Friday, December 31, 2010

The Urban Organism

December 17, 2010

A Physicist Solves the City

By JONAH LEHRER, New York Times
Geoffrey West doesn’t eat lunch. His doctor says he has a mild allergy to food; meals make him sleepy and nauseated. When West is working — when he’s staring at some scribbled equations on scratch paper or gazing out his office window at the high desert in New Mexico — he subsists on black tea and nuts. His gray hair is tousled, and his beard has the longish look of neglect. It’s clear that West regards the mundane needs of everyday life — trimming the whiskers, say — as little more than a set of annoying distractions, drawing him away from a much more interesting set of problems. Sometimes West can seem jealous of his computer, this silent machine with no hungers or moods. All it needs is a power cord.
For West, the world is always most compelling at its most abstract. As a theoretical physicist in search of fundamental laws, he likes to compare his work to that of Kepler, Galileoand Newton. “I’ve always wanted to find the rules that govern everything,” he says. “It’s amazing that such rules exist. It’s even more amazing that we can find them.”
But the 70-year-old West, who grew up in Somerset, England, is no longer trying to solve the physical universe; he’s not interested in deep space or string theory. Although West worked for decades as a physicist at Stanford University and Los Alamos National Laboratory, he started thinking about leaving the field after the financing for the Texas superconducting supercollider was canceled by Congress in 1993. West, however, wasn’t ready to retire, and so he began searching for subjects that needed his skill set.
Eventually he settled on cities: the urban jungle looked chaotic — all those taxi horns and traffic jams — but perhaps it might be found to obey a short list of universal rules. “We spend all this time thinking about cities in terms of their local details, their restaurants and museums and weather,” West says. “I had this hunch that there was something more, that every city was also shaped by a set of hidden laws.”
And so West set out to solve the City. As he points out, this is an intellectual problem with immense practical implications. Urban population growth is the great theme of modern life, one that’s unfolding all across the world, from the factory boomtowns of Southern China to the sprawling favelas of Rio de Janeiro. As a result, for the first time in history, the majority of human beings live in urban areas. (The numbers of city dwellers are far higher in developed countries — the United States, for instance, is 82 percent urbanized.) Furthermore, the pace of urbanization is accelerating as people all over the world flee the countryside and flock to the crowded street.
This relentless urban growth has led to a renewed interest in cities in academia and in government. In February 2009, President Obama established the first White House Office of Urban Affairs, which has been told to develop a “policy agenda for urban America.” Meanwhile, new perspectives have come to the field of urban studies. Macro­economists, for instance, have focused on the role of cities in driving gross domestic product and improving living standards, while psychologists have investigated the impact of city life on self-control and short-term memory. Even architects are moving into the area: Rem Koolhaas, for one, has argued that architects have become so obsessed with pretty buildings that they’ve neglected the vital spaces between them.
But West wasn’t satisfied with any of these approaches. He didn’t want to be constrained by the old methods of social science, and he had little patience for the unconstrained speculations of architects. (West considers urban theory to be a field without principles, comparing it to physics before Kepler pioneered the laws of planetary motion in the 17th century.) Instead, West wanted to begin with a blank page, to study cities as if they had never been studied before. He was tired of urban theory — he wanted to invent urban science.
For West, this first meant trying to gather as much urban data as possible. Along with Luis Bettencourt, another theoretical physicist who had abandoned conventional physics, and a team of disparate researchers, West began scouring libraries and government Web sites for relevant statistics. The scientists downloaded huge files from the Census Bureau, learned about the intricacies of German infrastructure and bought a thick and expensive almanac featuring the provincial cities of China. (Unfortunately, the book was in Mandarin.) They looked at a dizzying array of variables, from the total amount of electrical wire in Frankfurt to the number of college graduates in Boise. They amassed stats on gas stations and personal income, flu outbreaks and homicides, coffee shops and the walking speed of pedestrians.
After two years of analysis, West and Bettencourt discovered that all of these urban variables could be described by a few exquisitely simple equations. For example, if they know the population of a metropolitan area in a given country, they can estimate, with approximately 85 percent accuracy, its average income and the dimensions of its sewer system. These are the laws, they say, that automatically emerge whenever people “agglomerate,” cramming themselves into apartment buildings and subway cars. It doesn’t matter if the place is Manhattan or Manhattan, Kan.: the urban patterns remain the same. West isn’t shy about describing the magnitude of this accomplishment. “What we found are the constants that describe every city,” he says. “I can take these laws and make precise predictions about the number of violent crimes and the surface area of roads in a city in Japan with 200,000 people. I don’t know anything about this city or even where it is or its history, but I can tell you all about it. And the reason I can do that is because every city is really the same.” After a pause, as if reflecting on his hyperbole, West adds: “Look, we all know that every city is unique. That’s all we talk about when we talk about cities, those things that make New York different from L.A., or Tokyo different from Albuquerque. But focusing on those differences misses the point. Sure, there are differences, but different from what? We’ve found the what.”
There is something deeply strange about thinking of the metropolis in such abstract terms. We usually describe cities, after all, as local entities defined by geography and history. New Orleans isn’t a generic place of 336,644 people. It’s the bayou and Katrina and Cajun cuisine. New York isn’t just another city. It’s a former Dutch fur-trading settlement, the center of the finance industry and home to the Yankees. And yet, West insists, those facts are mere details, interesting anecdotes that don’t explain very much. The only way to really understand the city, West says, is to understand its deep structure, its defining patterns, which will show us whether a metropolis will flourish or fall apart. We can’t make our cities work better until we know how they work. And, West says, he knows how they work.
West has been drawn to different fields before. In 1997, less than five years after he transitioned away from high-energy physics, he published one of the most contentious and influential papers in modern biology. (The research, which appeared in Science, has been cited more than 1,500 times.) The last line of the paper summarizes the sweep of its ambition, as West and his co-authors assert that they have just solved “the single most pervasive theme underlying all biological diversity,” showing how the most vital facts about animals — heart rate, size, caloric needs — are interrelated in unexpected ways.
The mathematical equations that West and his colleagues devised were inspired by the earlier findings of Max Kleiber. In the early 1930s, when Kleiber was a biologist working in the animal-husbandry department at the University of California, Davis, he noticed that the sprawlingly diverse animal kingdom could be characterized by a simple mathematical relationship, in which the metabolic rate of a creature is equal to its mass taken to the three-fourths power. This ubiquitous principle had some significant implications, because it showed that larger species need less energy per pound of flesh than smaller ones. For instance, while an elephant is 10,000 times the size of a guinea pig, it needs only 1,000 times as much energy. Other scientists soon found more than 70 such related laws, defined by what are known as “sublinear” equations. It doesn’t matter what the animal looks like or where it lives or how it evolved — the math almost always works.
West’s insight was that these strange patterns are caused by our internal infrastructure — the plumbing that makes life possible. By translating these biological designs into mathematics, West and his co-authors were able to explain the existence of Kleiber’s scaling laws. “I can’t tell you how satisfying this was,” West says. “Sometimes, I look out at nature and I think, Everything here is obeying my conjecture. It’s a wonderfully narcissistic feeling.”
