Profile of Professor Banks

The situation seems to be that some countries in that region want to use natural gas for electric power generation, while conserving oil as the main input for the production of petrochemicals and oil products (i.e. diesel, kerosene, fuel oil, various petrochemical inputs, etc). This makes a great deal of economic sense at the present time, although some decision makers in that part of the world seem prepared to substitute uranium for natural gas in the production of electricity. According to recent information about the apparent plans of Qatar Petroleum (the national energy company), they intend to use approximately 12 billion cubic feet a day (= 12 Gft³/d) of natural gas in the production of LNG, and in addition they want to produce 300,000 barrels a day of liquids from gas-to-liquids (GTL) projects. If the latter is achieved, it will make them the largest GTL producer in the world.

The key market for Qatari natural gas is of course Asia, where the gas price is three times that in North America. But obviously, with that price difference, some serious arbitrage can take place. Qatar Petroleum, the state oil company, has requested permission to export American natural gas in partnership with Exxon Mobil. Gas is gas, and business is business, is the position the Exxon Mobil management seems to take, and this is a good thing if it involves helping foreign governments to exploit their energy assets, but if yours truly were asked by the American government what he thinks about exporting domestic natural gas, I would say that I would be careful, because it is likely that Americans will need that gas in a couple of decades, and Qatar and American millionaires can find some other way to become billionaires

According to a natural gas model developed at Rice University (Texas), Qatar will be the largest exporter of gas from the Middle East until 2030, and may have plans to become the largest exporter to Asia. What happens after that is unclear, although if the model builders were asked, they would probably say that Iran will eventually have similar intentions, and perhaps some day those intentions will be realized. At energy conferences a decade or so ago, many energy professionals and students of the gas markets felt that one of the most dramatic events in modern gas market history would feature the construction of large gas pipelines from Iran to Europe.

In order to make its LNG dreams come true, Qatar has started ordering QFlex and MFlex tankers, which are designed to take 210,000 and 260,000 tonnes of LNG respectively. This should be compared with the 135,000-145,000 tonnes carried in the largest earlier tankers. As economic theory often suggests, moving up in size could mean a further exploitation of ‘increasing returns to scale’, which in turn will ensure that in the near future natural gas originating in Qatar can compete with – or out-compete – any gas from any source in the world. This must sound good to some persons in Qatar, unless they conclude that selling more gas than other producers might involve accepting lower prices.

As I point out in my textbook ENERGY AND ECONOMIC THEORY (2014), the best expression for Qatar might be ‘a done deal’. It is a member of the very-rich club that prefers doing business the right instead of the wrong way, and so there must be some logic behind their conduct that other countries should attempt to duplicate, and not just countries in the Middle East. For instance, education plays a major role in preparing the country for the day in the future – although probably the distant future – when their gas resources are (or appear to be) in the final stages of depletion. Making the education sector as efficient as possible is the kind of action that every intelligent government facing an uncertain future should think about taking, and that includes countries like Sweden and the United States. Something of considerable interest is the extension of Kuwait’s planning horizon by the present government. Earlier a hundred years was mentioned, but why should they or any rich country, or for that matter any not-so-rich country be satisfied with placing a limit on their ambitions?

Incidentally, Qatar will host the 2022 World (football/soccer) Cup, and ostensibly billions of dollars have been investigated in that project. The government of Qatar wants the rest of the world to take a look at their country, and they want to show that they have the style and rhythms that will make them valuable friends for large countries in Europe and the Americas.

When writing my forthcoming textbook I suggested that Qatar has indicated a strong willingness to do business with buyers in Europe and also North America, and their attitude toward e.g. China was not particularly clear, however given the rate of growth of gas consumption in China, it is almost certain that they will become an important client of a large LNG producer like Qatar.

As compared to Russia and Qatar, and perhaps other resource-rich countries, Iran is a country that may someday be of maximum interest to curious development economists, in case any of those still exist. Everywhere in the world it is possible to encounter highly intelligent Iranians, and some of them have superb educations, but even so the Iranian economy does not appear to be developing as fast as it should. This situation might very well change, because oil and gas prices may move in such a way as to greatly favour producers who make the right kind of investments in oil, gas, refining and petrochemicals.

