Profile of Professor Banks

Now let take a brief look at a prisoner’s dilemma type game, beginning with the original anecdote. Ms Bibi Sally and Professor Bill Lather are picked up on suspicion of having robbed a parking meter of a few pennies, taken to a police station, and interrogated separately. If one confesses (C) and the other denies (D), then the one confessing receives a light sentence, while the one denying receives 12 months: the outcomes are (1/2,12) or (12, ½). If both confess the sentence is moderate (3,3), if neither confess, each gets a month in jail for jaywalking (1,1). The normal (or matrix) form of the game is give in Figure 1a, and the lengths of sentences are shown in months. For example, if Bibi denies and Bill confesses, she receives 12 months and Bill ½ months Bibi

Bill

P-P Group

C D

C

D

(a)

(b)

(c)

N

P

P

P

Max

(M)

Limit

(L)

M

L

3,3

15,15

20,5

5,20

17,17

1,1

12, 1 1

1

_

2

2

‘Oz’ Group

Figure 1

,12

(12,1/2). The dilemma comes about because they have to make a complicated choice.

If they trust each other, they would cooperate and play (D,D). If the trust were justified, they would receive light sentences. Isolated, however, cooperation/trust might seem difficult to justify and so it might be easy to be a ‘snitch’. The ‘school solution’ is that both snitch, and end up with 3 month sentences.

It does not have to be said that this last assumption depends on the values in the ‘boxes’. If the sentences were in days instead of months, then there is a good chance that neither would consider confessing, since there is a certain status to being regarded as a ‘stand-up guy’ by the street crowd, and to attain this distinction you cannot make a practice of ‘snitching’. If you want to see a film in which the word ‘snitch’ is used beautifully, then you should see one of the final scenes in the film ‘Scent of a Woman’, with Al Pachino.

Nest we take these concepts to the pollution arena, where the numbers shown are levels of utility/satisfaction. The assumption ins Figure 1c is that we have two groups of countries: rich countries, labeled the ‘Oz Group’, which holds most of its meetings in Sydney (Australia), and the Pago-Pago (or P-P) Group, which are poor countries, but hold most of their meetings in Monte Carlo. If both the Oz Group and the P-P Group decide to limit domestic pollution (L,L), both realize the utility (or satisfaction) level 17. That level takes a number of things into consideration, to include the global benefit of pollution abatement, less harassment from Greenpeace, intense feelings of moral superiority, an opportunity to discuss strategies – and wine and dine – in wonderful Sydney and/or wonderful Monte Carlo, etc.

But if both continue on their present course of maximizing personal satisfaction, then they pay a penalty in terms of higher pollution levels for both, as well as having to anticipate even higher levels in the future, which is something that could result in considerable mental and physical distress. The remaining ‘plays’ involve one party undertaking a serious pollution abatement program (L), while the other Group continues to go all out in the way of generating pollution (M). The outcomes are thus (L,M) or (M,L). As you can verify from the figure the Nash Equilibrium is (M.M), since if one Group plays M the other feels compelled to play M, while the more favorable (in terms of the aggregate satisfaction outcome) is (L,L), [But note, I am assuming that we can aggregate satisfactions: (17 + 17) is absolutely superior to the other outcomes, even though (5,20) and (20,5) are preferred by one or the other Group.]

The assumption in a thousand classrooms every year is that the cooperative solution (L,L) = (17,17) is unstable and will not be maintained, because one of the ‘players’ will ‘cheat’, but of course it is maintained in the case of OPEC. This is probably the thing that was so insulting to Professor Friedman: normal human beings, to his way of thinking, were not prone to favor long term considerations, but instead went for short term satisfactions when real money was on the table.

Put simply, with regard to Figure 1c, in trying for 20 instead of 17, a player will inevitably end up with 15. I got these numbers wrong in my first energy economics textbook, but they make sense the way they are now.

Finally, we can introduce an expression that you likely to have encountered early in your economic studies. The expression is Pareto Optimal. Pareto optimality is a situation where if both ‘parties’ or Groups are rational, they would not leave a ‘payoff pair’ unless one party gained while the other did not lose. Looking at Figure 1c, this applies to the lower left hand corner, the upper right hand corner, and the lower right hand corner. In the upper left hand corner however, both Groups would be glad to move to the lower right hand corner.

Clearly, the upper left hand corner is ‘different’: it is a Nash equilibrium, because if one Group choses that move, so does the other, and ‘vice versa’. The other positions in the figure are Pareto optimal: if one or both moved somebody would lose, and so at least one of them would not countenance a move. Figure 1b shows what we have with regard to Pareto Optima (P) and Nash Optima (N).

It perhaps should be noted that if we have a play such as (1/2,1/2), the outcome for the ‘row player’ (Bibi) comes first, while the other value is for the ‘column player’. The row player moves up and down, while the column player moves from left to right. The goal here is not money but a limitation on time served, which may seem trivial, but for some reason game theory has achieved a prominent place in academic economics, although some of it is best ignored

OPTIMAL THOUGHTS ABOUT ENERGY AND ENERGY POLICIES

An optimal policy has the property that, whatever the initial state and initial decision are, the remaining decisions must constitute an optimal policy with regard to the state resulting from the first decision.

