How Dry I Am
A common Texas expression relating to the weather says, “If you don’t like it, just wait a few minutes, and it’ll change.”
This statement is certainly true on many occasions, especially when those “blue northers” rush into the Lone Star State or when the temperature changes abruptly because of the sudden approach of a weather front.
However, over the past several months, the expression has failed to live up to its reputation, because in many areas of the state, the weather has remained practically the same—hot and dry! Some parts of the state have been in various stages of drought since the spring of 2005. Other areas have seen some of the driest spells on record and then faced flash flooding. All in all, though, what rain there has been has generally been either “too little, too late” or “way too much.” As a result, farmers and ranchers have been hit hard, and the damage is mounting.
The agriculture sector is small in many respects, especially when compared to other segments. Agriculture industries generate some $7.78 billion each year and represent approximately 0.88% of Texas real gross product. The sector’s 95,500 workers represent about 0.94% of Texas wage and salary jobs. In some geographic areas, however, ag is a much more dominant player.
Although not as large as some, the agriculture sector is an important aspect of the state’s economy, and agriculture products and services are among the state’s top 10 exports. During the first two quarters of this year, the agriculture industry accounted for 2.43% of Texas exports. This percentage totals nearly $1.75 billion. For the year 2005, the agriculture sector, though down 10.59% from the 2004 aggregate, was responsible for $2.71 billion or 2.11% of the state’s total exports.
Unfortunately, due to adverse weather conditions which have caused such a lengthy drought, the Texas agricultural economy has been negatively impacted and has suffered extensive economic loss. Some officials estimate that through last month, the state’s agriculture industry has undergone crop and livestock losses of about $4.1 billion. This amount represents the worst single-year loss in Texas history, significantly more than the $2.1 billion loss in 1998.
Crop failures account for 61% ($2.5 billion) of the losses with $1 billion associated with cotton. The decimation of the Texas cotton crop is even causing some growers to consider insurance alternatives while others are taking part-time jobs to keep financially afloat.
There is also the possibility that the wheat crop this year could have less than normal yields, with most of the reduction attributed to the drought. Furthermore, upwards of 90% of Texas ranges and pastures are estimated to be experiencing stressed conditions.
Dry conditions and rising feeding costs, as well as high fuel prices and sagging markets, have caused many cattle producers to liquidate large portions of their herds. Sales at cattle auctions are running some 2% ahead of this same period last year.
On top of the estimated $4.1 billion crop and livestock losses, businesses and operations that provide services to farmers and ranchers are expected to endure an additional $3.9 billion hammering.
Some areas of the state are receiving occasional precipitation, but rainfall in most parts of West Texas has been little and far between. Of the state’s 254 counties, 226 are currently experiencing dry condition levels sufficient to cause increased fire risk potential. The dry circumstances have also caused extensive evaporation of lakes and reservoirs, and many areas of the state have imposed, or are considering, water use restrictions.
The Lone Star State is no stranger to dry conditions, and over time has seen a variety of “rainmaking” ventures come and go. Back in the 1960s, both the state and federal governments funded cloud seeding research and weather alterations projects. Although most government funding is no longer available, several rain enhancement projects are currently being undertaken in various parts of the state. Some of these projects have achieved modest successes, but not enough to completely turn things around.
The longer the drought continues, of course, the greater the potential for its impacting the overall state economy. However, we’ve come a long way from our days of relying on cotton and cattle and other ag products for our economic success. The fallout will certainly be devastating for some individuals and families and is likely to slow the pace of expansion in certain areas. For the state as a whole, things are still looking good, though I think we’d all be thankful for a little relief!
posted @ 07:55 AM CST [link]
Friday, August 18, 2006
Emerging Technologies
Many people enjoy and appreciate anniversaries. I count myself among them, and I frequently use such occasions to reflect upon the changes that have occurred over the year.
Since the first anniversary of the Texas Emerging Technology Fund is approaching, I thought it might be a good time to refresh our memories about this endeavor as well as recap progress to date.
