Where are the Input-Ouput Models for Analyzing Energy Flows?

As a student at MIT in 1972, with a expertise in economics and computer sciences, we built one of the first input-output models for analyzing the impact of oil prices on the economy. 

What happened to these models? 

How can the Republicans and Democrats propose policy without this data?

What is An Input-Output Model

The Input-Output model is a massively simultaneous system of equations. The equations quantify the impact of price change on each sector of the economy. Both short and long term impacts can be forecasted by quantifying the elasticity by sector over time. Time series methods corrected many of the estimation errors caused by simultaneous data streams. Leading models came out of MIT, UCLA, and Carnegie. 

Google page rank (PR) uses the same massively simultaneous system of equation method for near realtime computations. My team at MIT innovated to enable these solutions with large systems.

The model tells us the direct impact, that increases in prices results in higher gasoline prices. With small changes, the demand impact is relatively inelastic. This means consumer behavior does not change much.

With the first significant oil price change in 1972, we had our first historic data point to show that the price response was not linear. Large changes have much greater impact than small changes. As forecasters, all historic models used linear estimation and were forced to fudge the data to estimate results that were different from historic patterns based on low price changes.

The model also measures indirect impacts over time. Higher gasoline prices impacted general inflation causing price increases for all goods. Over a longer period of time, commercial interests increased oil efficiency or shifted to other resources. Thus, the model quantifies the hundreds of complex economic cycles as the economy settles into a new equilibrium.

Applying the Model to the Web 2.0 Economy

As a current innovator in the Web 2.0 economy, I’ve hypothesized the relationship of radical oil price change to web 2.0 adoption. Specifically, an input-ouput model would show the following relationships:

• Increased Web 2.0 Use: Web 2.0 provides news, entertainment, and information over the Internet. This decreases casual driving about town. With higher gasoline prices, consumers would immediately reduce driving and consume more services at home. The relationship is non-linear with oil price change. Early data on web 2.0 trends and gasoline consumption show the inverse relationship. Is it statistically significant?
• Telecommuting and Home Work: Web 2.0 enables more telecommuting and work at home professionals to be productive without wasting (1) time commuting and (2) dollars for gas. The impact is again inversely non-linear with oil price change.
• Shift of Advertising from Paper to Web 2.0: Although this trend is true, proper analysis would show that the marginal impact from oil price increases would be insignificant. Higher transport costs increase the cost of producing, printing, and distributing paper. This includes direct mailers, newspapers, and magazines. However, the marginal impact would not reduce gasoline consumption among transporters such as the US Post Office, Fedex, UPS, and other shippers. Their costs are fixed and lower demand for shipping services won’t decrease the cost to continue making the rounds for non-paper customers.

Similar hypothesis can be formed on hundreds of economic sectors. Together, the input-output model would integrate the complex relationships to produce short and long term forecasts. Like the Lionel Edie/Merrill Lynch/Bank of America group where dozens of sector economists cooperated to create one model, econometric models enable “blind men to see the elephant”.

What Happened to the Input-Output Models?

The sector analysis above demonstrates the value of input-output analysis. 

To verify my hypothesis, I searched for models and was shocked to see no updated studies relating to energy costs. Yet, candidates like Obama and McCain have proposed solutions without the data. How can those policy decisions make sense?

Energy Independence

The US consumes more oil than the next 20 countries combined. Our dependence on this scarce, imported resource hurts our short, near, long term future. Should we invest more to understand the problem?

Russia’s Bid to Strengthen OPEC Ties May Sow Unease

Ed: Connect the dots. Energy independence is issue one for national security.

Oil-Cartel Ministers 
Will Curtail Output 
Amid Falling Prices

By NEIL KING JR., SPENCER SWARTZ and ANNA RAFF

VIENNA — Russia upped the ante in its faceoff with the West by proposing “extensive cooperation” with the OPEC oil cartel, an idea that would stir concerns among big oil-consuming countries like the U.S.

