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English for Business IV. Implications for business. Karl Seeley, PhD Hartwick College. Fukushima. Casualties Minimum of 50? The technicians still trying to prevent a worse disaster Maximum? More radiation can get out Hard to tell how bad it could be

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fukushima
Fukushima
  • Casualties
    • Minimum of 50?
      • The technicians still trying to prevent a worse disaster
    • Maximum?
      • More radiation can get out
      • Hard to tell how bad it could be
      • Officials don’t seem concerned about large loss of life
        • Though other costs will be high
economic effects on japan
Economic effects on Japan
  • ~20% of Japan’s electricity generation is off-line
    • Replacement is considerably more expensive
      • Fuel cost, plus capital cost of setting it up
    • Replacement unlikely to be complete
      • Reduced availability of electricity will affect many activities
        • Though a portion can be covered by turning off some of Tokyo’s neon
global economic effects
Global economic effects
  • Disruptions to supply chains for many products
    • The nuclear problem is just exacerbating other effects of the earthquake and tsunami
  • Higher natural gas price?
    • Diversion of natural gas to Japan as a replacement source of electricity
      • Though concerns about recession are pushing down futures prices
nuclear renaissance
“Nuclear renaissance”
  • Increased global interest in expanding nuclear power
  • Seen as reasonable cost alternative to coal
    • Reduce greenhouse gases
  • With further electrification of transport can also replace oil
    • Deal with peak oil and increasing prices
not so fast
Not so fast!
  • Obvious new concern about nuclear power
    • Germany postponing decision to extend operating life of older plants
      • 7 plants already shut down provisionally
      • Price of electricity up 18%
        • Effects on electricity prices elsewhere too
    • Fewer nukes will be built than if Fukushima hadn’t happened
    • Electricity will be more expensive than otherwise
wrenches in risk calculation
Wrenches in risk calculation
  • Fat tails
  • Non-independent risks
  • Low-probability, high-damage events
  • Black swans
fat tails
Fat tails
  • Much statistical modeling assumes a normal distribution
    • Events that are 10 s.d. from the mean are practically impossible
  • Some phenomena (often finance) have much higher risks of extreme events
    • Very extreme events are somewhat rare but do happen
    • Distorts our estimate of risk
not just increased variance
Not just increased variance
  • In a normal distribution, you can have wider variance
not just increased variance1
Not just increased variance
  • In a normal distribution, you can have wider variance
  • The tails are fatter,
  • But the density around the mean is reduced
slide13

http://beyondmicrofoundations.blogspot.com/2010_08_01_archive.htmlhttp://beyondmicrofoundations.blogspot.com/2010_08_01_archive.html

fat tails harder to predict
Fat tails: Harder to predict
  • Lots of density in the middle
  • Along with fat tails
  • Finite data will tend to cluster near the middle
  • If you estimate the distribution using a standard normal, you’ll underestimate the tails
non independent risks
Non-independent risks
  • Two bad events:
      • A (Pr=0.01) and B (Pr=0.02)
    • If they’re independent, probability of both at once is

Pr(AB) = Pr(A)  Pr(B) = 0.01  0.02 = 0.0002

    • If A happening increases risk of B to 0.5:

Pr(AB) = Pr(A)  Pr(BA) = 0.01  0.5 = 0.005

non independent nuclear risks
Non-independent nuclear risks
  • Earthquake itself can damage a reactor
    • Design around that
  • Tsunami can damage a reactor
    • Tsunamis linked to earthquakes
  • Loss of power from outside is a danger
    • Earthquakes and tsunamis can eliminate power from the outside
expected value
Expected value
  • Define the value of all the possible outcomes
  • Assign a probability to each of those outcomes
  • Multiply each value by its probability, sum up
  • Result is expected value
low probability high damage
Low-probability, high-damage
  • What if there’s an outcome that’s really unlikely …

… but really bad?

low probability high damage1
Low-probability, high-damage
  • What if there’s an outcome that’s really unlikely …

… but really bad?

  • Expected value may look fine
  • But if disaster strikes, that won’t matter
black swans
Black swans
  • Disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology
  • The non-computability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)
  • The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs.
  • The event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.
    • Wikipedia, after Nassim Nicholas Taleb
non nuclear risks
Non-nuclear risks
  • Sporadic nuclear disasters
    • Three Mile Island (1979), Chernobyl (1986), Fukushima (2011)
    • Few deaths, many deaths, ?? deaths
  • Coal is less dramatic, but continual toll
    • Respiratory problems
    • Landscape destruction for mining
    • Mercury release
comparing disasters
Comparing disasters
  • A nuclear accident could sicken 100,000, kill 10,000?
    • Displace many more
    • Connection to nuclear power will be obvious
  • A climate disaster could easily kill and displace as many
    • If coal combustion is changing climate, then coal caused it
    • Will we make the connection emotionally?
possible futures
Possible futures
  • If GDP growth depends on resources, and we’re hitting resource constraints, three possibilities
    • Business as usual (BAU)
    • Modified BAU
    • Stagnation, catabolic collapse
slide26
BAU
  • Even if resource constraints are binding
    • It’s possible that some technological breakthrough will enable BAU to continue
    • Or that a new resource will be found to overcome limitations of those currently in use
opportunities under bau
Opportunities under BAU
  • Assume there will be an alternative to oil / coal / gas
    • Deal with both supply constraints and climate-change problems
  • If you’re connected to that alternative, you’re golden
    • Coal created fortunes in 19th century
    • Oil in 20th
      • What will it be in the 21st?
bau under bau
BAU under BAU
  • You don’t have to be in the new resource sector to get rich
    • You can use whatever criteria you would use today
      • Figure out what people will pay for, and sell it to them
        • Assume that resources will be sufficient to make that possible, and to basically run the economy
        • Solve the micro problem of your firm, not the macro problem of the whole economy’s resource situation
modified bau
Modified BAU
  • Economic growth will continue, but energy will be expensive
  • Different opportunities than in BAU
    • Not just directly in the energy sector
efficiency markets
Efficiency markets
  • Increased value in things that provide a given service with less energy consumption
    • Lighting
    • Transportation
    • Housing
    • Food preparation
impact on energy intensive
Impact on energy-intensive
  • Some lines of business are inherently dependent on large quantities of energy
    • e.g., tourism in Hawai’i
slide32