No one, of course, needs reminding of the role technology plays today—from common household items to sophisticated machines that do practically anything. Virtually all aspects of life are impacted by recent advances. Moreover, high-tech industries will be the major engines of economic growth in the decades to come.
The future success of numerous industries will undoubtedly depend upon the use of technology, much of which is not even in our vocabularies or imaginations yet. Similarly, the future prosperity of regions, states, and nations will be driven by whether (or not) they emerge as key locations for cutting-edge industries.
The creation of both the United States and the Republic of Texas was by revolution. That unique spirit still survives, but rather than focusing on political matters, it is now channeled into improving our economies and subsequently our daily lives. In fact, some analysts predict that over the next decade, life will be completely revolutionized because of the accelerated changes in areas such as biotech, nanotech, smart materials, and infotech.
Over the past several years, business, civic, and government officials have implemented programs designed to prepare the state for economic expansion in these and other nascent fields. One of these strategies is the Long-Range Plan for Technology (1996-2010) which outlines a vision for education in the 21st Century. Since its adoption, computers and the Internet have made learning more interesting and exciting in today’s classrooms. From instructional materials to library resources to better prepared teachers, the eyes of Texas are upon the countless benefits this and other, similar initiatives will provide in the years ahead.
Work is also ongoing to cement Texas’ role as a site for tech-oriented industries. One such endeavor is the Texas Technology Initiative. This plan was designed to retain and attract advanced technology industries and to accelerate commercialization from research and development to the marketplace. The initiative’s overarching goal is to expand current businesses and attract new ones to the Lone Star State. Targeted industries include nanotechnology, biotechnology, and software technology, all of which will help make Texas a worldwide leader in research, development, design, commercialization, and manufacturing.
Closely associated with this program is the identification of several industry clusters that have essentially unlimited potential for growth in the future and the development of plans to expand employment opportunities in them. I was closely involved in selecting these clusters, many of which relate to projected advances in industry groups such as biotechnology and life sciences, information and computer technology, aerospace and defense, energy, petroleum refining and chemical products, and manufacturing.
The success of this endeavor has played a significant role in efforts that led to the authorization by the 78th Legislature of the $295 million Texas Enterprise Fund in 2003. This fund has provided state leaders with the flexibility and financial means to close deals that will improve the state’s economy. They include business incentives, infrastructure development, job training programs, and community development endeavors. These monies have given Texas a competitive advantage and have helped to put our state at the top of the list of business relocations and expansions.
The most recent visionary endeavor designed to create jobs and enhance the state economy is the Texas Emerging Technology Fund. Signed into law by Governor Perry on June 13, 2005, the program went into effect September 1 making $200 million available to improve the state’s competitiveness on the technology front.
To help implement the program and guide the application process, seven regional centers for innovation and commercialization were established. The three major areas of investment include the increase of research collaboration between public and private sectors, the expansion of matching research grants from both federal and private sponsors, and the addition of expert research teams to numerous Texas universities. Over the past year, each of these areas has experienced significant success.
Innovation is key to expanding the Texas economy. It is crucial that we use technology effectively to increase the competitiveness of all Texas businesses, enhance the quality of education for Texas children, and otherwise improve quality of life in the Lone Star State. To maximize future prosperity, it is also critical that we continue to work to maintain Texas’ position as a center for emerging industries. With carefully crafted and visionary strategies, there is every reason to believe we will succeed on both fronts.
posted @ 07:45 AM CST [link]
Friday, August 11, 2006
The Alaskan Oil Situation: Disaster or Wake-up Call?
It’s certainly true that oil production is a risky and sometimes volatile business. When things go right, it’s all good; when things go wrong, it seems like the wheels fall off.
Such is the case this week when British Petroleum (BP) announced a planned shutdown of a large portion of its Alaskan production due to corrosion in the pipeline. Even before all the details were known, the market responded amid fears that supplies would soon be limited. BP has 22 miles of transit lines that bring oil to the 800-mile trans-Alaska pipeline. About 16 miles of pipe will need to be replaced.
