Author Archive
The President’s New Cars
I had an op-ed yesterday in USA Today about President Obama’s proposed new fuel-economy standards. Don’t like ‘em. Unfortunately, an editing snafu over at the newspaper inadvertently left out the fact that there are four models at present that meet the proposed new standard — the 2010 Honda Insight (41 mpg) and the 2010 Ford Fusion Hybrid (39 mpg) were left off the list.
Space prohibited me from making an additional point. Even if there is no rebound effect, my colleague Pat Michaels finds that global temperatures will only be reduced by 0.005 degrees Celsius by 2050 and 0.0078 degrees Celsius by 2100 once you plug those emissions reductions into the computer models used by the IPCC. Of course, proponents contend that U.S. action on fuel efficiency will lead to like action abroad. Well, good luck with that. But even if all of the signatories to the Kyoto Protocol adopted Obama’s proposed fuel-economy standards, global temperatures would be reduced by only 0.038 degrees Celsius by 2050 and 0.071 degrees Celsius by 2100. If you tried to monetarize those benefits, you would be hard pressed to come up with an defensible number of consequence.
So what should be done instead? Nothing. At the risk of sounding politically irrelevant, there is no good case for the government to reduce U.S. gasoline consumption via fuel economy standards or fuel taxes; an argument I made at length in a study I co-authored almost two years ago with my colleague Peter Van Doren.
[Cross-posted at The Corner]
Obama Administration Agrees with Cato on Auto Fuel Efficiency
Well, sort of. The Obama administration signaled last week their belief that it would be better to have one national fuel efficiency standard than a multiplicity of different state fuel efficiency standards. Now, we have long maintained that fuel efficiency standards — federal or state — are a bad idea. Consumers should be free to buy whatever sort of car they want without government economic coercion. But if we must do violence to consumer sovereignty, better to do so via one national standard rather than via a hodge-podge of differing state standards.
This is the very argument I made late in January over at The New York Times when asked about California’s petition to establish its own fuel efficiency standard as a means of addressing greenhouse gas emissions. Alas, I was pilloried on the NYT comments board at that time for all sorts of sins against man and nature. Now it appears that President Obama has come over to the dark side. Welcome to my world, Mr. President.
David Brooks — An Update
After carefully transcribing and then posting the nearly indecipherable argument forwarded yesterday on NPR’s All Things Considered by David Brooks, I thought, well, even the smartest people in the world can make a verbal hash of things when put on the spot with a live radio or television interview. I had a nagging feeling that there must have been a well-thought-ought perspective knocking around in those words somewhere. Was I being unfair to the man?
And this morning — what do you know! — I open up Friday’s New York Times (I didn’t get to it yesterday) and see an op-ed length treatment of the very argument Brooks tried to make on NPR. Alas, even when Brooks had a couple of days to think about each and every word, he still managed to be only a smidge less opaque than on NPR.
David Brooks: Thumbs Up for the Housing Bailout
On Friday’s All Things Considered, New York Times columnist David Brooks was dismissive of Rick Santelli’s now-celebrated rant against President Obama’s housing bailout. Brookes conceded that there was a “fundamental unjustice [sic]” associated with the bailout, but…
We’re not just individuals; we have a system, a system we all share. And the system right now is so unsteady that we have no individual responsibility in our own system because the economy is so unsteady. If you deserve a job sometimes you get laid off, if you don’t deserve, sometimes you don’t get laid off. And the government’s fundamental responsibility right now is to make sure the system is stable. And that may reward people who took unnecessary risks but we just have to live with that. The primary responsibility here is not to worry about the moral hazard; it’s to keep the stability of the system as a whole intact. And I think that the housing plan is a pretty moderate and respectable way to go about that.
If you can figure out what the heck Brooks is saying here, my hat’s off to you. As best as I can tell, Brooks is arguing that the economy is in free fall and the only way to arrest the collapse is to stop the foreclosures. If that means bailing out the irresponsible, then bail them out we must. At least, I think that’s what he’s saying.
But do foreclosures equal macroeconomic collapse? It’s not obvious that they do. Foreclosures should only bother the unforeclosed if they reduce the value of their homes. Do they? Empirical investigation suggests that the impact of foreclosures on unforeclosed housing values is quite small. It’s vacant homes that (sometimes) drive down the value of neighboring inhabited homes. But if foreclosures are quickly followed by sales to new owners, that problem does not arise. And even if it takes a while for the empty houses to sell, the impact on neighborhood housing value is temporary. That is, as long as you’re not trying to sell when all the for-sale signs are littering the neighborhood, you’ll be OK. Hence, the problem here is excess housing stock — empty houses that can’t find buyers — not foreclosures per se.
