Wall & Main

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My perspectives as an investor and consumer

What does energy independence mean?

BillONeil_Adakame Does the implementation of energy independence and environmental stewardship need to be linked?  Can each aspect be tackled separately or in some order of priority?

Energy independence, considered on its own, would mean that the sources of energy that feed our consumption come from within the United States.  Environmental stewardship would involve lower emission of pollutants and greenhouse gases during the production and consumption of each additional Btu of energy.

We currently seem to be tackling two massive issues at the same time with aspects of each pulling in opposite directions and hindering the advancement of either.   It seems to me that we would be able to step closer to accomplishing both if we tackle energy independence first.  When we control the input-output elements of our nation’s energy, we can better direct our efforts towards environmental stewardship.

The schematic below provides a summary of energy sources, and energy consumption, in the United States in 2007 as compiled from Energy Information Administration data.  In order to compare the various sources, I’ve converted the normal units of each into Btu.  The colors representing the various sources are consistent within the consumption sectors.  This will, hopefully, facilitate quick comprehension of the dynamics between the energy sources and consumption sectors.

The United States consumed 101.6 quadrillion Btu of energy in 2007.  85% of the energy we consumed (in Btu) was provided by petroleum (39%), natural gas (23%), and coal (22%).  64% of our petroleum consumption and 16% of natural gas consumption came from imports.  The United States is a net exporter of coal.

US_Energy_Picture_2007In order to wean ourselves off imported petroleum and natural gas – energy independence – while reducing pollutants and greenhouse gases at the same time – environmental stewardship, it would require the replacement of petroleum and natural gas with renewable energy.  Herein lies the challenge of tackling these two major issues at the same time.

Since 96% of our transportation needs are met by petroleum-derived products, the replacement fuel from renewable energy sources would have to serve as transportation fuel.  This practically eliminates solar, wind, geothermal, and hydro-electric or 48% of 2007 renewable energy production.  Only 17.4% of the 3.6 quadrillion Btu of biomass directly contributed to transportation through fuel ethanol and biodiesel.   There would, therefore, have to be a 41 fold increase in the production of fuel ethanol and biodiesel to replace current petroleum imports, not to mention the complications associated with setting up infrastructure for the replacement fuel.

I don’t pretend to be an expert in energy infrastructure nor claim to have the perfect solution.  However, one viable alternative I see would be to focus the efforts of renewable energy on the nation’s electric grid.  As can be seen in the schematic, the electric power sector is one area where all sources have some contribution, especially natural gas and renewable energy.  More importantly, almost all sources of renewable energy can be used for the generation of electricity.

Natural gas, according to various sources, is an abundant resource within our country and cleaner burning than petroleum or coal.  Measuring natural gas in the ground is no easy job, and it involves a great deal of inference and estimation. With new technologies, these estimates are becoming more and more reliable; however, they are still subject to revision.  Three different organizations – Energy Information Administration, National Petroleum Council, and Potential Gas Committee – estimate that the technically recoverable natural gas resources are about 1.5 quadrillion cubic feet.  In comparison we produced 19.3 billion cubic feet of natural gas in 2007.  In other words, our technically recoverable resources of natural gas are 77,000 times greater than the total production in 2007.  Technically recoverable resources include both discovered and undiscovered resources that we currently have the technical capability to extract.  Keep in mind that just because a resource is technically recoverable doesn’t mean that it is economically recoverable, where the parties involved have a financial incentive to extract it.  Update: On June 18, 2009, the Potential Gas Committee updated its resource numbers for natural gas to 1.84 quadrillion cubic feet.

If clean coal technology is more of a story than a reality, we could focus our efforts on unconventional natural gas – the most abundant form in the United States – and renewable energy (solar, wind, geothermal, hydro-electric, and biomass) such that they become the major contributors to each additional Btu added to the electric power sector.

Transportation, on the other hand, would seem to require one source of power the way gasoline has served consumers and diesel has served commercial vehicles in the past.  The infrastructure that is needed to support fuel consumption – filling stations, fuel transport – is the main reason for such a requirement.  The ability to go to any gas station and fill one’s vehicles with the same kind of fuel made the adoption of cars and light trucks easier for consumers.  I believe the same will be required for the next source of power for consumer vehicles.  Electricity is one such option.

Consumer-based transportation (light trucks and smaller vehicles) can gradually be shifted to run on electricity through improved battery technology and recharge stations.  8.8 million gallons of gasoline and 3.4 million gallons of diesel were consumed for transportation purposes last year.  Since most of the gasoline is used in cars and light trucks, replacing it with electric power should be sufficient to eliminate the importation of petroleum as the US production of petroleum should be adequate to meet the needs of heavy duty trucks and industrial applications.

