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The political economy of natural gas
Book reviews
struck by the gulf between the accusations of high cost one sees levelled against nuclear energy from all sides and the robustness of the economic case that emerges from close analysis of the facts - future fossil fuel prices could be as much as 40% below those currently assumed in coal/nuclear comparisons and still leave nuclear with the edge. This section of the book was somewhat disappointing, however, in lacking consideration of the broader aspects of policy: it would have been nice to see some discussion of the implications of the extent to which the world is already committed to nuclear energy and the significance of the increasing electrification of economic activity, with the steady fall in energy consumption per unit of economic output in developed countries complemented by a steady rise in electricity per unit of output. One of the last few chapters included a rather irritating digression on forecasting. The oil crises of the 1970s and the associated economic ups and downs provided a Roman holiday for the hindcasters of this world to be clever at the expense of the forecasters. In this case all the forecasting methodologies are stuck up one by one like Aunt Sallies to have the economic and energy discontinuities of the 1970s hurled at them. It did not help that the illustration for the first target was a 20-year old paper by the reviewer (his first ever on energy)! It reported an attempt to fit an 'S' curve to UK electricity consumption from 1920 to 1965 at a time when his organization was projecting unfitted "S' curves. Jones quoted it as an example of trend extrapolation which he dismissed as simplistic, charging that it 'implicitly assumes that all factors that have operated in the past will continue to operate in the same way in the future and that the interrelationships will remain f i x e d . . . ' In fact trend extrapolation assumes no more than that time alone is a sufficient explanatory variable and this may well be true for some stages of the life cycle of the dependent variable. From 1920 UK electricity consumption grew like Topsy by a factor of 50 expanding during the inter-wars slump as if nothing was happening while coal
ENERGY POLICY April 1988
consumption showed a deep trough. Another paper of the reviewer's and a colleague's - a summary of a substantial report of a polymethodological attempt to forecast UK and world energy and electricity consumption at the turn of the century - was treated a little more kindly but the editor then spoiled it all by reversing the authorship and awarding primary authorship to the junior author, whose responsibility was confined to part of only one of the methods used for forecasting UK electricity. The giants were not immune either. Jevons was ticked off for failing to take account of energy conservation and the future role of oil in the 100-year projection of coal consumption that he published in 1870. He was given no marks for his great insight in recognizing that increasing energy efficiency amounts to a reduction in the implicit price of energy. The tone was nihilistic and there was an unspoken assumption that energy price and economic activity were unpredictable autonomous factors in a unidirectional model of
energy consumption. There were one or two other small lapses. In the chapter on nuclear power economics there was a diagram comparing the profiles of capital repayments under straight line depreciation and under the annuity method which showed the total payments over the amortization period to be the same. It is of course the discounted (not the undiscounted) sums of the r e p a y m e n t s that e q u a t e to one another. (They equate to the initial capital cost.) And the editor's own paper on discounting, given as an appendix, seemed to confuse social opportunity cost with the commercial discount rate although it was in other respects good. Another appendix discussed the case for economic growth without once mentioning Mishan or Beckerman. These cavillings notwithstanding this is an excellent book that will fill a place in the literature that has long been vacant.
L.G. Brookes Boumemouth, UK
Rubbishing academics and policymakers THE POLITICAL ECONOMY OF NATURAL GAS by Ferdinand E. Banks
Croom Helm, Beckenham, Kent, UK, 1987, 200 pp, £30.00 This book is wrongly titled. It is understandable that Professor Banks wanted to maintain the same title formulation as his books dealing with oil and coal, but unfortunate in that politics is a very important subject in natural gas markets and there is very little politics in this book. The introduction tells us that the book ' . . . is intended as a simple, comprehensive and up to date review of natural gas markets' (p 1). It is also intended to fill a gap in recent literature which consists of studies, 'bare of the analytical tools of mainstream
economic theory'. The claim for comprehensiveness is overstated. No book of 200 pages (with two chapters on general energy and economic matters) could fulfil such a task. As a general introductory text on the subject for students, the book succeeds sporadically and patchily. There are some very good sections and some rather gross generalizations where readers could be led badly astray. The great strength of the book is its rather conversational style which sweeps the reader along, contrasting pleasantly with the generally laboured and turgid texts on this subject. Professor Banks cuts a swathe through i m m e n s e l y complicated subjects, cheerfully rubbishing most academics and policymakers (he is particularly rude about the Swedish government) along the way. Assertions such as: ' . . . when Soviet gas from the new pipeline began flowing into Western Europe . . . in 1984, it caused the price of gas to fall all over the world'
191
Book reviews
(p 82); 'Despite occasional setbacks, the Soviet Union is bracing itself to dominate the Western European energy market by the end of the century' (p 94); 'Dutch disease . . . created a small group of losers, but increased prosperity for almost everyone else. Norwegian oil has meant about the same thing' (p 114); make one gasp. In a short review, it is hard to know where to begin to discuss them. In a number of places, I believe he is unfair: 'the Japanese have not hesitated to abrogate negotiations when the price offered by the supplier appeared even slightly out of line with what the Japanese interpret as the developing price trend' (p 106). In fact the Japanese have been remarkably tolerant towards their gas suppliers, much more so than either the U S A or the Europeans. On rare occasions he is plain wrong: 'At the present time the market price of traded gas is almost uniform, and fairly close to the crude oil equivalent at the point of delivery' (p 15).