Not every biologist was persuaded, however. In fact, West’s paper in Science ignited a flurry of rebuttals, in which researchers pointed out all the species that violated the math. West can barely hide his impatience with what he regards as quibbles. “There are always going to be people who say, ‘What about the crayfish?’ ” he says. “Well, what about it? Every fundamental law has exceptions. But you still need the law or else all you have is observations that don’t make sense. And that’s not science. That’s just taking notes.” For West, arguments over the details of crustaceans were a sure sign that it was time to move on. And so, in 2002, he began to think seriously about cities.
The correspondence was obvious to West: he saw the metropolis as a sprawling organism, similarly defined by its infrastructure. (The boulevard was like a blood vessel, the back alley a capillary.) This implied that the real purpose of cities, and the reason cities keep on growing, is their ability to create massive economies of scale, just as big animals do. After analyzing the first sets of city data — the physicists began with infrastructure and consumption statistics — they concluded that cities looked a lot like elephants. In city after city, the indicators of urban “metabolism,” like the number of gas stations or the total surface area of roads, showed that when a city doubles in size, it requires an increase in resources of only 85 percent.
This straightforward observation has some surprising implications. It suggests, for instance, that modern cities are the real centers of sustainability. According to the data, people who live in densely populated places require less heat in the winter and need fewer miles of asphalt per capita. (A recent analysis by economists at Harvard and U.C.L.A.demonstrated that the average Manhattanite emits 14,127 fewer pounds of carbon dioxide annually than someone living in the New York suburbs.) Small communities might look green, but they consume a disproportionate amount of everything. As a result, West argues, creating a more sustainable society will require our big cities to get even bigger. We need more megalopolises.
But a city is not just a frugal elephant; biological equations can’t entirely explain the growth of urban areas. While the first settlements in Mesopotamia might have helped people conserve scarce resources — irrigation networks meant more water for everyone — the concept of the city spread for an entirely different reason. “In retrospect, I was quite stupid,” West says. He was so excited by the parallels between cities and living things that he “didn’t pay enough attention to the ways in which urban areas and organisms are completely different.”
What Bettencourt and West failed to appreciate, at least at first, was that the value of modern cities has little to do with energy efficiency. As West puts it, “Nobody moves to New York to save money on their gas bill.” Why, then, do we put up with the indignities of the city? Why do we accept the failing schools and overpriced apartments, the bedbugsand the traffic?
In essence, they arrive at the sensible conclusion that cities are valuable because they facilitate human interactions, as people crammed into a few square miles exchange ideas and start collaborations. “If you ask people why they move to the city, they always give the same reasons,” West says. “They’ve come to get a job or follow their friends or to be at the center of a scene. That’s why we pay the high rent. Cities are all about the people, not the infrastructure.”
It’s when West switches the conversation from infrastructure to people that he brings up the work of Jane Jacobs, the urban activist and author of “The Death and Life of Great American Cities.” Jacobs was a fierce advocate for the preservation of small-scale neighborhoods, like Greenwich Village and the North End in Boston. The value of such urban areas, she said, is that they facilitate the free flow of information between city dwellers. To illustrate her point, Jacobs described her local stretch of Hudson Street in the Village. She compared the crowded sidewalk to a spontaneous “ballet,” filled with people from different walks of life. School kids on the stoops, gossiping homemakers, “business lunchers” on their way back to the office. While urban planners had long derided such neighborhoods for their inefficiencies — that’s why Robert Moses, the “master builder” of New York, wanted to build an eight-lane elevated highway through SoHo and the Village — Jacobs insisted that these casual exchanges were essential. She saw the city not as a mass of buildings but rather as a vessel of empty spaces, in which people interacted with other people. The city wasn’t a skyline — it was a dance.
If West’s basic idea was familiar, however, the evidence he provided for it was anything but. The challenge for Bettencourt and West was finding a way to quantify urban interactions. As usual, they began with reams of statistics. The first data set they analyzed was on the economic productivity of American cities, and it quickly became clear that their working hypothesis — like elephants, cities become more efficient as they get bigger — was profoundly incomplete. According to the data, whenever a city doubles in size, every measure of economic activity, from construction spending to the amount of bank deposits, increases by approximately 15 percent per capita. It doesn’t matter how big the city is; the law remains the same. “This remarkable equation is why people move to the big city,” West says. “Because you can take the same person, and if you just move them to a city that’s twice as big, then all of a sudden they’ll do 15 percent more of everything that we can measure.” While Jacobs could only speculate on the value of our urban interactions, West insists that he has found a way to “scientifically confirm” her conjectures. “One of my favorite compliments is when people come up to me and say, ‘You have done what Jane Jacobs would have done, if only she could do mathematics,’ ” West says. “What the data clearly shows, and what she was clever enough to anticipate, is that when people come together, they become much more productive.”
West illustrates the same concept by describing the Santa Fe Institute, an interdisciplinary research organization, where he and Bettencourt work. The institute itself is a sprawl of common areas, old couches and tiny offices; the coffee room is always the most crowded place. “S.F.I. is all about the chance encounters,” West says. “There are few planned meetings, just lots of unplanned conversations. It’s like a little city that way.” The previous evening, West and I ran into the novelist Cormac McCarthy at the institute, where McCarthy often works. The physicist and the novelist ended up talking about Antarctic icefish, the editing process and convergent evolution for 45 minutes.
Of course, these interpersonal collisions — the human friction of a crowded space — can also feel unpleasant. We don’t always want to talk with strangers on the subway or jostle with people on the sidewalk. West admits that all successful cities are a little uncomfortable. He describes the purpose of urban planning as finding a way to minimize our distress while maximizing our interactions. The residents of Hudson Street, after all, didn’t seem to mind mingling with one another on the sidewalk. As Jacobs pointed out, the layout of her Manhattan neighborhood — the short blocks, the mixed-use zoning, the density of brownstones — made it easier to cope with the strain of the metropolis. It’s fitting that it’s called the Village.
In recent decades, though, many of the fastest-growing cities in America, like Phoenix and Riverside, Calif., have given us a very different urban model. These places have traded away public spaces for affordable single-family homes, attracting working-class families who want their own white picket fences. West and Bettencourt point out, however, that cheap suburban comforts are associated with poor performance on a variety of urban metrics. Phoenix, for instance, has been characterized by below-average levels of income and innovation (as measured by the production of patents) for the last 40 years. “When you look at some of these fast-growing cities, they look like tumors on the landscape,” West says, with typical bombast. “They have these extreme levels of growth, but it’s not sustainable growth.” According to the physicists, the trade-off is inevitable. The same sidewalks that lead to “knowledge trading” also lead to cockroaches.
Consider the data: When Bettencourt and West analyzed the negative variables of urban life, like crime and disease, they discovered that the exact same mathematical equation applied. After a city doubles in size, it also experiences a 15 percent per capita increase in violent crimes, traffic and AIDS cases. (Of course, these trends are only true in general. Some cities can bend the equations with additional cops or strict pollution regulations.) “What this tells you is that you can’t get the economic growth without a parallel growth in the spread of things we don’t want,” Bettencourt says. “When you double the population, everything that’s related to the social network goes up by the same percentage.”
