PROFILE of Professor Banks Ferdinand E. Banks (Uppsala University, Sweden), performed his undergraduate studies at Illinois Institute of Technology (electrical engineering) and Roosevelt University (Chicago), graduating with honors in economics. He also attended the University of Maryland and UCLA. He has the MSc from Stockholm University and the PhD from Uppsala University. He has been visiting professor at 5 universities in Australia, 2 universities in France, The Czech University (Prague), Stockholm University, Nanyang Technical University in Singapore, and has held energy economics (guest) professorships in France (Grenoble), Hongkong, and the Asian Institute of Technology (Bangkok). The main portion of his military service was in Japan (infantry) and Germany (artillery), and he was employed for one year in the engineering department of the U.S. Navy at the Great Lakes Naval Training Station (Illinois). He has also been a lecturer in mathematical and development economics in Dakar (Senegal), and macroeconomics at the University of Technology in Lisbon (Portugal). He was an econometrician for UNCTAD (United Nations Commission on Trade and Development) in Geneva, Switzerland for 3 years, and fellow of the Reserve Bank of Australia when visiting professor of mathematical economics at the University of New South Wales (Sydney). He was a consultant for the Hudson Institute in Paris. He has published internationally 12 books, to include 2 energy economics textbooks and an international finance textbook, and 200+ articles of various lengths. His new book ENERGY AND ECONOMIC THEORY will be published next year (2013)…according to GOOGLE.

ENERGY AND YOUR FUTURE: OIL, NUCLEAR AND THE OTHERS

By Professor Ferdinand E. Banks

CONTENTSIntroduction1. Some Aspects of Energy Economics: nuclear, oil, climate warming, OPEC, natural gas and coal2. Oil3. Natural Gas4. Nuclear5. Coal6. OPEC7. Electric Regulation and Deregulation, and some painless economic theory8. A Long Conclusion: Myth and Meaning in the Great World of Energy Economics

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INTRODUCTION

The flow of energy should be the primary concern of economics

−Frederick Soddy (1933)

When I was informed that the publication of my new textbook ‘Energy and

Economic Theory’ would be delayed until the middle of 2013, I decided to complete

a shorter and more popular book about energy economics. This project was

initiated in Singapore shortly after I gave a talk on nuclear energy, participated in a

rancorous debate about the future of energy, and gave a long but perhaps not too

successful lecture on oil in which my mathematics led to a completely irrelevant

comment about ‘Iran’.

In my humble opinion, the present book is long overdue. During the past six or

seven years I have participated in a number of (interactive) net forums, and

although ‘cashiered’ from most of them, I have found participation in several to be

much more enlightening, more stimulating, than pouring over articles in the

conventional and best known (learned) energy literature. Moreover, since the

beginning of the energy economics phase of my teaching career, my energy

economics students in Sweden, Australia, France and Thailand were duly informed

that uninvited references to many of the articles in those journals were not

appreciated, and instead they should concentrate on the approach prescribed in this

book. That approach is primarily concerned with obtaining a thorough knowledge

of certain very important topics: the kind of knowledge that will allow you to

participate in conversations and debates about energy as a fluent, well-informed

and imposing equal instead of an interloper.

Please note that in the title of this book I speak of your future instead of the

future. What I mean is that energy has a crucial macroeconomic dimension, and

that dimension might be important for your income, as well as the income and

quality of life of your descendents. Since my first book devoted only to energy – ‘The

Political Economy of Oil’ (1980) – I have argued that the global economy was a

hostage of the oil price, and I notice that the leading oil economist in the United

States (U.S.), Professor James Hamilton of the University of California at San Diego,

has verified my contention that the bad macroeconomic news currently experienced

in much of the industrial world can be traced to the oil price escalation of 2008.

Some observers blame this dilemma on the financial markets (and financial

speculation), which clearly was important in the near macroeconomic meltdown

experienced after 2008, however as far as I am concerned, the accelerated oil price

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rise that began in 2007 was the key ‘force’ driving many countries into or close to

recession. On this point let me note that Dieter Helm, professor of energy policy and

economics at the University of Oxford, has chosen to claim that in reality the United

States has access to a superabundance of oil. I have seen that claim in the net forum

OilPrice.Com, and I would like to say that while it may carry considerable weight at

Oxford, or in the store-front universities at which some of us received a portion of

our educations, in seminar rooms and conferences frequented by dedicated

researchers, its authors might receive an assessment of their knowledge that they

would prefer others not to hear. I can add that Professor Helm believes in the

reality of U.S. energy independence. Ceteris paribus, that conviction is preposterous!

Occasionally I find myself perplexed by the lack of knowledge about energy

matters displayed by the decision makers and their advisers, but I have come to the

conclusion that this could not have been avoided. Academic (and pseudo-academic)

economics is probably a couple of hundred years old, but energy economics is still in

its blooming youth, and there is much to be done before we can avoid having our

intelligence insulted by e.g. meaningless claims that as much economical petroleum

(= oil + natural gas) can be found on and off-shore the U.S. than in the entire

Middle East and Russia. Of course, in the very long run, technological advances and

sheer desperation may result in the exploitation of large new deposits of oil and/or

oil-like resources, but as John Maynard (Lord) Keynes once informed his friends

and neighbours, in the long run mortal man will be singularly incapable of enjoying

scientific and/or engineering prodigies. Put another way, at the present time oil and

gas – or perhaps better energy – is the life blood of our civilization, and the more we

know about it, and the sooner, the better off we will be.

There is no mathematics in this book. In his brilliant ‘A Brief History of Time’

(1988), Stephen Hawking (Lucaisian Professor of Mathematics at Cambridge

University) points out that the presence of a single equation in a popular book has a

very negative effect on readership, or maybe that was sales, but even so he could not

avoid using Albert Einstein’s famous equation in his book.

There is a mention of the reserve-production ratio for petroleum (= oil + gas)

in Chapter 2 of this book, where I go into considerable detail about the oil scene, but

there is a world of difference between summing up the equivalence of mass and

energy with Einstein’s crowning achievement, and e.g. (mistakenly) saying that if a

new petroleum deposit containing confirmed reserves of 5000 units was discovered,

it makes economic sense for its manager to propose that he should produce 50 units

per year so that 100 years (= 5000/50) of production can be enjoyed. Unfortunately,

as shown in the next chapter, geology and profit maximization will upset his plans.

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Many people have failed to understand this reality. One of them is the

president of the United States, who evidently has been misinformed by his experts

about the amount of natural gas as the disposal of his country’s producers, although

those experts may be correct when they say that in 2035, only 9 percent of the

energy consumption in the U.S. will be supplied by renewables.