Finally, as a political scientist myself, I can recognize an economist who believes that politics is something that can be picked up from life experience and the newspapers. My favourite example is worth quoting at length (p 90):
and 1980s. The oil chapter is less satisfactory because of failure to delineate clearly all the critical distinctions. Such basic points as that Japan has limited crude oil production potential and participates in a well organized world market are inadequately stressed. Numerous As for the politics of buying Soviet gas I have only this to say. Having worn the separate events are reviewed but it is uniform of the United States Army in difficult to reach conclusions about the Western Europe in the early 1950s, the two critical distinct issues of the proponly kind of attack on Western properties er role of domestic crude oil and the by Soviet citizens at the present time that I can imagine would be an attack on the duty optimal organization of refining and free gin and whisky so prominently display- distribution and the side issue of ed at Western diplomatic and commercial Japanese participation abroad. We receptions. learn a great deal about many failures Having devoted some considerable and a few successes in establishing study to this subject myself, I can only government corporations or controls say that I agree wholeheartedly, but over the industry. However, I came would not expect to convince oppo- away inadequately informed about the exact organization of refining and nents on the basis of such assertions. All in all an enjoyable book, but distribution of oil in Japan and particularly of the role of the international not, perhaps, one for the expert. majors. The chapter attempting to provide Jonathan Stern Joint Energy Programme germane comparative information on Royal Institute of International Affairs other countries is disappointing. In the three areas treated (coal, electricity, and oil), he provides sketchy overviews, good listings of the major state ventures, and more detailed discussions of selected major actions such as best to develop the new nuclear tech- the UK and French nationalizations of nology. coal and electricity and government The case studies are the main con- involvement in oil companies such as tribution of the book. We get excel- BP, CFP, and ENI. Important conlent reviews of coal, electricity, and trasts such as the ad hoc way in which nuclear but a rather fragmented treat- the government roles were assumed in ment of oil. The coal discussion traces US electricity and electricity and coal government industry relations from in West Germany are hardly noticed. the 1870s on. Emphasis is upon Moreover, little recognition is given to aborted efforts after World War lI to the difference between programmes establish greater direct government designed better to develop an expandcontrol and upon the series of plans to ing industry (or at least one expected cushion the effects of declining com- to expand) and those to support a petitiveness. The electric power dis- declining industry. The fault carries cussion sketches developments before over into the discussion of Japanese World War II and proceeds to review coal. (The deficiency cannot be attriin more detail reoganization proposals buted to lack of knowledge. His during the US occupation, and their tabulation of government ventures ultimate resolution. The nuclear dis- and various remarks show that he has cussion reviews carefully how the deliberately omitted many details of choices of technology and the orga- which he is aware.) nization for implementing the nuclear Samuels' primary interest is why the p r o g r a m m e were developed. The Japanese government had owned fewsame chapter has a terse review of er energy companies than even the abortive synthetic fuels programmes U S A with its significant public sector during World War II and the failure to in electricity and public ownership of implement a programme in the 1970s significant energy resources. His
Japanese energy policy explained THE BUSINESS OF THE JAPANESE STATE: Energy markets in comparative and historical
perspective by Richard L. Samuels
Cornell University Press, 1987, 359 pp, $45 Samuels has undertaken the valuable task of presenting the history of Japanese government efforts to regulate 'energy markets'. Specifically, he has surveyed public policy in coal, electric utilities, oil, synthetic fuels, and nuclear power. To the many energy policy analysts unable to read Japanese, the reviews provide muchneeded discussions of unfamiliar developments. As Samuels implicitly recognizes, the energy rubric covers a diverse range of i s s u e s - the protection of a dying coal industry, the classic issues of natural monopoly in electric power, the proper attitude towards international majors in oil, and how
192
ENERGY POLICY April 1988
struck by the gulf between the accusations of high cost one sees levelled against nuclear energy from all sides and the robustness of the economic case that emerges from close analysis of the facts - future fossil fuel prices could be as much as 40% below those currently assumed in coal/nuclear comparisons and still leave nuclear with the edge. This section of the book was somewhat disappointing, however, in lacking consideration of the broader aspects of policy: it would have been nice to see some discussion of the implications of the extent to which the world is already committed to nuclear energy and the significance of the increasing electrification of economic activity, with the steady fall in energy consumption per unit of economic output in developed countries complemented by a steady rise in electricity per unit of output. One of the last few chapters included a rather irritating digression on forecasting. The oil crises of