CQ Today reports that Sen. Ted Stevens is now gung-ho on saving oil:

A bill introduced by a prominent Republican has buoyed hopes by environmentalists that a narrowly divided Senate can achieve bipartisan accord on climate change legislation.

Sen. Ted Stevens, R-Alaska, has introduced a bill that would require automakers to boost passenger-vehicle fuel efficiency standards to 40 miles per gallon. The still-unnumbered measure aims to reduce the burning of fossil fuels and cut down on the amount of greenhouse gases emitted into the atmosphere.

As a colleague of ours responded: "40 miles to the gallon? That is a disaster. We’re going to have cars made of balsa wood."

Stevens, of course, represents Alaska and was one of the biggest pork-barrel spenders in the former Republican majority. He is also a long-time supporter of opening Alaska's ANWR for oil exploration, a measure that nearly, so nearly passed in the last session. Is Stevens seeking to strike grand compromise here--tougher efficiency standards (no matter the costs to consumers in terms of choice, price, and safety) in exchange for opening ANWR?

Raising CAFE standard is just bad policy. While raising costs to consumers and limiting choice, CAFE has failed to accomplish its purposes. Oil imports have not decreased. Rather they increased from about 35 percent of supplies in the mid-1970s to 52 percent in 2001. And consumption has not decreased. As fuel efficiency improves, consumers have generally increased their driving, offsetting nearly all the gains in fuel efficiency--the only countervailing factor has been higher gas prices due to OPEC and international issues, not CAFE. Not only has CAFE failed to meet its goals; it has had consequences. As vehicles were being made lighter to achieve more miles per gallon and meet the standards, the number of fatalities from crashes rose.

Worse, a grand compromise involving CAFE and ANWR could result in few gains for U.S. energy supplies if the agreement opens ANWR but limits exploration and drilling there too much. A win on paper is not necessarily a win in practice.

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Daniel Yergin knows energy and he knows oil. Yergin is author of the Pulitzer-winning The Prize: The Epic Quest for Oil, Money, and Power, and is widely regarded as the premier go-to guy on issues of energy supply, energy economics, and energy production statistics.

Peak oil is the idea that oil production will soon hit a peak and fall off precipitously as supplies dwindle. The folks behind peak oil seem like standard nutty alarmists, but some bright people have fallen for the idea, too. A number of environmentalists also buy into it; for them, it's a sort of moral comeuppance for the absolute wrong of carbon-based energy. Some are really just millenarians, basically, and believe that the end of oil will be our end, too.

Fortunately, their faith is misplaced, argues a new report from Yergin's firm, Cambridge Energy Research Associates. "[T]he remaining global oil resource base is actually 3.74 trillion barrels -- three times as large as the 1.2 trillion barrels estimated by the theory’s proponents -- and...the "peak oil" argument is based on faulty analysis which could, if accepted, distort critical policy and investment decisions and cloud the debate over the energy future."

Rather than a peak, expect a plateau:

Global production will eventually follow an “undulating plateau” for one or more decades before declining slowly. The global production profile will not be a simple logistic or bell curve postulated by geologist M. King Hubbert, but it will be asymmetrical – with the slope of decline more gradual and not mirroring the rapid rate of increase -- and strongly skewed past the geometric peak. It will be an undulating plateau that may well last for decades.

Peak oil never made much sense, really. First, oil "reserves" count only oil that is extractable at a certain cost. But as the prices of gas and other petroleum products rise, lots of oil that is now too expensive would be booked as reserves and extracted. This alone should put a damper on any sudden drop-off in energy production or rise in prices.

Second, at higher prices, there's less demand. So if prices rise, we'll just put oil-based products to fewer low-value uses. Walking and biking will become more attractive alternatives. Consumers will demand more fuel efficient cars.

Third, the availability of substitutes caps energy prices. When energy prices rise to a certain level, alternative means of energy production become more attractive. Nuclear, hydrogen, wind, wave, solar, and others fall into this camp. For now, on a dollar basis, these sources are just too expensive for many uses. But their prices are falling.

The key is that we value oil for its uses and not intrinsically--in the end, it's just sticky, mucky black stuff. So far as its uses are concerned, we can substitute other energy sources, and they just might cost a bit more--not great but hardly catastrophic. And if oil production falls off gradually, as CERA's study indicates it will, the likely cost difference will be very small in the end.

Malthus and many since him have prognosticated about the future but undervalued human ingenuity. Their predictions tend towards crisis; but reality keeps coming up with very different outcomes.