West and Bettencourt refer to this phenomenon as “superlinear scaling,” which is a fancy way of describing the increased output of people living in big cities. When a superlinear equation is graphed, it looks like the start of a roller coaster, climbing into the sky. The steep slope emerges from the positive feedback loop of urban life — a growing city makes everyone in that city more productive, which encourages more people to move to the city, and so on. According to West, these superlinear patterns demonstrate why cities are one of the single most important inventions in human history. They are the idea, he says, that enabled our economic potential and unleashed our ingenuity. “When we started living in cities, we did something that had never happened before in the history of life,” West says. “We broke away from the equations of biology, all of which are sublinear. Every other creature gets slower as it gets bigger. That’s why the elephant plods along. But in cities, the opposite happens. As cities get bigger, everything starts accelerating. There is no equivalent for this in nature. It would be like finding an elephant that’s proportionally faster than a mouse.”
There is, of course, a very good reason that animals slow down with size: All that mass requires energy. Because the elephant has to eat so much to feed itself, it can’t afford to run around like a little rodent. But the superlinear growth of cities comes with no such inherent constraints. Instead, the urban equations predict a world of ever-increasing resource consumption, as the expansion of cities fuels the expansion of economies. In fact, the societal consumption driven by the process of urbanization — our collective desire for iPads, Frappuccinos and the latest fashions — more than outweighs the ecological benefits of local mass transit.
West illustrates the problem by translating human life into watts. “A human being at rest runs on 90 watts,” he says. “That’s how much power you need just to lie down. And if you’re a hunter-gatherer and you live in the Amazon, you’ll need about 250 watts. That’s how much energy it takes to run about and find food. So how much energy does our lifestyle [in America] require? Well, when you add up all our calories and then you add up the energy needed to run the computer and the air-conditioner, you get an incredibly large number, somewhere around 11,000 watts. Now you can ask yourself: What kind of animal requires 11,000 watts to live? And what you find is that we have created a lifestyle where we need more watts than a blue whale. We require more energy than the biggest animal that has ever existed. That is why our lifestyle is unsustainable. We can’t have seven billion blue whales on this planet. It’s not even clear that we can afford to have 300 million blue whales.”
The historian Lewis Mumford described the rise of the megalopolis as “the last stage in the classical cycle of civilization,” which would end with “complete disruption and downfall.” In his more pessimistic moods, West seems to agree: he knows that nothing can trend upward forever. In fact, West sees human history as defined by this constant tension between expansion and scarcity, between the relentless growth made possible by cities and the limited resources that hold our growth back. “The only thing that stops the superlinear equations is when we run out of something we need,” West says. “And so the growth slows down. If nothing else changes, the system will eventually start to collapse.”
How do we avoid this bleak fate? Constant innovation. After a resource is exhausted, we are forced to exploit a new resource, if only to sustain our superlinear growth. West cites a long list of breakthroughs to illustrate this historical pattern, from the discovery of the steam engine to the invention of the Internet. “These major innovations completely changed the way society operates,” West says. “It’s like we’re on the edge of a cliff, about to run out of something, and then we find a new way of creating wealth. That means we can start to climb again.”
But the escape is only temporary, as every innovation eventually leads to new shortages. We clear-cut forests, and so we turn to oil; once we exhaust our fossil-fuel reserves, we’ll start driving electric cars, at least until we run out of lithium. This helps explain why West describes cities as the only solution to the problem of cities. Although urbanization has generated a seemingly impossible amount of economic growth, it has also inspired the innovations that allow the growth to continue.
There is a serious complication to this triumphant narrative of cliff edges and creativity, however. Because our lifestyle has become so expensive to maintain, every new resource now becomes exhausted at a faster rate. This means that the cycle of innovations has to constantly accelerate, with each breakthrough providing a shorter reprieve. The end result is that cities aren’t just increasing the pace of life; they are also increasing the pace at which life changes. “It’s like being on a treadmill that keeps on getting faster,” West says. “We used to get a big revolution every few thousand years. And then it took us a century to go from the steam engine to the internal-­combustion engine. Now we’re down to about 15 years between big innovations. What this means is that, for the first time ever, people are living through multiple revolutions. And this all comes from cities. Once we started to urbanize, we put ourselves on this treadmill. We traded away stability for growth. And growth requires change.”
While listening to West talk about cities, it’s easy to forget that his confident pronouncements are mere correlations, and that his statistics can only hint at possible explanations. Not surprisingly, many urban theorists disagree with West’s conclusions. Some resent the implication that future urban research should revolve around a few abstract mathematical laws. Other theorists, like Joel Kotkin, a fellow in urban futures at Chapman University, in Orange, Calif., argue that the working model of Bettencourt and West is already obsolete and fails to explain recent trends. “In the last decade, suburbs have produced six times as many jobs,” Kotkin says. And these aren’t just unskilled service jobs. Kotkin says the centers of American innovation are now low-density metropolitan areas like Silicon Valley and Raleigh-­Durham, N.C. “For a supposedly complete theory” of cities, Kotkin says, “this work fails to explain a lot of what’s happening right now.”
The theoretical physicists aren’t discouraged by these critiques. While they admit their equations are imperfect, they insist the work remains a necessary first draft. “When Kepler found the laws that govern planetary motion, he didn’t get the laws exactly right,” West says. “But the laws were still good enough to inspire Newton.” In the meantime, West and Bettencourt continue to search for new statistics (they have just received a data set from the I.R.S.) that they hope to feed back into the model. Nevertheless, West says they believe that their essential theory — those superlinear and sublinear laws — will remain intact. The math is scientifically sound.
In fact, West is so satisfied with his urban research that he’s already becoming a little restless. Recently, he and Bettencourt, led by this impatience, began exploring yet another subject: the corporation. At first glance, cities and companies look very similar. They’re both large agglomerations of people, interacting in a well-defined physical space. They contain infrastructure and human capital; the mayor is like a C.E.O.
But it turns out that cities and companies differ in a very fundamental regard: cities almost never die, while companies are extremely ephemeral. As West notes, Hurricane Katrina couldn’t wipe out New Orleans, and a nuclear bomb did not erase Hiroshima from the map. In contrast, where are Pan Am and Enron today? The modern corporation has an average life span of 40 to 50 years.
This raises the obvious question: Why are corporations so fleeting? After buying data on more than 23,000 publicly traded companies, Bettencourt and West discovered that corporate productivity, unlike urban productivity, was entirely sublinear. As the number of employees grows, the amount of profit per employee shrinks. West gets giddy when he shows me the linear regression charts. “Look at this bloody plot,” he says. “It’s ridiculous how well the points line up.” The graph reflects the bleak reality of corporate growth, in which efficiencies of scale are almost always outweighed by the burdens of bureaucracy. “When a company starts out, it’s all about the new idea,” West says. “And then, if the company gets lucky, the idea takes off. Everybody is happy and rich. But then management starts worrying about the bottom line, and so all these people are hired to keep track of the paper clips. This is the beginning of the end.”
The danger, West says, is that the inevitable decline in profit per employee makes large companies increasingly vulnerable to market volatility. Since the company now has to support an expensive staff — overhead costs increase with size — even a minor disturbance can lead to significant losses. As West puts it, “Companies are killed by their need to keep on getting bigger.”
For West, the impermanence of the corporation illuminates the real strength of the metropolis. Unlike companies, which are managed in a top-down fashion by a team of highly paid executives, cities are unruly places, largely immune to the desires of politicians and planners. “Think about how powerless a mayor is,” West says. “They can’t tell people where to live or what to do or who to talk to. Cities can’t be managed, and that’s what keeps them so vibrant. They’re just these insane masses of people, bumping into each other and maybe sharing an idea or two. It’s the freedom of the city that keeps it alive.”
Jonah Lehrer is the author, most recently, of "How We Decide."