Shai Agassi is one of the leaders in the area of electric vehicle services, such as recharging stations, and is currently implementing his vision in Israel.

Experts estimate that the capacity of the electric grid will have to double in order to facilitate a major shift towards electric vehicles, which is why I believe it important to focus all current natural gas and renewable energy efforts to increasing electric capacity.

An added benefit is the the ability to change the mix of sources for electric power generation down the road as we continue to make strides in renewable energy in terms of efficiency and scale.  For example, we may be able to wean ourselves off coal and nuclear followed eventually by natural gas.  No matter what the input mix and how long it takes us to get there, consumers can rest assured that the output will remain the same – electricity, which will continue to power their homes and vehicles into the future.

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Filed under: Energy, Government, Politics, , , , , , ,

Scientifically exploring solutions to health care

BrianDettmer_WheelAs America considers major health care reforms, can its crafting of policy benefit from scientific guidance?    Ryan Moore, co-author of a study published in The Lancet, a leading international medical journal, thinks so.  Seguro Popular is Mexico’s ambitious plan to improve healthcare for its estimated 50 million uninsured citizens.  The publication was the culmination of a collaborative study of Seguro Popular between Mexican health officials and researchers from leading American universities.  As a result of this study, U.S. policymakers are encouraged to scientifically explore solutions to America’s own looming healthcare crisis – an experimental approach with the potential for providing objective answers to even the most controversial and politically charged questions.

“If the administration has done arms-length science and has involved third parties, like the researchers who were involved in this study, then the case that the administration can make for continuing these programs is much stronger,” said Moore, an assistant professor of political science at Washington University in St. Louis. “They’re more likely to get at the truth – it’s good politics and it’s good science.”

The article, “Public Policy for the Poor? A Randomized Assessment of the Mexican Universal Health Insurance Program,” details a massive, two-year field experiment designed to evaluate Mexico’s push to bring better healthcare to communities ranging from remote villages to crowded urban areas. The study turned dozens of Mexican communities into real-world laboratories where causal effects of the insurance program could be empirically measured and evaluated at the household level as new services rolled out in phases across seven Mexican states: Guerrero, Jalisco, Estado de Mexico, Morelos, Oaxaca, San Luis Potosi and Sonora.

Moore and colleagues developed the experimental design, wrote public-use software to implement it and then “tied their own hands” by publishing a preliminary study detailing exactly how the experiment and analysis would be carried out – a process designed to insulate findings from after-the-fact political meddling.

Researchers identified 74 matched pairs of communities that shared similar demographic and health conditions, and worked with Mexican officials to conduct household surveys capturing a baseline snapshot of each community’s health status. Then, working independent of the Mexicans, researchers randomly selected one from each matched pair of communities for early introduction of Seguro Popular, establishing a controlled framework in which individual changes in health experiences in one community could be empirically compared to control conditions in the matching community.

“This was the largest randomized health policy evaluation ever undertaken,” Moore said. “We the researchers were involved in experimental design, and in charge of data collection and analysis at the other end. Mexican officials had no control over the results and we had full freedom to publish what we found.”

Residents in test areas were encouraged to enroll in Seguro Popular, and participating Mexican states received funds to upgrade medical facilities and improve access to health services, preventive care and medications. Follow-up surveys show the program is making a difference on its primary objective, documenting a 23 percent reduction in families experiencing catastrophic health expenditures.

According to Moore, “If money is put into a program targeting the poor to receive health insurance, and if that program is well structured, then the poor can actually see reductions in the amount they pay out of pocket for health care. That may seem obvious, but it’s not. Designing a program that’s targeted in a certain way may not mean that resources actually reach the people it’s intended to reach.”

In fact, the Lancet study identified areas where Seguro Popular needs improvement, showing it’s been slow in reaching some residents. Surprisingly, researchers found no measurable, first-year effect on medication spending, health outcomes or utilization of health services. The bottom line, Moore said, is that without objective empirical evaluations of new programs, it’s difficult to say whether funds are being spent effectively.

“This example of arms-length field experimentation and policy evaluation demonstrates how social science can contribute to bettering individuals’ lives,” said Moore. “A great deal can be gained when policymakers are willing to let science steer the evaluation process, when they’re willing to subject themselves to the possibility of being wrong. When they do that, not only is better public policy made in the long run, but we have a stronger case to make for successful policies in the short run.”

Moore is confident the Seguro Popular evaluation template could be used to guide healthcare reforms now contemplated by the Obama Administration. He points to the State Children’s Health Insurance Program, known as SCHIP, as an example of legislation that already incorporates incentives for states to experiment with funding and services. Some Medicare reform plans encourage experimentation as a way to answer questions about what works best, both on cost and quality of care.