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Well, the latest investigative report on oil company price gouging and collusion from the FTC is finally in. So is big oil manipulating gasoline prices? Energy expert Ben Lieberman explains what the FTC found:

The Federal Trade Commission (FTC) released its "Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases" on May 22. Overall, FTC found no evidence of market manipulation behind high gasoline prices in 2005, including the post-Katrina price spike. The report states that "the evidence collected in this investigation indicated that firms behaved competitively."

The conclusions are no different than previous FTC and other agency reports, which found that market forces and not illicit conduct among oil companies or refiners explained pricing behavior. In the case of Katrina, FTC concluded that the high price of oil leading up to the hurricanes, as well as the storm’s damage to oil platforms, refineries, and pipelines, were behind the post-hurricane price run-up.

FTC is to be commended for handling a difficult political task as well as it did. The agency continues to take a great deal of heat from those in Congress convinced that "big oil" wrongdoing must be the explanation for gas price increases. Several have already accused FTC of being too incompetent to see the market manipulation they believe is obvious. Others even hint that the agency is somehow in on the fix.

FTC's report is of particular significance, given that a bill giving FTC authority to enforce "price gouging," as defined by the agency, has passed the House of Representatives by a wide margin. But proponents of H.R. 5253, The Federal Price Protection Act of 2006" should note what the report said about price gouging. FTC warned that such legislation "would leave businesses with little guidance on how to comply and would run counter to consumer's best interest."

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Jonathan Adler is concerned that Congress's attempts to "do something" about high gas prices could actually make the problem worse.

And as he explains, Congress's instincts on the issue are sometimes just backwards. Take, e.g., proposals to tax "windfall profits":

Consider the shortfall in domestic refining capacity. While gasoline prices are largely a function of global crude markets, the lack or surplus-refining capacity makes temporary price spikes more likely because refiners are unable to respond to regional changes in demand. Some of the gap between domestic demand and domestic-refining capacity can be made up through imports, but here the U.S. is at a disadvantage due to our more stringent environmental requirements for domestic fuels.

Regulatory impediments, combined with traditionally thin profit margins, have combined to discourage capacity-increasing investments. The lion’s share of recent investment in the refining sector has gone to meet various environmental and other regulatory mandates, rather than increasing output. Siting and permitting new facilities is particularly difficult. If it took the Arizona Clean Fuels project a reported five years to obtain air-quality permits for a proposed refinery project, few companies will be encouraged to follow their lead.

So Congress--along with state and local governments, too--has made it extremely expensive for a usually low-profit industry to open facilities that would increase supply and lower prices over the medium to long term. And when profits climb, sending a strong signal that there's room for greater supplies, Congress blocks the transmission by threatening to tax away the "windfall."

Brilliant.

Writing on the Volokh Conspiracy weblog, Adler links to this National Bureau of Economics Research paper that attempts "to estimate the effect of gasoline content regulation on wholesale prices and price volatility." Interesting reading--but note that NBER access is required to get the full paper.

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Jim Maguire finds, buried in a NY Times / CBS News polling report (by "buried," we mean its on page 38 of a monospaced PDF posted as an addendum to a Times article that doesn't even mention the topic), that "supporters of drilling in ANWR outnumber opponents for the first time in this data series, which goes back to 2001."

The current tally stands at 48 percent approving "of the proposal to open up the Arctic National Wildlife Refuge in Alaska for oil and natural gas drilling" and 45 percent disapproving. Those numbers stood at 36 approving and 57 percent disapproving as recently as March 2001.

Posted by Andrew Grossman at 03:52 PM | Permalink | TrackBacks (0)

Don't miss today's excellent Holman Jenkins column in the Journal:

Few are the subjects on which you can exhibit in public an abject, sub-protozoan stupidity without fear of damage to your reputation. Gasoline is surely a miracle commodity.

Apparently.

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Gas prices have continued to rise to a national average of $2.90 per gallon. In Los Angeles, at least one service station is charging $3.79 per gallon.

What's behind this steady upwards creep? There's an easy explanation, writes Lee Hudson Teslik of the Council on Foreign Relations, who explains some of the major market factors behind the gas price spikes.

First, let's consider the supply side of things. This seems fairly important:

According to March 2006 EIA statistics, about 55 percent of every dollar spent on retail gasoline went to crude suppliers, compared with 47 percent in 2004 and 44 percent in 2003.

And while the price of crude has been rising, consumers haven't borne the full price of the rise. Interesting.

Refining is also a part of the supply side:

The process of turning crude oil into a product that is ready for consumer use accounts for about 22 percent of the retail price of gasoline, on national average, according to EIA. This number has increased significantly in recent years, up from about 15 percent in 2003.

