All right. Oh, hi everybody. It's so excited to be back and with Justin.  Hi, I'm Justin. I am working on Istio for Google. I've been working on it for about three years. Most of the work I've been doing for the last couple has been sort of in preparation for this ambient work. Prior to that, I used to work on a project called Open V-Switch and the OVN, so it's a little bit more in the SDN world than the service mesh. So I've been enjoying what I've been seeing so far, though. Awesome. Yeah, I'm so excited because Justin and I have been working on Istio Ambient Service Mesh for at least six months. And also, even before that, in the Istio community, Justin, I believe you presented some idea to the Istio Networking Workgroup. So that was over a year ago. So it's really cool to be together with Justin. I think some of you know me from early on, but just real quickly, I work for Solo. I'm one of the founding members of the Istio community, sits on the technical oversight and steering committee. And most exciting about me is Istio Ambient. I actually wrote a book about Istio Ambient, Explained with Christian. So if you guys ask really good questions for our session, you're going to get one of our books. All right. I'd like to start talking about challenges with psychos today. The biggest challenge, in my opinion, is transparency. So it requires the injection of psychos, right? How many of you are running startup or shutdown sequence issue with psychos today? Nobody? Somebody? Got to be somebody. There's actually a lot of complaints we heard from our user in the Istio community. And I'm sure it's all across different service mesh projects, too. And then how many of you are not too happy the cycle upgrades that require restarting of your application? Yeah, that's right. And how many of you ever wanted to run jobs, Kubernetes jobs, but find out, all right, it doesn't really support jobs with the cycle? That was a little bit frustrating, right? And what if you have server-sent first protocols, like MySQL, right? How many of you had the requirements to run those in service mesh? Sorry, hopefully I didn't cost that. Yeah, so these are the challenges with psychos, right? You always have to drag something with you, and then it has frequency needs with CVE upgrades. And the second challenge, I would say, is incremental adoption, right? Most of you adopt service mesh because mutual TLS, but psychos doesn't offer a choice. They can just adopt service mesh just for a fraction of the cycle. They still have to carry the entire cycle with their application container, even though they just need one single piece of the service mesh, which is typically mutual TLS. It's really all-or-nothing model with the cycle today. The third thing, in my opinion, with cycle is over-provision of resources. Let's say you have 10 replicas for your services, and each of your 10 replicas always have the psychos that's along with them, even though you may only need three parts to do the job your psychos is doing, whether it's mutual TLS or traffic shifting or layer 7 processing. So you don't have that choice, and you have to always pay for that cost of psychos. With that, I'm going to pass to Justin to talk about ambient service mesh. Yeah, so the plan with ambient was we wanted to address those issues that Lynn was mentioning. So sort of the most important one, from at least my point of view, was not being disruptive to the applications. So having the proxy be a sidecar, the way that those sidecars are instantiated, it requires restarting the application. So you can't just hot insert service mesh into your workloads. You have to do something that's fairly disruptive. And because we're doing full L7 processing, there's also the chance that we can break some applications that have non-compliant HTTP stacks. There is some stuff with the way that we do MTLS upgrade in Istio that could cause some breakage. And so we wanted to address those things. And then also just when there are CVEs that need to be addressed in the proxy, it requires, if you want to upgrade, it requires restarting the workloads as well. So we wanted to be much less disruptive to applications. As Lynn mentioned, currently we have to, in Istio with sidecars, you have to over provision for the proxies. You have to, for each workload, you need to have a proxy and allocate resources for worst case scenario for the traffic that is likely to be seen on that particular application, which means that you end up telling Kubernetes that you need additional resources that you end up never using so that a lot of it just goes underutilized. We also wanted to make sure though that sidecars still have their place. There are a number of applications that require the security model or the approach that sidecars have. And so we also wanted to make sure that whatever we did also continue to interoperate with sidecars. And as Lynn was mentioning, we also currently, the way that Istio would work is if you wanted just even a feature like MTLS, you had to take all of Istio and all of the complexity you needed sidecars and you needed to restart your applications. And we wanted to have a smooth path so that sort of the amount of work that you had to do was related to, or to get it installed was related to the complexity of what you wanted to do. So we wanted a smooth upgrade path from something relatively simple like MTLS encryption to full Istio. So here's a picture of traditional sidecars. So you can see that we have five workloads here. And then for each of the workloads, there is a sidecar proxy within the same pod. So the approach that we took with Ambient is that we broke apart the proxy into two parts. And then we also are looking now at providing policies, separating L4 policies from L7 policies. So at the lowest layer, we have the L4 policies, which we call the secure overlay. And so instead of having the sidecars, we take the proxy that we're calling Z-tunnel and we run that as a daemon set on the node. So instead of having one proxy per workload, we have one proxy per node. And then that Z-tunnel is responsible for doing the MTLS connections between it and other Z-tunnels. And when I talk about how L7 works between the Z-tunnel and a waypoint proxy. Now, once we want to introduce L7, we still have the Z-tunnels. Nothing changes in the workloads themselves, but now we introduce what we call a waypoint proxy. And that is a full L7 Envoy proxy that we're deploying that does everything that you would normally expect Istio to do. And rather than make it an all or nothing, we configure it per namespace or per service account. So let's say that you had these S1 and S2 workloads that you are in one network names... Sorry, Istio namespace. Then if you had L7 policies for those, what we would do is we would spin up a waypoint proxy and then we would redirect any traffic that would... Before, in the previous drawing here, we saw that a C1 wanted to connect to S1. It would just go over that tunnel. But now what we do is we tell any traffic that needs to reach that S1. It needs to go through the waypoint proxy and we redirect the traffic. And Lynn will get into a lot more of these details when she does the packet I view of tracing the traffic. So as I mentioned, we're now breaking the Istio into two different... consciously choosing two different layers. So we have the secure overlay layer, which is just doing L4 processing. And so in that case, we can't actually do anything L7 related. But we can do any L4 policies could be done in that Z-tunnel. And so we can do TCP routing, TCP metrics, MTLS tunneling. But if you want things like authorization policies on URIs, that requires the waypoint proxy and then that gets deployed and that's that L7 processing layer. Another thing that we introduced with Ambient is something that we're calling HBone. So previously when we did an MTLS connection in Istio, we had sort of a hacky method that we would use for upgrading every connection to MTLS that was sort of fragile and it could break some applications. And so we have defined this new protocol that we're calling HBone. And it's really HTTP Connect with just sort of standard headers within the HTTP header. And then we use MTLS for the encryption. And so instead of previously, if you used Istio and you wanted to encrypt the traffic, if we had these three connections on 80, 443 and 980, each one of those would be a separate connection to the proxy. Instead what we're doing is we're opening a single HTTP connection and then tunneling all of the traffic through that, which cleans up a lot of the issues that we were seeing with the previous method. It also makes it easier now when we have those waypoint proxies because we've defined a standard tunneling mechanism to carry some of that identity as traffic has to go out of its way and not just going from workload to workload. So one of the questions that we get, the first question that people often ask about this is what the security model is because obviously it looks a lot different from the sidecar where before it was pretty easy to understand that the sidecar did everything and it's just sitting next to the workload. But now we have multiple shared resources. So I wanted to just briefly touch on this. We actually wrote a blog when we announced Ambient Mesh. It's available on the Istio website if you're interested that goes into a lot more detail about how security works. But there's sort of three different levels that I think of. So first is the way that the application interacts with the service mesh. And so it's actually an advantage now not to have the workload co-located with the proxy. So previously if there was a vulnerability in the application then that application could actually attack the proxy. And also if the application was just misbehaving the current way that we would send traffic through the proxy is we would just use IP tables rules and redirect the traffic. But it was pretty trivial for an application that is misbehaving to just bypass the proxy entirely. So by moving the enforcement outside of the workload we actually have better protection than we previously had. Another one is the Z tunnels. And so obviously there is some concern that people have when they first hear about this design about having this Z tunnel have the certificates of all of the workloads. But we try to mitigate or we mitigate that in a couple different ways. First of all when the workload requests the certificate or so when a workload starts up the Z tunnel notices that and then it requests from the CA for the certificate for that workload. And then that CA actually ensures that that workload is available. It authenticates the Z tunnel and then it makes sure that that workload that is being requested is actually present. So that not a Z tunnel can't just ask for anybody's certificate. The other thing is that the Z tunnel I mentioned that is just doing L4 processing. So it has a much smaller attack surface than the full Envoy proxies that we were doing before as sidecars. So when we look at the Envoy CVEs most of them are related to the L7 processing that's happening that we are not doing at all in the Z tunnels. And then finally there are the waypoint proxies which are shared. But the way that we share them are per service account or per name space. So those workloads already have a common identity. So really having the waypoints shared doesn't reduce the security at all because it's not really any different than the sidecar. So I'm going to pass it to Lynn to walk through the packets. Okay, great. Thank you so