The quick rise in crude oil prices dropped slightly after further examination of the system provided hope that BP could continue some production even while the pipelines were being replaced. Other nations, particularly Mexico and Saudi Arabia, also indicated a willingness and ability to help bridge the gap.
Still, crude oil costs had already gone up 25% this year, and many people began to anticipate hikes to unprecedented levels. The jumps in prices over the past several months, of course, had several causes including the recent hurricanes in the Gulf of Mexico, continuing conflicts in the Mid East, and unrest in Nigeria and Venezuela. The current situation layers on still another one—the Prudhoe Bay oil operations.
The nation’s largest oil field, the Prudhoe Bay area provides about 8% of the US daily oil production of 5.1 million barrels a day. By comparison, Texas produces nearly 20% of the national total, more than any other state. The 400,000 barrels per day normally provided from the Prudhoe fields is only about 2% of the US crude consumption, which is approximately 15 million barrels per day. (Total petroleum consumption is around 20.1 million barrels per day.)
Fears of a potential national disaster were relieved when the government noted the possibility of using a portion of the strategic petroleum reserve supplies to temporarily meet the expected needs.
The 688 million barrels of oil that comprise the strategic petroleum reserves are located in underground salt caverns in Texas and Louisiana. There are, of course, no pipelines connecting these reserves with west coast refineries and thus, the loss of output from BP’s Prudhoe Bay field would likely hurt California and the Pacific Northwest the most. So far, according to the US Secretary of Energy, substitutes for the diminished supply of Alaskan oil are available, and no requests to draw from the nation’s reserves have been made.
In addition, various OPEC nations have responded with promises to increase their production levels to meet any shortfalls. The US imports around 58% of the oil it uses, and OPEC, which supplies roughly 55% of the nation’s oil imports, claims it can tap its spare capacity of about two million barrels per day if necessary.
Although most analysts believe the current situation will be relatively short term, interruption of supplies can cause difficulties for industries that are significantly dependent on petroleum, and it could possibly add another nickel or dime at the pump, a definite strain on many pocketbooks.
So, what can we learn from this situation? There are probably several lessons.
The most relevant is the need to formulate policies that would diversify exploration and expand domestic oil production while reducing imports, which often puts money in the hands of unstable or hostile regimes. Another relates to the establishment of procedures for better inspection and maintenance of pipelines.
A third centers around the need for technological and engineering advancements, especially as related to fuel efficient motor vehicles. Closely aligned to it would be the expansion of alternative fuels.
There are many more lessons to be learned, but space prevents me from discussing them. Perhaps in a future column.
Sometimes the nation needs a wake-up call to spur action that leads to improvement. We may have just had one.
posted @ 08:10 AM CST [link]
Friday, August 4, 2006
Keep on Talkin’
I don’t have to tell you that times are changing. There is no place where that is more apparent than in the way we communicate with one another. It seems as if my kids are constantly finding something new to do with their cell phones, laptops, or other gadgets; with any luck, I catch up a few months later. Competition has brought lower prices, remarkable innovations, and a knitting together of the world in a way that we wouldn’t have imagined a few years ago. In the midst of all of this progress, however, we can’t lose sight of the basics.
That brings me to the Universal Service Fund (USF), a topic which has recently surfaced as a subject of increasingly intense scrutiny and debate. You might recognize the USF as it generates a line item on your phone bill every month. Some individuals are currently arguing that the USF should be scrapped or restructured. It never hurts to try to make something better; however, it’s essential that any change in the workings of the USF be approached with extreme caution.
The topic is complex and really goes to the very heart of market economics and effective public policy. Let me begin by providing something of a “big picture” framework. Then, we’ll cut to the specifics.
As I have frequently said in print and testimony to various legislative, regulatory, and congressional bodies, markets are extremely powerful and achieve incredible things in a seemingly invisible and effortless manner; but they are not perfect. Markets are, in essence, a mechanism to allocate resources. If left unfettered, they do so with great efficiency. They do not, however, honor social policies and priorities beyond efficiency, and they do not capture social benefits or costs that extend beyond private transactions. These facts have long been recognized. Even in The Wealth of Nations, Adam Smith’s seminal work in 1776 which first fully exposited the structure of a market economy, he noted these phenomena and suggested numerous situations in which intervention was necessary and justified.
