February 2008 Archives

In business history, there are a few industries that especially stand out for their lack of interest in the welfare of their workers, the places where they work, or pretty much anything except the bottom line. Mining of all kinds is historically awful, as are oil and gas drilling. Related industries - refining, smelting, and electricity generation, aren't particularly beloved either. All of these can be called extractive industries, as they seek to get something out of one place and bring it to another place.

The basic problem with extractive industries is simple: they try to serve their customers, while making the most profit they can. Since the results of extractive industries are usually generic commodities, it's historically been hard to seek premium prices from customers for better quality or behavior. Profits need to come from reduced production costs. There's often a geographic separation between their customers and the place the goods come from. The more drastic the separation, the less likely it is that the customers will care about the consequences of the extraction, freeing companies to cut their costs of production.

I should pause to be clear that I don't mean to say that extractive industries are evil by their very nature. However, economics suggests and history by and large supports the idea that the internal forces that drive decisions for these business don't always feels so good to those on the outside.

Wind energy is often cast as a key technology that will rescue us from other, more polluting, extractive industries. This perspective makes a lot of people more willing to dismiss people who aren't thrilled by wind power as the occasional crank, while they'd happily support the same kinds of people if, say, mountaintop-removal was at issue.

Assuming that windmills are perfectly clean and that they have no side effects (uncertain), how could they possibly hurt the places in which they're installed? It's not a coal mine spewing tailings, right?

It's not. However, there are still a lot of factors worth contemplating. Wind farms tend to be out in the middle of nowhere, and generate power that needs to go to homes and businesses in denser areas. That means more transmission lines. Transmission lines, however ugly, have become a standard part of the landscape, though, so how can you complain about those?

Well, again, the investors developing these megaprojects want to get the maximum return on their investment. That means selling power where power is most expensive - typically not the places where the power is generated. In New York State, for example, electricity generally costs considerably more than it does in other states. Not only that, but power costs more Downstate - New York City and its suburbs - than it costs Upstate - where the wind farms are likely to go.

The answer, for smart investors? Build a huge powerline connecting the cheaper power to the more expensive power, and sell the same electricity at a significantly higher price. The side effect of that arbitrage will of course be higher prices in the area that used to have the cheaper prices - but that's not the investors' problem.

Sure, there might be local opposition, but that's what friends in Washington are for. Just like the other extractive industries, energy businesses of all kinds have some very nice support from a federal government that lately doesn't have much patience for federalism.

And hey, look at that - there's lots of money pouring into wind, lots of it coming from oilmen and power companies.

I don't mean to rain too hard on wind energy's parade. It's an important component of our future energy generation. At the same time, though, I think we need to give the promises of all kinds of energy investors the same kind of scrutiny we give the promises of oil companies. There's a lot more going on here than free energy.