much, Justin. That was a great overview of Istio Ambient Service Match. I'm really excited about the security stuff you were just talking about. So a disclaimer, we don't have a live demo because we actually have multiple live demo on YouTube. So if anybody wants to see an ambient live demo just go to the Istio channel. The market walkthrough we are going to have is going to focus on the pieces relevant to Istio. So I'm not going to dive into like Kubernetes networking and how the container networking works just because we don't have enough time for the talk. So as Justin was just mentioned, if you just need mutual TLAs or layer 4 functionalities you basically only need a Z tunnel. So what happens in this case is the client, which is app A in this diagram. So the app A would come over and, you know, and then when it's attempts to send the traffic, request to app B, what happens? Sorry about that, hiccup. Sorry about that. This is a single point of failure. So God bless. So when app A is attending to send a request to app B, the Z tunnel, we set up traffic redirections through IP table and routes. So the request would be captured by the Z tunnel that's co-located on the same node. And then the Z tunnel would impersonate as app A and send the request through the edge bone tunnel that Justin was just mentioned and then to the target Z tunnel. And then the target Z tunnel is intelligent to forward the traffic to app B. So that's how it works at a high level. So let's take a dip into how it works. So the first thing is you would need to include your application in ambient service mesh, right? Else we don't know whether you want your application part of ambient and to do that the simple way to do that is label on the namespace. So for anything you want to be part of is your ambient service mesh, you just simply label that namespace with ambient and that's how we know you want to be part of the ambient. So essentially in is your config map there is an ambient mesh configuration by default that configuration is namespace. But eventually when you feel comfortable about ambient you want to enable it for the entire mesh you could enable it as for the entire cluster. So that's also available. But for now let's do it on the namespace as people looking explore ambient and transition to ambient. So another key component is Istio CNI. We have expanded Istio CNI to work with ambient. So what it does is the Istio CNI would do a check to see if the application is part of ambient based on the namespace label we just talked about. And if it's part of ambient we are going to set up the traffic redirection to have the Z tunnel co-located with the application part to always capture all the incoming and outgoing traffic. Similar as the IP table setup with the Psycon and application container today except we're doing it between the application pod and Z tunnel co-located on the same node. And if the pod is not, the app is not part of ambient we would essentially do nothing. So it would behave the exact same as you are not part of Istio or ambient service mesh. So let's walk through how Z tunnel works. Before you even send any request from app A to app B the moment you stand up your pod in that particular namespace that you labeled as ambient Z tunnel is going to serve as XDS client. It's going to try to get the application get the configuration from the Istio control plane. So essentially what Z tunnel is going to send the request to Istio control plane on 15012 and then the Istio control plane finger out oh you are the Z tunnel on that particular node and this is your specific XDS config because if you are Z tunnel on a different node your configuration will look differently. Now let's talk about as you add applications to your namespace that has this magic ambient label Z tunnel is also served as a certificate authority client. So in this case what Z tunnel is going to do is Z tunnel is going to say hey this is my service account token for Z tunnel now this application application A is can you give me the search of the application A so that I can impersonate application A. So the Istio control plane is going to do the check that Justin was just mentioned whether the pod for application A is co-located on the same Z tunnel that's sending the request to see if it's application A and then send back to say if it's allowed hey you are allowed to represent application A and here are your search so essentially a Z tunnel on the node is multi-tendency it can represent application A or it could represent any other application that's part of the ambient and co-located on the same node. The next thing we want to talk through is how the traffic redirects right so when the application does send a request to from application A to application B on pod 80 in this example so the connectivity between application A to Z tunnel right now is actually plain text in green the reason why it's plain text is because we don't encrypt that traffic at the moment and the Z tunnel would upgrade the connection through encrypted traffic through the edge bone once the traffic hits the Z tunnel so this is also what Justin mentioned earlier it's very very similar as how your application container works with the side card next to it it's also the plain text traffic. So now at the moment the Z tunnel for app A it also have the right XDS configuration so it can think out you know where is the target what is the target of the application B Z tunnel it needs to reach out to. So the next thing we're going to talk about is on the source Z tunnel what's going to happen when the package arrives on the source Z tunnel so essentially the source Z tunnel is going to think out what is the destination Z tunnel based on the XDS config we just talk about how it gets the XDS config and then from there it's going to try to think out is there an existing edge bone Z tunnel between application A and application B service account pal it's trying to reach from this particular source and the targeted Z tunnel if it is yes let's go ahead reuse the existing tunnel right be more efficient and then if there's no existing pal it would create the new tunnel so if you record an edge bone slide that Justin talked about this is the edge bone tunnel and the logic trying to decide whether to reuse. Now as we think out where the destination is and think out whether to establish the edge bone tunnel as the package reaching out to the destination Z tunnel so by the way this traffic is encrypted it's mutual TLS because the source Z tunnel needs to present the app is certificate and the destination Z tunnel using similar way it's can impersonate application B so it also serves as XDS client and also CA client so it gets the app B search here and it also gets the right configuration so now what happens when the package arrives at the destination Z tunnel the first thing it does is to terminate the mutual TLS that the traffic is terminated and then it's going to do a policy check but Justin talked about you can do a layer four policies so it's going to check if application A is allowed to call application B right on that particular port number and if it's allowed yes let's go ahead forward the package to application B and there will be plain tags forwarding and if it's not allowed it's going to drop the package so it's going to go through Justin also talked about waypoint proxy one of the key innovation is your ambient service mesh is the two layer approach right the layer four is multi tendency with Z tunnel and optionally you can add layer seven through waypoint proxy only if you need that functionality so in the case there is waypoint proxy for instance you need layer seven processing so the source Z tunnel it would be programmed automatically by Israel control plane through the XDS client and configuration from Israel control plane and then it would know to send the traffic to the waypoint proxy so the waypoint proxy it's going to represent service B service account in this example and the waypoint proxy is also going to get the application B search from the Israel control plane and the interesting thing here about waypoint proxy is it doesn't represent more than one search it only represents the application B search so it's going to go through the same car to Israel control plane which we talk about and then from there the waypoint proxy is also having XDS config from the Israel control plane so it knows to forward the traffic further to the destination Z tunnel in the case of the waypoint proxy alright so that's how it works in the basic scenario with source and target Z tunnel and whether you have a waypoint proxy in for your layer 7 processing now let's talk about how Psycar works in issue 1.16 and master it's recently just added support for H-Bone for Psycar so shout out to John did a lot of work on that in our audience so the purpose reason why we put H-Bone support for Psycar is for interoperability right when you guys run Psycar with 1.16 and then when you use NBN you can actually have them talk to each other the reason is the Z tunnel speak H-Bone and then the Psycar post 1.16 or newer can also speak about H-Bone so the two can easily interoperate which is really really cool the next thing I want to talk about is what if the source is in ambient and the application D is outside of mesh so in this case it's still control plane is going to be automatically program the source Z tunnel to recognize the application the destination is outside of the mesh and it's going to try to send the plain text traffic because that's only traffic the application D could understand and the other scenario is what if the source is I guess is outside of the mesh right the application E here and the destination is application B is part of ambient and then it also have a waypoint proxy in this case right so the way it works is application E will send the traffic to application B and because of the traffic redirect set up by the CNI it would always capture the traffic on the destination Z tunnel and then the destination Z tunnel will do a high opinion and forward the traffic to the waypoint proxy for application B if application B has a waypoint proxy so this would come through the edge bone encapsulation and it would be using the application B search on both the Z tunnel and also the waypoint proxy alright I think that's all the scenario we have for different package I've used I guess I just want to quickly talk about the state of is your ambient service mesh at the moment so it's an experimental branch in Istio we're working really really hard in the community to merge it to master John actually started a list of things that we need to finish before drive ambient to master and people can start to run it in production so give us a little bit more time we do expect to be merging master is a very high priority in upstream we actually have weekly meetings with contributors from Google Solo and AWS cloud Red Hat and a couple of other companies participating in the meeting so really really excited about that we're also looking at optimized Z tunnel we had some challenges with configured Z tunnel to be multi-tendency with our way cause our way wasn't designed to be multi-tendency so we're looking at Z tunnel we're trying to standardize the API between the control plane and also the data plane and you know be able to upgrade allow you guys to upgrade from cycle today whether you're running it in your production environment to is your ambient and we highly recommend you all to get involved in the Istio Slack they are I believe is not part of the member register