– Richard E. Bellman (1957)

I have finally come to the end of 7 chapters, and I feel a need to assure readers that given a choice, I prefer optimal energy policies to the other kind, because in the Chicago of my youth, had Professor Bellman’s instructions been known, they would have been interpreted as ‘let bygones be bygones’, and exploit present options without becoming transfixed by past failures. I also suspect that in the textbook world everybody else has the same opinion on this subject, but unfortunately in the real world most people would not recognize or be interested in an optimal energy policy if its originator joined them at a corner table in the Café Rendezvous, and insisted on paying for their meal as well as any programs they intended to sponsor during the sensual Paris night.

In any event, on the classroom level, the issues being considered in these first 6 chapters are fairly simple, and where optimality is concerned, the American oil billionaire T. Boone Pickens probably provided a suitable first step when he calls for a NATIONAL ENERGY PLAN. According to Mr Pickens, every country except the U.S. has one of these, which is wrong, but this error can be ignored because he also seems to believe that a National Energy Plan does not make sense unless the government plays an integral part in the proceedings. Many years ago the American business executive Thornton Bradshaw expressed a similar approach, calling for an alliance of business and government where energy was concerned, however his proposal was not met by a burst of enthusiasm from his peers, nor for that matter the editors of the newspapers they and he read.

Notice the expression “first step” above. The United States has an Energy Department (USDOE) where the theoretical work for a National Energy Plan should and could be carried out, beginning with the assembly, organization and spreading of relevant information, however I happen to believe that the less said about the USDOE and its present and preceding directors the better. Those gentlemen are clearly not in the business of providing insights that are useful for dealing with the energy future.

But as good luck would have it, I am in that business, and have been in it for a long time. My favorite pursuit right now involves confirming my belief about the outcome of the energy situation in Japan, where a tsunami in the north of the country resulted in the shutdown of all the Japanese reactors, and a panic-like reaction in that country and elsewhere led to similar foolishness in Germany. Nuclear energy provided about 30% of Japan’s electricity, and to substitute for the lost nuclear output, an increased consumption of imported oil, natural gas and coal imports became necessary. These developments deserve close attention, because they led to a weakening of the Japanese yen, which in turn caused an immediate increase in fuel costs.

But my knowledge of Professor Bellman’s thinking tells me that all that will pass. You see, various fantasists thought that Japan would move from nuclear to renewables, but instead the use of fossil fuels (oil, gas, and coal) escalated. The Japanese government elected to spend billions every year in an attempt to compensate energy consumers for the costs imposed by the closing of nuclear facilities, but according to what I have heard and read the energy bills of Japanese households have increased by about 20%, and for industry it has been reported that the increase is approximately 30%.

Ceteris paribus, the same unpleasantness is in the cards for Germany as a result of their Energiewende (= energy transition), although in that country a relentless circulation of lies and misunderstandings has portrayed the German rejection of nuclear as a success, and Energiewende doubters as fools. What needs to be pointed out though at the highest academic and official level, and repeatedly, is that with an average capacity factor of about 90 percent, nuclear provides benefits that cannot possibly be matched by renewables, and the next generation of nuclear equipment (Gen 4) will be even more impressive.

Voters everywhere – and for that matter non-voters – need and deserve to be told what is – or will be – going on behind the scenes in Japan and Germany, to include the unspoken and perhaps unconscious intention of their decision makers to be the most nuclear intensive countries in the world before the middle of the present century. How do I know this? I know it because this is what an optimal economic policy in the spirit of Richard Bellman is all about. In case you have not heard, the populations of those two countries have no intention to tolerate an avoidable decrease in their standard of living, Neither do the Swedes, even though there is nothing that they want foreigners to believe more than their eagerness to take a standard of living decline in order to make the world a better place.

And finally, I would like to finish this long exercise by saying something about ‘fracking’, and which is an extremely important topic in Europe. This being the case, consider the following notice: EU ENERGY EFFICIENCY GOALS TAKE AIM AT RUSSIAN GAS LINKS.

This unenlightened misrepresentation originated with the (UK) Financial Times (2014). But unfortunately the person responsible (Alan Barker) and his editors still do not understand that Russian gas links are moving out of range of what is called “EU Energy Efficiency Goals”, no matter how often and how clearly teachers like myself informed them. One might easily conclude that in an optimal setting, U.S. Energy Minister Ernest Moniz and his foot soldiers would be compelled – or compel themselves – to do everything possible to make this clear to confused journalists, as well as their readers, but this assumes that before sounding off, those ladies and gentlemen are familiar with what clarity means in scientific terms.

Regardless of what they are or are not familiar with. eight years ago Phillipe Norec and Fabrice Noilhan (2006) explained that Russia was in no position to supply large quantities of oil and natural gas to both Europe and Asia. Thank you very much gentlemen, because I would like to use this occasion to tender my assurances that before the next decade is over, China, Japan and possibly South Korea and India will be the main Russian gas customers, while in Europe, the burning of coal will reach record proportions, unless they come to their senses about nuclear. Perhaps this is the right place to add that the decision to interfere with the movement of energy resources from Russia to western Europe was a noteworthy exercise in stupidity. Something like the belief that the U.S. should remove restrictions from the export of crude oil.