the 1970s and the associated economic ups and downs provided a Roman holiday for the hindcasters of this world to be clever at the expense of the forecasters. In this case all the forecasting methodologies are stuck up one by one like Aunt Sallies to have the economic and energy discontinuities of the 1970s hurled at them. It did not help that the illustration for the first target was a 20-year old paper by the reviewer (his first ever on energy)! It reported an attempt to fit an 'S' curve to UK electricity consumption from 1920 to 1965 at a time when his organization was projecting unfitted "S' curves. Jones quoted it as an example of trend extrapolation which he dismissed as simplistic, charging that it 'implicitly assumes that all factors that have operated in the past will continue to operate in the same way in the future and that the interrelationships will remain f i x e d . . . ' In fact trend extrapolation assumes no more than that time alone is a sufficient explanatory variable and this may well be true for some stages of the life cycle of the dependent variable. From 1920 UK electricity consumption grew like Topsy by a factor of 50 expanding during the inter-wars slump as if nothing was happening while coal
ENERGY POLICY April 1988
consumption showed a deep trough. Another paper of the reviewer's and a colleague's - a summary of a substantial report of a polymethodological attempt to forecast UK and world energy and electricity consumption at the turn of the century - was treated a little more kindly but the editor then spoiled it all by reversing the authorship and awarding primary authorship to the junior author, whose responsibility was confined to part of only one of the methods used for forecasting UK electricity. The giants were not immune either. Jevons was ticked off for failing to take account of energy conservation and the future role of oil in the 100-year projection of coal consumption that he published in 1870. He was given no marks for his great insight in recognizing that increasing energy efficiency amounts to a reduction in the implicit price of energy. The tone was nihilistic and there was an unspoken assumption that energy price and economic activity were unpredictable autonomous factors in a unidirectional model of
energy consumption. There were one or two other small lapses. In the chapter on nuclear power economics there was a diagram comparing the profiles of capital repayments under straight line depreciation and under the annuity method which showed the total payments over the amortization period to be the same. It is of course the discounted (not the undiscounted) sums of the r e p a y m e n t s that e q u a t e to one another. (They equate to the initial capital cost.) And the editor's own paper on discounting, given as an appendix, seemed to confuse social opportunity cost with the commercial discount rate although it was in other respects good. Another appendix discussed the case for economic growth without once mentioning Mishan or Beckerman. These cavillings notwithstanding this is an excellent book that will fill a place in the literature that has long been vacant.
L.G. Brookes Boumemouth, UK
Rubbishing academics and policymakers THE POLITICAL ECONOMY OF NATURAL GAS by Ferdinand E. Banks
Croom Helm, Beckenham, Kent, UK, 1987, 200 pp, £30.00 This book is wrongly titled. It is understandable that Professor Banks wanted to maintain the same title formulation as his books dealing with oil and coal, but unfortunate in that politics is a very important subject in natural gas markets and there is very little politics in this book. The introduction tells us that the book ' . . . is intended as a simple, comprehensive and up to date review of natural gas markets' (p 1). It is also intended to fill a gap in recent literature which consists of studies, 'bare of the analytical tools of mainstream
economic theory'. The claim for comprehensiveness is overstated. No book of 200 pages (with two chapters on general energy and economic matters) could fulfil such a task. As a general introductory text on the subject for students, the book succeeds sporadically and patchily. There are some very good sections and some rather gross generalizations where readers could be led badly astray. The great strength of the book is its rather conversational style which sweeps the reader along, contrasting pleasantly with the generally laboured and turgid texts on this subject. Professor Banks cuts a swathe through i m m e n s e l y complicated subjects, cheerfully rubbishing most academics and policymakers (he is particularly rude about the Swedish government) along the way. Assertions such as: ' . . . when Soviet gas from the new pipeline began flowing into Western Europe . . . in 1984, it caused the price of gas to fall all over the world'
191
Book reviews
(p 82); 'Despite occasional setbacks, the Soviet Union is bracing itself to dominate the Western European energy market by the end of the century' (p 94); 'Dutch disease . . . created a small group of losers, but increased prosperity for almost everyone else. Norwegian oil has meant about the same thing' (p 114); make one gasp. In a short review, it is hard to know where to begin to discuss them. In a number of places, I believe he is unfair: 'the Japanese have not hesitated to abrogate negotiations when the price offered by the supplier appeared even slightly out of line with what the Japanese interpret as the developing price trend' (p 106). In fact the Japanese have been remarkably tolerant towards their gas suppliers, much more so than either the U S A or the Europeans. On rare occasions he is plain wrong: 'At the present time the market price of traded gas is almost uniform, and fairly close to the crude oil equivalent at the point of delivery' (p 15).