Another is one of the best known energy authors in that country, whose firm

has a program which calls for convincing – or at least trying to convince –

Americans and citizens of other petroleum importing countries that natural gas will

allow Americans (and others) to reclaim their energy future. Both contend that

(ceteris paribus) the U.S. has a 100 year supply of natural gas at present

consumption rates. It certainly would be lovely if this were true, but on the basis of

present evidence, I am unable to endorse what might be a shale gas mirage.

The reckless praise of natural gas, and particularly shale gas, has also been

taken up by the Oxford scholar mentioned above, and one of the chief editors of the

(London) Financial Times has added his limited knowledge of energy matters to the

discussion. Please allow me quote myself on this subject: shale gas is a valuable

resource, but not as valuable as many self-appointed energy experts believe, and

more important want others to believe. If it were, other countries that are rich in

shale gas would also be singing love songs about it.

With all due respect for teachers and researchers attempting to master an

increasingly difficult subject, it might be useful to recognize that the U.S. is the

largest importer of oil in the world, and only the loss of 5 million industrial jobs, out

of the 17 million registered in 2012, has kept energy prices in the U.S. from rapidly

moving toward a very unhealthy level, As for the situation globally, oil production

and exports have been falling in most of the top supplier nations, but production

costs have not been falling and demand remains high. This and the OPEC agenda

referred to later tell me that the trend price of oil will continue to rise.

SOME ASPECTS OF ENERGY ECONOMICS

Once upon a time I was approached by a customs officer at Indianapolis Airport

(U.S.), and when he asked this suspicious looking teacher what he did for a living, I

told him that I taught mathematical economics. The look on his face made it clear

that he didn’t know what that was, and so later the same year, upon returning to

Sweden from Singapore, and experiencing the usual harassment about my presence

in Scandinavia from the customs personnel at Helsinki (Finland) airport, and my

plans for the future, I confessed to teaching and doing research in energy economics.

4

They understood perfectly what that meant, because the new (1600 Megawatt)

nuclear reactor in Finland that was supposed to be constructed in 5 years, and to

cost 5 billion (U.S.) dollars, might take more than 8 years to go from ‘ground break’

to ‘grid power’ (where a ‘grid’ is a collection of wires). As for the additional 3

billion (or more) dollars that will be the cost of this delay, a financial journalist

assured his readers that the constructing firm – Areva, of France – will have to “eat”

that extra money, which can be construed as the penalty for not fulfilling the terms

of the contract entered into with the Finnish purchaser of the reactor.

Before continuing, we can note what appears to be an approximate relation

between construction time and the present cost of a reactor outside of China and

maybe South Korea. On the basis of the initial sales arrangements in Finland, and

later the reported agreement between South Korean reactor manufacturers and the

United Arab Emirates, perhaps a good estimate is a billion dollars a year. I consider

this excessive though, because I am familiar with the present and estimated future

cost of reactors in e.g. China. That cost or something close to it will eventually

prevail for all reactor producers.

Later in this book I will argue that because of the importance of electricity, we

need every energy source that we can muster, which includes nuclear and perhaps

every conceivable kind of renewable, although I would have a hard time just now

convincing my students or myself that paying 8 billion dollars (or more) for a

nuclear facility made economic sense. I won’t argue with the Finns however,

because they seem to be in the process of ordering another very large reactor. They

have evidently decided that in the future nuclear is the best way to obtain the most

inexpensive electricity for their industries and households, and if their all-inclusive

energy agenda and economic ambitions are what I suspect they are, they are

probably correct.

IT’S CALLED BAD GOOD NEWS

These days I try to believe that just about everyone understands the situation with

oil. I assume that with the ‘average’ oil price (West Texas Intermediate + Brent)

occasionally exceeding a hundred dollars a barrel (= $100/b), the more vulgar forms

of optimism will be discarded. Amazingly enough however, there are persons with a

passable background in energy matters who are unable to deal with the realities of

the oil markets. One of these harbingers of good news made herself known to me a

few years ago.

5

Where that person was concerned, seismic technology was described as a

“guess and a gamble”- Furthermore, I was told that even when drilling you can miss

a mega-sized oil field by a matter of “feet”. With all due respect, I interpret this

kind ‘hokum’ as no less than contempt for mainstream science and technology, as

well as the men and women who have devoted their lives or sometimes their health

to it.

I was informed by the same person that the attempt to assess oil reserves

should be characterized as “guesswork” – which to a certain extent it is, and so “the

stuff written today about peak oil is a bit like the usual nonsense about climate

change. It is written by people who know nothing about it”.

The elite of oil geologists, petroleum engineers and managers, now accept the

peak oil thesis: how can they do otherwise, since conventional oil peaked in oil

powerhouses like the U.S., Russia, and the English and Norwegian North Seas. A

large percentage of acknowledged climatologists attach a high probability to climate

change taking place that is influenced to some degree by human behaviour.

Personally, I don’t have the slightest idea as to whether this is correct or not, but on

the basis of what is happening on the climate and environmental front in many

parts of the world, I suspect that climate change of some sort is real, and some smart

people need to figure out how to protect us from its protectable aspects. By that I

mean e.g. where to construct and how to pay for very high and thick concrete walls,

and where to locate nuclear power stations so that they will not be interfered with

by tsunamis.

I’ve also decided to reject the hypothesis offered by that young lady that 80

percent (or more) was the correct figure for the recovery factor of oil. Even if this

was correct, our oil worries might not be over, because only about one barrel of

conventional new oil is discovered for every three barrels consumed. I wouldn’t

advise anyone to spend valuable time mulling over the above recovery factor either,

When I gave my first lecture on oil in Australia, the actual recovery factor for

conventional oil was about 32%, although I have heard that it is about 35% today.

Successful producers have understood this for many years, and thus when possible

reinject the natural gas that often comes along with their oil in order to maintain

pressures and the flow rate.

Of course there are always unconventional resources (like shale oil in the

U.S.), and oil (or tar) sands of the variety located in Canada. Where the first of these

is concerned, at a workshop in Vienna many years ago, an American executive

called me a fool because of the enthusiasm I showed for this resource, saying that in

his part of the U.S., there wasn’t enough water to economically obtain large

6

quantities of oil. As for Canadian oil or tar sand reserves, these are valuable

resources, but I don’t have much faith in them where changing the international oil

picture is concerned, as least in the near future. At the same time it might happen

that e.g. oil and tar sands, and especially the heavy oil of Venezuela and elsewhere,

will someday provide us with enough motor fuel to keep our autos moving toward

the skiing in the resorts of Middle Sweden, and hopefully the skiing and partying in

the Midnight Sun further north, in the middle of an exotic Swedish summer.

Quite obviously, if there was as much oil in this old world of ours as the young

lady above thinks, or thought, then we would never have to worry again about oil

prices escalating the way they did in 2008. That price was catastrophic for much of

the global economy, and especially for some of the people working in that economy

although wish-fulfilment for some countries in the Middle East. I happen to be an

optimistic person, because I know what American technology achieved during the

Second World War. In the words of the ‘ditty’ so popular during that war, ‘THEY

DID IT BEFORE, AND THEY CAN DO IT AGAIN’. But it will not be easy.