Will Obama’s plan reduce the excess housing stock? It’s hard to see how. Foreclosures have been most heavily concentrated in places where housing supply is elastic and prices remain well above construction costs. As long as that is the case, new construction will go on — and has gone on — even in the teeth of the ongoing house price collapse.
But maybe Brooks isn’t really worried about foreclosures. Maybe he’s worried about the decline in housing prices and the related collapse of securities built on existing mortgages. Maybe he’s arguing that propping-up — or at the very least, stabilizing — housing prices is the only way to rescue the trillions of dollars worth of assets tied to the housing market and, thus, to rescue the economy as a whole. If so, then good luck. Harvard economist Edward Glaeser makes a very strong argument that nothing the feds can do will keep housing prices at the inflated levels reached over the last decade. And even were such a thing possible, Glaeser argues it would be economically counterproductive:
Artificially boosting prices will distort construction decisions and redistribute wealth from buyers to sellers. Moreover, most schemes seem unlikely to significantly raise prices, especially in the elastic areas that have seen the largest reductions in prices. Against these uncertain benefits, the costs of many of the schemes seem quite large. Using hundreds of billions of dollars to buy or refinance mortgages represents a large transfer from taxpayers to current homeowners… Moreover, a large-scale intervention that makes the government a vast lender is likely to create permanent institutions that impose large future costs on taxpayers. Recent events at Fannie Mae and Freddie Mac certainly suggest the difficulties that result when government-sponsored enterprises play mortgage lender to the nation.
Nor is Glaeser sympathetic with the political rush to save those threatened with foreclosure:
As foreclosure becomes more difficult, the value of mortgages declines, which reduces the value of banks assets. Direct aid to distressed homeowners may be less problematic, but it isn’t clear that the government can or should be trying to keep people in homes they can’t afford at any reasonable interest rate. In most cases, a small amount of aid to help in moving would be a more sensible, and cost effective, response to foreclosures. We do need action to fix our banking system, but those actions should be targeted towards the banking system itself, not towards the housing market.
While public intellectuals like Brooks are — for the moment anyway — inclined to lecture the Rick Santellis of this world about the necessity of housing bailouts for the greater good, there is far less substance to that lecture than one might think.
Oil Price Collapse — Bad News?
In the Washington Post today, staff writer Steven Mufson gets space on the front page to tell us about how the oil price collapse is playing out for oil producers, rival energy generators, and, ultimately, for consumers. Much of what follows is obvious — prices are declining because the economic collapse is hammering demand — but other aspects of the narrative offered by Mufson are on shakier ground.
Ed Morse — managing director and chief economist of LCM Research and a favorite “go-to” guy for print reporters — says, “The last five years saw the rebirth of the use of oil as a critical instrument of foreign policy by key resource countries, Iran, Russia, and Venezuela in particular. With oil and natural gas prices having collapsed, the power of their weapons has been waning rapidly…” Really? When, exactly, have oil-producing states used oil as a weapon in foreign policy over the course of the 2004-2008 price spiral? Have there been embargoes I’ve missed? Strategic production cutbacks tied to the Israeli occupation of the West Bank? Or substantive threats about the same that have been used as an effective lever in international relations? Not that I know of.
The only example I am aware of that Morse might cite to back up his claim is Russia’s ongoing dispute with Ukraine over natural gas prices. But gas producers have leverage in markets that oil producers don’t have, given the much higher transaction costs associated with changing buyer-seller relationships.
In short, Morse’s first claim — that oil producers have been using oil as an effective foreign policy weapon during the boom — is utterly without foundation. His second claim conflates natural gas with oil markets in a manner that muddies the issue. Belief in the “oil weapon” is like belief in UFOs; lots of people claim to have seen such things — and some continue to fear such things — but every attempt at verifying existence has come up empty. The reality is that embargoes can’t deny oil to consuming states given the fungible nature of the international oil market and severe production cutbacks will do far more harm to producers than consumers — which is why we never see those sustained production cutbacks play out.