If America wants to be ready to make large-scale changes in its health system, now is the time for small-scale testing. “If researchers are allowed to select these test areas — using scientifically and statistically valid methods -– we’ll be able to use experimental methods to do good science, to cut through the politics and get the answers we need,” Moore said. “We can get at truth using these randomized experiments.”

Filed under: Government, Health, Politics, , , , , , ,

So you’re saying, “There’s a chance.”

zebraOne of the many funny scenes in the movie, “Dumb and Dumber” involves an exchange between Lloyd (Jim Carrey) and Mary (Lauren Holly).  Lloyd is wondering about the probability of a future with Mary:

Lloyd: What are my chances?

Mary: Not good.

Lloyd: You mean, “Not good” like one out of a hundred?

Mary: I’d say, more like one out of a million.

Lloyd: So you’re telling me there’s a chance.  Yeah!

The reaction of investors on March 18th seemed similar to that of Lloyd’s as they digested the statement by Ken Lewis, the CEO of Bank of America.  He stated that his company could pay back the $45 billion it received from the Troubled Assets Relief Program (TARP) by the end of 2009 or early 2010.  The price of the stock shot up 22% that day.

This got me thinking about “rhetoric” and the perception it creates in the minds of the audience.  Notice the use of the phrase, “could pay back.”  The intended effect here was that of using the phrase, “will pay back” without the negative legal and psychological ramifications of actually making such a definitive statement.

The reaction that such a statement generated in the stock price of Bank of America is what elicited this post.  Executives of corporations and politicians see it as their job to put as positive a spin on an issue as possible while staying within the legal bounds.  Corporate and political public relations (PR) departments are in the business of using the imagination of the audience and causing them to project what is possible as something that is probable or even highly probable.

What does this mean?  There is a distinction between possibility and probability.  Simply put, that which is possible may not be probable, while that which is probable has to be possible.  In other words, the likelihood of an outcome increases when you move it from the realm of the possible to that of the probable.

What does this have to do with rhetoric?  The intent of rhetoric in the world of business and politics is two fold:

  1. To get people to perceive that which is merely possible as actually being probable
  2. To minimize or eliminate liability from the statements that are made

Let’s take a look at a couple of examples, one from the corporate world and the other from politics:

Corporate.  Ken Lewis, the CEO of Bank of America says that the company could pay back $45 billion by the end of 2009.  This is actually within the realm of possibility.  But things that are merely within this realm do not provide enough actionable information for an investor.  I cannot make an investment decision based solely on this information because the company could just as well not pay back the money.  However, if the executive can make me think that this is highly probable, then I have something to build an investment thesis on.  It would go something like this…

The company pays back the TARP money.  They are excluded from discussions about banks that are going to be nationalized.  Management is, therefore, free to run the company in a manner that’s in the best interest of the shareholder as opposed to the government.  Bonuses for highly talented people are dictated by the company’s compensation committee, not the government.  This becomes a tool for poaching talent from other nationalized or semi-nationalized banks.  The company, as a result, is able to run a business that is more efficient than their nationalized counterparts.  As an investor, this would make the company a candidate for my investment dollars.  Therefore the spring-loaded effect on Bank of America’s stock price on March 18th.

If this does not pan out and the company is unable to pay back the money, they minimize their liability by saying that they never made a definitive statement to that effect.  It was only a possibility.  The company has succeeded in capturing current upside and minimizing future downside.

Politics.  Here is a case with similar intentions but contrasting results to the corporate example.  I remember even when the recession was underway, President George W. Bush and Senator John McCain were sounding like a broken record emphasizing that the fundamentals of the economy were strong.  Their intention was to keep the country, as a whole ,from going into panic mode.  It is possible that the country would not go into a deep recession, but probability showed otherwise.  They were trying to get the American people to project what was possible as that being highly probable.  If called to account, they would try to minimize liability by saying that the “fundamentals of the economy” actually referred to something like the integrity, optimism, entrepreneurial spirit, and work ethic of the American people.  However, as the popular saying goes, “The road to hell is paved with good intentions.”  The administration and Senator’s intentions were instead seen as ignorance, arrogance, and subterfuge and contributed significantly to the results of the subsequent elections.

Here are the lessons for consumers/citizens/investors:

  • Realize that it is the job of corporate executives and politicians to present any situation in a positive light.
  • It is not your job to receive it at face value.
  • The explicit statements may not contain much actionable material.
  • The interesting material is implicit as is the case with the work of art shown above by Victor Vasarely, considered by many to be the father of Optical Art (Op-Art).
  • Learn to read between the lines and be diligent about it.
  • Ask yourself questions like, “What is the real information here?” and “What is intended merely as a projection?”

“One in a million” could mean that you have a chance or very little chance.  Which one, as a consumer or investor, are you going to pick as being actionable?

Filed under: Business, Politics, Psychology, , , , ,