there's an ambient channel part of the Istio Slack and the weekly contributor meeting with that I would like to thank you all and I would love to hear questions from the audience alright anyone have any questions alright I actually have two questions if that's okay so even though it's a layer for proxy do you think it becomes a bottleneck for everything running on the node and how do you scale it as the workloads are scaling up and my second question is we talked about reduced operational overhead but it seems that the overall net complexity of the system would you say it's comparable to the sidecar approach or it's you know at the same order of magnitude just delegate it more to the node for example if we were trying to debug would we have a harder time debugging or an easier time debugging so first of all on the z-tunnel so Lynn had mentioned that we're looking at optimizing the z-tunnel so currently the way it's implemented is we've taken Envoy and we've modified it we have to create a lot more tunnels than I think Envoy is usually set up for and so the scale isn't great for that but we are looking at rust implementation that's showing looking quite promising so even with like 20,000 tunnels we're seeing it use less memory than Envoy so we think that you know there's work to be done but we don't think that that scaling will actually be an issue in practice by the time we finish optimizing it and then the second question about the complexity I would say you're right I think it is a bit more complex than the previous model but the sidecar has its own set of complexities when debugging them but we will have to come up with a different way of debugging so we have to look at introducing new debugging tools to make it easier to trace for example where packets are getting dropped if something's going on in the network that sort of thing so we do recognize it's something that we need to work on to make it deployable Yeah, can I ask you have you tried it is your ambient service mesh? Okay, well the question you asked got really good which made me think you already tried it I mean I totally agree with what Justin said I would say the other thing you want to also look at is the complexity with sidecar because if you have a unique container if you have Kubernetes jobs if you have service and protocol you know the transparency to the hurdle to get it working with sidecar you know you're actually paying a lot of complexity and then ambient is it's a baby at the moment right it's experimental so give us time to work through the debugability you know a lot of performance issue ambient is actually as performant as sidecar even with its experimental stage so that's very impressive how many years do we spend to work on sidecar five plus years and ambient is just you know six months plus so yeah, great question alright that's another question Hi there, that was a great talk so I wanted to understand a little bit on the resiliency of the Z-tunnels so how do you build the resiliency because what if the Z-tunnel has a failure and say there can be multiple reasons for the failure so how do you build the resiliency in such cases because I'm sure more and more the user just come the failures will keep coming as well right so yeah I mean I think that one of the hopes is that the Z-tunnel the way that we're implementing it will be much simpler than the sidecar proxies so you're right I mean there is going to be that single point of failure I mean we have other examples of that also within you know within Kubernetes with the networking stacks so it is something that we will need to look at but I think that the simplicity of what we're trying to do will create a much more resilient system than it has been in the past Yeah I would add that the way to think about the Z-tunnel is think about it as your CNI right what if your CNI is not running on the node right it's real but it could happen right that's also it's really important when you design your application you want to make sure it's higher availability across different nodes so yeah just think about it as a CNI part of the infrastructure Hi just thinking about layer 7 handling and that extra envoy is there already or do you anticipate there being something to say make sure that network hop stays within the zone or any other optimizations that you anticipate yeah that's a really good question yeah we've actually heard a lot of people asking for that the way we implemented it right now at the moment how you deploy a waypoint proxy we haven't talked about that so it's using the Kubernetes gateway API so you basically tell us you need a waypoint proxy for your application and then we would automatically provision the waypoint proxy for you the current API doesn't really allow you to optimize on the placement of the waypoint but that's something we're definitely looking into to allow you to placement it nicely in a particular maybe zone or region that's co-located with your app or whatever you need yeah with the persistence H-Pone connection how does low balancing work are there multiple connections to endpoints or is it or does traffic just always flow to a single destination service do you want to take that? yeah so the way that it so currently works is that there would be a new connection for each workload tuple and so right now I think they all share a single H-Bone connection I imagine it wouldn't be that difficult to do some sort of load balancing for like Z-Tunnel to Z-Tunnel we are looking at the ability to scale the waypoint proxies in which case there would be some sort of L4 load balancing so if one of those namespaces was enabled it had a number of it needed a number of waypoint proxies then we would do the load balancing on the client side thank you this is a very interesting talk with moving traffic to lower in the stack have you had to make any concessions about surfacing metrics and observability and do you have plans to implement that feature in the future if you have how to make concessions? yeah that's a great question it's something we are actively working on I believe layer 7 telemetry it's in place with the experimental branch a couple of us actually tried it so you can actually go to the permissive endpoint to get all pretty much all the is geometric like the total the H2P metrics that's all available today with the layer 4 telemetry it's been actively working on you'll see on my team been doing a lot of work on that it hasn't made to the branch yet we also have red hat team from Kayali who actually try to put the services in the Kayali graph and they've been raising some of the missing metrics so that's definitely an area we would look into next to show it up the observability graph in different tools yeah I will add one thing though which is in order to get the performance up we try to drop one of the envoy hops so if for example previously you would have a sidecar on both sides of the connection now what we want to do is we have just a sidecar but we just want an envoy proxy more on the server side to enforce policies so that means some of the telemetry that you might get for request latency that's not going to be available just because we're doing a different model we do have some thoughts about how we might be able to bring some of that back but currently that is missing I have to apologize for the delay it's 1056 because I'm the emcee for the next session so really apologies I just didn't keep track of time really well so I would say thank you all for joining us for this session I hope you guys enjoyed it and learned something and for folks you ask good questions come by and get your books here so we'll see you next time


Okay, so what I'm talking about today is energy policy and this, my consulting job, a large chunk of it, I work for the Institute for Energy Research, so let me just plug them while I'm thinking of it. If you're interested in the stuff that I'm bringing up here and you want a resource to go to, it's primarily for U.S. energy facts, but it's also, you know, these issues are relevant for people in other countries as well, but it's just one long phrase institute for energyresearch.org is their website and so that's, I'm their senior economist, that's one of my titles, and so a lot of what I'm talking about here is I'm just relaying some of the things that I've picked up consulting for them. So this, a lot of the stuff I'm going to do here, it's all very free market economic stuff and it's consistent with the Austrian school approach, but it's, a lot of these things are just like topical policy issues that they thought would be interesting for me to share with some of you guys today. Okay, if you've seen my other lecture, the same problem happened, it's not that I'm saying everything is equally important, it's just that the Roman numerals didn't carry through, it's supposed to be one, two, three, four. So here's the outline of what we're doing today, I'm going to talk about energy supplies, how to think about that from a free market perspective, the claims of market failure in the energy sector, we're going to talk briefly about fuel economy standards, see the trade-offs there, and then I'm going to spend a good chunk of the lecture on this issue of the social cost of carbon. That's where I've done a lot of my research, I've gone and testified before the House and sent it on these matters, and so this, this is where I know a lot of, of the minutiae, so I want to just give you guys an understanding of how this energy debate is unfolding, at least in the United States and to, to my knowledge, it's similar in other industrialized countries. Okay, so a lot of these charts that I'm going over right now, they come from, I don't know if you can read in the back there, this is Energy the Master Resource, that's the title of the book. The author of this is a guy called Robert Bradley, just as it sounds, that's how you spell it, and what's interesting about him is he got his PhD, Murray Rothbard was his chair for his committee, but he didn't go to UNLV, what happened was Bradley was a student and was gonna get a PhD, and I don't know if it was economics or political economy or, you know, some hybrid like that, and he was an Austrian, Robert Bradley was, and so he wanted Rothbard to be his chairperson, and the school where Bradley was going allowed you to pick somebody from outside the school to be your chair, so that's, so Robert Bradley is one of the few people I think that has a PhD that Murray Rothbard was technically the person overseeing it, so anyway, and this stuff is all online for free, the PDFs if you want to go look at more of this, so let me just go over some of these basic facts, why he calls Energy the Master Resource, that's a takeoff from Julian Simon's book, The Ultimate Resource, okay, so in case you don't know that name, you probably should let me just throw that out there, it's Julian Simon, as again, as it spell it as it sounds, and what Simon's point was is that in this Malthusian, after the economist Thomas Malthus, so there's this Malthusian mindset of scarcity, and that carries over, so Simon was talking about it more generally, that people, there are a lot of people ringing their hands, oh my gosh, poor mother earth can't support these teeming billions of people, we got too many people running around, and so we need the government to crack down on population growth, we need to wag our fingers at people and say, hey, stop having so many kids, stop consuming so much, every time you have a gallon of gasoline that you burn, that's one gallon less for somebody