The Russian proposal came just hours before the group’s 13 ministers decided to scale back production by around 520,000 barrels a day, or less than 1% of world oil supply, over the next 40 days in the face of falling prices and slowing demand growth.

OPEC officials described the move as necessary to avoid a buildup of excess supply, but the group could face criticism for moving to cut production when prices are still above $100 a barrel. The cuts would put OPEC’s output — now at around 32.7 million barrels a day — back to where it was during the first three months of the year.

The decision, following hours of debate, came after U.S. benchmark crude fell Tuesday to its lowest level in five months, settling at $103.26 a barrel, down $3.08, or 2.9%, on the New York Mercantile Exchange.

The offer by Russia’s energy czar and vice premier, Igor Sechin, came as a surprise twist at the start of the OPEC session. The Organization of Petroleum Exporting Countries supplies around 40% of the world’s oil, while Russian output makes up another 11%.

Mr. Sechin made his offer for cooperation in person at the meeting in a visit that OPEC officials said was arranged in recent days. The Russian delegation of more than 20 officials raised eyebrows at the cartel’s usually cloistered headquarters along the banks of the Danube; it was among the largest sent to Vienna by a nonmember state, an OPEC official said. It was also the most high-profile visit from Moscow to the cartel in at least a decade. Among the group was Sergei Bogdanchikov, the chief executive of Russian oil giant OAO Rosneft.

The Russian outreach to OPEC comes at a time of severe strain between Moscow and the West after Russia’s invasion of Georgia last month. While an actual alliance with OPEC seems far-fetched, concerns already run high in the U.S. and Europe that Moscow is trying to increase its chokehold over Europe’s energy needs. Moscow supplies Europe with most of its natural gas and much of its crude oil and gasoline.

OPEC’s first formal gathering in six months was otherwise fraught with politics and posturing as factions tussled over whether to cut output even as oil still hovered above $100 a barrel. Some voices within the group argued that OPEC should exhibit restraint and lower its production. The decision to cut output over the next month means that Saudi Arabia will likely scale back its production to where it was earlier this year, before Riyadh began ramping up in a bid to drive down record prices.

Analysts have been closely scrutinizing OPEC’s actions for any signs of a consensus on what might be the optimal price that the cartel would seek to defend. The latest action suggests that OPEC sees that price at around $100 a barrel, despite the fact oil is still up nearly 33% from a year ago and nearly quadruple what it was in 2003.

The decision came as a surprise after many OPEC officials said in recent days that the market remains healthy, with neither too little nor too much oil washing around. Arriving at his hotel around dawn Tuesday, Saudi oil minister Ali Naimi, the principal voice within the cartel, described the market as “fairly well balanced” and “in a healthy position.”

But that view was contrary to assertions by the Iranian oil minister, Gholam Hossein Nozari, that the market is oversupplied. Libya’s top oil official, Shokri Ghanem, also spoke of a supply “glut.”

OPEC President Chakib Khelil, who is also Algeria’s oil minister, said the group’s action was unlikely to ease the recent slide in oil prices because weakening U.S. and European demand had allowed crude inventories to build. “It’s pretty obvious why we took this action,” Mr. Khelil told reporters afterwards.

For months, OPEC ministers have blamed everyone from market manipulators to doomsayers for driving oil prices to records, arguing that the price had no relation to the fundamentals of supply and demand. But now the cartel must decide when prices have fallen too far…

Solar Shares Collapsing; Where’s the Bottom?

from AllThingsDigital — WSJ by Eric Savitz

As far as I can tell, the sun is operating normally. But you might think otherwise judging from this week’s action in solar stocks. The sector, which suffered considerable losses yesterday, today went into freefall, with many names in the sector suffering losses of more than 10 percent. Exactly why investors decided to bail on the stocks today is unclear, but there are a number of factors that appear to be contributing to the current solar scare.