MORE OF THE SAME Project Smartypants, initiated in December 1996 by the online version of the Annals

of Improbable Research (http:www.improb.com) asked its viewers to rank academic

disciplines with regard to their estimate of the mental firepower of its practitioners.

As to be expected, physics came out at the top by a very large margin, while

economics shared the jumbo position with political science.

I am not overly discouraged by finding out that I am in the wrong line of work,

because I happen to know that physicists – like economists – hold widely divergent

views on the evolving energy situation, and not all of them are correct. What annoys

me is that many economists fail to interpret the lessons of history where vital issues

such as the availability of oil are concerned.

Many years ago, on a television program called ‘The Nobel-Prize Winners

Speak’, Professor Harry Kroto emphasized the catastrophic effect on world

agriculture that might follow in the wake of an oil supply ‘crunch’. He was thinking

of course of the importance of oil in the production of fertilizers. A few minutes later

the Nobel Prize winner in economics that year poo-pooed all this, and expressed

confidence that there was enough oil in the crust of the earth to keep a global

population of 10 billion persons well fed and comfortable. Although considerably

upset by this judgement, I fortunately remembered that many years earlier that

same gentleman was a co-author of a paper in which it was alleged that natural

7

resources were being consumed too slowly. Faced with this kind of goofy logic, and

noting the passivity of the program’s moderator, it was easy for me to decide to mail

the producers of that program, and threaten to deny them my viewing power in the

future if they continued to entertain blatant absurdities. As it happened though,

reason prevailed when I understood that they were not afraid of losing what I

naively called my “viewing power”, and so I kept my opinions to myself..

Observe the implication: blatant and frequent absurdities, as well as lies and

misunderstandings, are sometimes the way that business is done in the upper

reaches of the real world, as opposed to the make-believe world we sometimes

describe on the black or white boards in our economics classrooms. Most of the time

the lies are so obvious that they can be detected if you are only partially awake, but

the same is not true with the misunderstandings, because they are usually embedded

in a web of pseudo-scientific terminology.

Some years ago, in the Journal of Economic Perspectives, it was claimed that

”disturbances in the oil market are likely to matter less for U.S. macroeconomic

performance than has commonly been thought”. This was a strange contention,

because slight economic downturns reflected immediately on the U.S. economy

following the oil price ‘spikes’ of l973, 1980 and l981, and 1990, and they featured

economic growth declining and inflation rising (i.e. ‘stagflation’), as well as negative

employment effects. Things calmed down rather rapidly though in all these cases,

and so word went out in the learned (and other) literature, that ‘spikes’ – though

annoying – were a passing inconvenience, and normally would not cause an lasting

damage.

The really bad macroeconomic news started to arrive about the middle of the

first decade of the new century Although not initially noticed, this was the

beginning of a sustained oil price rise, and precious few of the colleagues got the

message. Our political masters probably did the best that they could once alerted to

the danger, but among other mistakes they failed to realize that a popular

description of what was happening to the global economy published by the leading

investment bank in the U.S. – Goldman Sachs – was completely in error. Among the

bad good news circulated by that organization was the belief that central banks in

the main industrial countries had enough ‘juice’ to keep the financial situation

under control, and more grotesque, if things got really bad in the oil markets, Saudi

Arabia was ready and able to prevent the oil price from going through the roof. The

next chapter in this book, and my forthcoming energy economics textbook (2013),

have a lot to say about these events, but I will mention now that in order to improve

the deteriorating situation in the U.S. economy, the president of the U.S. flew to

8

Saudi Arabia, and with his hat in his hand asked the ruler of that country for some

assistance. Assistance was unfortunately not available, although Mr Bush was

wished a safe flight home.

One person who had few doubts about what was taking place was the

chairman of the United States Federal Reserve System (the U.S. Central Bank) at

that time, Alan Greenspan. Efforts are now being made to picture him as a bungler,

but as far as I can tell, he understood that the ‘Fed’ was essentially a one-machine

operation, with that machine (or instrument) being the interest (or discount) rate,

and he tried to convey its limitations to his friends and neighbours in the decision-

making community. What he evidently forgot to stress however was the truth in

(philosopher) Ludwig Wittgenstein’s observation that there can be a big difference

between the functioning of an ideal machine, and the kind often encountered in the

workaday world. For example, the kind of machine that might break down

completely if energy prices go into orbit.

I have spent a great many years studying, teaching and thinking about oil and

nuclear energy. There are fairly long chapters below on these subjects, and also

natural gas and coal, because I happen to believe that everyone who takes a

modicum of interest in a book of this nature will have no problem understanding

their content, though they may not always agree with my conclusions. Here it might

be useful to remember that approximately 80 percent of the global energy supply

originates with fossil fuel (oil, natural gas and coal), which involves 70 percent of the

global electricity supply, but for various reasons there is no long chapter offered in

this book about the environmental significance of this arrangement. Accordingly, I

will say a few things about that very controversial issue now, focussing on climate

change.

ME AND CLIMATE CHANGE

In Sweden it is possible to hear a great deal about climate change. I don’t listen to

these conversations or monologues however, because there are some very intelligent

people who say that climate change is nonsense, while some equally intelligent

people claim that climate change is the real deal. As it happens though, I

encountered a problem of this nature long before completing my education, and

long before I or anybody else heard anyone use the expression ‘climate change’. It

had to do with a potential Third World War.

When I was an infantry soldier in Japan, I was told almost every week that it

was only a matter of time before the first shots in that catastrophic conflict would be

9

fired. Among the people who said that that war could happen and should happen

were two of the most famous mathematicians of the twentieth century: Bertrand

Russell and John von Neumann, The latter is occasionally labelled the best brain of

the 20th century, and of course there were other war-mongers in various

governmental offices as well as neighbourhood saloons. I hope that no one is

offended if I say that some of the reasons offered for fighting that Third World War,

and the way it should be fought, were pure loony-tune. The best short review of

those reasons can be found in the book Prisoner’s Dilemma (1992) by William

Poundstone. .

About seven years later, as an artillery soldier in Germany, I was assured by a

high ranking officer in the replacement depot at Kaiserslauten that a Third World

War neither could nor would be fought, although this kind of assurance could not

be detected on prime-time TV news, nor anywhere in the global U.S. military

newspaper ‘Stars and Stripes’. But even so, by that time it was becoming understood

that the likely damage resulting from another world war would be so extensive, that

responsible governments composed of men and women of both modest and high

intelligence were convinced that a nuclear clash had to be avoided at all costs. For

instance, President John F. Kennedy once unambiguously stated that “Anything is

better than a war”, which is not what a certain general of his close acquaintance

wanted to hear.