State of Hawai’i, Department of Business, Economic Development & Tourism

http://hawaii.gov/dbedt/info/visitor-stats/tourism/, downloaded 14.3.2011

impact on energy intensive1
Impact on energy-intensive
  • Some lines of business are inherently dependent on large quantities of energy
    • e.g., tourism in Hawai’i
      • Visitors in 2009 were down ~15% from 2007
        • Mostly recovered in 2010
slide34

State of Hawai’i, Department of Business, Economic Development & Tourism

http://hawaii.gov/dbedt/info/visitor-stats/tourism/, downloaded 14.3.2011

impact on energy intensive2
Impact on energy-intensive
  • Some lines of business are inherently dependent on large quantities of energy
    • e.g., tourism in Hawai’i
      • Visitors in 2009 were down ~15% from 2007
        • Mostly recovered in 2010
      • Expenditures in 2009 down > 20% from 2007
        • Also mostly recovered by 2010
      • How much is energy prices, vs. just recession?
other tourism
Other tourism
  • Some destinations see ambiguous impact
    • Upstate New York draws nationally
      • Scenery, outdoor recreation, Baseball Hall of Fame
    • Reduced by high travel costs
    • But we’re near metropolitan NYC
      • 16 million people, most will vacation
      • Some will switch from distant destinations to their “backyard”—upstate New York
strongly modified bau
Strongly modified BAU
  • Economic growth continues, but in different direction
    • Auto-centric model fails
      • More of an issue in North America than in Europe
end of the auto centric model
End of the auto-centric model
  • Big losses in stranded investments
    • Suburban development no longer viable
      • Housing and commercial real estate loses value
      • Some light manufacturing and other industry must relocate
  • Big opportunities in redirection
    • Reconstruction of transit for refocused cities
    • Further impetus to web-based business
not so simple
Not so simple?
  • Higher transport costs mean partial relocalization
    • Smaller stores accessible by foot
      • Instead of “big box” stores
    • More local production
  • Implies reduction in current economies of scale, benefits of trade
  • Not clear how consistent this is with “growth”
biological energy requirements
Biological energy requirements
  • A young person’s body needs increasing amounts of energy to keep growing
  • An adult needs substantial energy to keep functioning
    • Basic metabolic operations of breathing, circulation, etc.
    • Repair and upkeep of the body
    • A bigger body needs more energy
catabolism
Catabolism
  • Breaking molecules down into smaller units to release energy
  • Your body uses it when energy intake is constrained too far
  • When you start breaking down crucial items, you get catabolic collapse
economy s energy requirements
Economy’s energy requirements
  • Growth requires (?) ever growing energy flows?
    • Building new roads, houses, bridges, airports, railroads, …
  • Even “steady state” requires an energy flow
    • Simple maintenance of infrastructure
      • Roads, houses, bridges, airports, railroads, …
catabolic collapse
Catabolic collapse
  • Shrinking energy: you can’t even maintain what you’ve already built
    • Some pieces have to fall into disuse
    • Other parts may depend on them and also fall apart
      • Like a body with progressive system failure
    • “Civilizations are complex, expensive, fragile things.”
        • http://www.energybulletin.net/node/16649
fiscal and monetary responses
Basic response to downturn

Fiscal: increase government spending or reduce taxes

Monetary: increase money supply

Both are potentially effective when downturn is caused by failure of demand

There are unused economic inputs

Good policy can spur their use

Fiscal and monetary responses
macro policy and resources
Macro policy and resources
  • A resource-induced downturn is a supply problem, not a demand problem
    • “Stimulating” the economy causes people to try to use more resources
    • But they can’t, so economic growth doesn’t pick up
policy consequences
Policy consequences
  • Ineffective monetary policy leads to inflation
  • Ineffective fiscal policy leads to unpayable debts
    • Keynesian approach based on long-run growth
      • Stimulate the economy out of recession, then there will be wealth to tax to cover the old deficits
useful policy
Useful policy
  • Money supply based on realistic appraisal of long-run growth
  • Government spending focused on things that maintain production under resource constraints
    • To the extent possible
    • Where collective action is needed
      • Transit needs social investment
      • Farming less so
business impacts
Business impacts
  • Long run: wealth will be based on interaction of resources and technology
    • Business opportunities will go along with that
  • Government policy can make it worse
    • Unpayable debts
    • Failure to enable viable technological paths
  • Good policy can minimize damage
    • Not eliminate it if it’s coming