Thursday, December 23, 2010

Bad Bets: Ever Shifting Winds of Energy Sector

DECEMBER 22, 2010

A Wind Power Boonedoggle

T. Boone Pickens badly misjudged the supply and price of natural gas.

By ROBERT BRYCE, Wall Street Journal

After 30 months, countless TV appearances, and $80 million spent on an extravagant PR campaign, T. Boone Pickens has finally admitted the obvious: The wind energy business isn't a very good one.

The Dallas-based entrepreneur, who has relentlessly promoted his "Pickens Plan" since July 4, 2008, announced earlier this month that he's abandoning the wind business to focus on natural gas.

Two years ago, natural gas prices were spiking and Mr. Pickens figured they'd stay high. He placed a $2 billion order for wind turbines with General Electric. Shortly afterward, he began selling the Pickens Plan. The United States, he claimed, is "the Saudi Arabia of wind," and wind energy is an essential part of the cure for the curse of imported oil.

Voters and politicians embraced the folksy billionaire's plan. Last year, Senate Majority Leader Harry Reid said he had joined "the Pickens church," and Al Gore said he wished that more business leaders would emulate Mr. Pickens and be willing to "throw themselves into the fight for the future of our country."

Alas, market forces ruined the Pickens Plan. Mr. Pickens should have shorted wind. Instead, he went long and now he's stuck holding a slew of turbines he can't use because low natural gas prices have made wind energy uneconomic in the U.S., despite federal subsidies that amount to $6.44 for every 1 million British thermal units (BTUs) produced by wind turbines. As the former corporate raider explained a few days ago, growth in the wind energy industry "just isn't gonna happen" if natural gas prices remain depressed.

In 2008, shortly after he launched his plan, Mr. Pickens said that for wind energy to be competitive, natural gas prices must be at least $9 per million BTUs. In March of this year, he was still hawking wind energy, but he'd lowered his price threshold, saying "The place where it works best is with natural gas at $7."

That may be true. But on the spot market natural gas now sells for about $4 per million BTUs. In other words, the free-market price for natural gas is about two-thirds of the subsidy given to wind. Yet wind energy still isn't competitive in the open market.

Despite wind's lousy economics, the lame duck Congress recently passed a one-year extension of the investment tax credit for renewable energy projects. That might save a few "green" jobs.

But at the same time that Congress was voting to continue the wind subsidies, Texas Comptroller Susan Combs reported that property tax breaks for wind projects in the Lone Star State cost nearly $1.6 million per job. That green job ripoff is happening in Texas, America's biggest natural gas producer.