Finally, as a political scientist myself, I can recognize an economist who believes that politics is something that can be picked up from life experience and the newspapers. My favourite example is worth quoting at length (p 90):
and 1980s. The oil chapter is less satisfactory because of failure to delineate clearly all the critical distinctions. Such basic points as that Japan has limited crude oil production potential and participates in a well organized world market are inadequately stressed. Numerous As for the politics of buying Soviet gas I have only this to say. Having worn the separate events are reviewed but it is uniform of the United States Army in difficult to reach conclusions about the Western Europe in the early 1950s, the two critical distinct issues of the proponly kind of attack on Western properties er role of domestic crude oil and the by Soviet citizens at the present time that I can imagine would be an attack on the duty optimal organization of refining and free gin and whisky so prominently display- distribution and the side issue of ed at Western diplomatic and commercial Japanese participation abroad. We receptions. learn a great deal about many failures Having devoted some considerable and a few successes in establishing study to this subject myself, I can only government corporations or controls say that I agree wholeheartedly, but over the industry. However, I came would not expect to convince oppo- away inadequately informed about the exact organization of refining and nents on the basis of such assertions. All in all an enjoyable book, but distribution of oil in Japan and particularly of the role of the international not, perhaps, one for the expert. majors. The chapter attempting to provide Jonathan Stern Joint Energy Programme germane comparative information on Royal Institute of International Affairs other countries is disappointing. In the three areas treated (coal, electricity, and oil), he provides sketchy overviews, good listings of the major state ventures, and more detailed discussions of selected major actions such as best to develop the new nuclear tech- the UK and French nationalizations of nology. coal and electricity and government The case studies are the main con- involvement in oil companies such as tribution of the book. We get excel- BP, CFP, and ENI. Important conlent reviews of coal, electricity, and trasts such as the ad hoc way in which nuclear but a rather fragmented treat- the government roles were assumed in ment of oil. The coal discussion traces US electricity and electricity and coal government industry relations from in West Germany are hardly noticed. the 1870s on. Emphasis is upon Moreover, little recognition is given to aborted efforts after World War lI to the difference between programmes establish greater direct government designed better to develop an expandcontrol and upon the series of plans to ing industry (or at least one expected cushion the effects of declining com- to expand) and those to support a petitiveness. The electric power dis- declining industry. The fault carries cussion sketches developments before over into the discussion of Japanese World War II and proceeds to review coal. (The deficiency cannot be attriin more detail reoganization proposals buted to lack of knowledge. His during the US occupation, and their tabulation of government ventures ultimate resolution. The nuclear dis- and various remarks show that he has cussion reviews carefully how the deliberately omitted many details of choices of technology and the orga- which he is aware.) nization for implementing the nuclear Samuels' primary interest is why the p r o g r a m m e were developed. The Japanese government had owned fewsame chapter has a terse review of er energy companies than even the abortive synthetic fuels programmes U S A with its significant public sector during World War II and the failure to in electricity and public ownership of implement a programme in the 1970s significant energy resources. His
Japanese energy policy explained THE BUSINESS OF THE JAPANESE STATE: Energy markets in comparative and historical
perspective by Richard L. Samuels
Cornell University Press, 1987, 359 pp, $45 Samuels has undertaken the valuable task of presenting the history of Japanese government efforts to regulate 'energy markets'. Specifically, he has surveyed public policy in coal, electric utilities, oil, synthetic fuels, and nuclear power. To the many energy policy analysts unable to read Japanese, the reviews provide muchneeded discussions of unfamiliar developments. As Samuels implicitly recognizes, the energy rubric covers a diverse range of i s s u e s - the protection of a dying coal industry, the classic issues of natural monopoly in electric power, the proper attitude towards international majors in oil, and how
192
ENERGY POLICY April 1988