The difficulty with climate change, or global warming, or whatever it is called

in the corridors and restaurants of power, is that no genuinely systematic attempt

has been made to obtain an elementary but accurate and comprehensive

understanding of the problem. Instead we are treated to mastodon and overly

publicized climate meetings in Kyoto, Copenhagen and Capetown, where everyone

present is glad-handed and treated as a full-fledged expert.. The point is that if a

comprehensive understanding of this issue can be achieved, and suitably advertised,

then ultimately it might be possible to deal with it by the same kind of thinking and

actions that led to abolishing the danger and constant contemplation of a Third

World War.

In conventional game theory, and advanced microeconomic theory,

preferences are revealed by actions, and since the most celebrated document from

various climate meetings and conferences was inconsequential Kyoto Protocol, I

had no problem believing that most of the delegates to Kyoto and other conclaves

were essentially in a non-cooperative mode. Put more explicitly, when cooperation

evolved, its primary purpose was to further personal gain. If the Swedish delegates

(and hangers-on) to those meetings can be taken as a representative sample of the

10

whole, then it is quite clear that the main concern of most delegates was to find some

way to qualify for admission to future climate warming jamborees.

In my work I have occasionally suggested that doing something about actual or

potential environmental problems should first be approached on the highest

governmental level, which may or may not mean that all governments should be

welcome to sit at the table. What it does mean though is that everyone at or just

behind the table has the appropriate background and/or education and/or attitude

to comprehend the basic aspects of the climate conundrum, and amateurs o half-

baked ‘careerists’ are not welcome at or in the vicinity of the action. But that is only

the beginning. Once presumptive evidence and position papers are laid on the table

by believers and sceptics, then the right scientists and perhaps a few economists –

judiciously chosen – would be called in to examine this evidence, present new

evidence, make recommendations, call attention to disagreements, and publicly deal

with disagreements and what appeared to be scientific and economics mistakes in

the conference documents.

I have recently been informed that the above procedure has already been

installed, but if true I prefer to believe that it has not been done to the extent that it

should be done.

A year before I left the U.S. Army, I was the acting gunnery officer of the 35 th

Field Artillery Group, and involved in one of the largest exercises that had ever

taken place in West Germany. It was called Apple Harvest. Shortly before – or after

– midnight on one of the last days of the exercise, a colonel or general or something

came into the operations van, where I was alone and dreaming about my

forthcoming visit to Paris, and told me that referees for the exercise had concluded

that the ‘enemy’ had broken through the Fulda Gap, and their tanks and other

armoured vehicles were heading toward Nuremberg. To deal with this situation, he

wanted me to plot a ‘fire-mission’ involving a simulated nuclear artillery shell.

What I did not do was to tell him that the firing of a nuclear artillery shell

might have been an immoderate response, taking into consideration collateral

damage. Instead I did what I was ordered to do, and presumed that he or somebody

gave an order to fire the simulated round. Actually, I was more concerned with

going to sleep than receiving and analysing information about that travesty. It was

clear to me then, as well as now, that if that artillery shell had been real instead of

simulated, it would have removed a large part of the eastern suburbs of Nuremberg

from the face of the earth.

Someone – I don’t know or care who – leaked some information about that

episode, and my theory is that most of the gusto went out of the pro-war movement

11

in West Germany as a result. Yes, there were persons in West Germany who were

prepared – or maybe even anxious – to fight in or to finance a new war, but they

were not prepared to promote or approve of a state of affairs where nuclear

artillery manned by Americans and Russians were raining destruction on the newly

rebuilt cities of that country. (Although irrelevant, unless I am mistaken it was

believed by someone important that I was the person who was responsible for that

‘leakage’, and so my gunnery talents were dispensed with for the remainder of my

‘tour’ in Germany,)

The devastation caused by a large negative climate event might not be on the

same scale as that caused by nuclear artillery, but it would be severe if it took place.

The problem is that – unlike the outcome of nuclear war – voters, taxpayers and the

high and mighty are uncertain as to how severe, and they might choose to not

become certain even if they were in possession of all the available information,

because if they went public they might find themselves described as communists

and ‘kooks’. Exactly how this quandary would play out is unknown to me, but I

know that as a result of events like the Hurricane ‘Sandy’ that New York and a long

stretch of the US East Coast recently experienced, people like former (Republican)

governor Christine Todd Whitman of New Jersey, and a President George W. Bush

associate, have admitted that the time has come for a broad discussion of climate

change.

Having mentioned the military, I can cite the journalist David Stipp (2004),

who at one time probably had a good working knowledge of what goes on in

conference rooms at the Pentagon. He – and perhaps his sources – call climate

change “the mother of all national security issues.” I will not try to explain in detail

what he meant, but the logic behind that statement is that disasters like ‘Sandy’ and

a few others of a larger magnitude, could lead to large population movements, and

in their wake perhaps widespread social disorder. In a brilliant survey, Professor

David Goodstein (2004) ties these phenomena to the peaking of global oil, because

such a happening could result in a gigantic increase in the consumption of coal,

which in turn would increase the likelihood of menacing climate events.

Giovanni Immordino (2003) has said that the divergence of views on climate

matters is caused by “scientific uncertainty”. This may or may not be true, but as

far as I am concerned the problem is mostly due to cultural and geographic

considerations. In the U.S. climate risk has been managed relatively successfully for

two centuries, at least before ‘Sandy’, although there have been some short- term

discomforts. For example, the bad news in Oklahoma during the 1930s ((n the form

12

of the ‘dust bowl’), meant good news for California (in the form of many new

residents at a time when California may have been relatively underpopulated).

Moreover, I have heard it said that the explosive growth of Las Vegas was

caused to some extent by many Californians wanting to put more distance between

themselves and the Pacific Ocean. Managing with their feet or their Cadillacs might

be an apt description here. By way of contrast, “Untouched and untouchable” was

the final judgement about the U.S. by Wehrmacht Sergeant Christian Diestl in

Irwin Shaw’s brilliant war novel ‘The Young Lions’. Many Americans may still

think in those terms when the discussion about climate turns serious, although fewer

today than before ‘Sandy’.

“Climate change and politics” was the sub-title of a brief discussion in The

(London) Economist (February 5, 2005). Its obvious purpose was to make readers

believe that a large collection of high-profile physical scientists (and others) regard

the climate warming controversy as biased in such a way that it favors “believers”.