Today's low natural gas prices are a direct result of the drilling industry's newfound ability to unlock methane from shale beds. These lower prices are great for consumers but terrible for the wind business. Through the first three quarters of 2010, only 1,600 megawatts of new wind capacity were installed in the U.S., a decline of 72% when compared to the same period in 2009, and the smallest number since 2006. Some wind industry analysts are predicting that new wind generation installations will fall again, by as much as 50%, in 2011.

There's more bad news on the horizon for Mr. Pickens and others who have placed big bets on wind: Low natural gas prices may persist for years. Last month, the International Energy Agency's chief economist, Fatih Birol, said that the world is oversupplied with gas and that "the gas glut will be with us 10 more years." The market for natural-gas futures is predicting that gas prices will stay below $6 until 2017.

So what is Mr. Pickens planning to do with all the wind turbines he ordered? He's hoping to foist them on ratepayers in Canada, because that country has mandates that require consumers to buy more expensive renewable electricity.

How do you say boonedoggle in French?

Mr. Bryce is a senior fellow at the Manhattan Institute. His latest book is "Power Hungry: The Myths of 'Green' Energy and the Real Fuels of the Future" (PublicAffairs, 2010).

Tuesday, December 21, 2010

The Ethanol Economics Debate

Ethanol Gets A Boost; Will It Return The Favor?

by Frank Morris

Iowa Public Radio - December 21, 2010

The recent tax cut bill preserves a pretty sweet deal for corn ethanol. It extends a tax subsidy, along with an import tariff supporting a fuel that already enjoys a guaranteed market. But what do taxpayers get for all the help?

In the first of our three-part series on ethanol, Frank Morris of Harvest Public Media reports that the heated debate over ethanol tramples some basic realities.

Ethanol may seem modern, but people throughout Appalachia have been making it for hundreds of years.

"We are known for our moonshine industry," says science writer Bill Kovarik with a laugh, "very well known for our moonshine industry. It is still flourishing."

Kovarik, who's also a professor at Radford University, says that ethanol is, first and foremost, a way to make corn more valuable. More than a century ago, Henry Ford built cars to run on it, with just that in mind.

"So, you could replace the transportation income that farmers used to have by [their] growing the fuel for the cars, instead of growing horses and feed."

Prohibition killed that idea, but the farm crisis, oil shocks and environmental concerns have revived it. Lawmakers gave companies a tax credit -- currently 45 cents a gallon, more than $5 billion a year -- for blending ethanol with gasoline.

The EPA forces fuel blenders to use billions of gallons of ethanol a year. And there's also a high tariff on imports -- giving ethanol triple support. But according to the ethanol industry ads, the payback is huge.

One spot claims that ethanol is responsible for "12 billion gallons of clean, renewable American energy a year, fueling the economy, and nearly 400,000 jobs."

But, says David Swenson of Iowa State University: "Nationwide, the number of ethanol jobs isn't as many as people would think it was. It's probably in the territory of 30,000 to 35,000."

Swenson doesn't count farm jobs in his equation. But he does say that ethanol spreads money across the Midwest -- and even all the way back to Washington, D.C., in a way.

Ethanol uses a lot of corn, which makes it, and other row crops, more valuable.

These days, grain never gets cheap enough to trigger federal price support payments to farmers -- something that used to happen frequently. But "Federal support for ethanol effectively replaces other farm subsidies" doesn't really make a great slogan.

Instead, the industry's ad uses this motto: "Turning everyday, abundant, renewable ingredients into clean, sustainable energy."

Farmers now grow a lot more corn, but ethanol's voracious appetite keeps supply tight and prices high. Ethanol does burn much cleaner than gasoline -- creating no soot -- but producing it creates pollution and sucks up lots of water, which muddies the environmental benefit.

Of course, ethanol boosters aren't the only ones talking in this debate.

"We're importing oil to produce this ethanol," says David Pimentel, a professor at Cornell University.

Pimentel added up all the energy used in growing corn -- the fertilizer, the tractor fuel and tractor manufacturing, everything -- plus the energy used by ethanol plants. He says that making 1 gallon of ethanol uses the equivalent of about 1-1/3 gallons of oil.

Since his first study came out 30 years ago, Pimentel says, his findings haven't changed.

"There's been no net gain, as far as making the U.S. oil-independent," he says.

Pimentel's analysis of corn ethanol as an energy black hole has been widely cited by the diverse coalition lined up against corn ethanol, spanning everyone from liberal environmentalists to Fox News pundit Glenn Beck.

Beck has said: "Not only is corn ethanol wildly inefficient -- I mean, it takes more energy to produce it than it ends up providing. Hello?"

But Pimentel uses what many researchers believe are outdated or worst-case scenarios for growing corn and producing ethanol. Factoring in dramatic technical advances in both fields, most researchers figure that corn ethanol now delivers an energy gain -- of about 40 percent.

"But that's not really good enough," says Kovarik. "What we need is something in the neighborhood of 12 to 1, not, you know, 1 to 1.4."

Kovarik says that larger gains will come only after solving wickedly complex scientific, logistic and financial problems, allowing us to make ethanol from grass, trees or something other than corn.

"The corn ethanol industry is not really a long-term solution to oil dependence," Kovarik says. "It's just an octane booster."

And that's because ethanol is safer than banned gasoline additives, like lead, benzene and MTBE.

So, corn ethanol does create domestic energy and jobs -- but not as much, or as many, as backers hoped. It has helped some farmers get off other subsidies, and improved the rural economy.

The question is: Does it deserve a multibillion-dollar tax credit, on top of a tariff, on top of a huge and growing mandate to use it?

Saturday, December 18, 2010

Global Demand: Land Prices Surge

DECEMBER 16, 2010
A Bumper Year

Real estate may be hurting. But farmland has become a hot commodity.

By LIAM PLEVEN, Wall Street Journal

The price of farmland is climbing sharply again. Will a new round of pleas for aid from Willie Nelson be close behind?

The rally in land values stirs memories of the 1980s farm debt crisis, when many farmers borrowed heavily as property values soared, then faced foreclosure after the bubble burst. The farmers' plight prompted musicians led by Mr. Nelson to stage high-profile Farm Aid concerts.