Demo Fall: Going Green in Both Ways

Demo Fall: Going Green in Both Ways

Categories:   Demo, Show Reports

“Green” was the topic of the second morning session at Demo today, with both environmental and economic applications taking center stage. Mapflow uses an iPhone and its GPS capabilities to let people share rides along a similar route. You enter your route on its Avego .action web site, and it then finds other people who want rides on that route. It includes a “meter” for sharing costs (using a pincode system), ratings of drivers and passengers, etc. It’s an interesting idea – and certainly more ride-sharing would be more efficient. But I’m not sure how many people will really do this. Microstaq has a MEMS-based chip it says will reduce the energy needed to run air-conditioning systems by 20-25 percent. The Ventilum chip works in a special valve that replaces mechanical valves and solenoids in AC systems. It says its valve will be much more efficient. This isn’t really my area these days, but it certainly sounds great…

NEWS: Gas May Finally Cost Too Much

Highway traffic is falling as pump prices climb. Are Americans rethinking their auto addiction?

by Christopher Palmeri

BW MAGAZINE

• (full story)
• 

Acme Illustrators

For 20 years now, county workers in Palm Beach County, Fla., have been counting cars with sensors at strategic points along its 4,000 miles of roads. Nearly every year traffic volume has climbed at least 2%. But in 2007 there was a slight decline in the number of vehicles on the roads. This year traffic is down 7.5% through March. “We’re seeing a very significant change,” says county engineer George Webb. “We’re having a good time speculating why.” …

Ed: Muddled economics. BW says ‘gasoline use tends to dip during recessions’. 

Drastic increases in oil prices cause economic dislocations that lead to recessions. High oil prices and lower incomes lead to lower gasoline consumption.

MAY 7, 2008

USA Productivity Shows Resilience

Ed: It’s official – no recession. Productivity is GNP (Gross National Output) divided by labor costs. How does higher prices and lower wages translate into growth?

Web 2.0 is Green, Recession-Proof – The Macroeconomic View

How does the recession tie with the green economy and increased shift toward online advertising? In the early 70’s, the sudden shift of oil prices caused severe dislocations. Here is the macroeconomic view for 2008.

• Cause: The double whammy of the mortgage crisis and oil prices created the recession.
• Effect on goods: Consumers have less money; price of goods have inflated – thus buying less stuff.
• Effect on services: The marginal cost of online services is free. Consumers spend more time online – playing, socializing, interacting, creating.
• Effect on gas use: Shift from time spent purchasing goods to consuming online services reduces gas consumption – e.g. commuting costs to buy or work; and eventually publications that depend on gas guzzling lumber, paper mill, print, and mail supply chains.
• Online ad growth: Online websites grow. Advertisers chase the hot action.

The domino effect of dislocations – economic history repeats regularly.

Game Plan for the Green, Growth Economy

1. Consumers: Stay home. Chat by IM, social networks more; play online; telecommute.
2. Entrepreneurs: Export creative services to the globe.
3. Publishers: Timetable to withdraw from Iraq by ending paper waste.

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UPS: Dramatic Slowing in U.S. Economy
Paul Kedrosky’s Infectious Greed by pk

This is striking stuff from courier company’s UPS’s earnings conference call:

Chief Executive Scott Davis:

UPS’s first quarter results illustrate the dramatic slowing  in the U.S. economy. At our investor conference on March 12th, we told you that volume growth in January had been up 3%. But in the six weeks prior to the conference, it had been negative. We also said if these trends persisted through March, we would not achieve the earnings guidance we had provided for the quarter. [The] trends did continue. Many have become sharply more negative in the last two months. … The great unknowns are the severity and the duration of the current economic slowdown. Many of our customers have tightened their belts resulting in a shift away from our premium air products to ground shipments. [Emphasis added]

Move along folks. No recession here.