One of the others is the superstar journalist and writer Paul Johnson, who on

occasion seems to regard all scientists as neurotic and untrustworthy believers,

while the late sci-fi novelist Michael Crichton informed his fans that “science and

politics is a bad combination, with a bad history”. Crichton concluded his

evaluation of climate-warming and its believers by insisting that “critics” (i.e.

sceptics) are few and harshly dealt with. This is a serious accusation that I am not

particularly qualified to judge, but when I was a confirmed reader of the most

important scientific journals (like Nature and Science), they hardly published any

papers by sceptics, because those publications preferred that ‘experts’ who obtain

this designation in popularity contests rather than through the quality of their work

should find less distinguished outlets in which to disseminate their precious wisdom.

Among the observations in the above mentioned Economist article is a blurb

about the utilization of the wrong “exchange rates” by scientists or economists

working with the Intergovernmental Panel on Climate Change (IPCC). Apparently

this deficiency was pointed out by two concerned London economists. Fortunately,

the meticulous assessments by those scholars did not come my way, because if they

had they would have been immediately filed in the nearest dumpster. Believe it or

not, exchange rates do not have the slightest application to this exercise. It was also

noted that the statistical issues associated with this subject are complicated, which is

true, but fortunately they are not complicated to the Nobel Laureates and teachers

of statistics who have informed the governments of the leading industrial countries

that in all likelihood climate warming is real and not science fiction.

13

A few years ago I was asked by the editor of a widely distributed journal to

review the book on energy and climate warming by David Goodstein (2004), provost

and professor of physics at California Institute of Technology, whose speciality is

thermodynamics. As things turned out, that editor and self-appointed guardian of

energy science correctness later referred to Goodstein’s volume as “thin”, and

perhaps not of interest to readers of his publication.

Professor Goodstein’s book has been widely and favourably reviewed, and if

any reputable academics have anything against it, they have kept their objections to

them themselves. The reason for this is obvious. Goodstein presents a realistic

scenario of oil and gas depletion that could lead to an ill-advised reliance on coal –

assuming that by that time coal is not on the critical list where availability is

concerned. The point is to avoid an escalation of greenhouse gases that could –

could, not will – bring about the kind of bad news that no sane individual would

enjoy being exposed to in person or via prime time ‘infotainment’, particularly if the

climate-warming wolf is really in the neighbourhood waiting to give a

demonstration of what he can do. The bottom line here incidentally is not just rising

water on the Reeperbahn (in Hamburg) or Canal Street (in Amsterdam), or New

York, but catastrophic ramifications that might impact politically and/or

economically on any number of countries. A good place to get an insight into this

situation is in the easily read and incisive article by David Stripp that was

mentioned above.

Interestingly enough, almost all the climate sceptics I am familiar with are

strong believers in the long run availability of oil. Bjorn Lomborg – one of the

poster boys of the sceptics – once stated publicly that oil will last at least 100 years.

He is certainly correct with this judgement, however even if it were close to a

thousand it would make little difference. Scarcity needs to be defined in terms of the

peaking of the world oil supply, which the prominent geologist Colin Campbell, and

physicists like Professors Goodstein, Kjell Aleklett and Ugo Bardi see as near at

hand, because oil production is clearly ‘flattening’.)

In other words, it might be useful to disregard the way that scarcity is

sometimes defined in much of the economics literature where, despite the algebra,

readers are treated to a soap-opera rather than a scientific exposition. It can also be

mentioned that in Stipp’s article, the Pentagon (and likely the CIA) are concerned

observers of many ecological and economic dramas, and perhaps any indication that

the peaking of oil and oil-like resources is indisputably taking place would cause the

lights to burn longer than usual in that impressive structure (where, incidentally, I

had the good luck to fail my first officer candidate interview). That is one of the

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many reasons why a dramatic peaking of the global oil output could lead to more

than a repetition of the near-macroeconomic meltdown that began in the summer

of 2008

OPEC

OPEC has been one of the favourite hate objects of academic economists in the main

oil importing countries since the first oil price shock (in 1973). And not just

academics, because that initial shock was brought about by the nationalization of an

appreciable slice of the global oil production capacity. There were a number of

reasons for that episode, many of them extremely interesting and important in a

practical and theoretical sense, and in the next chapter I will examine some of those

reasons in detail, OPEC has been an enormous success, and some of their countries

have become very rich, while the economies of some of the oil importing countries

are in serious trouble.

If you study economics in what could be called capitalist or near-capitalist

countries, you might be assured on your first day in class that competition is good,

while monopoly is definitely bad, and oligopoly is a mixed bag. With monopoly or

oligopoly goes something called ‘market power’, which hinders the working of

competitive forces, which in turn supposedly bring about severe discomforts for

persons on the buy side of markets.

As a result, even if Mr and Ms Consumer – and sometimes their teachers of

economics – are a little vague where economic theory is concerned, they know

enough about the world in which we live to insist that where monopoly or oligopoly

is unavoidable, their representatives/legislators should limit the ability of

monopolists and oligopolists to set prices at any level they choose. This can mean

regulation, which is another hate word in the vocabularies of certain people, and in

extreme cases can mean healthy jail terms for the directors of large firms who

arrantly violate the anti-monopoly laws.

In Sweden (and perhaps other countries), regulated electricity firms provided

reliable and cheap electricity, while the arrival of deregulation drastically increased

the market power of some electricity sellers, and after a few years helped to bring

about a doubling of the price of electricity in a country (Sweden) where it was once

produced at or near the lowest cost in the world. My question here is, couldn’t the

decision makers in this country and their ‘experts’ see that this was bound to

happen?

15

Norway had the same ugly experience, and it was indeed illuminating to hear

about people in designer clothes demonstrating in the streets of Oslo against the

exorbitant price of electricity that resulted from deregulation, and allowing the

electricity price to be set in a grossly inefficient manner. As you may or may not

know, because of the oil and gas that has been produced in that country, and all the

good things that can be bought with the money that is selling that oil and gas at the

high prices of recent years, Norway is one of the wealthiest countries in the world,

but apparently not so wealthy that Norwegians are willing to be taken advantage of

by parasites and charlatans in the deregulation business, and their academic

sycophants.

OPEC is not concerned with inconveniences like the anti-monopoly laws

because it is international in structure, and more important the governments of the

OPEC countries know that the present arrangement for selling oil is in their

interest. Many persons – particularly academic economists – do not believe that

OPEC sets oil prices, and to a certain extent neither do I, but I do believe that

OPEC’s behaviour/strategy has a critical impact on the oil price, both directly and

through expectations. This does not bother me at all, because they are doing exactly

what you and I would do if we were in their place. Here I would like to recall that in

the middle of the l970s it was believed by some of the most important energy

economists in the world that OPEC would be better off under a quasi-competitive

arrangement in which they sold oil at 5 dollars a barrel ($5/b) rather than 25 dollars

a barrel or higher. I can remember this kind of thinking being directed at Saudi

Arabia, where it might have been true if that country had been willing and able to

produce the hoped for 20 million barrels of oil per day (= 20 mb/d), and in addition

they had an infinite supply of oil reserves that could be exploited at a very low cost.