Arable land has again become a hot commodity—despite the struggles of the broader real-estate industry. It's attracting buyers ranging from wealthy individuals and institutional investors to farmers themselves. Many are investing in farmland funds, though some farmers are expanding operations.

"It's just gotten sexy lately," says Shonda Warner, managing partner of Chess Ag Full Harvest Partners, which has a fund with about $50 million invested in farmland in four states.

Farmland values in key upper Midwest states shot up 10% in the third quarter compared with last year, according to the Federal Reserve Bank of Chicago. The Kansas City Fed says prices of irrigated farmland jumped 12% in Kansas and Nebraska in the same period. The recent increases follow a 55% rise in value in real terms over the past decade.

Near and Far

Investors are plowing money not just into prime U.S. soil, but into major agricultural areas abroad as well. Some expect the land to appreciate in value. Others are betting that fast-growing nations will need to import more food to satisfy increasingly prosperous populations, boosting farm income.

George Washington University, in Washington, D.C., began buying in 2007 and now has $80 million of its endowment invested in farmland. One-quarter of that amount is in the U.S., and the rest is abroad—including money in a fund that leases land in Poland.In October, Teachers Insurance & Annuity Association of America—part of the mammoth TIAA-CREF retirement plan for academics—bought Westchester Group Inc., which already managed some of TIAA's farmland investments. TIAA has about $2 billion invested in more than 400 farms in the U.S., South America, Australia and Eastern Europe.

And Luminous Capital, an investment adviser in Los Angeles and Menlo Park, Calif., that serves wealthy individuals, has put $45 million of its clients' money into a fund that plans to buy 20 to 25 U.S. farms growing crops such as corn, cotton and wheat.

"We believe that the emerging markets are going to continue to grow in wealth," says Kim Ip, who oversees the farmland portfolio at Luminous. That, she says, will mean increased meat consumption, which in turn will drive greater demand for feed grains.

Primed for Exports

U.S. farms are well-positioned to benefit from strong global demand for key crops, because they produce so much more than Americans consume. U.S. farms will provide more than half the world's corn exports and over 40% of its soybean and cotton exports this crop year, according to the U.S. Department of Agriculture.

Exports can help farms earn significant revenue, particularly at times when prices are rising. Grain prices shot up this summer after a harsh summer drought in Russia that led to an export ban in that country on wheat. Corn and wheat prices were both up more than 65% recently from June lows, with soybeans up nearly 40%."

U.S. farmland is also growing scarcer, which can bolster its value. The nation's farmland acreage has been declining steadily for more than half a century, from more than 1.2 billion acres in the mid-1950s to a little less than 920 million acres last year, according to the Department of Agriculture.

Perils Aplenty

Farming, however, is a notoriously perilous business. Outside investors typically rely on tenant farmers or management companies to run the farms day-to-day, putting a premium on selecting skilled farmers. Farms are also heavily exposed to nature's whims.

"The biggest risk is operational," says Don Lindsey, chief investment officer at George Washington University. He tries to mitigate the risk by investing in different regions, and with a variety of managers.

Higher prices increase the risk that buyers may be paying too much, says Jim Grant, editor of Grant's Interest Rate Observer, a New York-based financial newsletter. "I worry about the aging Iowa farmers who are paying up for their neighbors' 80 or 100 acres because interest rates are so impossibly low," he said in a speech last month in Singapore.

And then there's the possibility of another collapse in land values.

U.S. Agriculture Secretary Tom Vilsack says the situation now is different. "I don't think we're looking at a bubble, just because I think people have been far more conservative about debt," Mr. Vilsack says.

Nonetheless, the earlier crash has regulators paying close attention.
"We don't want it to become a problem," says Richard Brown, chief economist at the Federal Deposit Insurance Corp., which monitors lenders.

Meanwhile, Farm Aid, the organization that grew out of the original concerts—and where Mr. Nelson remains board president—has focused its recent advocacy efforts on other farm-country concerns, according to a spokeswoman. But, she adds, "we are definitely watching the situation."

Mr. Pleven is a staff reporter for The Wall Street Journal in New York. He can be reached

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Friday, December 17, 2010

Wall Street Journal: Gore Swears Off Ethanol

NOVEMBER 27, 2010

Al Gore's Ethanol Epiphany

He concedes the industry he promoted serves no useful purpose.

Anyone who opposes ethanol subsidies, as these columns have for decades, comes to appreciate the wisdom of St. Jude. But now that a modern-day patron saint—St. Al of Green—has come out against the fuel made from corn and your tax dollars, maybe this isn't such a lost cause.

Welcome to the college of converts, Mr. Vice President. "It is not a good policy to have these massive subsidies for first-generation ethanol," Al Gore told a gathering of clean energy financiers in Greece this week. The benefits of ethanol are "trivial," he added, but "It's hard once such a program is put in place to deal with the lobbies that keep it going."

No kidding, and Mr. Gore said he knows from experience: "One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for President."

Mr. Gore's mea culpa underscores the degree to which ethanol has become a purely political machine: It serves no purpose other than re-electing incumbents and transferring wealth to farm states and ethanol producers. Nothing proves this better than the coincident trajectories of ethanol and Mr. Gore's career.

Ethanol's claim on the Treasury was first made amid the 1970s energy crisis, with Jimmy Carter and a Democratic Congress subsidizing anything that claimed to be a substitute for foreign oil. Mr. Gore, freshman House class of 1976, was an early proponent of what was then called "gasahol."

The subsidies continued through the 1990s, with the ethanol lobby finding a sympathetic ear in Clinton EPA chief and Gore protege Carol Browner, who in 1994 banned the gasoline additive MTBE and left ethanol as the only option under clean air laws. When the Senate split 50-50 on repealing this de facto mandate, then Vice President Gore cast the deciding vote for . . . ethanol. That served him well in the 2000 Democratic primaries against ethanol critic Bill Bradley.

During the George W. Bush years, Big Ethanol adapted again, attaching itself to the global warming panic that Mr. Gore did as much as anyone to foment. Republicans in Congress formalized the mandate and increased subsidies in the 2005 and 2007 energy bills.