Whenever the above topics are broached, shale resources and fracking enter the narrative. Here you need to appreciate that the CEO of Exxon Mobil stated that the U.S. is the only region on the face of the earth where ‘fracking’ has been unambiguously successful. This of course is also wrong, because fracking has provided Estonia with a large part of its oil for many years, if not decades. The problem here is that a discussion of fracking in that country would raise some ugly environmental issues. Then what about Poland and France, which have been judged by official American observers to contain large shale resources, and also countries like Germany and the UK which claim to be planning to replace Russian gas and oil with ‘fracked’ domestic resources?

Apparently about 50 wells were drilled in Polish shale before Exxon Mobil and the Italian ‘major’ ENI decided to call it quits. As for France, I know from living in that country that if it were possible to produce amounts of shale oil and/or gas that corresponded to the conventional (or average) estimated output from estimated shale reserves in France and elsewhere, then if left to themselves, French corporations and technicians would ensure that this extraction would take place, and once they began, raise production as fast as possible, because that makes both economic and political sense. Consequently, allow me to suggest that the ban on fracking imposed by President Hollande, and the new FRENCH Energy Plan just presented by Energy Minister Ségolène Royal made it difficult for me to conclude this book at the present time, because…..because just hearing the ballyhoo about French energy intentions badly damaged my concentration,
THE WAR ON COAL
Now for an item that I forgot to include in earlier versions of my new energy economics book (2014). I am speaking of THE WAR ON COAL, which like many wars does not always make a great deal of sense, whether in terms of intentions or methods. I certainly do not know the names, addresses and telephone numbers of most of the instigators of this proposed conflict, but I have heard people say that President Obama is one of them. I also remember seeing a statement in very large letters in the international edition of The New York Times stating that future energy supplies will feature a large amount of natural gas, and the accompanying exposition claimed that the present large-scale reliance on coal might soon be passé.

Needless to say, the International Energy Agency (IEA) plays a leading role in this burlesque, because just as real soldiers are told to leave their switch blades in the barracks and rely on their rifles when they go into combat, it happens to be true that in the struggle to reduce poverty and declining standards of living, coal is an invaluable weapon, though perhaps not everywhere, and if voters think that an Energiewende a la Ms Merkel has a future, they will eventually be taught an unpleasant lesson. The lesson turns on the indisputable fact that there is too much energy in the billions of tonnes of coal in the crust of the earth for this commodity to be dismissed like an outmoded zoot suit.

According to Maria van der Hoeven, executive director of the International Energy Agency (IEA), the technical advances that are being made on the ‘Carbon Capture and Sequestration (CCS) Front’ should be regarded as a “milestone” in the promotion of ‘green energy’. She says that “Carbon capture and storage is the only known technology that will enable us to continue to use fossil fuels and also decarbonize the energy sector.” That statement is illogical for a number of reasons, with one of the more obscure being that if CCS was as effective as she and some others believe, then billions or hundreds of billions of dollars would already be earmarked for it, especially in China, where the political elite has started to lose patience with the environmental shortcomings in their large cities.

As it happens, one of the most prominent energy consultants in Germany, the MIT graduate Jeffrey Michel, has called CCS “a thermodynamic travesty”, but as a brilliant student of thermodynamics at Illinois Institute of Technology, I prefer to label the most enthusiastic recommendations in its favor lies or misunderstandings. Moreover, as a result of living in Sweden, I have heard all that I want to hear about that subject because of the CCS and coal mining activities of the Swedish utility Vattenfall in Germany.

If we look at the cost of an average CCS investment involving a new power station, one constantly hears that it can involve a doubling of capital expenditures, and ostensibly a reduction in the amount of electricity that can be produced. To be fair, this phrasing would not be encouraged in my classroom, because what has probably happened is that – if profit maximization is the object of the exercise – the increase in capital expenditures calls for a smaller amount of electric generation.

But that’s not all. When movers and shakers from the world’s energy industries and seats of government met in New York at the end of September, 2014, the message dispatched by some of the most influential was that coal was a scourge that should be replaced by natural gas. That kind of talk was apparently intended to increase the revenues of energy companies, as well as to help mobilize enthusiasm for a forthcoming UN summit in Paris in the early summer of 2015, when our political masters are supposed to finalize a comprehensive agreement to limit carbon dioxide emissions.

Whether this gas-friendly message was acceptable to the thousands or tens of thousands of folks in the streets of ‘The Big Apple’ who were demanding a fossil-free world is uncertain, nor do I have any opinions about what would have happened if I had been on the speaker’s platform on that occasion, because I would have informed the assemblage early in my world-class lecture that more nuclear was the way to go. If that had been greeted with applause, I might also have said that regardless of what happens at the Paris talk-shop, more coal is going to be burned, and nothing short of martial law can prevent it.
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