CFR speculates this rise may have to do with refineries' speculating on future gas price increases. But there are other explanations. Here are three: 1) Hurricanes Katrina and Rita dealt a blow to the refinery industry from which is has not yet bounced back to full capacity. In a tight market--such as this one--even a small swing in supplies can have a significant impact on prices. 2) Federal mandates have become much more complicated in recent years. This drives up the costs of refining and distribution. 3) Capped infrastructure and capital risks. It is extremely expensive for refiners to increase capacity due to tough environmental regulations and lots of NIMBY politics. Even if that expense were justified, the refining business is a volatile one and profits are often low; when, every once in a while, profits do rise, Members of Congress begin bleating about "windfall profits" and threatening all sorts of new taxes. Would you invest in expensive new infrastructure in such an environment? And if not, guess what happens when demand rises...

So what has been happening with demand?

[T]he world's oil market has experienced a recent spike in demand. This has raised the price of crude, and thus in turn the price of gasoline. The spike is a result of increases in demand in the United States, the world's foremost energy consumer [and this may explain refineries increased profits, to some extent --AMG], and of explosive growth in the oil needs of major developing nations. In 2004, China displaced Japan as the world's second largest oil importer. India and Brazil also have emerged as major oil consumers. These new markets have only exacerbated upward pressure on the price of crude.

So what can be done to reduce gas prices? Generally, not much. Cutting the federal gas tax wouldn't really be a savings unless Congress cut highway spending, too. Though there's plenty to be cut, that still seems unlikely. Some federal environmental regulations and mandates could be curtailed. The 7.5 billion gallon ethanol mandate, for instance, will cost drivers about three cents per gallon at the pump:

Ethanol costs more to ship than gasoline, which is especially troublesome now that ethanol use has expanded beyond the industry’s Midwestern home base. It also requires more energy to manufacture ethanol, and cars that use it get lower gas mileage. All things considered, ethanol not only adds several cents per gallon to the price of gas, it does little, on balance, to reduce fossil fuel use.

As well, ethanol and other formulation requirements can lead to regional price spikes in the summer months. Getting rid of these regulations, then, would save consumers a few cents per gallon, on average, and much, much more in regions hit by temporary spikes. As for the environmental impact, it's not much: one study (PDF link) by the Wisconsin Bureau of Air Management found that a popular ethanol-gas mixture decreases carbon monoxide emissions but increases the concentrations of nitrous oxide, volatile organic compounds, and ozone.

Over the medium- and long-term, if prices remain high and volatile, consumers will gradually shift to other energy sources and will spend more on fuel efficiency--in other words, to a large extent, this is self-correcting by standard market mechanisms. At the same time, the U.S. would do well to open up what domestic supplies it does have, which could drive prices down a bit, increase our energy security, and possibly ward off some politically-induced price volatility.

But what can Congress do right now(!)? Really, not too much that wouldn't make the situation worse.

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Today's USA Today carries a great editorial on the folly of government gasoline formulation mandates:

Each day, for example, millions of gallons flow through pipeline past Atlanta on the way from the Gulf Coast to the Northeast. Little of this fuel can be used in Atlanta, however, because it's a conventional formulation, and the city requires a special kind of gas to meet its air pollution needs. Fuel produced in some East Coast refineries, meanwhile, travels out of the region because it's made for the needs of other communities....

There are 15 or 16 categories of boutique fuel, depending on how they are counted. Gasoline is becoming like coffee at Starbucks — unnecessarily complex and pricey....

Variety is fine for ketchup, beer and toothpaste. Not so for gasoline. Too many exotic fuels are flowing around the country, producing too few environmental benefits and too much pain at the pump.

To be sure, these kind of formulation requirements only cost a few cents per gallon, on average--as the editorial rightly notes, many other factors play a larger role in determining the price of gasoline. Still, that's money out of consumers' pockets, often unnecessarily. And as research from the Congressional Research Service and others has concluded, these requirements play a major role in temporary price spikes--when the price of gasoline rises quickly in an area due to dwindling supplies that cannot be replenished from nearby areas due to the formulation mandates--such have been prevalent in recent summers.

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The Philadelphia Inquirer reports that some Philadelphia-area service stations are running on empty. See if you can figure out why:

As if rising prices weren't enough, the tanks have run dry at some Philadelphia-area service stations in the last few days as the refining industry stumbles through a change in the formulation of gasoline.

The conversion to ethanol was prompted by the federal Energy Policy Act of 2005, which left refiners vulnerable to groundwater contamination suits and mandated greater use of renewable fuels. The use of ethanol forced gasoline retailers to clean their tanks, remove all water from them and install extremely fine filters on their pumps.