Meanwhile, the greens have slowly turned against corn ethanol, thanks to the growing scientific evidence that biofuels increase carbon emissions more than fossil fuels do. But the boondoggle lives on in dreams for so-called advanced fuels like cellulosic ethanol. Note Mr. Gore's objection only to "first generation," though we've been hearing that advanced ethanol is just a year or two away from viability for two decades.

At least on corn subsidies, we now have the makings of a left-right anti-boondoggle coalition. Major corn energy subsidies such as the 54-cent-per-gallon blenders credit expire at the end of the year, and Republican Senators Jim DeMint and Tom Coburn are encouraging the new Congress to prove its fiscal bona fides by letting them die. Chuck Grassley (R., Ethanol) responded this week on Twitter: "WashPost reports 2 of my colleagues want sunset ethanol tax credit R they ready sunset tax subsidies oilANDgas enjoys?"

Messrs. DeMint and Coburn replied, essentially, make our day—and rightly so. Regardless of government intervention, the economy will continue to demand oil and gas, because they are useful. No one could plausibly say the same about ethanol, and maybe now that he's had his epiphany Mr. Gore will join the fight against the subsidized industry he did so much to promote.

Thursday, December 16, 2010

Marketplace: Another Asset Bubble?

Thursday, December 16, 2010

Is farmland the next real estate bubble?

Farmer harvests corn in Illinois
The value of farmland is at an all-time high -- and it's still rising. Investors are snapping up agricultural land -- should they be concerned about another disastrous bubble burst?
A farmer harvests his corn crop in September 2007 near Morris, Ill. (Scott Olson/Getty Images)


KAI RYSSDAL: Timothy Geithner was up on Capitol Hill today testifying about the TARP. He tried again to convince a congressional panel that the bank bailout did what it was supposed to do, save the economy after over-speculation in an asset bubble. That is to say, in English, all those mortgage-backed securities based on residential real estate. But as we deal with lingering reminders of the subprime mortgage crisis, there's another asset class bubbling away: Farmland. Prices are up almost 60 percent over the past decade and still climbing.
Harvest Public Media's Kathleen Masterson has more.

AUCTIONEER: 8,000 bid. Now 8,050, 50, 50...
KATHLEEN MASTERSON: It's standing room only at this auction just outside of Ames, Iowa. Up for bid are three parcels of farmland that were owned by the same family for three generations. The room is packed with more than 100 people, mostly older farmers in flannel and their wives and a few out-of-state investors.
AUCTIONEER: 8,850, I'm asking 89 there. 8,950...
In the end, an investor from California dropped out. The 80-acre plot sold to a local buyer for nearly three-quarters of a million dollars.
AUCTIONEER: I've sold it -- 8,900.
That's $8,900 an acre, double the average price in Iowa from just last year. Farmland prices in the Midwest have been shooting up over the past year, and even over the last few months. All this buzz about farmland has caught the attention of the FDIC. Part of the FDIC's job, says chief economist Richard Brown, is to worry about these things, to worry about signs that, like the housing market, things could get out of control.
RICHARD BROWN: The asset price movement that we're watching right now is farmland values, which have increased by 58 percent over the past 10 years, after inflation.
That's led big financial companies like MetLife, John Hancock, and TIAA-CREF to ramp up investment in agricultural land. Part of the reason land prices have risen so high is the soaring costs of crops, a notoriously volatile commodity. Right now, grain is up, but not as much as land prices.
BROWN: Our sense is that land prices have risen faster than the underlying fundamentals, and again, that's indicative of a boom. But I think what would be more worrisome is if we saw an unstable debt structure under that.
And that last part, that's good news. Farmers and others buying land right now are cash rich, meaning they're able to put money down. So we're not seeing the kind of crazy borrowing that led to the 80s farm crisis. But there are some small signs that make economists wary.
Jason Henderson with the Federal Reserve Bank of Kansas City says he's starting to hear that some farmers are borrowing against the high value of their land. He has this example:
JASON HENDERSON: Farmers own say 500 acres with no debt on it, they're using equity in that parcel of land to purchase another parcel.
Henderson says there's talk of investors buying farmland as a hedge against inflation. Still, there just isn't that much farmland on the market. Low interest rates and an unstable stock market means that, for many farmers, owning land is a better retirement option.
RANDY HERTZ: People say I'd rather own a hard asset, own some farmland. Then if I convert that to cash, and put it in bank, what will I earn on that?
That's Randy Hertz, president of Hertz Farmland Management, Inc., based in Iowa. Hertz has been in the business for several decades. He says he's not worried about a bubble, not yet anyway.
HERTZ: If the wheels fall off our commodity markets, which they will go down, what goes up does come down, and I do not expect wheels to fall off the land market.
The key question is whether high farmland prices are just a result of speculative buying or are they really supported by farmland's ability to make money. One thing investors are counting on is a continuing demand for that non-luxury item we call food.
In Ames, Iowa I'm Kathleen Masterson for Marketplace.

Tuesday, December 14, 2010

Marcellus Shale: The Environment Versus Jobs Debate

DECEMBER 14, 2010
Gas Rush Reshapes Town
Tiny Towanda Cashes In on Drilling, But Some Worry About the Changes