else, that sort of mentality, that was very pervasive, certainly in the United States, and I gather in other countries as well, and so everybody has just been scared and guilt-tripped into thinking, oh, I need to conserve, I need to conserve, I can't be so wasteful, we Americans are so wasteful, you'll see statistics about Americans are such and such percentage of the world population, yet they consume this many of the resources, you see all kinds of statistics like that growing up in the United States that make you feel really horrible about being an American, don't get me wrong, there's plenty of reasons to be ashamed of being an American, but not for those reasons, all right, I probably can't find any of your countries on a map, for example, but these, this claim that, oh my gosh, Americans are this greedy group that's consuming all these resources, that's very typical, and again the idea that there are too many people walking around and we're just going to overload poor mother earth, she can't support all this, all right, and naturally how do we solve these problems, it's not enough just to write books and warn people you need the government to come in and enforce your notion of morality or sustainability, so Julian Simon in his book, The Ultimate Resource, he was saying the ultimate resource is not the physical things because the the Malthusian mindset was focusing on just oh there's limited resources here and if we use it up too quickly what are our great grandchildren going to do because they're not going to have anything to use for how are they going to have an economy if we use about the resources now and so Julian Simon's approach with the ultimate resource was to say no, don't worry about these tangible things, the ultimate resource is the human mind and human creativity that really where resources come from economically is knowing how to use the physical, the world, the material world to create things that then humans value and so it's that creativity and entrepreneurship that is the ultimate resource and so Robert Bradley you know loved that angle loved that insight and so that's why he mouses energy the master resources partly tribute to Julian Simon's viewpoint one way I like to crystallize I don't remember if I made this up or if I just stole it from somebody but it's intellectual property so we don't believe in that anyway is the the way I try to crystallize the difference is the Malthusians look around and see people and they think oh look at all these bellies right how are we going to feed all these people whereas someone in Julian Simon's framework looks around and says look at all these minds imagine the wonderful discoveries these people are like I might cure cancer right that person might figure out a new way to produce energy okay and then the thing too is with a lot of you know some the nature of technological discoveries is once just one person thinks of it everybody else can copy it all right so it only takes one person to figure out how to cure cancer and then whether there's 200 people alive or two trillion that cure can get multiplied and spread around very quickly all right and so that's the sense in which if you're worried about the earth running out of food or oh my gosh where are we going to put all these people well actually maybe the right solution is to say well let's have as many kids as possible because maybe one of our grandkids is going to figure out how to make you know a cheap way to make ocean or cities that float on the ocean you know they'll come up with some or she will come up with some discovery that will make that very cost effective whereas right now it would be too expensive to try to just put millions of people floating around on the oceans all right so that's that's the difference in mentality and you see empirically that Julian Simon's approach pans out and so that's what Robert Bradley is doing here in this slide so he's showing the labor time needed for energy so it's true there is a certain sense in which every time you burn a gallon of gasoline you're ultimately drawing down the earth's finite stockpile but that's not really economically what the relevant issue is and so if you look at it instead in terms of if you're worried about is is population growing too quickly do we had just too many people running around Julian Simon said well if that's if that is the case if there really were the melthusian world the way that would manifest itself in terms of market prices is that labor you know wages would go down while the prices of the raw materials would go up right because the raw materials are becoming more scarce whereas labor would be superfluous if it really were the case that oh man we just have too many people now we got a slow the rate of population growth and so you would expect to see empirically that workers an hour of a workers labor would buy you less and less in the marketplace if it really were the case that we just population were growing unsustainably quickly but of course you see the exact opposite that for various reasons and of course you guys know having been here now in your outside reading you can come up with why free open competitive markets lead to this outcome but whatever the explanation this is just what the facts are over time so this starts in 1920 and goes up through 2000 you can see for example gasoline the minutes of average workers labor needed to purchase a gallon of gasoline was 32 minutes okay so just make sure you understand what this is saying what that means is back in 1920 the average workers wage compared to the average price of the gallon of gasoline i think this is for the united states it took you had to work for a little bit over half an hour in order to earn enough wages to then go buy a gallon of gasoline whereas that has plummeted such that in 2000 it was about you had to work six minutes in order to earn the wage rate necessary to then go buy a gallon of gasoline okay so even though in a chemical or physical sense yes the earth is unable to produce as many gallons of gasoline technologically in the year 2000 is in 1920 because as far as we know martians weren't giving us crude oil in between nonetheless it was economically easier for a worker to go get a gallon of gasoline all right and also what what rob doesn't have on this slide is that a gallon of gasoline now gets you farther than it would have back then in 1920 because cars are more fuel efficient as well all right so it's not merely just the amount of labor you need to expend to obtain a physical gallon of gasoline but then what you can do with it now is multiplied a lot more compared to what it was in 1920 so rob bradley's point is economically speaking gasoline has become more plentiful it's become less scarce over time so the malthusian mindset is exactly backwards and you can see a similar thing with electricity how many minutes you had to work to earn the wages necessary to buy a kilowatt hour of electricity it was eight back in 1920 and then plummeted to about 0.2 by night or about the year 2000 okay let me spend some time on this because this is also counterintuitive at first so it's this issue of oil reserves so the specific metric here is billions of barrels of world crude oil but the specific category we're talking about is proven reserves all right and so back in 1944 this y e means year end year end of 1944 the official tally for worldwide crude oil proved reserves was 51 billion barrels that's what they would have reported back then if people said hey what's worldwide what's the proved reserve right now of crude oil they would said 51 billion barrels if you ask the same question at the end of 2003 the answer would have been oh right now worldwide proved reserves of crude oil uh proved reserves of crude oil we have about 1.3 trillion barrels all right 1266 billion well about 1.3 trillion so the proved reserves increased by 25 times and that doesn't count the fact that as you may know between 1944 and 2003 humans did burn a few gallons or barrels of crude oil here and there in particular they burned 917 billion okay so make sure you understand this is the existing inventory that they know about this isn't saying how much did we go through during that time this is saying right now snapshot in 2003 how much oil is in the ground that we are confident and know about that our geologists and seismologists have located in you know in the employee of oil companies and government surveying agencies it's about 1.3 trillion so it increased 25 times even though during that same time interval globally this is how much crude oil was taken out of the ground and consumed you know refined into gasoline and other fuels and so forth okay so how is that possible because at first that seems physically impossible it's because this concept of proved reserves does not mean how much oil is literally contained within planet earth no it has a much more specific meaning and a definite meaning that these are oil deposits where experts from again from the oil companies and certain government agencies go out and they have various techniques that have improved over time you know but way back in the early 1940s they used different techniques now they have you know planes using different measurements and satellites to give them a more accurate idea and they go out and they try to locate oil deposits right major oil companies they need to know when this well that we have runs dry where are we going to start drilling to replace that okay because it's not that it's the same wells all the time they they use them up and then they go and drill other places and as time passes they go out deep sea oil rigs they've come up with new ways to to tap into oil deposits that may have been uneconomical to tap into back in the 60s let's say okay so the point is that humanity has located and now has on deck a lot more 25 times more than it did back then and so if you stop and think about that actually makes perfect sense for an analogy it would be you know if it's a little kid goes into the pantry of his house and he looks and sees that they have a half a box of Cheerios left and then he realizes wait a minute I eat a bowl of Cheerios every day and so mom and dad we better stop eating Cheerios so fast because at this rate we're going to run our Cheerios next Tuesday and so I got to now just cut myself down to half a bowl a day because you know I don't want to run our Cheerios next Tuesday and of course that mentality of that finite mindset the mom would just say well no if if that happens we just go to the store and get more you know you just focusing on the amount of Cheerios in the pantry is not the right thing to be looking at we can just go fill it up as that runs down so it's the same thing here that the oil companies make forecasts and they know as the located crew proven reserves out there as those get drained down then it makes sense it's profitable then spend money to go do more research and exploration okay because that that's a business right well an oil company has to make decisions about what to do they could spend money looking into ways to you know make the refinery process more efficient there's all kinds of things they could spend their money they could just go invest in bonds and what have you and one possible thing is should we spend an extra ten million dollars sending out more you know getting more satellite coverage or going in and sending out a ship into the ocean and exploring or drilling leasing land from the federal government in a certain area where we found oil before you know near there