Somewhat later, on the same day that he received the Nobel Prize in economics, Professor Gunnar Myrdal said (in a loud voice) that he did not believe in Nobel prizes in economics. In the seminar he conducted at Stockholm University, and which I was fortunate to attend, the reason he gave for this disbelief was that economists did not know how to study the most important topic in economics, which he believed to be development economics. Instead of concentrating on mainstream textbooks or articles in learned journals, he insisted that the only way to efficiently study development economics was to study in detail the dynamics of successful economies, which for every successful country meant the presence or evolution of efficient cultural patterns. It was clear that he considered the United States a very useful role model, although for pedagogical purposes he obviously thought the most useful was Sweden, which is a country where iron ore and forest products played to a certain extent the part that natural gas (perhaps in concert with oil) could play for Iran.

Although many economists have visited Sweden, only a few seem aware that in less than 60 years, Sweden advanced from Europe’s Third or Fourth World to perhaps the richest country in Europe, and by 1976 it was a country with one of the highest per- capita incomes in the world. As noted above, the thing that set the Swedish economy in motion were exports of iron ore and forest products (and a sophisticated apparatus for training and utilizing engineers and technicians), and if Professor Myrdal were alive I am sure he would propose that natural gas could possibly do the same thing for Iran. Moreover, when Swedish development began to accelerate, it became easier to borrow the money needed to construct an extensive electricity sector. That sector is probably the key element in the industrial development of most countries. For example, it played this part in the badly damaged post-war Finland, and it might turn out that electricity is more important in Sweden and Finland in the future than it was in the past.

That brings us to Russia. There should be little doubt that if Professor Myrdal was still alive and operating at maximum efficiency, he would find it possible to accept that Russia has as much or more to work with than virtually any country in the world. Not just energy resources, but enormous amounts of rich agricultural land, and an educational system that – theoretically – can be turned into the equal of any in the world.

The basic shortcoming seems to be that it was not until the arrival of President Putin that the Russian government began restructuring their economy in a facsimile of the way that Professor Yevsei Liberman suggested that it should be restructured many years earlier. Liberman’s position was that emphasis should be placed on individual enterprise, profits and bonuses instead of political doctrine, which at the time was not a popular line to take with many of his countrymen. Thus the ‘inevitable’ was postponed about 25 years, and except for a few researchers and journalists, Liberman’s name seems to have been forgotten.

But there is still a Cold War shadow dogging Russia’s footsteps. I consider this both unfortunate and absurd, although what has taken place recently on the Russian-Ukrainian border causes various Cold Warriors to begin saying things that intelligent people should not say. But if those things will result in Russia making Asia the destination for most of its energy exports, I think that it is time for Europe’s governments to get control of themselves, and learn how to think when energy matters are considered.
REFERENCES

Banks, Ferdinand E. (2014). Energy and Economic Theory. Singapore, London and New

York: World Scientific.

______. The Political Economy of Natural Gas. London, New York and Sydney:

Croom Helm

Mittal, Lakslumi (2014). ‘Rewrite energy policy and reindustrialize Europe’. The

Financial Times (January 21).
5. ENERGY AND MACROECONOMICS
<sub>Many years ago, one of my international finance students at Uppsala University (Sweden) – who is a gifted musician – wrote a song called ‘MACROECONOMICS IS A WAY OF HAVING FUN’. It was dedicated to yours truly, and occasionally played on the radio in the Stockholm-Uppsala region of Sweden, as well as at some of the brilliant parties organized by my students, and which I always attended. I can begin by saying a few words about what the “fun” in the title of that delightful melody means by comparing macroeconomics with physics, since many physicists believe that economists often suffer from ‘physics envy’.

If you read an excellent introductory textbook in macroeconomics, and learn what you read perfectly, you can tell academics, business persons, journalists, break dancers and rappers that you are a brilliant and highly educated macroeconomist, and generally get away with this bluff. Try the same routine with an introductory physics book, and you will likely be called a fool – or worse. I have taught macroeconomics in many countries, enormously enjoyed teaching the elementary and intermediate courses, and eventually learned everything I wanted or needed to know about that subject. But of late I make a point of avoiding advanced macroeconomic presentations – especially mathematical macroeconomics – and keep my distance from the elegant models that fill the so-called scholarly journals, because most of them are useless, and in reality are an insult to students and teachers, although the latter are often unaware of this sad fact.

