retain our military bases in Panama, to preserve our right to transit through the Canal, and to prevent the establishment of Chinese missile bases in Panama.”

That's a whole lotta crazy.  But it represented a defensive nationalism that seemed pretty much to be over.  After all, the United States is not a country that harkens back to a grand imperial past.  We are not a country bothered by our military defeats.  We are not a country afraid to recognize past wrongs, we move past ours, we ask others to move past theirs.  Nor does relative decline bother Americans; if we become more prosperous and more secure, there is no worry that others have overtaken us.

Oh, wait!  That's some other country I'm talking about.  Maybe Finland.  We get things like this:

My oh my.  But thank God for Geraldo.  America owes a lot to half-Jewish half-Latin guys from the New York metropolitan area, that's what I always say. 

What's the matter with Texas?

  Nothing, really. Oh, the governor seems to have gone a little crazy, but that’s because his party has decided to do its damndest to commit long-term suicide, and he's got to be crazy in order to win the primary. Have you read its platform? 

But Texans aren’t crazy. First, the percent who support secession is less than the Crazification Factor. Second, if you’d asked the question in November 2004, I think you could’ve easily gotten a similar percentage of Californians or New Englanders to say they support taking up their marbles and leaving.  Remember the “United States of Canada”? Finally, unlike most of the red states, Texas does in fact generally pay more to the federal government in taxes than it gets back. Red are payments, blue are receipts, all data in 2008 dollars.

Now, these figures are rough estimates. Pre-2005, the data are from the Tax Foundation; for 2006-07, they come from me using the same methodology. And they leave out a lot. Frex, a lot of federal spending comes from borrowing, rather than taxes, and these figures have made no attempt to allocate the future tax liabilities generated by borrowing. They also leave out a chunk of federal spending:  mostly interest payments, which aren’t allocated to states (and much of which goes to foreigners), but also foreign aid and imports purchased by the federal government. 

In addition, of course, joining a fiscal federation gets you more than just net tax payments. It makes Keynesian policy much easier: European countries, for example, have trouble using this tool because so much of any stimulus will leak away to the neighbors. It adds insurance against asymmetric macroeconomic shocks: if something bad happens to the economy of your jurisdiction, your residents will pay fewer federal taxes and get more federal benefits. Finally, it allows for economies of scale in the provision of public services. All three are why it probably makes economic sense for Iceland to become a Commonwealth, even at a fiscal cost of $109 million per year. 

In short, (1) Texans are no crazier than anyone else, and (2) the Republican Party is really going off the rails. It isn’t just Governor Perry; it’s state legislatures in Georgia, Oklahoma, and South Dakota, which have taken to voting in favor of secession.  In another country, these might be worrying in terms of national unity. In this one, there’s no worry about national unity.  (Although I recommend these comic books anyway.) Rather, there is a worry about the emergence of a de facto one-party democracy. I know I’ve got readers who still aren’t sure that the GOP is in on the road to suicide, but even they have to admit that the Tea Parties and aftermath are a big step down that path. Right?

Gridlocked

As I mentioned earlier the U.S. grid isn't very good.  Doug asks why.  I say bears.

Other hypotheses from our readers, however, would be very welcome.

Some current attempts to fix the problem below the fold.

¿Cómo se dice? ¿Cómo se llama?

Will Baird wants to know about Obama's “Latino problem.”  The short answer is that he doesn't have one.  His majority in Virginia only demonstrates what we already knew, after he got 41 percent of the Latino vote in Arizona and a majority in Connecticut. 

Of course, the race is far from over.  Hillary is ahead in Ohio (by quite a lot, actually) and Texas is up for grabs.  After all, as I shout from the rooftops to any Anglo who will listen, there isn't any reason to believe that Mexican-Americans in Texas will vote like Mexican-Americans in Arizona, let alone Puerto Ricans in Connecticut. 

That said, here's a good sign.  Music doesn't get much more all-American than this: