Industry views: Five Troubling Aspects of the Copenhagen Accord

Five Troubling Aspects of the Copenhagen Accord

IER, December 21, 2009

Even though the climate change PR machines are spinning away in the aftermath of Copenhagen’s COP 15, a few of the Copenhagen Accord’s more troubling consequences are not getting the attention they deserve.

Senator McCain called “the agreement to take note of the accord” reached by the United States and a handful of developed nations a “nothing burger.” Senator Kerry, on the other hand, believes the accord is important and called China’s participation “the most critical thing” to ensuring Senate passage of the national energy tax, even though few observers believe China will actually do anything to curtail their growing use of carbon-based energy. Meanwhile, the question of whether the outcome in Denmark was enough to advance international efforts to control emissions can best be summarized by Henry Derwent, president of the Geneva-based International Emissions Trading Association, who noted that the climate talks were a “step backward” in terms of a signal that will support carbon prices.

While the Copenhagen Accord does not represent a major change from the status quo, there are a few troubling aspects of the U.S. effort in Copenhagen worth noting.

First, U.S. negotiators opposed efforts from China and India to ban the use of border tariffs on energy-intensive exports. That means the U.S. actively fought to leave the prospect of Smoot-Hawley-type trade wars on the table for Senate cap-and-trade negotiators. The United States has benefited greatly from free trade; now the U.S. government is opposing free trade.

Second, unlike China and other developing countries, the U.S. will allow “international consultations and analysis” of our greenhouse gas emissions. It is not clear how intrusive these international consultations will be, but with millions of sources of greenhouse gas emissions, it’s hard to believe that they won’t in some way encroach on U.S. sovereignty.

Third, the U.S.’s commitment to hand over billions of dollars a year in taxpayer money was a premature gesture that will only serve as the new floor for developing nations in the next round of international talks. Why would nations in the third world operate under this agreement if they can now see that the starting point for COP 16’s bargaining talks is $30 billion?

Fourth, we must consider the sheer size of the U.S. delegation; press accounts reveal that in addition to the President, five cabinet officials, four other high ranking officials, one czar, over thirty Members of Congress and a host of staff attended all or part of the conference. The United States spent millions to send a small army to Copenhagen to forge a non-binding “accord” that very few Americans view as a priority.

Finally, contrary to Senator Kerry’s hopes, China’s willingness to sit at a non-binding negotiating table will not ease the pain a national energy rationing cap-and-trade tax will cause for American families and is certainly not a sufficient gesture to justify its passage.

Ultimately, Copenhagen will have no impact on the outcome of the cap-and-trade legislation moving through Congress. As we have just seen in the health care debate, Senate passage of this increasingly unpopular measure will depend on how much taxpayer money Majority Leader Reid is willing to give away to his fence-sitting colleagues to reach the 60 votes necessary to move this bill forward.

2009: Health Year in Review

2009: Health Year in Review
Innovation.org, December 16, 2009

In the midst of the high-profile health care reform debate, 2009 quietly marked another year of important advances against serious diseases and conditions.

There have been advances across diseases and life expectancy reached an all time high of 77.9 years.^[i] Findings like this demonstrate the progress we are making as a result of prevention, early detection and better treatments. Likewise, we’ve seen positive trends in many disease areas this year. Here are just a few examples:

HIV/AIDS: The Centers for Disease Control and Prevention reported this year that between 2006 and 2007 the HIV/AIDS death rate fell 10%, which was the largest single-year decline since 1998.^[ii] Antiretroviral drugs have been instrumental in bringing death rates down and the disease has become a chronic condition for many, rather than an acute fatal illness. Since the mid-1990s, when researchers developed this new wave of medicines to treat HIV/AIDS, the U.S. death rate from AIDS dropped by more than 70 percent.^[iii]

Cancer: The American Association for Cancer Research published a study in August 2009 showing that for people in their 40s, cancer mortality rates have been falling by 26% per decade.^[iv] Although most age-adjusted mortality figures show that cancer deaths were rising until the mid-1990s, this study emphasized the fact that among younger age groups death rates have been falling since perhaps the mid-1950s and continues today. The authors attribute the trend to improvements in cancer detection, treatment and prevention.

Cardiovascular disease: The number of hospitalized patients with coronary artery disease (CAD) declined by 31% in the last decade, knocking CAD from the top cause of hospitalization to third place, according to new data from the Agency for Healthcare Research and Quality. In an interview with HealthLeaders Media, AHRQ analyst Anne Elixhauser said, "A lot of people think it's because we have better control of risk factors…. We've decreased smoking, we have better control of cholesterol, and blood pressure," which she said is credited to better lifestyle awareness and the use of drugs like statins.^[v]

Other cardiovascular diseases showed great progress in the AHRQ report as well. For example, hospitalizations for stroke and heart attacks are down 14% and 15%, respectively, compared with ten years ago.

These examples demonstrate some of the improvements that are happening in the health of Americans as a result of improvements in lifestyle, prevention, detection and treatments. There are, however, many challenges on the horizon as the nation ages, obesity becomes more prevalent and chronic diseases affect more people. New treatments will be an important part of combating these worrisome trends. Today, in the US, there are over 2,900 medicines in clinical trials or awaiting FDA approval.^[vi] Researchers are using new strategies to attack disease. They are working on dozens of different approaches to treating Alzheimer’s disease, they are searching for an HIV vaccine, they are studying promising drugs to treat Lou Gehrig’s disease and lupus, and they are using genetics to better target treatments for many diseases. Although the challenges are many, progress promises to continue in the coming years.

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^[i] HHS, Center for Disease Control and Prevention, National Center for Health Statistics, National Vital Statistics System, J. Xu, et al. “Deaths: Preliminary Data for 2007,” National Vital Statistics Reports, 58, no. 1, p. 1, (19 August 2009) http://www.cdc.gov/nchs/data/nvsr/nvsr58/nvsr58_01.pdf (Accessed 4 December 2009).

^[ii] HHS, Center for Disease Control and Prevention, National Center for Health Statistics, National Vital Statistics System, J. Xu, et al. “Deaths: Preliminary Data for 2007,” National Vital Statistics Reports, 58, no. 1, p. 5, (19 August 2009) http://www.cdc.gov/nchs/data/nvsr/nvsr58/nvsr58_01.pdf (Accessed 4 December 2009).

^[iii] Centers for Disease Control and Prevention, National Center for Health Statistics, Health United States, 2008, (Hyattsville, MD: HHS, 2008).

^[iv] Kort et al, “The Decline in U.S. Cancer Mortality in People Born after 1925,” Cancer Research, 69: 16 (2009): 6500-6505.

^[v] C. Clark, “Heart Disease is No Longer Leading Reason for Patient Admission,” HealthLeaders Media, 24 September 2009, http://www.healthleadersmedia.com/content/239484/topic/WS_HLM2_QUA/Heart-Disease-is-no-Longer-Leading-Reason-for-Patient-Admission.html (Accessed 4 December 2009).

^[vi] Adis R&D Insight Database, 4 December 2009.

America's Natural Gas Revolution - A 'shale gale' of unconventional and abundant U.S. gas is transforming the energy market

America's Natural Gas Revolution. By DANIEL YERGIN AND ROBERT INESON
A 'shale gale' of unconventional and abundant U.S. gas is transforming the energy market.

The biggest energy innovation of the decade is natural gas—more specifically what is called "unconventional" natural gas. Some call it a revolution.

Yet the natural gas revolution has unfolded with no great fanfare, no grand opening ceremony, no ribbon cutting. It just crept up. In 1990, unconventional gas—from shales, coal-bed methane and so-called "tight" formations—was about 10% of total U.S. production. Today it is around 40%, and growing fast, with shale gas by far the biggest part.

The potential of this "shale gale" only really became clear around 2007. In Washington, D.C., the discovery has come later—only in the last few months. Yet it is already changing the national energy dialogue and overall energy outlook in the U.S.—and could change the global natural gas balance.

From the time of the California energy crisis at the beginning of this decade, it appeared that the U.S. was headed for an extended period of tight supplies, even shortages, of natural gas.

While gas has many favorable attributes—as a clean, relatively low-carbon fuel—abundance did not appear to be one of them. Prices had gone up, but increased drilling failed to bring forth additional supplies. The U.S., it seemed, was destined to become much more integrated into the global gas market, with increasing imports of liquefied natural gas (LNG).

But a few companies were trying to solve a perennial problem: how to liberate shale gas—the plentiful natural gas supplies locked away in the impermeable shale. The experimental lab was a sprawling area called the Barnett Shale in the environs of Fort Worth, Texas.

The companies were experimenting with two technologies. One was horizontal drilling. Instead of merely drilling straight down into the resource, horizontal wells go sideways after a certain depth, opening up a much larger area of the resource-bearing formation.

The other technology is known as hydraulic fracturing, or "fraccing." Here, the producer injects a mixture of water and sand at high pressure to create multiple fractures throughout the rock, liberating the trapped gas to flow into the well.

The critical but little-recognized breakthrough was early in this decade—finding a way to meld together these two increasingly complex technologies to finally crack the shale rock, and thus crack the code for a major new resource. It was not a single eureka moment, but rather the result of incremental experimentation and technical skill. The success freed the gas to flow in greater volumes and at a much lower unit cost than previously thought possible.

In the last few years, the revolution has spread into other shale plays, from Louisiana and Arkansas to Pennsylvania and New York State, and British Columbia as well.

The supply impact has been dramatic. In the lower 48, states thought to be in decline as a natural gas source, production surged an astonishing 15% from the beginning of 2007 to mid-2008. This increase is more than most other countries produce in total.

Equally dramatic is the effect on U.S. reserves. Proven reserves have risen to 245 trillion cubic feet (Tcf) in 2008 from 177 Tcf in 2000, despite having produced nearly 165 Tcf during those years. The recent increase in estimated U.S. gas reserves by the Potential Gas Committee, representing both academic and industry experts, is in itself equivalent to more than half of the total proved reserves of Qatar, the new LNG powerhouse. With more drilling experience, U.S. estimates are likely to rise dramatically in the next few years. At current levels of demand, the U.S. has about 90 years of proven and potential supply—a number that is bound to go up as more and more shale gas is found.

To have the resource base suddenly expand by this much is a game changer. But what is getting changed?

It transforms the debate over generating electricity. The U.S. electric power industry faces very big questions about fuel choice and what kind of new generating capacity to build. In the face of new climate regulations, the increased availability of gas will likely lead to more natural gas consumption in electric power because of gas's relatively lower CO2 emissions. Natural gas power plants can also be built more quickly than coal-fired plants.

Some areas like Pennsylvania and New York, traditionally importers of the bulk of their energy from elsewhere, will instead become energy producers. It could also mean that more buses and truck fleets will be converted to natural gas. Energy-intensive manufacturing companies, which have been moving overseas in search of cheaper energy in order to remain globally competitive, may now stay home.

But these industrial users and the utilities with their long investment horizons—both of which have been whipsawed by recurrent cycles of shortage and surplus in natural gas over several decades—are inherently skeptical and will require further confirmation of a sustained shale gale before committing.

More abundant gas will have another, not so well recognized effect—facilitating renewable development. Sources like wind and solar are "intermittent." When the wind doesn't blow and the sun doesn't shine, something has to pick up the slack, and that something is likely to be natural-gas fired electric generation. This need will become more acute as the mandates for renewable electric power grow.

So far only one serious obstacle to development of shale resources across the U.S. has appeared—water. The most visible concern is the fear in some quarters that hydrocarbons or chemicals used in fraccing might flow into aquifers that supply drinking water. However, in most instances, the gas-bearing and water-bearing layers are widely separated by thousands of vertical feet, as well as by rock, with the gas being much deeper.

Therefore, the hydraulic fracturing of gas shales is unlikely to contaminate drinking water. The risks of contamination from surface handling of wastes, common to all industrial processes, requires continued care. While fraccing uses a good deal of water, it is actually less water-intensive than many other types of energy production.

Unconventional natural gas has already had a global impact. With the U.S. market now oversupplied, and storage filled to the brim, there's been much less room for LNG. As a result more LNG is going into Europe, leading to lower spot prices and talk of modifying long-term contracts.

But is unconventional natural gas going to go global? Preliminary estimates suggest that shale gas resources around the world could be equivalent to or even greater than current proven natural gas reserves. Perhaps much greater. But here in the U.S., our independent oil and gas sector, open markets and private ownership of mineral rights facilitated development. Elsewhere development will require negotiations with governments, and potentially complex regulatory processes. Existing long-term contracts, common in much of the natural gas industry outside the U.S., could be another obstacle. Extensive new networks of pipelines and infrastructure will have to be built. And many parts of the world still have ample conventional gas to develop first.

Yet interest and activity are picking up smartly outside North America. A shale gas revolution in Europe and Asia would change the competitive dynamics of the globalized gas market, altering economic calculations and international politics.

This new innovation will take time to establish its global credentials. The U.S. is really only beginning to grapple with the significance. It may be half a decade before the strength of the unconventional gas revolution outside North America can be properly assessed. But what has begun as the shale gale in the U.S. could end up being an increasingly powerful wind that blows through the world economy.

Mr. Yergin, author of the Pulitzer Prize-winning "The Prize: The Epic Quest for Oil, Money, & Power" (Free Press, new edition, 2009) is chairman of IHS CERA. Mr. Ineson is senior director of global gas for IHS CERA.

Cato: The Government Robbed Chrysler Creditors

The Government Robbed Chrysler Creditors. By Ilya Shapirohttp://www.cato-at-liberty.org/2009/10/

In January 2009, Chrysler stood on the brink of insolvency. Purporting to act under the Emergency Economic Stabilization Act, the Treasury extended Chrysler a $4 billion loan using funds from the Troubled Asset Relief Program (TARP). Still in a bad financial situation, Chrysler initially proposed an out-of-court reorganization plan that would fully repay all of Chrysler’s secured debt. The Treasury rejected this proposal and instead insisted on a plan that would completely eradicate Chrysler’s secured debt, hinging billions of dollars in additional TARP funding on Chrysler’s acquiescence.

When Chrysler’s first lien lenders refused to waive their secured rights without full payment, the Treasury devised a scheme by which Chrysler, instead of reorganizing under a chapter 11 plan, would sell its assets free of all secured interests to a shell company, the New Chrysler. Chrysler was thus able to avoid the “absolute priority rule,” which provides that a court should not approve a bankruptcy plan unless it is “fair and equitable” to all classes of creditors.

Cato joined the Washington Legal Foundation, Allied Educational Foundation, and George Mason law professor Todd Zywicki on a brief supporting the creditors’ petition asking the Supreme Court to review the transaction’s validity. We argue that the forced reorganization amounted to the Treasury redistributing value from senior, secured creditors to debtors and junior, unsecured creditors.

The government should not be allowed, through its own self-dealing, to hand-pick certain creditors for favorable treatment at the expense of others who would otherwise enjoy first lien priority. Further, a lack of predictability and consistency with regard to creditors’ expectations in bankruptcy will result in a destabilization of existing and future credit markets.

The Court will be deciding whether to hear the case later this fall. Thanks very much to Cato legal associate Travis Cushman for his help with the brief.

How the U.S. Government Rations Health Care

How the U.S. Government Rations Health Care. By SCOTT GOTTLIEB
The agency that would likely run the 'public option' was slow to pay for implantable cardiac defibrillators.
WSJ, Oct 01, 2009

President Barack Obama deflects criticism that his health-care plan will bring on government rationing of medical care by arguing that insurance companies ration care. Everyone knows private payers limit access to some health care. But government does it in far more byzantine and arbitrary ways.

Consider the $450 billion Medicare program. It provides a model for—indeed its bureaucracy could well end up running—the "public option" health plan that Mr. Obama wants to offer all Americans under the age of 65. In recent years, Medicare's staff has been aggressively restricting coverage for costly treatments. Looking for ways to control spending on medical products—and preserve the illusory "trust fund" that pays Medicare claims—is what shapes the culture of the organization and motivates the agency's staff.

This often means limiting access to the costliest technologies. To do this Medicare relies on its rationing and pricing systems. National coverage decisions (NCDs) are assessments issued by Medicare's medical staff that define who is eligible for new but often expensive treatments. Medicare then assigns medical products and procedures with "codes" that determine which regulated category they fall into. Finally, price "schedules" are developed by Medicare's staff each year to assign each unique code with its own updated payment rate. The process for getting a favorable code on a new product is a source of intense lobbying. It can make or break a technology.

For a remote agency like Medicare, far removed from clinical practice, it's easier to try and manage the use of a high-cost but specialty treatment than a much lower-cost but very widely used product. Yet cheaper, more commonly used products can still be mispriced and account for more total cost to the agency. For example, low-tech orthotic devices and other "durable medical equipment" are a known source of wasteful spending. These medical products often evade Medicare's attention in favor of less used but more expensive items such as a biological cancer drug.

Take the agency's tortured decisions concerning the use of implantable defibrillators that jump-start stopped hearts during cardiac arrest. Medicare sharply restricted their use in the 1990s. Mounting research proved that the $30,000 devices could be saving many more lives. So in 2003 Medicare adopted a novel theory to expand coverage to some, but not everyone, who needed one. The agency said only patients with certain measures on their electrocardiograms (called "wide QRS") seemed to benefit.

It was an easily measurable but ultimately imprecise way to allocate the devices. After another major study firmly refuted the QRS theory, Medicare expanded coverage again in 2005, potentially saving 2,500 additional lives according to a press release issued with that decision.
That experience wasn't unique. From 1999 to 2007, Medicare denied access in a third of the treatments it evaluated through its coverage process, taking an average of eight months to complete its reviews. When coverage was granted, in 85% of cases the treatments were restricted, usually to patients with more advanced illnesses.

Medicare is lately increasing its use of the national coverage process and is becoming more tightfisted. Since 2008, according to my review of Medicare data, it conditioned access in 29% of its reviews and denied new or expanded coverage in fully 53% of cases.

Medicare's methods can also be arbitrary. Take the travails of the pharmaceutical company Sepracor and its drug Xopenex, an innovative respiratory medicine that competes with the chemically distinct and much cheaper generic albuterol. Both are inhaled aerosols used to treat asthma and chronic obstructive pulmonary disease. Xopenex has the same benefits as albuterol, but some believe fewer of its cardiac side effects. Medicare didn't agree.

The agency tried to make a "national coverage decision" on Xopenex but couldn't come up with a clinical justification to limit the drug's usage. So Medicare manipulated its payment process, saying it would pay Xopenex a price equivalent to the "least costly alternative" form of generic albuterol, 10 cents a treatment compared to about $2.50 for Xopenex. Then Medicare was sued by a patient, and a Federal court recently ruled the agency exceeded its authority.

Medicare finally succeeded in reigning in the use of Xopenex with its coding system. By issuing Xopenex the same classification as generic albuterol, it was able to pay both products the same "blended" price—an average of the cost of each individual drug. That lowered the price on Xopenex, but ironically increased what Medicare paid for the generics.

It's not a stretch to say that Medicare spent hundreds of cumulative man-hours focusing on Xopenex while other priorities languished. The question is why? There weren't safety concerns. Xopenex may have been used in lieu of a cheaper alternative, but at peak Medicare sales of about $300 million it represented far less than one one-thousandth of the agency's budget. Simply put, a few staffers inside Medicare were consumed with the drug and its higher price—revealing a process that is capricious and often disconnected from science.

Worse still is how impenetrable these programs have become. Drug and device companies spend millions of dollars trying to influence Medicare decisions. The hundreds of consultants they hire to advise them typically command $20,000-a-month retainers.

Formal patient and provider appeals to Medicare took an average of 21 months, according to a report issued in 2003 by the Government Accountability Office (using 2001 data), with delays in "administrative processing" due to "inefficiencies and incompatibility" of data systems eating up 70% of the time spent processing appeals.

There's nothing inherently wrong with a program like Medicare seeking value for taxpayers. But it shouldn't make up the rules as it goes. When private plans ration care, patients can appeal directly to an insurer's medical staff. Only a small fraction of Medicare's denied claims—about 5%—are ever formally appealed because its process is so impenetrable. People can also switch insurers, and in many cases patients chose a policy because it matched their preferences in the first place. These options don't exist in a government health program.

Dr. Gottlieb is a resident fellow at the American Enterprise Institute and a former senior official at the Centers for Medicare and Medicaid Services. He is partner to a firm that invests in health-care companies, and he advises health plans.

Biologics: Diverse and Dramatic Advances

Biologics: Diverse and Dramatic Advances
Innovation.org, September 3, 2009

Research in biologics offers huge promise to patients. As scientists learn more of the molecular underpinnings of disease, our ability to treat diseases with biologics in new and innovative ways rapidly grows. A recent article in the Journal of the American Medical Association stated that biologics “represent an important and growing part of the therapeutic arsenal.”[i]

Biologics are medicines made from living material (plant, animal or microorganism) and may be derived from natural sources or engineered in a laboratory. Because they are structurally so different from most existing treatments and allow for very precise targeting, they have revolutionized treatment for many diseases. In many cases biologics are the first treatment available for a disease or they offer a significantly better way to treat a given disease. And many believe that, with more research, the near future holds many more breakthrough biologics.

Here are just a few examples of biologics that are making an enormous difference for patients:

Bevacizumab (Avastin) represents a completely new approach to attacking cancer tumors by cutting off the blood supply that feeds them. Following three decades of research in this promising area, bevacizumab was approved in 2004 to treat metastatic colorectal cancer. Since then bevacizumab has proved effective against several other forms of cancer.

Approved in 2008 to treat metastatic breast cancer, bevacizumab, in combination with paclitaxel, was shown to double progression-free survival time for women with metastatic breast cancer. The American Society for Clinical Oncology (ASCO) highlighted this a major advance of 2008.[ii]

Another recent study presented at the 2009 American Society for Clinical Oncology annual meeting found that for non-small cell lung cancer patients, bevacizumab combined with chemotherapies can slow cancer growth by up to 25%. According to the study author, "This cancer is very hard to treat. There have been some advances, but we have reached a treatment plateau and we need more agents which may help us to offer better treatment to patients…We were able to confirm that bevacizumab adds efficacy to standard chemotherapy and provides hope for patients suffering from a deadly disease."[iii]

Etanercept (Enbrel), originally approved for treatment of moderate to severe rheumatoid arthritis in 1998,[iv] has since been approved for several other autoimmune diseases, including: plaque psoriasis, psoriatic arthritis, ankylosing spondylitis, and juvenile idiopathic arthritis.[v]

Etanercept has contributed to great strides in treating rheumatoid arthritis. A recent study found that patients treated with combination therapy including etanercept had a 50% chance of complete clinical remission after 52 weeks of treatment, compared with 28% taking an older medicine.[vi] According to an editorial in The Lancet, these results would have been “unthinkable in the 20th century” prior to new disease-modifying biological medicines.[vii]

Trastuzumab (Herceptin) is one of the earliest and most common examples of personalized medicine. About 30% of women have a form of breast cancer that over-expresses a protein called HER2, which is not responsive to standard therapy. Trastuzumab was approved for patients with HER2 positive tumors in 1998 and further research showed in 2005, that it reduced recurrence by 52% in combination with chemotherapy.[viii] A commentary in the New England Journal of Medicine concluded that findings suggested “a dramatic and perhaps permanent perturbation of the natural history of the disease, maybe even a cure.”[ix]

These are just three examples of advances that are already benefiting patients. Based on progress like this, many experts believe that biologics are a key source for potential future advances. According to the Association of American Universities, “Biologics have enormous potential to provide breakthrough medical treatments.”[x] Researchers continue to explore the possibilities of new biologics and the promise for patients is enormous. By fostering such research we can deliver on the potential of biologics for more patients in the coming years.


References

[i]T.J. Giezen, “Safety-Related Regulatory Actions for Biologicals Approved in the United States and the European Union,” Journal of the American Medical Association, 300 (October 2008): 16, 1887-1896.
[ii]American Society of Clinical Oncology, “Clinical Cancer Advances 2008: Major Research Advances in Cancer Treatment, Prevention and Screening,” Journal of Clinical Oncology, 22 December 2008.
[iii]A. Gardner, “New Treatments for Tough Cancers Show Promise,” 23 March 2007, HealthDay, http://abcnews.go.com/Health/Healthday/story?id=4507406&page=1 (Accessed 21 July 2009).
[iv]Food and Drug Administration, Approval Letter, 2 November 1998, http://www.accessdata.fda.gov/drugsatfda_docs/appletter/1998/etanimm110298L.htm, (Accessed 21 July 2009).
[v]Food and Drug Administration, Drugs @ FDA, (Accessed 21 July 2009).
[vi]P. Emery, et. al., “Comparison of Methotrexate Monotherapy with a Combination of Methotrexate and Etanercept in Active, Early, Moderate to Severe Rheumatoid Arthritis (COMET): A Randomized, Double-Blind, Parallel Treatment Trial,” The Lancet, 372 (August 2008): 9636, 375-382.
[vii]J.M. Kremer, “COMET’s Path, and the New Biologicals in Rheumatoid Arthritis,” The Lancet, 372 (August 2008): 9636, 347-348.
[viii]Personalized Medicine Coalition, “The Case for Personalized Medicine,” May 2009, http://www.personalizedmedicinecoalition.org/communications/TheCaseforPersonalizedMedicine_5_5_09.pdf (Accessed 21 July 2009); Piccart-Gebhart MJ, Procter M, Leyland-Jones B, et al. Trastuzumab after Adjuvant Chemotherapy in HER2-positive Breast Cancer. New England Journal of Medicine, 353 (20 October 2005):1659-72; Romond EH, Perez EA, Bryant J, et al. Trastuzumab plus Adjuvant Chemotherapy for Operable HER2-positive Breast Cancer. New England Journal of Medicine 2005; 353 (20 October 2005):1673-84.
[ix]G. Hortobagyi, “Trastuzumab in the Treatment of Breast Cancer,” New England Journal of Medicine, 353 (20 October 2005): 16, 1734-1736.
[x]R. M. Berdahl, Association of American Universities, Letter to Representative Anna Eshoo, 20 July 2009.

Industry views: The NREL’s Flawed White Paper on the Spanish Green Jobs Study

The NREL’s Flawed White Paper on the Spanish Green Jobs Study
Institute for Energy Research, Sep 03, 2009

Vegetables don’t want to be eaten and other lessons from Britain's organic food war

Vegetables don’t want to be eaten and other lessons from Britain's organic food war. By Trevor Butterworth
STATS.org, August 4, 2009

A major British study recently turned conventional wisdom on organic food on its head, triggering a war between science writers, reporters, activists and chefs. Was it a “myth” that organic produce was nutritionally superior to conventional food – or did an agency with an agenda cook up some flawed science to appease big agribusiness?

Bad Science, a book by Ben Goldacre, has become an unusual bestseller in the British Isles, powering its way into the higher reaches of nationally and locally compiled bestseller lists since its publication in the Fall of 2008. Goldacre is a doctor for Britain’s National Health Service (though he plays this down on the grounds that arguments from positions of expertise are often self-defeating with the public), and the book is a continuum of a column by the same name he writes for the left-leaning Guardian newspaper. The Royal Statistical Society awarded him first prize in their inaugural 2007 award for statistical excellence in journalism, and the British Medical Journal, in reviewing “Bad Science,” declared that Goldacre “is fighting what sometimes seems like a one man battle against a tide of pseudoscience and an army of quacks,” and that the country was lucky to have him.

The book’s popularity seems to speak to increasing consumer frustration with information promoted as “scientific,” whether in news stories, government pronouncements, or advertisements for pills and panaceas, and to the hopeful sign that people want to know – or want someone to examine on their behalf – the underlying principles that determine whether such research claims can be considered reliable or unreliable.

These principles came to the forefront in Britain last week – and the rest of the world – with the publication of a new study claiming that there was no reliable evidence that organically-produced food was better, nutritionally, than conventionally-produced food.
The study, “Nutritional quality of organic foods: a systematic review,” was funded by Britain’s Food Standards Agency (FSA), and conducted by researchers from the Nutrition and Public Health Intervention Research Unit at the Department of Epidemiology and Population Health, London School of Hygiene & Tropical Medicine; it was published in the peer-reviewed American Journal of Clinical Nutrition.

Senior reporter Karen McVeigh told readers of the Guardian in the opening paragraph of its news report on June 30 that the review’s “conclusions have been called into question by experts and organic food campaigners,” and more than half of the article focused on criticisms of the study, namely that the researchers had been “selective in the extreme,” used “questionable methodology, were contradicted by numerous other studies, and neglected to mention the risks of pesticides and fertilizers in conventional farming. As Peter Melchett, policy director at the Soil Association, the non-profit that advocates for and certifies organic farming in Britain, told the paper, “The review rejected almost all of the existing studies of comparisons between organic and non-organic nutritional differences.”

Given the way the story was reported, with the validity of the study immediately questioned in the opening paragraph (and with the paper being home to Goldacre’s column), readers could have been forgiven for concluding that the FSA had indeed funded some dodgy research, peer-review notwithstanding.

But at the Guardian’s sister, Sunday paper, The Observer, science editor, Robin McKie, defended the study. “[I]t is certainly not the work of dogmatic and intractably hostile opponents of the cause,” he wrote before weighing in on one of the key criticisms of the study, namely, that it did not take pesticide and fertilizer residues on conventional food into consideration.

“For a start, the idea that organic fruit and veg contain no harmful chemicals compared with non-organic produce is simply wrong, scientists argue. Certainly, there are pesticide residues in the latter but there is no evidence these are cumulatively harmful.

More to the point, organic crops - because they are untreated with chemicals - have correspondingly high levels of natural fungal toxins. Thus they balance out: artificial pesticide residues in non-organic crops, natural fungal toxins in organic.”

As Professor Ottoline Leyser, a molecular biologist at York University told McKie:

“People think that the more natural something is, the better it is for them. That is simply not the case. In fact, it is the opposite that is the true: the closer a plant is to its natural state, the more likely it is that it will poison you. Naturally, plants do not want to be eaten, so we have spent 10,000 years developing agriculture and breeding out harmful traits from crops. ‘Natural agriculture’ is a contradiction in terms.”

Over at the Times of London, science editor Mark Henderson took a similar position, as well as noting that

“Research that appears to support health claims for organic food also suffers from a quality problem. Many studies lack proper controls or fail to detail the organic regime and crop variety being evaluated or the analytical techniques used for assessment.

Studies that fail to meet these standards cannot provide useful evidence and are rightfully excluded from systematic reviews. It is no coincidence that the school had to throw out about two thirds of the available literature.”

The Times also noted that previous reviews by the French and Swedish food standards agencies had come to the same conclusion as this new study.

But as the Observer called into question the thrust of the Guardian’s initial news report, so the Times sister paper, The Sunday Times seemed to question the daily paper’s characterization of the study.

“We dig out the facts from the manure,” said the article’s sub head, but as reporter Chris Gourlay dug away, he seemed less convinced by the FSA’s evidence: The new study’s findings were “controversial” and the Food Standards Agency “claimed a comprehensive review,” but as Carlo Leifert, Professor of Ecological Agriculture at Newcastle University told Gourlay, the researchers “have ignored all the recent literature as well as new primary research which show the health advantages of organic.” He added that he intended “to rip their study apart in scientific journals.”

Other newspapers, such as the Daily Mail, warned that “studies have found” that children born to farmers in summer, when pesticide use was highest, were “less intelligent.” One columnist rued the focus on nutrition in the Daily Telegraph noting that “All food is nutritious; having no food is what kills. The wider benefits of organic foods are still worth pursuing. It is what food does not contain and the effects that it does not have that really matter.” The Telegraph’s gossip columnist warned that the pro-organic produce Prince Charles had reportedly taken a dim view of the FSA study and was girding for battle.

One notable pattern emerged in the coverage: If the reporter specialized in science, they thought the study well done and conclusive; if the reporter was a generalist, the study was flawed and controversial. So what did the scourge of bad science make of the review and the media coverage?

Goldacre began his column by noting that news coverage had given organic advocates a blanket right of reply to the study. This, he said, was “testament to the lobbying power of this £2bn [$3.38 billion dollars] industry, and the cultural values of people who work in the media.”

He pointed out one of the salient aspects of the study, namely, that it was only about the nutritional content of organic and conventional food, and not about any other kind of benefit. Critics of the study, however, only wanted to talk about other kinds of benefits to prove that the study was flawed; this was, he said, “gamesmanship.” And it was gamesmanship that worked to undermine the public’s understanding and ability to engage in a debate on the evidence by claiming that key evidence was ignored by the FSA.

“The accusation is one of ‘cherry-picking’, and it is hard to see how it can be valid in the kind of study conducted by the FSA, because in a ‘systematic review’, before you begin collecting papers, you specify how you will search for evidence, what databases you will use, what types of studies you will use, how you will grade the quality of the evidence (to see if it was a ‘fair test’), and so on.

What is it that the FSA ignored which so angered the Soil Association? As an example, from their press release, they are ‘disappointed that the FSA failed to include the results of a major European Union-funded study involving 31 research and university institutes and the publication, so far, of more than 100 scientific papers, at a cost of €18m [$25.9 million dollars], which ended in April this year’. They gave the link to qlif.org.

I followed this link and found the list of 120 papers. Almost all are irrelevant. The first 14 are on ‘consumer expectations and attitudes’, which are correctly not included in a systematic review of the evidence on food composition. Then there are 22 on ‘effects of production methods’: here you might expect to find more relevant research, but no.

The first paper (‘The effect of medium term feeding with organic, low input and conventional diet on selected immune parameters in rat’), while interesting, will plainly not be relevant to a systematic review on nutrient content. The same is true of the next paper, ‘Salmonella infection level in Danish indoor and outdoor pig production systems measured by antibodies in meat juice and fecal shedding on-farm and at slaughter’: it is not relevant.

Furthermore, the overwhelming majority of these are unpublished conference papers, and some of them are just a description of the fact that somebody made an oral presentation at a meeting. The systematic review correctly looked only at good-quality data published in peer-reviewed academic journals.”

This is a devastating indictment, not just of the Soil Association’s position, but the degree to which reporters did little more than act as stenographers to its criticisms of the FSA study. [Yes, we too followed the link to http://www.qlif.org/ and found that Goldacre was correct in his categorization of the research]. Readers of the Guardian may have been forgiven for wondering why they bothered to read the initial news story, given that the reporter’s focus on what was wrong with the study turned out to be more spin than science.

The uncomfortable question for the media – and the Guardian in particular – is to what degree would Goldacre’s rearguard defense of science be needed if the journalists who reported on the latest data did a better job of analysis before presenting it to the public?

Some pre-emptive scapegoating over rising oil prices

The Politics of ‘Speculation’. WSJ Editorial
Some pre-emptive scapegoating over rising oil prices.
WSJ, Jul 29, 2009

The oil speculators are back—that is, back in the cross-hairs of the political class. On Tuesday, Commodity Futures Trading Commission Chairman Gary Gensler uttered the Pentagon-like phrase that “every option must be on the table” to curb “excessive speculation.” If you’re wondering what makes speculation “excessive,” in Washington the answer is this: Speculation becomes excessive when prices move in a politically inconvenient direction. Which brings us to the real meaning of the three days of theater, er, hearings that Mr. Gensler is conducting this week.

Last summer, as oil prices were peaking, the CFTC launched an investigation into whether $100-plus oil was the result of market manipulation by those “speculators.” That interim report, issued in July 2008, concluded that price movements were largely driven by—wait for it— supply and demand.

The report noted, among other findings, that so-called speculators were net short during some of the biggest run-ups in oil prices over the past several years. In other words, they were, if anything, putting downward pressure on prices during some big spikes. The CFTC also found that markets in which futures trading is outlawed altogether—such as onions (yes, onions)—price volatility tended to be even greater than in commodities like oil with deep and efficient futures markets.

Oil prices began their six-month, 80% slide about the time that report was issued. But since last December oil prices have climbed back up again, and consumer gasoline prices have climbed along with them. This is not popular with voters. Three weeks ago, British Prime Minister Gordon Brown and French President Nicolas Sarkozy warned on these pages about the dangers of “damaging speculation.” Now the U.S. is getting into the act in the form of Obama appointee Mr. Gensler—and Congress can’t be far behind.

So the Gensler CFTC is now poised to issue a follow-up repudiating the commission’s earlier findings. This week’s hearings are being held without the benefit of the CFTC’s actual findings, which are due out in August—but no matter. The CFTC’s about-face is all about the politics, not the economics, of price discovery. And the real goal is not to blame the evil speculators for last year’s price spike or this year’s oil rally, but to lay the groundwork for explaining away the commodity-price bull run that we’re likely to see as a result of the Federal Reserve’s easy money and the Obama Administration’s spending and debt party.

As the CFTC’s 2008 report noted, price signals drive discovery and exploration, albeit with a lag. Low prices today beget shortages tomorrow, while high prices today encourage the discovery and development of future supply. Those prices, in turn, are not the product of any economic model or forecast, but are the sum total of the bids and offers available on the spot and futures markets.

In all of this, what nobody has managed to explain is what, exactly, happened to the omnipotent speculators between July and December 2008. Did they all go on vacation? Perhaps they paused for a six-month drinking binge with their winnings before returning to manipulate us anew in 2009.

No, what we really have here is the age-old scapegoating that our superstitious ancestors would have recognized. The only twist in Mr. Gensler’s case is that he’s trying to scape the goats pre-emptively. On our current fiscal and monetary policy course, the dollar is not done falling and interest rates have barely begun to rise. Both of these market moves will be felt in the commodities markets, as they were after Alan Greenspan cut short-term rates to 1% in 2003-2004. So better to send the posse after the speculators now than to confront the consequences of Washington’s policy errors.

There is an alternative to the market price—it’s called price controls. And the danger is that this is where we’re headed politically. If curbing speculation by limiting trader positions or restricting the ability of “non-commercial” buyers to trade is a politically acceptable way to dampen volatility (remember the onions), the logical next step is a political diktat that oil will not be bought or sold above a certain price.

Truth is, we need more speculators, not less. They’re the people who can help prices find the right level, because there is no “right” level other than the one the market gives us. And that’s why, in turn, excessive speculation is nothing more—or less—than a convenient fiction for when prices don’t move the way politicians would like.

The CFTC’s Flip Flop on Oil Speculation

The CFTC’s Flip Flop on Oil Speculation
IER, July 28, 2009

People, personalities, policies, drapes – just a few of the things the American people have come to expect will change from year to year, and from administration to administration, depending on the philosophy, interest and artistic sensibility of the chief executive.

Here’s what’s not suppose to change: the facts of existence, and the substance of the truth. Unfortunately, in the case of President Obama’s Commodity Futures Trading Commission (CFTC), every bit of analysis the agency did previous to the current regime can be tossed out the window – not because it was wrong then, but because it’s politically inconvenient now.

Observe the latest news from the CFTC this week. On Tuesday, the Commission announced that it will release a report in mid-August blaming the 2008 swings in oil prices on speculators (spoiler alert!) The announcement raises eyebrows because in 2008, the CFTC itself decisively concluded that fundamental supply and demand, not speculation, drove oil up to record highs in the summer of 2008. Bummer if you happen to make a political living off of scaring your constituents with shadows and straw men.

Could it be that the CFTC’s flip flop has something to do with the Obama Administration’s desire to further regulate the financial markets? By placing arbitrary limits on which institutions are allowed to spend their money on certain financial products, the government will make oil prices more volatile, and it will steer even more profits into the huge, politically connected firms on Wall Street. Meanwhile, the American people are still waiting for the government to remove the roadblocks to the offshore energy they were promised last year when two separate bans were finally and formally put out to pasture.

The Social Function of Oil Speculation

The essential insight of Adam Smith was that a market economy harnesses the self-indulgence of individuals and motivates them to serve the common welfare. In a free market, one becomes affluent by creating better and cheaper products or services that consumers are willing to buy.

In the case of speculation, this process actually reduces the volatility of price swings. We have all heard the successful speculator’s motto of “buy low, sell high.” To be more specific, the phrase should really be “short-sell high, cover low.” What this means it that if some investors believe that oil prices will rise sharply in a month, they can profit from this hunch by buying oil futures contracts. If and when the price of oil does rise as they had anticipated, their futures contracts will be adjusted, booking a profit to their trading accounts. (On the flip side, if some investors think oil prices will fall, they can sell—“go short”—oil futures contracts.)

It’s true, as the critics point out, that an investor who purchases oil futures contracts will indirectly pull up the current price of oil. This happens because producers have an incentive to reduce current sales when the futures price gets pushed up. They are effectively diverting some of their scarce supplies of oil to the future, rather than selling it all in the present.

But even if futures purchases push up current oil prices, the speculators perform a service to everybody else so long as they correctly anticipated a price spike. If oil is currently selling at $50, and an investor believes it will jump up to $70 in one month, then the investor will buy futures contracts until the “futures price” gets pushed up to reflect his forecast. In the process, his actions may have pushed the current, spot price up to $55. But that’s a good thing, because now the price will approach $70 more gradually; it won’t shock the market as much when oil hits $70.

Of course, if speculators are wrong, then they do make market prices more volatile. If a price is actually going to fall in the future, and speculators foolishly buy futures contracts because they mistakenly expect a price hike, then yes that does distort markets. But the government doesn’t need to crack down on this antisocial behavior, because the market has a built-in penalty: speculators who guess wrong lose money. And in fact, many investors lost a bundle of money when oil prices collapsed in the fall of 2008. And you didn’t hear the politicians praising speculators for the run down in the price of oil either.

The other thing producers do, and perhaps the most important thing for consumers, is that they are encouraged by the higher price to invest in finding more oil, because they will get a higher price for the oil. They buy equipment, hire people and buy services. They explore for new supplies and add new capacity. By combining their risked capital, additional human resources and intelligence, they bring new oil to the markets. New oil supplies help producers meet the increased demand and prices fall. This is supply and demand working to meet the wants and needs of consumers and there is nothing sinister about it.

Even Paul Krugman Agreed that Speculators Didn’t Cause the 2008 Spike

So we see that even when speculators move prices, so long as their forecasts are correct, they are actually helping to stabilize prices. Ironically, the point is moot regarding the 2008 price swings, because many analysts from across the political spectrum did not believe that speculation drove those movements. Instead, the underlying supply and demand conditions were the best explanation for why oil rose so high by the summer of 2008, and then collapsed in the fall.

The “smoking gun” in this conclusion was the fact that oil inventories were not rising during oil’s large ascent. Independent analyses by IER and the CFTC pointed to this fact, and Paul Krugman has recently reminded his readers that he too does not believe oil speculators were responsible for the 2008 movements.

All three analyses noted that the only way for speculators to drive up prices, is by giving an incentive for people to take oil off the current market and stockpile it for future sale. Since there was no obvious accumulation of oil inventories during the first half of 2008, oil speculation couldn’t have been the driving force. The reason the spot price of oil rose so much through the summer, was that worldwide supply still lagged behind demand for much of the year.Putting

New Curbs on Financial Markets Will Hurt Consumers

Of course, the real reason behind the CFTC’s change of heart is that it needs to justify its desire to expand its regulatory purview and slap on even more regulations of the financial markets. Specifically, the CFTC wants the power to limit “speculative” purchases of oil futures and other derivatives. The idea is that “physical hedgers”—such as airlines and oil producers—can trade in futures contracts as much as they want, because in theory they are just shielding their businesses from sensitive oil price moves. In contrast, the CFTC wants to crack down on those who buy futures contracts out of purely speculative motives.

This is a false dichotomy, and certainly we can’t trust bureaucrats to know the difference in practice. Airline companies can hold an opinion on oil prices too, and “bet” accordingly—that’s why some airlines invest more heavily than others in futures contracts. So even institutions that are directly related to the oil business can dabble in speculative transactions that will affect oil prices based on their forecasts.

On the other hand, investors who are completely isolated from the oil market might buy oil futures as a “hedge.” For example, during 2008 many portfolio managers gained more and more exposure to oil, meaning they “went long” on oil futures contracts. But they weren’t doing this in order to bet on higher prices. Rather, they could see that as oil kept rising, it was hurting the share prices on many major companies. So in order to protect their clients, the portfolio managers diversified their holdings, by selling off some of their stock and bond holdings in order to buy commodity futures. New government regulations could hinder this very useful tool to shield average investors from large price swings.

Finally, we need to realize that CFTC regulations will not stop large speculators from changing the world price of oil. Politically connected investment firms will easily be able to qualify as an “approved” purchaser of oil futures. And if nothing else, rich investors who want to bet on the price of oil can always take their business to foreign exchanges. Does anybody really think George Soros won’t be able to find someone else in the whole wide world willing to take the opposite position of an oil trade he wants to make?

Of course, we will have to suspend final judgment until we see the CFTC’s new report. It’s possible that every single analyst at the CFTC missed something last year when they concluded that speculation wasn’t driving oil prices. But one can’t help but note the timing of the CFTC’s about face – just as the Obama Administration is pushing for more regulation of energy markets.

China's War for Ore - Business is being reshaped around the world

China's War for Ore. By HOLMAN W. JENKINS, JR.
Business is being reshaped around the world.
WSJ, Jul 15, 2009

China was miffed by the outcome of what we last year called the corporate "deal of the century." But shareholder interests prevailed. How often will that be said in the future?

Politics, that ugly dynamic when mixed with business, was already back in play last week as Rio Tinto, an Australian mining giant at the heart of the controversy, saw four of its Chinese executives arrested in Shanghai on spying charges.

China says the busts are not retribution for the cancelled deal between Rio and a state-owned company, which received angry press in China. Instead, the arrests supposedly arise from skullduggery by Rio officials during fraught annual ore-price negotiations with mainland steelmakers. But the distinction may be irrelevant. Ore has become a major neuralgic concern for China. It sees its dependence on imported supply as strategically risky. It fears that its massive attempts to "stimulate" domestic job growth are being drained off as fatter profits for Australian mining companies.

When the intrigue is unraveled, moreover, don't be surprised if the arrests are partly aimed at corralling the mainland's own restive steelmakers, many of whom have not cooperated in Beijing's ore strategy but have been striking their own spot market deals at higher prices.

But let's step back. Rio has been wrongfooted over and over lately amid the zigzagging of the world's monetary conditions, whose chaos is now disastrously reshaping business-government relations globally (think the Obama administration's ownership of most of the Detroit auto industry).

When China was booming, Rio played coy in the face of a merger bid from fellow miner BHP Billiton 18 months ago, acknowledging the "industrial logic" of the deal but insisting the offering price was "several ballparks" short of fair value.

Oops. With the collapse of Lehman and the global meltdown, ore prices plummeted and BHP withdrew its bid. Suddenly, Rio needed its own debt bailout and turned to a company on the cash-rich mainland, state-owned Chinalco. Beijing was doubly pleased by the $19.5 billion Chinalco deal. Not only was China getting ownership of Australian ore assets at a bargain price, but the deal also killed off any chance of a BHP merger, seen on the mainland as an Aussie plot to gouge China.

Oops. The Chinalco proposal ran into a buzzsaw of nationalist opposition in Australia. And while a government review board dragged its feet, the delay allowed Ben Bernanke to rev up the monetary engine and China to launch its own massive stimulus. Ore prices recovered. A BHP joint venture was back on the table. In a jilting worthy of a Judy Blume novel, Rio last month dumped its Chinese savior and leapt into bed with its erstwhile Australian suitor.

Now the Chinese naturally see dirty politics at work, but the deal was actually scuttled by Rio's shareholders, who rightly saw more upside in BHP's offer. Yet it's also true the Chinalco bid would likely eventually have been torpedoed by the Australian government. Polls were running strongly against selling the country's mineral patrimony to a company ultimately controlled by the Chinese Communist Party. Australia Prime Minister Kevin Rudd, who prides himself on being an old China hand, must have been overjoyed when this icky chalice was taken from his lips by Rio's shareholders

Yet the politics have only turned ickier since the Rio arrests. And Beijing has other cards up its sleeve. It can take its opposition to the BHP-Rio deal to Europe's trustbusters, who voiced qualms about their earlier proposed tie-up. China also can make use of its own new anti-monopoly law, which has already been used to punish the U.S. for blocking an oil deal. Earlier this year, Chinese regulators nixed Coca-Cola's purchase of a local juicemaker on "competition" grounds that antitrust lawyers considered ludicrous.

More disturbing, China has upped its ore purchases in recent weeks even as mainland growth seems to be slowing, suggesting an effort to lay in a stockpile for a longer showdown against Rio-BHP.

If the Rio arrests mark the beginning of a Chinese war to remake the global ore market more to China's liking, Beijing might want to think again. Its clumsy attempt to make computer makers instruments of Internet censorship was not exactly confidence-inspiring. Ensuring nobody wants to do a business deal with China for fear of being charged with a death penalty crime hardly improves the case. Then there's the epic civil disorder in Xinjiang.

The final casualty may be China's overblown reputation for macroeconomic competence, on which so many hopes for global recovery depend. There are already signs its stimulus efforts are running off the rails. The world might appreciate a signal right now that China's government actually knows what it's doing.

Don't Shoot the Speculators

Don't Shoot the Speculators. By L. GORDON CROVITZ
They predict prices, not set them.
WSJ, Jul 13, 2009

Speculators don't get much respect. Short sellers last year were blamed for their trades warning about the credit crisis, and commodities traders are now accused of causing higher oil prices. Even when traders are later proven right -- maybe especially when they're proven right -- we blame them for delivering the bad news.

Maybe it's human nature to reject Shakespeare's warning and shoot the messenger. The good news is that a recent proposal aimed at one group of speculators could prove that speculators of all kinds deserve our thanks -- or if that's too much to ask, at least to be left alone to bring valuable information to markets.

The Commodity Futures Trading Commission is considering requiring more disclosure, intended to ferret out what politicians like to call "excessive speculation." Whatever the intention, enough transparency could instead show that oil speculators are heroes, not villains.

Last week, new CFTC head Gary Gensler said the agency might set new limits on oil speculators now that oil prices have doubled this year from a low of $34 a barrel. This was surprising because just last fall, the agency issued an exhaustive study concluding that speculators were not to blame for the runup in oil prices that reached $145 last summer. It's also telling that no one accused traders of harmful speculation when oil prices tumbled from their earlier highs.

The more interesting part of the CFTC proposal is for new transparency to the positions that different kinds of traders take in futures trading. Under current rules, the CFTC sets limits on trading positions based on Commitment of Traders reports, which date back to the 1920s. These put trading in two key categories, based on the type of user, not the positions they have in various contracts. This anachronism has long led to uncertainty about why prices move, a lack of transparency that also feeds the blaming of speculators.

Business users such as airlines and oil companies are considered in the "commercial" category, with hedge funds and other financial traders in the other, more regulated "noncommercial" category. But many commercial users have active trading desks. Likewise, financial firms need to hedge against movements in commodities such as oil because they have trading contracts that leave them as exposed to price risks as the companies that actually use the physical product.

More-detailed reporting on who has which kinds of positions in oil would make the market more understandable. It would show that so-called financial speculators are trying to predict price movements, but also trying to hedge risk. Likewise, commercial traders that take delivery of oil are hedging risks, while also predicting future prices. As oil expert Daniel Yergin points out, more visibility "will give a better sense of how much is the market responding to supply and demand in physical oil and how much is it responding to the supply and demand of money on the part of investors."

It doesn't make sense to shoot either kind of messenger. Markets are collections of information, translated through trading into prices. These prices, unless there is manipulation, are the best estimate of future supply and demand. Such price discovery should not be controversial, though it too often has been.

"Oil market speculation is back in the news," Bob McTeer, a former Dallas Federal Reserve president, wrote on his blog. "I'm afraid I don't have much to contribute since Milton Friedman convinced me long ago that profitable speculation is stabilizing and destabilizing speculation is unprofitable. Speculation is profitable if the speculator buys lower than he sells; it's unprofitable if he sells lower than he buys. Even if they don't make a profit, they are trying."

Or, as the sign in the 19th century saloon put it, "Don't shoot the piano player; he's doing the best he can." Oil industry experts, whether "speculators" or not, do their best to predict price movements. Some focus on uncertainty about Iran. Others point to demand trends from China and India. There's the inherent volatility in this market due to the OPEC cartel having a firm grip on the supply spigot.

Finally, there's the growing role that commodities are again playing as a hedge against inflation and a weak dollar. Increased trading in commodities is a danger-ahead warning about U.S. fiscal and monetary policies. While Washington might like to stifle these particular messengers for the warning they're sending, the rest of us should welcome information about troubles to come.

Congress has succeeded in rattling regulators at the CFTC into doing something about speculators. They have more regulation in mind, but if the CFTC can bring more transparency to oil trading, the result will be excellent even if unintended: We can focus our attention on the real pressures on oil prices instead of wallowing in searches for scapegoats. Better disclosure can reduce the human tendency to blame traders for rising prices when the responsibility lies elsewhere.

Obama v. the Tort Lawyers - The president's Auto Task Force worked hard to shield the new GM from jackpot justice

Obama v. the Tort Lawyers. WSJ Editorial
The president's Auto Task Force worked hard to shield the new GM from jackpot justice.
WSJ, Jul 09, 2009

Ask a CEO or small business owner to list his biggest economic problems, and near the top is always the depredations of the tort bar. Would you believe Uncle Sam feels the same way when he's the owner?

Apparently so, if we can judge from the sensible behavior of the Obama Administration's Auto Task Force. General Motors could emerge from bankruptcy as soon as today, leaving the federal government with a majority stake in the car maker. And it turns out the task force worked hard to shield the new GM from jackpot justice.

In its original reorganization plan, the Administration even proposed to leave behind in the old GM all tort claims arising from cars manufactured before bankruptcy. That would have meant that all past, present and future claims related to cars GM produced before June would have had next to no chance of meaningful recovery, as they would have had to stand in line with every other unsecured creditor of the bankrupt firm.

This was the arrangement approved by the courts in Chrysler's bankruptcy, and the task force sought to repeat the feat with GM. But 11 state Attorneys General and a group of tort lawyers cried foul and filed an objection to the bankruptcy plan with the court. In the end the Administration agreed to leave liability for future claims with the new company, while leaving behind current suits.

That's at least something. And the task force's attempt to shed these lawsuit liabilities shows that the feds recognize how expensive it can be to get caught in the sights of the tort lawyers. If only the Administration could see the issue with the same clarity when the targets of its trial-bar supporters are privately owned companies.

Supply, Not Speculation, Responsible For Volatile Energy Prices

Supply, Not Speculation, Responsible For Volatile Energy Prices
Latest CFTC Action a Diversion from the Real Cause, Supply and Demand
Institute for Energy Research, Jul 08, 2009

WASHINGTON – This week, the Commodities Futures Trading Commission (CFTC) unveiled a new plan for government takeover of how energy commodities are traded, valued and sold. In response to these proposed actions, Thomas J. Pyle, president of the Institute for Energy Research (IER), issued the following statement:

“For politicians who consistently oppose responsible energy development here at home, the demonization of so-called speculators remains a popular tool for absolving themselves of responsibility for the historically high prices they helped create. But for those with a genuine interest in punishing speculators who make money when oil prices are high, no single action would hurt them more than flooding the market with new supply.

“The CFTC, at least as an institution, understands this fact, and has published dozens of studies over the past several years debunking the myth that market trading activity artificially inflates the price of energy. Unfortunately, it appears that the current head of the commission has not read much of its previous work, joining a long list of policymakers either unwilling or unable to understand the difference between cause and effect.

“Washington has kept billions of barrels of oil shale in the Inter-mountain West under lock-and-key. Billions of barrels of oil remain effectively off-limit in our deep oceans, especially in Alaska. And at the same time, Washington is working to halt American energy production even further through massive tax hikes, mandates, and job-killing regulations. Interested in understanding the real causes of high energy prices? Speculate no more.”

READ MORE:

• IER: Speculators Fixing Oil Prices? Don’t Bet On It
• IER: Question: How Many Times Has the FTC Found Evidence of Price Gouging by Energy Companies?
• Paul Krugman: “Speculative nonsense, once again … The mysticism over how speculation is supposed to drive prices drives me crazy, professionally … A futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price … As I’ve tried to point out, there just isn’t any evidence from the inventory data that this is happening.” (New York Times, 6/23/08)
• Krugman: “Hyperventilation over oil-market speculation is distracting us from the real issues.” (New York Times, 6/27/08)
• T. Boone Pickens: “A U.S. probe into whether speculators manipulated oil prices up to more than $135 a barrel is a ‘waste of time,‘ … ‘There’s nothing to it to start with,’ Pickens said.” (Bloomberg, 6/3/08)
• Pickens: “Speculation has become a ‘scapegoat’ for what is largely a supply and demand problem.” (Houston Chronicle, 7/10/08)
• Warren Buffett: “But it’s not speculation, it is supply and demand …” (CNBC’s Power Lunch, 6/25/08)
• Federal Reserve Chairman Ben Bernanke: “The most important cause [of high gas prices] is the global supply-and-demand balance.” (Congressional testimony, 7/16/08)
• Bernanke: “If financial speculation were pushing oil prices above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But in fact, available data on oil inventories show notable declines over the past year.” (Congressional testimony, 7/15/09)

Ethanol and biofuels get 190 times as much subsidies as natural gas and petroleum liquids

So Much for 'Energy Independence.' By ROBERT BRYCE
The Wall Street Journal, Jul 07, 2009, p A15

Whenever you read about ethanol, remember these numbers: 98 and 190.

They offer an essential insight into U.S. energy politics and the debate over cap-and-trade legislation that recently passed the House. Here is what the numbers mean: The U.S. gets about 98 times as much energy from natural gas and oil as it does from ethanol and biofuels. And measured on a per-unit-of-energy basis, Congress lavishes ethanol and biofuels with subsidies that are 190 times as large as those given to oil and gas.

Those numbers come from an April 2008 report by the Energy Information Administration: "Federal Financial Interventions and Subsidies in Energy Markets 2007." Table ES6 lists domestic energy sources that get subsidies. In 2007, the U.S. consumed nearly 55.8 quadrillion British Thermal Units (BTUs), or about 9.6 billion barrels of oil equivalent, in natural gas and oil. That's about 98 times as much energy as the U.S. consumed in ethanol and biofuels, which totaled 98 million barrels of oil equivalent.

Meanwhile, ethanol and biofuels are getting subsidies of $5.72 per million BTU. That's 190 times as much as natural gas and petroleum liquids, which get subsidies of $0.03 per million BTU.
The report also shows that the ethanol and biofuels industry are more heavily subsidized -- in total dollar terms -- than the oil and gas industry. In 2007, the ethanol and biofuels industries got $3.25 billion in subsidies. The oil and gas industry got $1.92 billion.

Despite these subsidies, the ethanol lobby is queuing up for more favors. And they are doing so at the very same time that the Obama administration and Congress are pushing to eliminate the relatively modest subsidies for domestic oil and gas producers. Democrats want to cut drilling subsidies while simultaneously trumpeting their desire for "energy independence."

The cap-and-trade bill passed by the House aims to "create energy jobs" and "achieve energy independence." Meanwhile, Democrats are calling to eliminate drilling subsidies that have encouraged advances in technology that have opened up vast new U.S. energy sources. These advances have made it profitable to extract natural gas from the Barnett Shale deposit in Texas and the Marcellus in Pennsylvania -- deposits once thought too expensive to tap.

President Barack Obama's 2010 budget calls for the elimination of two tax breaks: the expensing of "intangible drilling costs" (such as wages, fuel and pipe), which allows energy companies to deduct the bulk of their expenses for drilling new wells; and the allowance for percentage depletion, which allows well owners to deduct a portion of the value of the production from their wells. Those breaks provide the bulk of the $1.92 billion in oil and gas subsidies.

In May, Mr. Obama called the tax breaks for the oil and gas industry "unjustifiable loopholes" that do "little to incentivize production or reduce energy prices."

That's flat not true. The deduction for intangible drilling costs encourages energy companies to plow huge amounts of capital into more drilling. And that drilling has resulted in unprecedented increases in natural gas production and potential.

An April Department of Energy report estimated that the newly available shale resources total 649 trillion cubic feet of gas. That's the energy equivalent of 118.3 billion barrels of oil, or slightly more than the proven oil reserves of Iraq.

Eliminating the tax breaks for drilling will make natural gas more expensive. Tudor, Pickering, Holt & Co., a Houston-based investment-banking firm, estimates that eliminating the intangible drilling cost provision could increase U.S. natural gas prices by 50 cents per thousand cubic feet. Why? Because without the tax break, fewer wells will be drilled and less gas will be produced. The U.S. consumes about 23 trillion cubic feet of gas per year. Simple arithmetic shows that eliminating the drilling subsidies that cost taxpayers less than $2 billion per year could result in an increased cost to consumers of $11.5 billion per year in the form of higher natural gas prices.

Amid all this, Growth Energy, an ethanol industry front-group, is pushing the Environmental Protection Agency to adopt a proposal that would increase the amount of ethanol blended into gasoline from the current maximum of 10% to as much as 15%.

That increase would be a gift to corn ethanol producers who have never been able to make a go of it despite decades of federal subsidies and mandates. Growth Energy is also pushing the change even though only about seven million of the 250 million motor vehicles now on U.S. roads are designed to run on fuel containing more than 10% ethanol.

There is plenty of evidence to suggest that gasoline with 10% ethanol is already doing real harm. In January, Toyota announced that it was recalling 214,570 Lexus vehicles. The reason: The company found that "ethanol fuels with a low moisture content will corrode the internal surface of the fuel rails." (The rails carry fuel to the engine injectors.) Furthermore, there have been numerous media reports that ethanol-blended gasoline is fouling engines in lawn mowers, weed whackers and boats.

Lawyers in Florida have already sued a group of oil companies for damage allegedly done to boat fuel tanks and engines from ethanol fuel. They are claiming that consumers should be warned about the risk of using the fuel in their boats.

There is also corn ethanol's effect on food prices. Over the past two years at least a dozen studies have linked subsidies that have increased the production of corn ethanol with higher food prices.

Mr. Obama has been pro-ethanol and anti-oil for years. But he and his allies on Capitol Hill should understand that removing drilling incentives will mean less drilling, which will mean less domestic production and more imports of both oil and natural gas.
That's hardly a recipe for "energy independence."

Mr. Bryce is the managing editor of Energy Tribune. His latest book is "Gusher of Lies: The Dangerous Delusions of 'Energy Independence'" (PublicAffairs, 2008).

"Exclusivity deals" between wireless carriers and handset makers to bring new devices to markets

Cellphone Politics. WSJ Editorial
The Wall Street Journal, Jul 07, 2009, p A14

One of the few bright spots in the current economic gloom has been the telecommunications industry, where competition is robust, innovation forges ahead and consumer prices continue to fall. Leave it to Congress and Beltway planners to mess with this success.

Yesterday, the Journal reported that the Justice Department has begun an informal investigation "to determine whether large U.S. telecom companies such as AT&T Inc. and Verizon Communications Inc. have abused the market power they've amassed in recent years." And last month the Senate Commerce Committee held a hearing on so-called "exclusivity deals" between wireless carriers and handset makers to bring new devices to market.

What's going on? Well, AT&T is the exclusive U.S. distributor of the Apple iPhone, and other big carriers like Sprint (Palm Pre) and Verizon (BlackBerry Storm) have cut similar distribution deals. Device makers like such arrangements because they can share the financial risks of developing and marketing new products. The partnerships lead to more choices and lower prices.

Nevertheless, some smaller carriers that lack the scale and resources to cut similar deals want Congress to ban them for everyone. To advance their argument, these carriers claim today's wireless markets are increasingly uncompetitive and underserving rural areas. Hu Meena of Cellular South, a Mississippi-based carrier with about 750,000 subscribers, told Congress that "the industry is trending back towards consolidation and the days of Ma Bell." Regional and rural carriers, he said, can't gain access to the latest gadgets because larger carriers have cut these exclusive deals. Mr. Meena is hoping to get some sympathy from Senators who represent rural states, like Mississippi Republican Roger Wicker and Minnesota Democrat Amy Klobuchar.

In fact, the wireless marketplace has never been more competitive. Eight years ago there were 100 million U.S. wireless customers. Today there are more than 270 million. It's true that AT&T (82 million) and Verizon (72 million) have the lion's share. But the next two largest carriers, Sprint and T-Mobile, have a combined 82 million, and the five carriers that round out the top 10 have another 18 million among them. Merely because Cellular South doesn't threaten Verizon's share doesn't mean other companies don't. As for rural areas, 96% of Americans have a choice of at least three carriers.

What these smaller carriers really want Congress to do is prevent bigger rivals from reaping the benefits of scale. But the government's role is to ensure competition, not protect competitors. AT&T, Verizon and other large carriers have invested billions to build the networks that device makers find so attractive.

There's also no denying that these distribution deals have benefited consumers. More than 30 devices have been introduced to compete with the iPhone since its debut in 2007. The fact that one carrier has an exclusive has forced other companies to find partners and innovate. In response, the price of the iPhone has steadily fallen. The earliest iPhones cost more than $500; last month, Apple introduced a $99 model.

If this is a market malfunction, let's have more of them. Isn't Washington busy enough re-ordering the rest of the economy?

Wal-Mart buys protection by selling out its competitors

Everyday Low Politics. WSJ Editorial
Wal-Mart buys protection by selling out its competitors.
The Wall Street Journal, Jul 02, 2009, p A12

Corporate America's cheerleading for more government involvement in health care now includes Wal-Mart, that liberal paragon of social irresponsibility. The discount giant's ex-critics probably ought to be more skeptical, given that this seems to be anticompetitive special pleading in progressive drag.

This week the nation's largest employer blessed an employer mandate, aka "pay or play." This would require businesses that do not offer "meaningful coverage" -- i.e., government-approved -- to pay some percentage of their payroll to a federal insurance plan. This mandate is one of the more controversial policies in the Democratic health package, and Wal-Mart's endorsement will help it along, or at least give liberals political cover against business criticism.

Another way of putting it is that Andy Stern finally got his man. Wal-Mart CEO Mike Duke was joined in his show of support by Mr. Stern, president of the Service Employees International Union and probably the most influential U.S. labor leader, as well as by John Podesta, President Clinton's former chief of staff now running the leftward Center for American Progress. Both organizations regularly assail Wal-Mart. The SEIU, having failed in its drive to organize Wal-Mart stores, went on to help fund a harassment group called Wal-Mart Watch. The Podesta outfit provides ammunition for critics about the retailer's supposedly skimpy benefits -- especially health coverage -- and other corporate-greed outrages.

Then the fog of politics set in. Wal-Mart hired Leslie Dach, another former Clinton operative, to give its public image an extreme makeover. It has since rolled out green programs (most of which save it money in any case), and in 2007 the company joined with organized labor to call for universal health care by 2012. Two years before, it plumped for a higher minimum wage.

The employer-mandate endorsement falls into the same self-interest department. A boost in the minimum wage helps Wal-Mart because most of its workers already earn well over the wage floor, and it hurts smaller, less-profitable competitors that can't afford to pay more. On health care, an employer mandate will also reduce the margins of their rivals. This is especially true for businesses of a slightly smaller size that cannot insure on the same scale or currently don't reach the 55% of the 1.4 million Wal-Mart employees who are insured through the company. (Another 40% or so are covered by spouses or the likes of Medicaid.)

The Wal-Mart-Stern-Podesta troika made sure to specify that "shared responsibility" must be "fair and broad in its coverage," with an emphasis on the latter. The Mom & Pop stores that liberals accuse Wal-Mart of running out of town may get hit hardest. Democrats say they'll exempt certain small businesses, size details to be determined. But if the mandate is limited to large employers, it won't reduce the number of uninsured. According to the Kaiser Family Foundation, 99% of firms with more than 200 workers provide health benefits, only 62% of smaller firms.

Businesses are also largely indifferent whether compensation comes in the form of wages or benefits, so an employer mandate -- an indirect tax on employment -- may cause wages to rise more slowly. Or it may simply mean fewer jobs. In a 2007 paper, the economists Katherine Baicker of Harvard and Helen Levy of the University of Michigan estimate that 0.2% of all full-time workers and 1.4% of uninsured workers would lose their lobs because of an employer mandate. Most at risk are the 33% of the uninsured earning within $3 of the minimum wage. Thus many of the same people who shop at Wal-Mart because of its low prices -- and who Democrats claim to speak for -- would be worse off.

An employer pay-or-play tax is not only a revenue grab to fund government health care, but it is also meant to transfer the choices about coverage to government from consumers. Businesses are going along with this and other gambits in part because of a prisoners' dilemma: They're terrified of being shut out of Democratic health negotiations lest they get stuck with the bill. Wal-Mart may also be trying to pre-empt an employer mandate the Senate is considering that would target companies with predominantly low-wage, low-skilled or entry-level work forces.

Other big businesses are also trying to buy protection or some political reprieve. Big Pharma recently promised to reduce the cost of prescription drugs by $80 billion over the next decade, and the physician, hospital and insurance lobbies have made similar offerings. Yet the political class is simply pocketing these concessions and demanding more, hastening the day when government controls most U.S. health dollars -- and the businesses become the equivalent of utilities.

Mr. Stern has been clear that his major goal all along has been to pressure Wal-Mart into endorsing government health insurance. As for Wal-Mart's executives, please don't come running for help when Mr. Stern returns for his next political payoff.

Does the "Smart Grid" Have a Smartest-Guys-in-the-Room Problem?

Does the "Smart Grid" Have a Smartest-Guys-in-the-Room Problem? By Ken Maize
Master Resource, June 19, 2009

[...]

However politically incorrect my conclusion, I’m convinced that the “smart grid” is not smart and even dumb. It diverts attention from what is a more important objective–a strong grid. And it politicizes in the very area where we need more consumer-driven, free-market incentives.

Following the Northeast grid collapse of 2003, the Electric Power Research Institute (EPRI) popped out the smart grid concept, largely the brainchild of then EPRI’s CEO Kurt Yeager. The blueprint was for an interconnected intelligent network reaching from the generating station to your toaster, able to talk up-and-down the line, matching supply and demand seamlessly.

Sounds cool, but doesn’t stand up to analysis in my judgment.


Where Did ‘Smart Grid’ Come From?

The idea of a smart grid has been laying around in bits and pieces for many years. I recall visiting Southern California Edison (SEC) in the 1980s where a group of us energy reporters visited the utility’s “smart house.” It kinda reminded me of the Betty Furness advertisements for Westinghouse kitchens when I grew up in Pittsburgh in the 1950s and 1960s. SCE assured us that the smart house, connected to the utility over phone lines (this was pre-World Wide Web) and through radio signals, would dominate home construction in the coming years. (Enron would have a ’smart house’ a decade later to awe visitors to 1400 Smith Street in Houston, but that’s another story.)

Didn’t happen, for lots of reasons, most of them good. It didn’t make economic sense for consumers (although it did for the utility — remember all-electric “gold medallion” homes?). It was way too technologically optimistic, assuming communications protocols that really didn’t exist, and appliances that weren’t remotely ready to talk to each other and the utility. Heck, this was largely before cell phones were making a big impact in the market.

Fast forward to the 21st Century. The grid has shown that it is in trouble. The Internet has demonstrated the utility of Vint Cerf’s IP communications protocol. EPRI is facing an existential moment (what the heck is our role here?). Presto! The smart grid. It controls power flows, adjusts supply demand on the fly, instantly corrects for frequency and power imbalances. It slices, it dices, it’s the latest, biggest, best Ronco product of all time. We can get Billy Mays (no relation, he spells it differently) to peddle it on late-night cable.


Rescuing Dumb Renewables

The concept of the smart grid (if not the reality) also fits into the allegedly new paradigm of renewables. We want lots of power from the wind and the sun (water doesn’t count). But the places where the winds blows a lot and the sun shines a lot are a long way away from where there are a lot of people.

Hence proposals to build a transcontinental, high-voltage (AC and DC) backbone grid on top of the existing transmission and distribution network (which former energy secretary Bill Richardson famously and erroneously called a “third world” grid following the 2003 grid collapse). What’s a trillion dollars or so to bring unreliable power to market?

So here is the Big Green Grid Dream: tie renewables to consumers, with a smart grid to govern (Big Brother?) usage. We could imbue the entire grid — high-voltage transmission and lower-voltage distribution with smarts, from the generator to the substation to the refrigerator. It’s the Big Rock Candy Mountain–or Dream Green Machine.


Another Problem: Cybersecurity

Another problem with the concept of a smart grid (which most advocates assume will use IP/TCP communications protocols) is cybersecurity. It’s hard to bring down a dumb but strong grid in a cyber attack. The smarter it is, the more vulnerable it becomes. There was a report in the Wall Street Journal not long ago that hackers from China and Russia had successfully penetrated the U.S.”grid,” which was undefined in the article.

I don’t believe it, and no other mainstream media outlet backed up the story. But the “smarter” the grid becomes, the more likely such hacking becomes. That’s a real problem.


The Legacy Problem

The U.S. transmission grid (and I’m talking about the big pipes — 365 kV and above) has clear weaknesses. We don’t have a U.S. grid, but loosely-interconnected regional grids. East and West don’t meet very easily. Texas is an island unto itself. Florida is aspiring to the same. Without strong physical interconnections, it’s impossible to dispatch and control a national grid. So a lot of “smart grid” is putting the cart before the horse.


Color Me Skeptical

I don’t buy any part of it, and it ain’t going to happen. It’s what I have described elsewhere as lemon-meringue pie-in-the-sky. Among other problems, the costs are simply unknown, and who will bear them is also unknown. Most of what I’ve seen implicitly suggests that taxpayers will get the check, since customers would revolt if the costs showed up on their monthly bills.

I’ve tuned into recent FERC discussions about grid issues, and heard what I think is a lot of nonsense about smart grids. I’d rather our regulators and policy makers were focusing on muscle, not brains. It’s heavy lifting we need, not heavy thinking.

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Ken Maize is executive editor of MANAGING POWER magazine and editor of POWER Blog. He was the founder and editor of Electricity Daily (1993-2006) and a reporter and editor at The Energy Daily for a dozen years, starting on March 28, 1979, the date of the Three Mile Island problem. Contact address: kmaize@hughes.net.