Helping others go green

Official Google Blog by A Googler Posted by Bill Weihl, Green Energy Czar

Happy Earth Day! I’m sure some of you are wondering how Google is celebrating, and we want to know what you’re doing too. We work to make our business more environmentally sustainable throughout the year, but this month, we want to support the hard work you’re doing to fight climate change. Last week we blogged about some of Google’s new green tools, and now we have even more ways to help you observe Earth Day 2008:

• Today we’re launching the largest batch of new Google Transit cities yet. Travelers in San Francisco, Denver, Milwaukee, Kansas City, Rhode Island and other locations across the country can now use Google Maps to plan trips using public transportation.

• Google Checkout continues to help you and your friends and family team up and donate to environmental organizations. We have a new video to help you learn how to donate and see how easy it is to map your network of generosity.

LinkedIn Answers: Gas Prices and Telecommuting… from The LinkedIn Blog by Mario Sundar

Rising gas prices have always been a topic of interest on news networks, but today it seemed to be all over CNN, including a news clip (featuring a cameo by LinkedIn’s Scott Roberts; after the jump). But I digress – here’s the LinkedIn Answers’ question of the week, featuring a question on the correlation between rising gas prices and telecommuting…

Is Apple Recession Proof? Find Out Today Wired Top Stories

Apple’s Q1 earnings report, scheduled for 5 p.m. Eastern today, will give a much-anticipated clue to the health of the tech economy. Wired.com is providing live coverage of the earnings report.

That Recession? Game Companies Aren’t Feeling It

…advertising business malaise? It’s still not affecting the video games business, even if Super Smash Bros. Brawl costs $50 at retail. Michael Pachter of Wedbush Morgan predicts video game software sales grew 47% y/y to $850 million in March, which would match February’s 47% y/y sales gain. Leading the pack: Super Smash Bros. Brawl for the Nintendo… Silicon Alley Insider

Ad Recession? Absolutely. Digital Crushed? Maybe.

…2008 Internet advertising growth from 21% to 19%. Next year it will shrink to 17%, he said: “I don’t think there’s any question there’s going to be an impact.” At the other end of the spectrum, Web optimists say a mild ad pullback could help digital. “A recession is great; it’s going to force people into digital and accelerate the pay-per track… Silicon Alley Insider

Bits: Online Advertising Is a Lagging Indicator of a Recession

…hurting Internet advertising. Unlike the collapse of 2000, this year marketers are cutting traditional media buys and preserving their online spending. NYT > Technology

Google’s chief economist waxes optimistic about Internet sector

Posted by Anne Broache| Post a comment

Google spokesman Adam Kovacevich moderates a chat about the Internet economy with (from left) Robert Atkinson of the Information Technology and Innovation Foundation, Edwin Garrubbo of the Electronic Retailing Association, Michael Avon of Columbia Capital, and Google chief economist Hal Varian at the company’s D.C. headquarters Friday.

(Credit: Anne Broache/CNET News.com)

WASHINGTON–The U.S. economy as a whole may not have the sunniest prognosis lately, but Google’s chief economist and other industry watchers on Friday diagnosed the Internet sector as relatively healthy.

During a panel discussion at Google’s D.C. headquarters, professor-turned-in-house-economist Hal Varian argued that an analysis of search queries at his company’s site mirrors deeper economic trends. Job-related searches are up as a share of total searches, for instance, and real-estate and luxury goods searches are down–exactly what you’d expect in a “recessionary environment,” Varian said.

But overall, the total number of searches on any topic continues to grow “very dramatically” from year to year, and e-commerce sales also continue to climb, Varian said.

“The lesson you learn from looking at query patterns on Google is, yes, we’re seeing an economic slowdown, but no, that’s not an Internet slowdown,” said Varian, who admitted that his day job focuses on a more microeconomic task: the economics of Google’s advertising auctions. “The Internet is still looking pretty strong, compared to most of these other sectors.”