Next, Mufson implies that energy secretary Steven Chu made some sort of gaffe when he told reporters on Tuesday that OPEC was “not in my domain.” Now, it may be correct that, politically speaking, OPEC is in his “domain,” but the reality is that American pressure on OPEC never has and probably never will have an effect on decisions made by the cartel. OPEC’s aim, after all, is to maximize revenue. Can the U.S. talk OPEC into decisions that will cost OPEC money? Chu’s right to suggest that no mere U.S. energy secretary is capable of such a thing and probably shouldn’t waste much time laboring for such an unlikely end. Bully for Chu — for a few moments at least, he had the courage to say what almost no energy secretary before him has ever dared to say.
Masters of the Universe – On the Dole
In one of the most “you’ve got to be kidding me!” stories that I’ve come across in a while, The New York Times reports that New York City wants to spend $45 million to retrain laid-off Wall Street financiers. This is so incredibly offensive that I don’t know where to begin. But I’ll give it a try nonetheless.
First, just because they are laid-off does not mean that they are poor. Won’t a lot of this taxmoney be going to, well, rich people who don’t really need it? Second, even if they now find themselves with nothing, why should the taxpayers come to the rescue? If they didn’t manage to sock away anything for a rainy day, then tough. Third, exactly what is New York going to retrain these masters of the universe to do? This ought to be well worth watching. Fourth, if they’re smart enough and savvy enough to be the master of the universe, they are smart enough and savvy enough to get back on their own two feet without the hard earned cash pinched from some cabbie somewhere.
It’s as if The New York Times has become The Onion.
Obama’s ‘Bold’ Action on Climate Change
I was invited to comment yesterday over at the New York Times on President Obama’s memorandum to the EPA to reconsider its earlier denial of a waiver requested by the state of California; a waiver that would allow that state to impose its own fuel efficiency standards for passenger vehicles and light trucks so as to reduce that state’s greenhouse gas emissions. The simple point I wanted to make at the Times is that allowing this waiver to go through would largely allow that state to dictate fuel efficiency standards for the nation as a whole. I argued that this is probably a bad thing — state action that imposes significant policy changes on the nation as a whole ought to be enjoined and those decisions ought to be left to Congress.
For those of you interested — and who have a strong stomach — read the comments on the board that follows. You might think that there is nothing particularly radical or even ideological in the argument I made. Apparently, you would be wrong.
This morning, I had a chance to reprise that discussion as a guest on the Diane Rehm Show. With me in the studio was David Shepardson, the Washington bureau chief of the Detroit News and Phyllis Cuttino, the director of the Pew Environment Group’s U.S. Global Warming Campaign. You can listen to the show online if you like, but in case you don’t have the time, here are the highlights:
Both Mr. Shepardson and Ms. Cuttino were nearly breathless about the bold, historic step allegedly taken by President Obama this week. Yet is seems to me that telling the EPA to rethink a decision made some months ago — with no stipulation that it actually reverse course — is something short of a political earthquake. “Bold action” would be legislative proposal to increase federal fuel efficiency standards, impose a federal carbon tax, institute an ambitious cap & trade program, etc. I’m not saying I support that sort of “bold” action, but please — let’s keep things in perspective.
Ms. Cuttino argued at every turn that energy efficiency equals emissions reductions. But it does not. Energy intensity in the United States declined by 34% from 1980 through 2000, but energy consumption increased by 26% over that same period. More ambitious gains in energy efficiency promise no better. For instance, energy intensity in China declined by 70% over that same period while energy consumption increased by 80%.
The only way to reduce greenhouse gas emissions is to increase the marginal price of fossil fuels OR to strictly ration their availability. Everything else is a dodge. Reducing the marginal cost of energy or energy-related services — which is exactly what energy efficiency standards do — will not, in aggregate, reduce energy consumption.
How Much Will Global Warming Cost Us?
A lot more than we used to think … or so we are told. Turns out that the economists who study this matter are not so convinced. Those interested in what the most recent literature review has to say on this topic should go here: http://www.cato.org/pub_display.php?pub_id=9850. Short answer: If you believe the scientific narrative offered by the IPCC, we’re probably looking at the low-end of $3-$24 per ton of carbon emissions.
The “Fairly Impeccable” Case for (Revenue Neutral) Carbon Taxes
In the course of making his argument that Cato frequently makes counterproductive alliances of convenience (from a strict libertarian perspective, anyway) with corporate special interests, Matthew Yglesias writes at Cato Unbound:
The free-market case for a revenue-neutral carbon pricing scheme seems fairly impeccable to me. But instead of organizing its climate change efforts around seeking to ensure that any future carbon pricing plan be as close to revenue neutral as possible, Cato prefers to steadfastly defend the rights of industry to unload air pollution unimpeded.
