Publications: Notes at the Margin

A Disruption with a New Twist; Tightening Markets; Transition Speed as Affected by Government (February 22, 2021)


This Notes at the Margin covers three topics. We start with the market disruption caused by the collapse of the Texas electricity distribution system. We follow with a review of the global oil market supply and demand status and then conclude by commenting on the speed of energy transitions.


The Texas disaster section compares the recent events in the state to prior disruptions. We show that the product price moves in 2021 were like those of previous cold spells and hurricanes. History suggests that the price peaks are close or have passed. However, this disruption differs in one respect from past episodes because it might precipitate widespread energy company bankruptcies. A Financial Times article reported that some firms might have suffered severe losses. The electricity price spike in Texas cost consumers and energy transmission firms as much as $50 billion over five days. On the other hand, at least one multinational oil company, ExxonMobil, may have doubled its annual profits by shutting down its refinery, running its generating plants, and selling the electricity to the grid at prices of as much as $9,000 per megawatt-hour. There were losers—and winners—in Texas.


Our review of the global supply and demand balance was motivated by a Julian Lee Bloomberg column published February 13. It was subtitled, "There’s no easy way to measure supply and demand, making OPEC’s efforts to game out a recovery from the pandemic a crapshoot."[1] Not for the first time, we explain that evidence from modern finance shows that all information is contained in prices and that one can measure supply and demand balances by manipulating price data. Sadly, analysts like Lee continue to rely on nineteenth-century economics in the twenty-first century and thus are unable to determine market balances.


Finally, we add to our discussion of the energy transition. Last week, Bill Gates published a new book titled How to Avoid a Climate Disaster. In it, he addresses the energy transition as part of his manifesto, relying on the work of Canadian professor Vaclav Smil. Smil and his disciples assert that physical assets, once built, are not retired until their usefulness is exhausted. We explain that government policies can slow or accelerate such transitions, noting how the US government’s promotion of airport, canals, and interstate highway construction accelerated the downslide of railroads, forcing the premature abandonment of significant amounts of capital investment well before equipment and facilities had reached the end of their useful lives. Likewise, today’s government could play a decisive role in the quick phaseout of gasoline and diesel-powered vehicles.

[1] Julian Lee, “Oil Price Targets Would Make a Far Better Goal,” Bloomberg, February 14, 2021 [].


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