and drilling test wells and seeing do we think there's oil down there okay so they have to spend they don't know where it is they're not sure and so they have to go explore and that costs money and so it's a cost benefit calculation to see is it worth right now spending more to go find more oil all right so that's the way it works and again this this actually when you really when you think through this makes total sense because you know why would it go up why is it not just replacing to keep it steady because annual consumption of crude oil has gone way up from here to here right and so if you looked at a a retail store for example a store that I don't know sells toys let's say not only would they do more business as you get into november and december because the christmas holiday not only would they sell more toys in november and december compared to like august but probably the amount of toys in their inventory even the number of weeks of toys in their inventory would probably be bigger certainly going into the christmas season and maybe even afterward because as their turnover increases they want to bulk up to make sure they don't get caught and run out you don't have people wanting to buy the toy then it's not that they don't have it in stock right so they might even quite rationally bulk up their inventory and even have a greater number of you know weeks of toys based on current selling rates as they go into a busy period the same thing here it rationally makes sense the oil company as the rate of consumption from their end clients goes up they want to enlarge the buffer that they have of oil that they know is there and it just will take a few years to get the you know to get it into the pipeline as it were or quite literally to get into the pipeline okay so that's make sure you understand that to give you a specific example of this in 1980 and to see why the malthusian mindset is very misleading in the year 1980 if you looked at the amount of proven worldwide crude reserves and then looked at the worldwide consumption of crude that year and divided the answer was about 25 and so conservationists people who were worried about capitalism in the energy markets and how we need to the government to enforce conservation they might write letters to the editor or have op-ed pieces throwing around statistics saying things like the earth right now only has 25 years left of oil okay and again what they mean by that phrase is the amount of oil reserves we know about crude oil reserves then compared to how much are we using this year and oh my gosh we only have 25 times that so we only have 25 years left of oil and so they would lead people to believe that the earth would have run out of oil around the year 2005 okay does everyone remember when we all ran out of oil in 2005 right and that's why we stopped using oil we had to switch to electric cars all right so that's obviously not what happened so I'm trying to get you to see what's utterly misleading about that statistic and you'll see those kind of statistics all the time okay this question will we run out of oil that's actually a very interesting question I'm gonna first let me just explain this slide you can see the the empirical facts but then I want to walk you through the logic of it because it's actually a really interesting theoretical question you see how markets work okay so as far as the slide goes I realized in the back you might not be able to totally see this by the way just so you guys in case they didn't announce it all of our power points are accessible somewhere all right that probably doesn't help you right you probably need more specific answer than that but yeah okay okay so if you ever need to see a slider where I saw some people come up taking pictures I mean you can do that if you want but there's also you can get the actual slide so um you can see here based on the act on the the type of resource you're talking about there's there's plenty of love and so these these statistics say years worth well obviously it's not that you go and look in the ground and there's a years worth of oil like that dimension what does that mean no there's physical amounts that they know about and then they're saying based on this year's current rate of consumption and you divide that's where they're coming up with this metric years worth so in terms of crude oil it was about 40 years that not again this chart I think was is circa 2003 so the the numbers are in the same ballpark they might have moved a little bit this is I'm just grabbing this because I like the way Rob presented it in his book crude oil resource so resource is a broader definition from the term reserves so resources is broader meaning seismologists and geologists they've they think that the oil's there but they're not as confident it's a broader range of confidence this one in particular where did my laser go this one means like they even have current market prices they can bring it to market and everything and some of these broader categories mean well it wouldn't be profitable to do so but we know the oil's there okay so you can see how it goes up depending on how broad you want to make it and back when Rob produced this this idea of shale oil was not as economically feasible to develop whereas now with uh innovations and hydraulic fracturing or what's just called fracking and horizontal drilling you know where they so they can drill down and then make the thing take a right angle and go this way and and tap into deposits that otherwise would have been hard to reach that's part of what's going on in this you may have heard like the boom and and shale and so forth so that's what's what's happening there so you can see there's plenty of resources and also uh if you're curious if you go to iers website the institute for energy research dot org and you look up it's it's called hard facts f a c t s and it just has a whole and it's it's um and there's also if you type in uh north american inventory so there's different reports that ier has published just documenting the tremendous amount of reserves that the us has in fact like do you guys know that the us is poised to to become the leading oil producer in the world okay that that would have been inconceivable 15 years ago right people were worried about the us running out of oil oh my gosh we're importing all this stuff from the middle east we have to wean ourselves from oil because those you know it's war-torn region over there and now the us is poised to become uh you know a greater ex even oil explorer than many of those places yeah do you have a question a huge difference in years no and uh i would have known that before i don't know i need to go check that i i don't know off the top of my head and i don't want to make up something that's wrong so there you go um it would take me 75 000 years to locate the answer for you okay um let's see here okay so this question of will we run out of oil the so the theoretical issue of that let me just walk you through that um the analysis here if you want to see it spell out more i'm just going to run through it really quickly for you guys i have an econ lib article it's called i think it's just called oil prices so if you go to google and do robert murphy oil prices it's probably one of the top hits but it's at econlib.org and i just walk through the logic of this in particular uh the the economist herald hoteling and the way he analyzed the economics of exhaustible resources or depletable resources all right so let me just walk you through that so thus far i've kind of shown you it's wrong to think about even something that's a finite depletable resource like natural gas stockpiles or crude oil in contrast to solar which you know people say oh it's solar so it's renewable and that's why it's great because we're not going to run out whereas we don't want to be dependent on crude oil because that's going to run out right that's the kind of argument you hear which just first of all just think through that that they're saying we need the government to force us to stop using cars that rely on gasoline because that only works if you get you know use crude oil and refine it to gasoline why don't we switch to electric cars because then we can use the sun or other renewable energy sources so they're they're forcing you to stop using gasoline now or in the near future because otherwise left to its own devices the market would have us using it until we would run out and at that point we would have to switch to electric cars you get what i'm saying it's like because they're afraid of some awful thing that might happen in 50 years they're making the awful thing happen right now all right so so that's that's one issue but beyond so what i'm trying to get you to see is even beyond the issues that i was bringing up like in this slide in the one before about how yeah technically the amount of crude oil on earth is finite but it's misleading to think of it like that because entrepreneurs have to go find it and so practically speaking it's you can treat the existence of crude oil deposits just like how many apples you have to pick or you can just plant more apple trees in the same token by the same token economically that it's fine if you analyze even stockpiles of oil and natural gas like that because you can just go find more but even i just want to push the logic to his experience suppose all the oil all the crude oil in the world literally we're in just a giant basin and we knew where it was and so you had whatever 10 trillion barrels and that was it there was not a single drop of crude oil anywhere else on earth and you know we couldn't get some from asteroids or whatever that that was it that was all humanity ever had to use and everybody was dead certain about that fact just walk through the logic how would that play out and what would be the and one just suppose one guy owns it okay may actually one woman owns it let's not be sexist okay one woman owns all that and and so now the question is you know at what rate will she sell off barrels of that and so this guy herald hotel and walked through the logic of that problem and so let me just give you some insight into that listening to the most naive anti-capitalists environmentalist types would say oh markets are extremely short-sighted they just chase the dollar and they don't think about the future and so she would sell all trillion barrels this year and you can realize you know then we'd run out next year we have nothing left you really will know that's that can't be right because anybody with even halfway common sense would realize if the if there were no oil next year or just like a little bit well then clearly the market price would be far higher than then if you try to dump all 10 trillion barrels this year right to sell 10 trillion barrel you'd have to you know sell it for a penny a barrel or something to get rid of it whereas next year the price would zoom up to a thousand dollars a barrel if there was barely any oil left okay so you see that that can't be right so you start thinking through the logic and the optimal thing to do using mainstream neoclassical assumptions and so forth and perfect certainty in equilibrium it turns out that the rate at which the owner of this fixed research would sell it off would maximize the current market value so it involves interest rates and things like that it's a little bit of a complicated problem but the point is on the margin if the owner is trying to decide okay i could take one more barrel out and sell it or leave it in the pool in the basin