Eventually those economists learned that the oil of that country, like oil

elsewhere, was eminently exhaustible, and they also discovered that the Saudis were

aware of this fact! They also were made aware that neither Saudi Arabia nor the

other OPEC countries wanted or needed their advice.

Academia rose to this particular challenge by insisting that OPEC was a

delicate reed, and it was only a matter of time until free market logic prevailed, and

this ‘cartel’ crumbled. The thing that was missed was that oil at $25/b can

completely change the development prospects for countries in possession of large

quantities of this resource – assuming that the countries and the resources at their

disposal are properly managed. THE OIL AND GAS PRODUCING COUNTRIES

OF THE MIDDLE EAST ARE BRILLIANTLY MANAGED, and what has

happened is that as their incomes increase, so do their options. They no longer have

16

to ponder allowing the ‘free market’ to work what some economists think of as its

‘magic’, where in this case its magic consisted of the kind of irrational pretensions

and distasteful outcomes that characterized electric deregulation in places like

Sweden and Norway.

Ten or so years ago, at the Rome meeting of the International Association for

Energy Economics (IAEE), I was gratuitously informed that the proper management

of oil resources in the case of the Gulf countries consisted of turning back the clock

and allowing the major oil producing companies of Europe and North America

greater access to the oil and natural gas of the region. The underlying but unspoken

assumption here was that the Arab and Persian owners of this oil were incompetent

– unspoken that is until the cognac made a few trips around the table.

On the plane of mainstream economic theory and economic history, I found all

this silly of reasoning about OPEC by many academic economists bizarre, however

in the real world – the world where real people and not economic theorists go about

their business – virtually anything is possible. Accordingly, we may now be in a

situation where one of the potentially richest oil producing countries, Iraq, could

find itself under pressure to leave OPEC, and to follow in the path of the

economically righteous, as defined by academic celebrities like Professors Gary

Becker and the late Milton Friedman, as well as many of their co-workers at the

University of Chicago.

We can thus attempt to judge what could take place if Iraq elects to go its own

way with its potential wealth, and decides to dump its former associates. On the

basis of the logic in my energy economics textbooks (2013, 2007, 2000) very little or

nothing would happen, because the optimal situation for all oil producers is one in

which OPEC remains in existence, even if the major oil firms outside OPEC manage

to gain extensive access to the oil reserves of Iraq.

And how those firms would love that access, because then they and their

admirers could stop pretending that potentially there are huge quantities of oil to

win in the waters off Tierra del Fuego or in Iceberg Alley. Before proceeding, I

would like to note that Alan Greenspan, the former director of the Federal Reserve

System in the U.S., openly stated that the war in Iraq started by the government of

George W. Bush was about oil, and I would like to claim that the same thing is true

about the recent war in Libya – a country with the largest reserves of oil in Africa,

and also rich in natural gas reserves.

Professor Marian Radetzki, who is/was a well known energy economist in

Sweden, once said that it will be a simple matter to revitalize present oil producing

facilities in Iraq, and more important to open new ones. That remains to be seen,

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although a statement of that kind reminds me of another so-called energy expert

who has claimed that Qatar would be better off if they stopped selling their natural

gas to important buyers on a quasi-monopolistic basis, and instead practiced the

kind of pricing that he believes is used in Europe and perhaps elsewhere, which

means that the price is determined in ‘liberalized’ markets, Since Qatari citizens

presently enjoy the highest per capita incomes in the world, I am more or less

certain that his advice will not receive the welcome that he feels it deserves.

But it should be recognized that anyone can make a mistake where oil and gas

are concerned. One of the best oil analysts once asked “Who wants a bunch of

Chinese and Russian oil technology when they can get a BP or an Exxon or a

Shell?” Who indeed, although persons who hear the expression “workshp of the

world” repeatedly applied to China might hesitate to denigrate Chinese engineering

skills. In addition, remembering something that Frank Sinatra once said, I am

tempted to add: If you fall into the arms of the oil majors, it might be for

keepsville!Much of the wild guessing about how things are or will play out in the oil

producing countries of the Middle East is indeed tiring, but I feel it essential to say

that if the OPEC countries – with or without Iraq – are genuinely concerned with

increasing the prosperity of all groups of their citizens, to include those of future

generations, they are in splendid possession of the means to do so. With a careful

exploitation of their oil and gas resources, and equally important the establishment

of other industries (e.g. petrochemicals) using local inputs – which means a greater

resort to technical education at all levels – these countries can continue to be in

position to take advantage of the increasing gap between energy demand and

domestic energy availability that will become progressively harder to bridge for

most of the industrial world.

Please forgive my modesty, but I would like to emphasize that for many years I

was the only energy economist in the world who fully appreciated – and advertised –

the power of OPEC. The pitiful thing is that many economists still don’t get the

message. A very little applied game theory makes it clear that the correct strategy

for OPEC is not to raise the output of oil at the rate once desired or recommended

in Washington or Brussels, but to keep it that output as low as possible. One of the

OPEC founders disagreed with this, saying that there were stones left when the

Stone Age, but the issue here is not stones. The constraint that is applicable though

is to avoid contributing to an international macro-economy collapse, or an oil price

that would accelerate the search for oil substitutes (natural gas, electricity, etc).

18

I fully appreciated the power of OPEC, and I was the most published author

in the OPEC Bulletin and the OPEC Quarterly Review. As is usually the case, no

money changed hands for my services, nor was I ever named their economist of the

year. Exactly where I went wrong I don’t know, or care, but I suspect that they lost

faith in me when unwittingly I began to notice and comment on obvious

discrepancies in the announced production intentions of several OPEC countries. I

would like to proclaim that I meant no harm, nor did I have access to any classified

information. What I had were intermediate economics textbooks, and some articles

I used when I taught intermediate economic theory.

Last year (2011) OPEC revenues exceeded one trillion dollars, and the same

will likely be true this year.. I would love to believe that in all the OPEC countries

this money was spent wisely and well, but that unfortunately is not the case. It was

however spent wisely and well in the countries of the Middle East – or at least most

of them. In their conferences at the OPEC headquarters in Vienna, I would not be

surprised to learn that the goal at the present time is to maintain an average oil

price of about one-hundred dollars a barrel. (By “average” I mean the unweighted

average of the West Texas Intermediate (WTI) oil price, and the Brent oil price.)

That should give them their trillion dollars, and probably a few more dollars for

good measure.

At the present time the Brent Oil Market is the largest market, measured in

barrels of oil traded, and while the WTI price has shown weakness, the Brent price

has maintained its strength. Accordingly, I believe that any of the decision makers

in Washington or Brussels who have concluded that the conduct of the OPEC

general staff will become unreasonable, should spend less time at their desks, and

more in the excellent jazz clubs of those cities.