The last time I stood in front of a macroeconomics class was at the University of Technology in Sydney Australia, and since then I have adopted a very special approach to the topic. For me macroeconomics involves everything that has to do with the aggregate standard of living, and thus includes items like energy, population, and education – especially primary and secondary education. Excluded are crank lectures of the type presented in Sweden by some of the recent Nobel laureates in economics, and even more pitiful, junk science discourses on energy economics that are often delivered to graduate students at various universities, and sometimes to readers of the best known and more renowned business press. Let’s put that another way: it’s better to try to learn everything about the few things in energy economics that matter, than a lot about the trivia and bunkum that is sometimes unloaded on unsuspecting economics students in our institutions of higher learning.
THE OIL PRICE AND MACROECONOMICS
In the silence of my lonely room, and sometimes in crowded seminars, I like to call myself an accomplished energy economist, and among other things I feel that this gives me the right to describe Professor James Hamilton as the leading academic oil economist in the United States (U.S.). I want to make it clear though that I don’t know that scholar, nor do I want to know him, because although we share the same outlook on the past and future of oil, he has never mentioned me in his publications, despite my citing and alluding to his work whenever I get the opportunity.

Hamilton has carefully examined the relationship between increases in the oil price and the negative effect they have on the U.S. economy, beginning at the end of the second world war (WW2), until the early years of the last decade of the 20</sub>^th <sub>century. His results are similar to those of Professor Andrew Oswald of Warwick University and myself, but much more thorough, and covering a longer period. The thing that my future energy economics students will kindly be asked to remember is Hamilton’s claim that “all but one of the recessions in the United States since WW2 were preceded – typically by about 9 months – by a dramatic increase in the price of oil.”

This is an important macroeconomic observation, and you should make every attempt to remember it. It is the kind of contention that you can take to the bank and draw interest on, although in later articles and conference papers, and of course on the blogosphere, his research likely goes as far as the present day. I might as well confess however, that for the period 1991 to the present, my own work on oil economics ranks with any that has been done anywhere in the world, and as a result I will use this opportunity to give readers a taste of exactly what has happened on the global oil market.

From the formation of OPEC in 1961, until the beginning of the twenty-first century, it was the intention of that organization to manage not only the oil in their countries, but also to eventually obtain a controlling interest in the global oil price. In order to do this efficiently, complete (or nearly complete) unanimity among the directors of that cartel was required, and as far as I can tell they did not obtain that like-mindedness until the price of oil fell below ten dollar a barrel (= $10/b), and the amateur energy experts – or ‘know-nothings’ and charlatans as I usually call them – in the oil importing world, began talking foolishness about it reaching $5/b. That was when even the ‘independent thinkers’ in the OPEC executive suite in Vienna saw the light, and fell into line with OPEC’s main men.

Econometrics is a topic that I taught for a few years in Stockholm and Uppsala, and was one of the reasons why I was given the opportunity to spend 3 years in Geneva (Switzerland) but eventually abandoned. However some simple calculations that I made about 2004 indicated that the oil price had started to accelerate upwards. A few years later, while I was giving a long talk on oil at the Ecole Normale Superieure (Paris), that price was on its way into orbit, and eventually it reached $147/b, which provided OPEC with the income they had been dreaming of since the formation of that organization. Fortunately, a high degree of intelligence and rationality prevailed in the OPEC executive suite, and so there was no attempt to over-exploit a good thing. Unfortunately however, according to myself and Professor Hamilton, the macroeconomic damage had been done. As much as I hate to say it, the machinations of speculators, and the clumsiness of bank directors and politicians had very little to do with the bad economic news that began in 2008, which is best described as the most serious economic downturn since the great depression (that began in l929).

Future students of mine will have to understand the above perfectly if they prefer a passing to a failing grade. They will also have to understand the power of OPEC. The recession triggered by the oil price escalation cut the ground out from under the global macroeconomy, and as a result the demand for oil fell in such a way that the oil price bottomed out at about $32/b. OPEC simply reduced production by a small amount and the oil price quickly climbed to $72/b. This is something else for you to remember should you find yourself in a conversation on oil with persons who think that they know more than you do! Shortly after – with the global macroeconomic apparatus still in disarray – the oil price kept moving up, until finally the aggregate oil price exceeded $100/b, although the demand for oil was not increasing rapidly.

It is also useful to cite what happened when the war in Libya began – a war, incidentally, that was about oil and not protecting civilians, as the ignorant NATO president claimed. Oil production in Libya almost ceased, which meant that about 1.7% of the global oil output disappeared. That loss was enough to cause the oil price to increase by approximately 17%, as you have already been informed in this book.

Even students at the store-front university in Chicago from which I obtained my economics degree should be able to calculate and interpret the short-run elasticity of the oil price from those numbers, and if they are hooked on nonsense about speculation, also realize that OPEC receives all the help it needs from large oil producers who, surprisingly, prefer high to low oil prices, and understand how to make the moves that are necessary to obtain them. PLEASE REMEMBER THIS!