By KRIS MAHER, Wall Street Journal

TOWANDA, Pa.—Drill rigs sprouting up on dairy farms are transforming this once-quiet community and dividing residents who welcome the economic boost from those who worry about the effects of development.
On Towanda's Main Street, Select Energy Services LLC hires drivers out of a storefront office to haul the millions of gallons of wastewater generated at the wells. Down the street, though, the owner of the Red Rose Diner says he feels like this borough of 3,000 by the Susquehanna River is "under siege."Energy companies are investing billions of dollars drilling for natural gas in the huge Marcellus Shale, a 400-million-year-old shale deposit stretching beneath parts of Ohio, Pennsylvania, West Virginia and New York. Places like Towanda are especially attractive because they are close to gas users in Boston, New York and Philadelphia, and have high-producing wells.
A similar tension is echoing through the state. In November, Pittsburgh banned drilling over concerns drinking water could be contaminated from pumping water, sand and chemicals thousands of feet underground to fracture rocks and stimulate gas flow in a process known as hydraulic fracturing. Smaller communities have done the same."It's a mixed blessing," said Frank Bertrand, a real-estate appraiser who sold lease rights on 10 acres with a partner to a drilling company for $50,000 in June. He said he expects "collateral damage" to roads from truck traffic and even that some water wells could be contaminated from drilling. "We just have to hope that they use the best practices to do their drilling."
Gas-industry officials attribute much of the anxiety to residents' lack of experience with the natural-gas industry and the sudden influx of out-of-state energy giants, like Chesapeake Energy Corp., of Oklahoma City, and Range Resources Corp., of Fort Worth, Texas.
Environmental fallout from older industries like steel and coal that were less regulated decades ago is "rightfully putting a lot of scrutiny" on drilling, said Kathryn Klaber, president of the Marcellus Shale Coalition, a trade group. But she said stricter federal and state guidelines would ensure that the impact on water and land is minimal. "We want to be first and foremost safe and considerate of the communities we operate in," she said.
Some people believe the Marcellus Shale will transform the entire economy of the state.
This year, 286 Marcellus wells have been drilled in Bradford County, the most in the state. Chesapeake, the most active drilling company in eastern Pennsylvania, has paid out $300 million in lease bonuses and royalties since 2008 in the county, out of a statewide total of $1.1 billion. In Bradford, roughly 13,600 people, more than 20% of the county's population, have leased mineral rights to Chesapeake.At the very least, millions of dollars are being pumped into tiny outposts like Towanda, in the northeast corner of the state. It is the county seat of Bradford County, where the unemployment rate is 6.6%, among the lowest in the state.
Chesapeake has spent more than $94 million this year to pave or repair 300 miles of roads in Bradford and three other counties. That has benefited Leo Drabinski, who co-owns Calvin C. Cole Inc., a hard-rock quarry and construction company in Bradford County. He said demand for rock used for roads and well sites used by gas companies grew 10 times in the past year. He increased his quarry staff to 15 from six, and even started a van service to shuttle rig workers to their jobs. "We were so lucky," Mr. Drabinski said. "We're right in the heart of this natural-gas boom."
Business is also booming for truck dealerships, restaurants and motels. Some farmers have sold lease rights for $5,000 an acre, using the money to pay off debt, invest in new farm equipment or retire
Others aren't thrilled. Many worry drilling will impact drinking water. Since 2008, six wells in Bradford have been contaminated with natural gas as a result of drilling into the Marcellus, according to the state Department of Environmental Protection. The agency has tightened engineering requirements and said companies are providing drinking water to affected residents. "The vast majority of our wells have been without incident," Chesapeake executive Matt Sheppard said. "When we've had incidents we try to address them quickly."
The additional trucks on the road have led to more traffic and accidents. Gary Wilcox, safety director for the county, noted a 23% increase in 911 calls over the past year, mainly for car and truck accidents. Volunteer fire departments are straining to respond to calls, he said.
Then there's the jolt to real-estate values. An apartment in Towanda that would have rented for $425 a month two years ago is now fetching $1,200 to $1,500 a month, according to Henry Dunn II, a local real-estate agent.
Mike Holt, owner of the Red Rose Diner on Main Street, said most small towns in America "would die to have a resource to stimulate their economy." But he and other residents complain that most high-paying jobs are going to out-of-state workers.That is good news for some, but families have become homeless and children placed in foster care because of steeper rents, said Mark Smith, chairman of the county commissioners.
Chesapeake, whose Towanda offices are in a renovated department store, says it is working with local colleges so it can train an all-local work force. In the past year, the company increased its staff in the state to 1,100 from 250 and said more than 400 employees are state residents. It opened a facility last month to house 276 workers and help ease the rental crunch.
"There's no doubt Bradford County is a much busier place,'' said Chesapeake's Mr. Sheppard.
The rapid changes in Towanda are attracting attention from around the state. On a recent day, retirees Bill and Catherine Brubaker of Lancaster, Pa., came to see what they could be in for.
Mrs. Brubaker said they were impressed that drill sites didn't disturb much land. But her husband, sitting in the passenger seat with a pair of binoculars on his lap, remains wary. "We still have major, major questions about the chemicals and the groundwater," he said.
Write to Kris Maher at

Monday, December 6, 2010

Regulators Look at Farming Landscape

DECEMBER 6, 2010
By IAN BERRY,  Wall Street Journal

Food prices are back on the march, and the powerful U.S. farm lobby faces a day of reckoning on Wednesday as the Obama administration wraps up a yearlong study into competition and consolidation in the agricultural sector.
The Departments of Justice and Agriculture are holding their fifth and final workshop to review the competitive landscape in food production and livestock rearing after a unique collaboration that has left some of the industry's largest players looking nervously over their shoulders.
Ellen Weinstein
Monsanto Co. is already embroiled in a Justice Department investigation into alleged anticompetitive practices linked to the sale and distribution of genetically modified seeds that dominate U.S. farming. Dean Foods Inc., the country's largest milk producer, has also seen antitrust officials move to block a small acquisition.
Lawmakers already have had to wrestle with external forces on the sector, such as the rise of speculative funds that critics contend have inflated prices. The latest run-up in commodity prices has also reawakened the long-running food-versus-fuel debate as Congress decides whether to renew subsidies to the ethanol industry.
This week's workshop will seek to unravel the impact of the supply chains that stretch from the field to the retailer and assess whether consumers and producers are getting a raw deal from the industry's existing structure.
U.S. Attorney General Eric Holder, Agriculture Secretary Tom Vilsack and Christine Varney, the Justice Department's antitrust chief, are scheduled to participate Wednesday.
The two agencies announced in August 2009 that they were targeting the agricultural sector, triggering a series of joint agency workshops around the country examining competition, pricing and industry structure in seeds, dairy, livestock and poultry. The events prompted often heated exchanges between farmers and representatives of Big Ag.
The final workshop will include a closer look at margins throughout the industry, including the difference between what consumers pay at the grocery store for milk, beef and poultry, and what farmers receive.
As the final workshop, it will also wrap in themes from earlier events. Smaller farming operations say consolidation has given them little bargaining power as they buy seed or sell their livestock or milk. With feed prices well above historic levels, dairy, livestock and poultry farmers in particular are under pressure.
Write to Ian Berry at