Before going to natural gas and coal, let me confess that while I may have

overlooked a few significant details about oil, nuclear, and other resources in this

book, I am satisfied that what I am providing is important – more important than

most of the equations I will put on the board the next time I teach energy economics.

But as you may have noticed, I have already referred to game theory several times,

and may refer to it again. As a result, I should probably tell readers where I stand

on this subject.

I was first introduced to game theory when I took a very upper level course in

operations research at Illinois Institute of Technology (in Chicago). Frankly, I was

deeply unimpressed by that portion of the course, and to a certain extent I still am,

even though Paul Samuelson – who was often considered the top American

economist of the 20th Century – said that “To know game theory is to change your

19

lifetime way of thinking.” He continued by saying that the book Games of Strategy

(1999) was “a delightful skeleton key to the Twenty-first century’s emerging

culture.” I had the good fortune to meet Paul Samuelson, and I still remember the

gasp that went through a large room at the top of Wenner Gren Center in

Stockholm when he walked into the room.

Another Paul however – the Princeton University mathematician Professor

Paul Halmos – called game theory a waste of time, and an acquaintance of mine in

Geneva (Switzerland) referred to it as “Viennese coffee house gossip”.

I taught this subject once, and it was one of the few times that I have been

dissatisfied with my performance. Since then I have spent countless hours putting

diagrams and equations on blackboards and whiteboards and pads of paper, hoping

that I could find something that would tell me and colleagues and students about

OPEC’s agenda. The thing I recall most intensively is the so-called Prisoner’s

Dilemma Game, where rationality together with a lack of trust of fellow players

prevents the optimal solution from being realized, where by optimal I mean a

solution where all parties are winners. I also have a recollection of what John von

Neumann told Jacob Bronowski about what he called “real games”. The main

elements of these “real games” were lies and misunderstandings, although he had

more genteel names for them.

What OPEC understood – which for years or maybe decades I overlooked –

was that the correct strategy for playing Prisoner’s Dilemma Games (without

prisoners) was to begin by asking how can ALL rather than just one player can win.

If this is done, then we come to a conclusion found in the famous The Theory of

Games and Economic Behavior by John von Neumann and Oscar Morgenstern

(1944), in which it is made clear that cartels should always be formed and

maintained if there are no legal and/or technical restrictions.

NATURAL GAS AND COAL

Not too long ago I was a major contributor to a site called Seeking Alpha. (SA).

They received about 20 articles and 4000 comments from me before their

submission procedure for articles became too complicated, and I decided to

concentrate my efforts on the magnificent sites EnergyPulse and 321 Energy.

In any event, I learned two valuable things from SA contributors. Gas and coal

are often regarded as competitors. In addition, like many persons in the United

States and elsewhere, some of their contributors wanted to believe that the

apparently large deposits of shale gas in the United States (and perhaps Canada)

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would provide a basis for energy independence. Furthermore, in some parts of the

world these resources are thought of as competitors to nuclear energy. Japan is

obviously one of these, and I have stumbled on a few numbers that everyone reading

this book should remember: in 2008; according to the World Nuclear Association,

nuclear energy provided the lowest cost electricity in Japan. With 100 cents = 1

dollar, nuclear was 20 cents per kilowatt-hour, while the kilowatt-hour cost for coal

was 40 cents, natural gas 80 cents, and oil 180 cents (= 1.80 dollars) per kWh. The

production costs for renewable energy sources, such as biofuel, solar photovoltaic

and others were even higher.

In looking at these figures, remember that at that time Japan had access to a

great deal of inexpensive coal from Australia and Indonesia. Moreover, whenever

the topic is nuclear and Japan I remember a pleasant walk through Vienna in

which I discussed the cost of nuclear energy with a Japanese gentleman, and he

assured me that the light water technology used in Japan and elsewhere was

uneconomical, and Japan should go to breeder reactors as soon as they received the

OK from voters. It should also be remembered that Japanese governments have

shown a tendency to regard nuclear as a climate mitigation technology. An

important article on this subject has been authored by Joni Jupesta and Aki Suwa

(2011), and among other things it reinforces my belief that Japan will never

abandon nuclear energy.

Unfortunately, it happens to be true that many observers think that nothing is

simpler than solar and wind energy, and there was a heated discussion in Finland

before the government of that country made it clear that they were not going to

jeopardize the standard of living of the Finnish people by pretending that

environmentalists were better informed than the superb Finnish engineers, and

renewables provided more economical power than nuclear reactors. The provision

of electric power to households and businesses is a complicated matter, where

perhaps the key factor is the ability of power suppliers to provide power purchasers

with electricity when they need it, even when the wind is not blowing and the sun

not shining. Natural gas and coal are also excellent and well tested inputs for the

generation of electricity, but Scandinavia is a part of the world where many voters

have developed a tendency to be extremely antagonistic to arrangements that

involve the production of fairly large amounts of pollution.

There are fairly long chapters on coal and natural gas in this book, as well as

my other textbooks, but a couple of things should be scrutinized now. In the past ten

years, the coal consumption of India has more than doubled, and as for China the

figure is 155 percent. As for natural gas, the consumption of India has increased by

21

131 percent, while the consumption of China has increased by a gigantic 376

percent. (These figures come from BP, whose Statistical Review is the most

important in the world). Natural gas is a topic that I once knew a great deal about,

but I have been remiss of late because I find oil and nuclear more interesting, and

also the study of the gas markets are complicated by the attention that is being given

shale gas. Behind much of this attention is some bogus or misleading information

Despite my suspicions, and occasional use of the expression “propaganda”

when discussing shale gas, I have come to the conclusion that shale gas must be

carefully studied, and there are intelligent economists who are capable of doing so.

But there are many questions about this resource that will not be easy to answer.

When a firm like Exxon pays 41 billion dollars for shale reserves, but later admits

that they are in a ‘world of hurt’ because the price of this gas is so low, then it is

time to look at a few details. One of these can be alluded to now, because word has

gone around that the U.S. has 100 years of shale gas reserves, given present

consumption. The contention here is that that number is wrong, and regardless of

what private firms come to believe about the availability of shale gas (and shale oil),

it is in the interest of all the governments of the industrial countries to let genuine

experts provide an impartial opinion of what they can expect from those resources.

It should perhaps also be mentioned that natural gas is not exactly the kind of

resource that many environmentalists would be in a hurry to endorse if they knew

more about it. The methane in natural gas has occasionally been described as a

worse threat to environmental health than carbon dioxide.

Similarly the study of coal is not as straightforward as it sometimes appears to

be. Recently, Researchers at Uppsala University and the California Institute of

Technology have questioned the amount of coal that will be available over the first

half of this century. When I published my book on coal I claimed that coal could be

regarded as the main backstop resource, in that if oil and natural gas were to

become scarce, there would always be enough coal, and it might be inexpensive.