and let a year another year go by it would have to be that if you could sell it now let's say the market price is a hundred dollars and the interest rates five percent the choice would be okay i could take this marginal barrel now sell it for a hundred dollars cash or i could leave it in the basin and wait a year and it would have to be the case that the spot price of oil would rise by five percent so that that same barrel on the margin i would be just indifferent okay again we're using neoclassical calculus issues here just to get you to see the logic of it the point is you would keep selling until the point at which that marginal barrel you would be indifferent between selling it now for cash or letting it sit in your possession in a year pass okay so you can see there that in equilibrium the owner would project and say well what oil price is going to do right so that's the the logic of that isolated case and so you can see they wouldn't just use it all right now and in fact if you just walk through i'm not going to take the time here to do it but a lot of the things that the environmentalist you know the naive anti-capitalist environmentalist would want you to do actually market prices capture that so i say oh but i'm worried about our great great grandchildren what if they don't have any oil well what would the price be then if there were only two get two barrels of crude left in 300 years the market price would be really high if they were still using oil at that point and so then you can just work your way backwards and realize that market prices give you that outcome the reason you so the reason you're not selling now as the owner isn't out of altruism for future generations it's because you realize i can earn a higher rate of return by holding it off the market because prices are going to move in a certain way and you can say oh well that's kind of arbitrary and isn't that expecting a lot from the entrepreneurs well there are things like futures markets and even more sophisticated derivatives like put and call options and crazier more exotic things if you want to read up on that aspect of it i have a amesis.org article called the social function of futures markets i think is the title and that there i go through an oil example and spell out what i'm telling you right here so you can see how is it that if some people think the market's using oil too quickly or people are being too optimistic about how much oil they think we have and actually i think we're going to run out of oil and be surprised compared to what everybody else thinks well then you would have an incentive the way you could profit from that knowledge if you're right is you could go buy oil futures or you could buy oil call options or even more exotic derivatives and then you would profit from that and it's not just that you make money off of our suffering the very act of you doing that would push up the spot price of oil today and so would cause people to economize more so people would have an incentive to go you know people who are on the margin between buying an electric car versus buying a conventional gas powered car if if crude oil goes up in price and so gas prices go up the pump now you're more likely to buy the electric car okay so all the kind of things that environmentalists worry about market prices can handle that stuff and in fact do so in a much more efficient way than presumably a politician who just has to get reelected every few years right that you have a built-in incentive to really consider the desires of future generations because of their spending so it's it's not out of altruism it's just the the issue of consumer sovereignty the way mises talked about it okay so let me just round out that discussion this issue of will we run out of oil my answer is no of course we won't but that statement is neither optimistic nor pessimistic because if you think through the logic of that you know you have the 10 trillion barrels in the basin and then an equilibrium it starts getting drawn down what would happen is the amount the the total amount we had used would go like this you know from your perspective so like if this is 10 trillion and this is zero it would go like this and it would just asymptotically approach 10 trillion or in other words the amount that basin would just shrink down but it would never quite run out because the price would just keep going up and up and so that you know at the end there it would just get far more expensive and so everybody who used oil as its price went up would naturally just start shifting into other options okay so that to say we would never totally run out doesn't mean oh so everything is fine it's consistent either with catastrophe or with you know a great standard of living because we're finding out other technologies to replace crude oil okay let me skip this so the same thing in terms of coal in particular in north america there's just an outrageous amount of coal that could literally power what we're doing for centuries at current rates of consumption okay let me skip this slide i don't want to get bogged down okay government and energy markets so there are many claims of market failure to justify government intervention in specific areas for example having a natural monopoly and electricity and natural gas delivery so the idea here so what i'm trying to get you to see is if you read mainstream economics books they're more sophisticated than just the naive environmentalists and by the way you can be a free market economist and be an environmentalist so i don't mean to be denigrating somebody who really loves nature i think walter block even has a collection of essays called free market environmentalism and so when i'm saying environmentalist in this lecture i'm just using it for shorthand i'm sure you guys know the mindset that i mean the people who think that capitalism is inherently antithetical to the preservation of nature and so forth okay so um as far as but beyond that sort of naive mentality just think oh by definition anybody who cares about money is going to then just start dumping chemicals in a river uh there's have you guys do you know captain planet does that mean anything to you guys okay that was for those who don't know there was this cartoon when i was younger and i guess i don't know if they i hope that i was hoping it would be canceled um and it's the the character the guys the hero is captain planet and the villain is you know these guys like business men and they derive it's not that they're trying to make money and all shucks we have to pollute as an offshoot of making money it's no they they enjoy destroying nature like they they're like uh you know mr burns so okay um so in contrast to that mentality there are you know mainstream economists could give you more sophisticated reasons for why they claim government should be involved in energy markets whereas they wouldn't say government has a role in providing cans of tuna fish or something so you know what what sorts of arguments could they give well one standard one is to say that there's natural monopolies in things like delivering electricity and natural gas to individual homes okay so the the idea is they're going to say look if we just left it wide open to the market there would be 16 different utility companies with different lines bringing natural gas to various homes and that would clearly be inefficient and so what would happen then is one company that had you know more market share had access to better financing would offer to buy out all of its rivals because it would be crazy for them to be digging you know different pipelines to to different homes in the same neighborhood or on the same street that would be crazy and so instead one company will find an advantage to buy out all of its rivals and so there'll be natural monopolies providing all the electricity or natural gas service but then as we know using mainstream price theory if there's a monopoly well then you know where they do marginal benefit marginal cost is not the socially optimal point lotty dotty dotty and so price is higher than it should be and the quantity produced is lower than it would be in a perfectly competitive market okay so that's the the standard argument I think Tom DeLorenzo gave you guys a lecture if you went to that one about the problems with that logic but that's what the argument is so what I want to make the point is beyond the stuff that Rothbard points out in man economy and state taking this idea just head on if you haven't read that I encourage you so Rothbard in man economy and state has a whole section where he just obliterates the very notion of a free market monopoly price he just says that that's nonsensical but even if you conceded that okay yeah there is a sense in which letting the market provide these services wouldn't work out as well compared to you know something like wheat production where there's many sellers and so forth and all the characteristics that we associate with perfectly competitive markets even if you conceded that still that wouldn't mean therefore because there's these bottlenecks or because there's these imperfections in the market's provision of electricity and natural gas to individual homes it wouldn't follow that therefore the government should come in and since there's going to be a natural monopoly we might as well have the government running right because that's what they're saying I mean that that's kind of sick if you think about it that yeah there's going to be a natural monopoly so given that we're going to have it why would we have these these capitalists do it you know my local politician oh that's the guy I want to trust with my electricity service you know I want to keep prices down so that's why I want the politicians involved right that's what that's what they're saying which makes no sense but that's the argument okay so there's the issues of incentives and the calculation problem let me just explain I'm sure you guys have heard this but it helps to reiterate it especially since for some of you this might be this week might be the first time you've really been exposed to these ideas so let me just take a moment why am I distinguishing an incentive problem from a calculation problem by the incentive problem and I'm talking about central planning here or socialism so my point is it's not just these issues the critique of socialism and why do we have markets allocate resources rather than a socialist central planning board that logic once you see it isn't merely restricted to outright full-blown central planning by the you know soviet board it also applies if whenever the government tries to run a certain enterprise especially if it doesn't just do it as a business you know I mean like if it's if it's taking in revenue and through taxes and then providing services so the further removed it is from the market the more it resembles just outright socialism so you see these arguments apply so the distinction between an incentive problem and a calculation problem an incentive problem just means if they're elected officials for example and people are complaining because hey my my electricity bill isn't working or jeez when there's a storm and my power goes out it takes the utility company three days to come here and fix it that's outrageous you can't just fire them and get somebody else if the government's granted one agency a local monopoly right and you're probably not going to change your vote for who the mayor is next election because of that one time there was a storm and your power was out for three