Much more will be said about oil in my forthcoming textbook (2014), but right now I want to mention some thoughts of the billionaire Canadian investor Stephen Jarislowsky, which are especially appropriate when dealing with energy economics.

“We’re living in just about the most dishonest time in the history of mankind. It’s theft from A to Z”. Well Steve, it’s also lies and misunderstandings, where by the latter I constantly refer to President Obama’s belief about natural gas, and where the former is concerned the persons who have provided the commander-in-chief with his counter-productive opinions about energy, since I am certain that some of them know as much or more about that issue than my good self. Actually they know a great deal more because they are in a position to obtain all the information they want or need, at any hour of the day or night, from world-class economists, managers and scientists.
REFERENCES
Banks, Ferdinand E. (2013). Energy and Economic Theory. Singapore, London and

New York: World Scientific.

Hamilton, James (2012). ‘World oil production is not going to increase forever’.

Working paper, University of California (San Diego).</sub>
4. MYTH, MEANING AND NUCLEAR ENERGY
Berthold Brecht put it as follows: “If you don’t know the truth, you are a fool, while if you know the truth but say that it is a lie, you are a villain." I seldom object to that kind of language, because I used it all the time when I taught financial economics, but it is not appropriate when the subject is nuclear, and so I modified it somewhat: If you don’t know the truth about nuclear energy you are probably too tired or unlucky to find out, because learning what you need to feel comfortable when the conversation turns from mathematical economics or Frank Sinatra to energy is as simple as locating your name on your birth certificate. On the other hand, if you know the truth but say that it is a lie – which often happens – it generally means that you don’t want to offend certain persons. For example, persons who might not invite you to their parties and dinners if you reject their beliefs about this very touchy subject.

In classroom situations I have never had a problem presenting my views on oil, but it is different with nuclear energy. With nuclear there are always a few students or colleagues who are anxious to give the impression that they are experts on the subject, to include its technical aspects, but inevitably those ladies and gentlemen become careless and tend to miss a few salient points.

The most important project in energy economics at the present time is understanding that optimal national energy structures in at least the first half of the present century will be a mix of all sorts of items – nuclear, fossil fuels, renewables, various alternatives etc. Once this is appreciated, some effort should immediately be put into comprehending a few basic characteristics of nuclear, as well as the relationship of nuclear to other energy media. This is not always easy, even for me, however I can congratulate myself on my familiarity with a few things. For instance, I know that while some countries, to include China, make a special effort to pay tribute to renewables, where serious business is concerned they will eventually bet on nuclear. I know something even more important. I know that when dealing with all energy matters, you are liable to find yourself confronting a whirlwind of lies and misunderstandings.

Mainland China has 14 nuclear reactors in operation, more than 25 under construction, and perhaps 100 are in the planning stages. But even so, the energy directorate in that country is apparently in no hurry to increase the pace at which reactors are produced, because they possess plenty of coal to burn in a clean or dirty manner, and in addition they want to make sure that they are constructing and installing the most efficient nuclear equipment. Perhaps I should mention that the Chinese are in the nuclear business because they intend to become and/or remain the ‘workshop of the world’, and to do that an enormous amount of energy will have to be consumed. Attempting to obtain a majority of this energy from items like wind and solar would be completely and totally counterproductive.

Now let’s consider Sweden and Germany. A question that might have been asked at the Singapore Energy Week – but fortunately was not – was why should I spend valuable time discussing those nations and not Asian countries? After all, I was specifically requested to deal with the Asian energy future?

The correct answer is that Swedish and German experiences and aspirations have everything to do with Asian energy! The technological and economic issues in those two European countries are almost exactly the same as those in Asia: they are operating on the same wave length. Unlike e.g. fashions and eating habits, there is only one nuclear story, and that simple story applies everywhere.

I had the Japanese nuclear situation explained to me in detail by a Japanese gentleman during a long walk through Vienna about twenty years ago. What he essentially said was that contemporary nuclear technology was merely an entrée to the real deal, by which he meant fast-breeder technology. That was a discussion that I was not anxious to take part in, because for various reasons I have never found a plutonium community something to cheer about. I can also mention that when I wanted to know more about the likely present and near-future cost of nuclear energy in Europe and North America, I began my research with some questions about what is taking place in the Chinese nuclear sector. In case you are curious, what is taking place in that sector is what Anne Lauvergeon – the former director of Areva – described as “worrying”, by which she meant worrying for other reactor producers who might have to compete with the Chinese. In other words, she implied that the cost of Chinese reactors will be the lowest in the world, if they aren’t already.