After all, the gasification of coal is well understood, and during World War II in

Germany, and later in South Africa, coal has been easily transformed to a liquid.

But I was wrong. Had I used the simple algebra in my coal book to calculate

and interpret what I call the “dynamic length of life of a resort”, and in addition

gave some thought to the likely development of the global population, I might have

become cognizant that well before this century is over, coal will also be on the

critical list. In fact many resources will, except certain renewables and nuclear fuels

for new types of reactors.

22

At the 1997 meeting of the British Institute for Energy Economics (BIEE),

several of the participants repeatedly assured the rest of us that science would

eventually be in possession of a silver bullet that would eradicate all the Draculas in

our energy-shortage nightmares; and if this didn’t happen, we could count on the

prevailing technology to dig us out of any hole in which we might find ourselves

languishing, although this might not happen at once, and it might not be cheap. As

Paul Ehrlich and his colleagues have pointed out on a number of occasions, many of

the poor souls in the scientific and technological communities who will have to turn

this crank daydream into reality seem to be completely oblivious of the heavy

responsibility that has been assumed on their part by naïve academics and

journalists, especially the latter. Especially the latter because selling newspapers,

and gaining and keeping the attention of TV audiences, often requires extravagant

and repeated departures from the truth.

SOME CONCLUSIONS

To paraphrase the great physicist Paul Ehrenfest, economics is easy but subtle.

Sometimes it is too subtle, because if I were asked what are the most important

topics in energy economics at the present time, I probably should begin by saying

shale gas. Shale gas because I get the impression that a great many people are

talking and perhaps thinking about it, only I do not consider myself informed

enough on that subject to take an assertive role in their conversations just now, or to

sit in the front row of lectures that they may be holding. I will admit though that I

am unable to discard – as the one-time U.S. Secretary of State, the sophisticated and

elegant Dean Acheson put it – my suspicions that somebody is being led down the

garden path. This alone means that I should begin a careful study this resource.

But that will take time, and so now I will fall back on one of my favourite

topics, which is nuclear energy, and the proposed nuclear retreat that Germany is

ostensibly being tuned up to make. Note the word “ostensibly”. Around mid

century, Germany might turn out to be the most nuclear intensive country in

Europe, because having been an American soldier in Germany shortly after the

Korean War, I cannot imagine any country in the world in which the population is

more determined to maintain or increase their standard of living.

The German President, Angela Merkel, announced a forthcoming German

nuclear retreat shortly after the tragedy at Fukushima in Japan. Few things have

surprised me more than the scope of the Fukushima calamity, but this is not the

reason for Chancellor Merkel deciding to abandon nuclear. The reason is that she

23

wants to extend her stay at the head of the German government, and to do so she

requires the votes of some voters who nominally support other parties. Moreover,

Stephen Kohler, director of the German Energy Agency (Dena) and a former eco-

activist has turned thumbs down on Frau Merkel’s ambitions (2012), calling it

simple madness (“Einfach Wahnsinn”), and the leading energy economist in

Germany – the MIT graduate Jeff Michel – says that the cracks in Germany’s

proposed energy transition show up as clearly as blueprints of the hull of the Titanic

made clear to careful observers what would happened to that unlucky vessel.

According to the journalist Ian Buruma, it was in the l950s that conservative

Japanese politicians began to push for nuclear. Let me make it clear though that

they did not shout and cheer for nuclear because they are conservative, but because

they were told by their scientists and engineers that nuclear would get the Japanese

people the prosperity they desired faster than anything else. To construct their

nuclear sector – which eventually provided 30 percent of Japanese electricity –

technology was imported from the large U.S. firm General Electric, and the

Japanese probably constructed some reactors faster than any country in the world,

which had a very beneficial effect on the cost of electricity in that country.

The only other country I know of that constructed reactors as fast as Japan

was Sweden: where beginning in the l970s 12 reactors were constructed in 13+

years, and this equipment played a decisive role in providing Swedes with a

standard of living that was envied by the rest of the world.. I have also just been

informed by the nuclear engineer and executive Malcolm Rawlingson that in

Ontario (Canada) four ‘Candu’ of reactors (of 800 Megawatts each) have been

installed since 2005, and the intention is to reduce burning coal to a minimum.

The question that I have heard asked is why didn’t the Japanese construct

more reactors. After all, at least 70 percent of French electricity is produced by

reactors. One answer is the meddling of persons like Buruma, because in my

opinion Japan is desperately short of energy resources, and now or later most

Japanese will not hesitate to support nuclear energy for the same reason that most

Germans will: they prefer higher incomes to lower incomes.

In discussions about Fukushima, the Tokyo Electric Power Company

(TEPCO) is often mentioned. This firm has monopoly power in much of Japan, and

apparently has had to shoulder a certain amount of the blame for the Fukushima

tragedy. I don’t know much about that firm – other than at one time I was stationed

next to a dam that they probably owned – however the question that I might ask

first if I wanted to know more about Japan would concern regulation in that

country. When teaching international financial economics, I made a point of telling

24

my students that the Japanese industrial machine was unbeatable, and when that

machine ran out of steam some years later, it was clear to me what happened. Some

very influential persons in the Japanese government forgot the instructions of the

American tennis great, Bill Tilden: “ALWAYS CHANGE A LOSING GAME, AND

NEVER CHANGE A WINNING GAME!” This kind of thing happens in many

countries. It has also happened in Sweden and the U.S. in a very distasteful way.

If I were the nuclear boss in Japan or anywhere else, I would not be

particularly concerned if there were strong monopolistic elements or tendencies in

the electric industry, because due to ‘increasing returns to scale’, large generating

facilities are superior to small facilities, and this industry would be strongly

regulated, and scrupulously inspected at regular intervals. My basic attitude here is

that I have nothing against energy being left to the so-called free market, as long as

the actions of the persons who control this energy make economics sense.

Consequently, an ‘outfit’ like the Nordic Energy Exchange (Nordpool) would never

be allowed in or near my domain. At the same time it should be noted that of the 34

American nuclear facilities in the path of Hurricane Sandy, all of them performed

the way that they were designed to perform, and all of them are privately owned.

In his writings on social control in Japan, Buruma uses an expression that I

have not seen since I was a teen-ager, and this is “Thought Police”. Those very

inquisitive gentlemen are not active in Japan at the present time, but according to

Buruma their methods have been adopted by a network of government bureaucrats,

national and local politicians, and big business; and anyone who does not toe the line

can expect trouble. For instance, academic critics of the nuclear booster club have

been roughly pushed aside.

Welcome to the club ladies and gentlemen, because I have had the same

experience, only I don’t care. The way to fight and win the academic wars is to join

the academic teaching and/or research stars, and places are always available in

those beautiful ranks for any and everyone willing to do the necessary work.

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