When markets are regulated, it is not at all uncommon for various subsidies to surface, often as a matter of conscious choice or because there is simply no mechanism to prevent it. For example, during the era when banking was highly constrained, loan revenues commonly funded a variety of other services, while commercial accounts subsidized checking account costs for households. When trucking was subject to extensive rate controls, heavily traveled routes were used to subsidize more remote areas. Once competition entered these sectors, market forces compelled the fees for each type of service to be indicative of their cost. In the absence of any other considerations, competition tends to provide the outcomes which maximize economic wellbeing. If a social priority is sufficiently compelling to outweigh the advantages of optimal efficiency (and it often is), it is within the power and responsibility of government to make appropriate adjustments. Such actions are a part of the social contract which underlies the philosophy giving rise to Western democracies.
In the case of communications, it became a widely accepted priority at least by the 1930s that providing basic telephone service availability to everyone at affordable rates was a worthy national goal. This view emerged because of the impact that telecommunications was having on the integration of the country and the risk of rural and remote areas being left out of future opportunities. During the long period of telephone regulation, service to high-cost areas was partially funded through the rates that were set for other, more densely populated areas and for long-distance calling. Once the market became more open to competition, such implicit subsidies were no longer possible. Thus, in order for universal service to be maintained at affordable prices, an explicit subsidy was required.
If anything, the need to assure that everyone has a reasonable opportunity to communicate is more critical than ever. Moreover, this situation is particularly acute in Texas because of its vast geographic territory and wide dispersion of population. According to an analysis conducted by the Public Utility Commission of Texas (PUC) a few years ago, the cost of providing basic service in some areas ranges as high as $400 per month. Similarly, the average cost in the regions designated as “high cost” were about 50% higher than the average for the state. In order to assure the continuation of affordable service in these areas, Texas implemented a Universal Service Fund. This program is funded by a fee that is assessed on all basic telephone customers which is explicitly listed in monthly billing statements. The USF provides a mechanism to reduce charges in high-cost areas, as well as programs for low-income and hearing-impaired individuals. The payments from the fund are allocated and administered by the PUC. The subsidy remains with the customers if they switch to alternate providers and it is offset by reductions in charges for other services (one of the factors leading to dramatic reductions in long-distance rates).
While some constituencies now maintain that the USF should be curtailed or eliminated, any alterations in the system should only be made cautiously and after very careful consideration of the consequences. Ironically, much of the pressure for major changes is coming from relatively new entrants to the telecommunications market who have chosen not to participate in high-cost areas. It should be noted that, while much of the USF flows to provide service to users in high-cost areas, the social benefits are observed across the entire state.
Given the complex and interrelated nature of economic activity, accessibility to customers and suppliers in all segments of the state yields “spillover” gains beyond the immediate areas receiving the subsidies. Such improvements will not be captured in a “pure” market. To the extent that universal service at affordable prices remains a significant social priority, a mechanism such as USF remains an appropriate public policy initiative. In the absence of some types of specific provisions, market forces will compel that all users pay the full amount of service, and affordable rates in many areas will be eliminated.
It is my understanding that the PUC is presently conducting a comprehensive study of the USF. This information and that from other competent analysts should be carefully evaluated before making any major policy changes. Telecommunications services and markets are clearly evolving, but that fact does not in any way negate the traditional public policy priorities. The consequences could be substantial, and the existing approach appears to be generally achieving the desired outcome in a reasonable and effective manner.
Adequate and affordable phone service is essential to economic progress. However, many areas of the state are too sparsely populated or otherwise too high cost to be desirable business for some providers. Every fee, tax, subsidy, and other market variation is worthy of examination now and then. But when it comes to eliminating or materially changing the Universal Service Fund, we had better be very careful about what we ask for.
posted @ 08:36 AM CST [link]