days right because there's all sorts of things that you're mad about or that you care about when it comes up to the electoral or the election for mayor you know maybe you care because the police shot some teenager and that's the thing that bothers you it's all sorts of reasons you could be mad at one government party versus another so the point is the the the political people have less incentive to make sure that the agency to whom they give or to which they give the monopoly is satisfying its customers whereas if it's a private business then they do have more incentive to provide customer service and to watch costs and things like that beyond that there was the calculation problem and so there you're saying even if we concede for the sake of argument that the people in charge have nothing but your best interest at heart and they're doing you know they lay awake at night saying how can i keep people happier with their natural gas service you know even if they were doing that and then even if they bring in all the best experts to advise them and say you know there's various ways we could deliver natural gas to these homes you know we could build pipelines under the ground we could do this we could do that you know there's all sorts of things we could do here are the options nonetheless the further you get removed from genuine market prices and an open entry in competition the less they know even after the fact are we doing this in a sensible way are we making an efficient use of resources they honestly wouldn't know the further they get removed from genuine market prices because again the test is profit and loss and so if the government's taking over more and more areas of that then they don't have market prices they don't have that feedback so they just don't know they can look mechanically it well we're using this much steel and this much blah blah blah and this much labor power and we're providing this many units of natural gas to our customers but they would they say is that a good thing or a bad thing they would have no way of knowing okay so do beer companies have rolling blackouts in the summer have you ever heard of that right has any beer company or any bottled water company ever announced whoa people are drinking way too much of our product it's the end of july and so we urge everybody to just have one beer from now on right no that's not what they do they love it when people are buying their product when it's real hot out and their people are rushing to buy more of their product whereas with government monopolized utility services that is what happens that you will get lectured you know you have radio spots and so forth and the mayor somebody will come on the person running the local utility regulation board or regulatory board will say you know it's it's so hot out right now people are using water please conserve you know think about you know don't water your lawn don't wash your car right now just reserve it for essential uses they might even say you know don't take a shower every day things like that so that's what the in fact in some places it's not just a helpful suggestion they will actually post you know if there's an actual water shortage and they you know they'll have some official bureaucratic way of defining when that is and they will have specific rules about i'm not making this stuff up in case you haven't encountered this they'll have things like you're only allowed to water your lawn if your house is an even number and it's a wednesday you know things like crazy arbitrary rules like that because they have to artificially contain the consumption of water why because they're not letting the the price of water rise to its market clearing level okay so that's the fundamental difference i mean i hope you can agree with me that there is this crazy difference in outcomes but what's the source of it the ultimate source is they're not letting the market price uh clear the form all right that they're holding the price down and that's why the public foolishly would support government intervention in these markets the average person if you said hey should there be a totally open free market and water they would say no because water is essential that's crazy i want to make sure i have access to water and i you know i don't want some monopolist charging me a thousand dollars a gallon because he has to because i you know otherwise i'll die if i have water so if you let the market do it i'd have to pay all my money for water and of course that's not what would happen because yeah it's easy to get people water and that's the water would be much cheaper if it were totally delivered by the market and you wouldn't have this craziness of the supply being interrupted at the very moment when you want it the most right it's not that your air conditioning goes out in the winter is the air conditioning goes out on august 1st when everyone's sweltering okay so uh let me i'm kind of running out of time let me skip some of this stuff okay tradeoff in cafe standard so this stands for corporate average fuel economy and so what this means in the united states these are regulations that the u.s government puts to mandate certain minimum fuel economy standards in automobiles and light trucks and other vehicles so the idea is the government saying to car manufacturers we don't like the number of the miles per gallon or what you guys would say kilometers per liter is that what you would say in europe that you get for gasoline in the vehicles that the market would choose and so we're going to raise it so it forces automobile manufacturers if you're selling in a u.s market to make the engines more fuel efficient meaning they get more miles for every gallon of gasoline they burn then would otherwise be the market outcome okay so i mean you there's lots of problem what's the rationale it used to be to conserve energy like back in the late 70s and early 80s it's because if you remember the history there in the middle of the 70s there was the the opac embargo against the united states and so americans became very concerned about our dependence on foreign oil and so that was this was part of that the response that they say oh we're going to wean ourselves off of oil consumption by making our automobiles more fuel efficient we don't like the pace at which the market's innovating so government's going to speed up the process now in more recent years the the rationale has shifted to climate change to say well if you emit more co2 then that causes climate change and so therefore we want to force cars to emit less co2 for given traveling distances okay so what ends up happening well one of the ways the manufacturers comply with that they meet the objective is they make the car lighter all right because you just think about it how are you going to make a car get more fuel efficient you make it lighter than it otherwise would have been had just consumer preferences dictated the combination of attributes because remember other things equal consumers would want to buy a car that's more fuel efficient but the point is there's trade-offs that if you make it more fuel efficient other things equal it's going to be lighter or you know or there's there's other considerations maybe the design's not going to be is aesthetically pleasing and so forth so there's trade-offs and so if the originally we're at an optimum given consumer preferences and now the government comes along and says okay on this one dimension of fuel economy we we're going to tighten the screws now what well the car's partly going to get more expensive that's one dimension that's going to get worse from a consumer's point of view but another one to try to contain the increase in the price of the car is to just make the thing lighter okay and so what does that mean well now cars want to get into accidents with each other if they're lighter other things equal more people die and so there have been estimates to try to assess that impact and so i've seen some range from 42,000 up to 125,000 traffic fatalities okay so in a very real sense these standards it's not merely that it makes cars more expensive than they otherwise would be it actually results in many tens of thousands of people dying who otherwise would not have died okay let me spend the last 10 minutes or so here on the climate change debate because this again this is where i've done the most of research myself and my consulting business so the the issue here is what's called the social cost of carbon of the scc and so what that is the definition of it it's an estimate of the monetized damages associated with an incremental increase in carbon emissions in a given year all right so the idea is you guys know what the greenhouse effect is but let me just run through it real quickly so the idea is carbon dioxide and other greenhouse gases humans emit them through various operations business operations driving their vehicles and so on that accumulates in the atmosphere so that raises the co2 content of earth's atmosphere and then concentrations of other gases as well so that when the sunlight comes in the the light can go through but then when it hits the earth and bounces off and now turns into infrared you know it can't get out so it's like the green us it's like when you go into your car and the windows have been rolled up and you get in there and sweltering even though it's much hotter in your car than the outside air it's the same principle right because the sunlight can get in your windows and warms up the air inside and then it can't get out so that's what's happening to the earth and so the the claim is there's this huge negative externality that when you emit co2 you are unwittingly making the earth warmer and the real kicker in this is it's not going to really manifest itself until many decades in the future so it's really uh you know our grandkids that were really screwing over every time we emit this ton of carbon dioxide so the way to quantify this what the actual negative externality is what they're saying by definition the social cost of carbon is saying you emit one ton of co2 today and then we're going to project centuries into the future and figure out how much warmer on the margin is earth going to be because you did that and then we're going to quantify all of the uh the net harms that's going to cause to people and then we're going to discount those to the present and come up with a present discounted value of that damage okay because in principle some of what you're doing is affecting people in 300 years okay so if it causes 10,000 dollars worth of damage in 300 years that's not 10,000 dollars today we're discounting it because we're scientists right we're not going to do something crazy right this is all logical right so they discount it and then so they're coming up with a number so that's what the number means the social cost of carbon in 2014 then is saying if you emitted a ton of co2 today how what's the present discounted value of all that future damage on the margin okay whereas the social right now to us to say the social cost of carbon in 2050 means based on our forecast of what's going to happen right now when we picture someone in 2050 doing that then what what damage is that going to do and then at that point in 2050 what's the present discounted value going to be okay so that's that's the nomenclature that's the convention when they report that stuff okay so by the way just a little tidbit social cost of carbon usually now is reported in terms of carbon dioxide but Beck originally in the in the economics literature