(Emphasis ours)

So a government-mandated change in formulations, combined with the switch to government-mandated summer recipes, which differ, as mandated by government, between different regions are causing regional price spikes. Who could ever have seen this one coming?

Cynicism aside, there is something to be done about this sort of problem: strip away the expensive and complicated regulations that make it difficult for refineries to meet demand and that cause localized price spikes. How many summers of short-term high prices in Philadelphia, Chicago, and other cities do we need to see before Congress gets the idea?

The President, however, seems to understand the burden of gasoline regulation. But then again...

Posted by Andrew Grossman at 09:06 AM | Permalink | TrackBacks (0)

Will this topic have to be revisited every year when the weather begins to turn warm?

Oil prices are at record highs, say some news outlets. Drudge seems to love the claim. But it doesn't pass the laugh test. As Reason's Ron Bailey explains, adjust for inflation and prices are nowhere near their peak.

But Bailey goes even further and tries to answer the question of what level prices would have to reach before the economy started feeling a hit, as it did in the 1970s. He comes up with what seems to us to be a conservative estimate: "[T]he price of oil would need to double from today's $70 per barrel to have the same impact on the U.S. and world economy that prices had during the 1970s oil crisis."

Why conservative? Americans are not only wealthier than they were in the 1970s (and this new wealth is what drives the new estimate), but our economy is also far more flexible. For example, tens of millions of Americans can telecommute, an option that will become far more attractive if the price of driving into the office every morning spikes. And while many Americans now drive SUVs and other vehicles that consume lots of gas relative to what's possible, they could easily switch to cars that use much less, such as smaller sedans and even hybrids. Greater wealth makes this easier than it was in the 1970s, and greater choice makes it more likely to happen when gas prices reach a level that impacts the economy. Finally, as the response to Hurricane Katrina demonstrates, the federal government is willing to step away (not in!) and dispense with burdensome energy regulations during times of crisis. Stripping away government regulation would lower gas prices in general and prevent regional price spikes during the summer months.

In all, we think this makes a gas crisis fairly unlikely. But that's not to say that consumers won't suffer from higher prices and that it is not appropriate to plan to prevent the worst-case scenario. As Ben Lieberman argues, Congress would still do well today to address regulations that limit domestic supplies of gasoline.

Anyway, expect to see plenty of "record high" headlines over the next few months. The key numbers to watch for, though, are $98 / barrel (the inflation-adjusted level reached in 1979), nearly $30 above today's "record high" prices and $135 / barrel (the wealth-adjusted level reached in the 1970s).

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The Wall Street Journal explains Congress’s partial responsibility for today's high gas prices:

Capitol Hill… created the conditions for this mess last summer with its latest energy bill. That legislation contained a sop to Midwest corn farmers in the form of a huge new ethanol mandate that began this year and requires drivers to consume 7.5 billion gallons a year by 2012. At the same time, Congress refused to include liability protection for producers of MTBE, a rival oxygen fuel-additive that has become a tort lawyer target. So MTBE makers are pulling out, ethanol makers can't make up the difference quickly enough, and gas supplies are getting squeezed.

As Ben Lieberman has explained, corn-based ethanol costs fifty cents to a dollar more per gallon than pure gasoline, which is the reason its producers require the mandate instead of the open market. Sugar can be used to make ethanol less expensively, but sugar subsidies have kept sugar-based ethanol too expensive from the U.S. market. Foreign-made sugar-based ethanol, which can be produced at less than half the cost of the corn-based variety, is blocked by high tariffs and other trade barriers, which are in place at the urging of the corn-ethanol industry and domestic sugar growers. What a mess.

Exacerbating the problem are strict federal fuel formulation standards for the summer months. The standards require the use of oxygenates and other additives in gasoline. They have had only a negligible impact in reducing smog in major cities but raise gas prices between four and eight cents per gallon anyway. Even worse, different formulations are required in different parts of the country, meaning that fuel is non-fungible between these regions. Price spikes occur when one region runs low and has to wait for more of its special cocktail to be produced.

As Lieberman observed last week, the year following the passage of major energy legislation intended to drive down the cost of energy Congress is now considering...more major energy legislation designed to drive down the cost of energy. Subsidies and regulations and mandates--the meat of last year's legislation--appear to have actually made things worse, not better, for U.S. drivers. So here is a radical idea: why not try the opposite--deregulation, lifting of mandates, opening more areas for domestic oil exporation, which could also ameliorate price spikes--and see what happens?

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