as opposed to like the policy debates it was quoted in terms of carbon okay so just you know think of your chemistry carbon is 3.67 times has has more carbon than carbon dioxide right because a molecule of carbon dioxide is diluted by the the oxygen you know what I'm saying so if you see people quoting things like in the economics journals especially if it's from a few decades ago they will probably say oh I recommend the carbon tax of such and such and it'll be a much bigger number because they're talking about per ton of carbon whereas nowadays the number will probably divided by 3.67 because they're talking about carbon dioxide and that's not a coincidence I think they did that on purpose because they didn't want the number to be too high and scare people you see what I'm saying like if they quoted the number of the tax per ton of carbon the number is 3.67 bigger and that scares people no no we're just quote you know this is the tax on carbon dioxide even though it's the same thing okay I'm kind of cynical about this stuff okay why is this important because already they are using these estimates of the social cost of carbon so the federal government has commissioned work stops or studies working groups they go out and they estimate the social cost of carbon for various years and so now when they issue when federal agencies like the EPA or the Department of Transportation or whatever issue some new regulation and if you guys don't know this the stuff they do they have regulations for microwaves in your house when they're on standby how much energy they use there are federal regulations regulating that in the interest of combating climate change just so you know so the the government's on the job protecting our grandkids so how do they do this so they have to by regulation they have to provide cost benefit analyses of those regulations and so now if you have any regulation that could be remotely construed as restricting co2 emissions you now have all these benefits right because you can just say oh in 2035 co2 emissions will be such and such tons less than they otherwise would be if it weren't for this regulation we're proposing and so we're going to multiply that number of tons savings by the social cost of carbon in the year what i say 2030 and that's the dollar savings that year alone from this regulation just because of the issue of co2 emissions right so that's the logic that they're using and so they're already doing that they are trying to justify federal regulations using this stuff and then in the economics literature the social cost of carbon is related to an optimal carbon tax or a cap and trade program okay i'm running a little bit out of time here so i'm going to go a little bit quickly through this stuff a carbon tax is just what it sounds like the government levies an explicit tax based on how much carbon dioxide you emit it's just related to the a c pigu's idea of a negative extra daily so just like if a factory's dumping pollutants into a river and the standard pogoving approach says put a tax on it by the same token if we agree technologically speaking that or with the atmospheric science whatever you want to call it that emitting co2 in the atmosphere causes harms to third parties who aren't privy to that transaction well then the standard pogoving approach is oh you should tax that and make them internalize the externality a similar thing is a cap and trade program where instead of taxing the activity instead the government decides this is how many permits we're going to issue for this year this is how many tons of co2 are are going to be permits are allowed to be emitted and then we're going to just hand those things out to people or sell them or auction them off and then people can trade them so if one group wants to emit more co2 than they have permits for they go into the market and buy permits from other people who then restrict their emissions and sell the permits okay so in under conditions of perfect certainty and things like that these two approaches are largely equivalent in the real world there's reasons you would prefer one versus the other if you were going to do this it gets kind of technical in the queue and you know later if you want to ask me i can go through it but i want to skip it right now it's too it's too technical okay to give you a ballpark idea these are the numbers the white house working group put out in may of 2013 for the social cost of carbon at various years so you can see it goes up as it gets later in the years and that's for two reasons one is like in 2050 if you emit a ton of co2 then the idea is at that moment you will be causing 71 dollars worth of future damages to earthlings present discounted value as of the year 2050 whereas in 2010 it was only 33 so why is it going up so much two reasons one is the harm there more co2 would have been emitted by this point and so the global greenhouse effect is worse and so on the margin putting out more co2 is even more harmful so that's one reason the other thing is that you're closer now to all those bad damages right so because back here most of the bad damages aren't kicking in for another 50 years at least whereas here in the world of the computer simulation you're already starting to experience the the harms and so that since they're closer they get discounted less heavily okay so that's why they go up so again right now the federal government is using these numbers in cost benefit assessments of proposed regulations and that's how they're deriving social benefits if they restrict emissions because they're saying like in the year 2030 a ton of co2 dings humanity by 52 dollars and so if you somehow reduce it you just saved everybody 52 dollars and so that's a benefit okay now that you understand how this is being used let me just take the last few minutes to show you something that might surprise you you've probably heard the science has settled you know the IPCC the intergovernmental panel on climate change is the consensus of scientists on this and anybody who disputes this stuff is a denier right they actually use the term a climate denier of course giving you know alluding to a holocaust denier right and so that's the terminology they use and so the stuff i'm going to show you might surprise you okay first of all using the peer-reviewed literature there are plenty of models suggesting that there's initial benefits of global warming okay so this comes from a compendium by this guy Richard Toll and he's one of the pioneers in the field and so he i think he revised this graph since then but i'm just showing you just qualitatively you can see he was looking at various estimates and so this is showing climate change by degrees centigrade and so this zero line these are are benefits okay and so the point was up until about 2.25 degrees centigrade global warming for a lot of these models was showing benefits and only eventually that it that it turned down so why would there be benefits well if you think about it if it were the case that right now any global warming was automatically conferring net harms that would be kind of a coincidence that would mean right now the earth was like at the optimal climate you know or like optimal temperature and so there's no reason to expect other things equal why if it got a little bit warmer why would it all of a sudden make us worse off maybe it would make us better off and so that if you go through and quantify you can come with all sorts of benefits from having a warmer planet that you know there's certain regions where they can plant crops at different times things like that there's fewer people will die from cold in the winter stuff like that so it's not obvious that it should just be negative consequences if the earth gets a little bit warmer so that's just again that's what's in the literature that there's plenty of studies that that's found no for moderate degrees of warming it actually would confer net benefits and so if that were true you would want to subsidize CO2 emissions using the Pagovian logic right say these these coal-fired power plant operators are selfishly not taking into account the full benefits of emitting CO2 and we need to subsidize them because capitalism doesn't work okay here is so toll in a different paper in 2011 gave a list of different estimates of the social cost of carbon in the published literature over time and so each dot represents a point estimate of what the social cost of carbon was so notice the points get more dispersed as time passes and look at like in this in 2005 look at the huge range it goes from 120 dollars down to a negative amount so these negative ones mean the social benefit of carbon emissions okay so my point in this is this if you ask chemists to show the estimates of the charge on an electron it wouldn't look like this it would be extremely focused because they're all pretty sure as to what the charge on an electron is and they're you know disagreeing on the hundred decimal place or something like that whereas you can see they're all over the map here because there's different assumptions just the nature of what does it mean when they estimate the social cost of carbon they have a computer that simulates the earth the the economy and the climate for 300 years and then discounts all that I mean so there's all kinds of assumptions they put into that all right they don't even know what gdp is going to be next quarter and yet there's assumptions made about the economy in 300 years and that's that's how they come up with these numbers so it's not surprising that they're all over the map and it's not because these people it's not because oh these guys are lying and these guys are communists and these guys are great free market economists probably they're all communists right these guys in this field but but the point my point is in this stuff especially you know in general you know you want to hire me as a consultant I can give you any number you want right I mean I'm seeing obviously certain things I wouldn't do just because I have moral problems with it but you can come up with a model that spits out just about anything and you're not even lying because in economics the way they do those simulations and things they have to make assumptions and you know well if I assume this the answer is going to go like that and so if the client wants the answer to go like that I'm going to assume that right so that's how that's how it works okay uh let me hang on let me see here okay let me just do one more thing and then I'll let you guys out of here okay let me just focus on this slide last thing okay just there's plenty of stuff wrong with this let me focus on one issue global versus domestic the federal regulations require that the government report cost benefit analyses in terms of impact on Americans and so if you think about what I was saying that the social cost of carbon was not that's a global figure they're looking at impacts on humanity so they just flat out ignored what the office of management and budget's own rule was when they reported this stuff and if you actually did what the rule said you could see what it actually would be right it's it's like 10 percent you know there's a range they gave but if you adjusted their official figures based on the impact to Americans and so that's just one point to say you know in terms of cost benefit for Americans these rules don't pass that test even on the face of it okay so imagine that the government doesn't even follow its own rules I hope you guys were sitting down for that okay I'm out of time thanks guys