I’m not sure how one might define a “free market case” for a revenue-neutral carbon pricing scheme, but the economic case for it would require evidence that (1) the benefits of the tax shift would exceed the costs, and (2) that the proposed tax shift is a less expensive means of addressing climate change harms than other possible remedies.
Regarding (1), the argument is intuitively plausible but is, in fact, quite problematic. And you don’t need to be a Cato libertarian to come to this conclusion. You will find great skepticism about the claim that a tax shift would on balance prove economically positive from economist Lawrence Goulder (a supporter of carbon taxes, by the way). This seminal piece from economists A. Lans Bovenberg and Ruud de Mooij is also good. As energy economist Stephen Smith observes after surveying the relevant economic literature on eco-tax shifts:
Ecotaxes are likely to involve distortionary costs at least as high as those involved in raising equivalent revenues through existing taxes. If the question is posed whether we would choose to use energy taxes, in preference for existing taxes on labour and other bases, in the absence of any environmental benefits, then the answer is almost certainly that we would not. Energy taxes would be likely to involve just as much distortion of the labour market as income taxes, and at the same time distort the commodity market. Only if there are expected to be environmental gains can the use of environmental taxes be justified, and the case for ecotax reform must be made primarily on the basis of the environmental gains that would result.
Read that last sentence again.
So, are the benefits that might flow from a carbon tax (defined at the monetarized value of the temperature reductions that might follow) greater than the costs of the same? Energy economist Richard Tol’s review of the published economic literature suggests that the monetarized damages that follow from a ton of carbon emissions at the margin (if mean estimates of future climate change from the IPCC are to be believed) likely works out to about $2. Hence, if a carbon tax is set above $2 dollars, it will may very well deliver more social costs than benefits.
Regarding (2), Indur Goklany makes a strong case that adapting to climate change and applying targeted public policy initiatives to directly address subsequent harms is much cheaper – and much more effective – than a policy of reducing greenhouse gas emissions. Moreover, Goklany points out that this conclusion holds even if we accept the worse-case scenarios spun-out in the Stern Review on the economics of climate change.
Of course, Matthew Yglesias is free to disagree with the above. But the case for a revenue-neutral carbon pricing scheme is not “fairly impeccable” … from an economic perspective, anyway. There are ample grounds for disagreement … and that’s true even if we ignore the debate about the underlying science.
Energy Dust-Up in LA
This week, the Los Angeles Times has invited me to participate in a daily on-line debate (a regular feature they sponsor called “Dust-Up”) with V. John White, executive director of the Center for Energy Efficiency and Renewable Technologies. Monday, we debated off-shore drilling. Today, we debated the T. Boone Pickens’ energy plan. Tomorrow, we’ll debate nuclear energy. Thursday, the issue is the future of the automobile. Friday, the topic is what America’s energy economy will and/or should look like in a generation. While our exchanges won’t be in the newspaper’s print edition, I’ll take the on-line exposure.
So far, I don’t think John has laid a glove on me. In the off-shore drilling discussion, John has a hard time differentiating between electricity markets and transportation markets. To say that we should rely on wind, solar, or whatever — and not oil — is to say that we should rely on batteries to run our automotive fleet. Well, that would be great, but until some pretty big-time breakthroughs occur in battery technology, that’s not going to happen. Regarding T. Boone Pickens’ energy agenda, I’m still waiting for a concrete argument about why markets “fail” to produce all the investment dollars that this supposedly worthy industry needs.
Tomorrow’s debate will likely produce few sparks. I’m against nuclear energy subsidies and don’t think the industry would survive without them. Thursday and Friday, however, will be more interesting. I don’t have the faintest idea what sort of personal automobiles will be on the market in, say, 2030, and even less idea what the energy economy of the next generation will look like. I suspect, however, that John thinks it’s all rather obvious where energy markets and technologies are heading and that he has the perfect master plan to most efficiently accelerate all the big-time changes that history has in store for us.
Saying “I don’t know” to questions like these is never that good of an idea if you want to dazzle people with your wisdom and insight. On the other hand, it’s hard to marshall the argument that “the oil age is over and the age of genetically modified gerbils on treadmills is coming” (or whatever) and then say that the government needs to do something to get us there. Well, if its so inevitable, then why must government act at all? We’ll find out if John can manage to resolve that tension in what will likely be his argument.
Gasoline Affordability Reconsidered
Last Monday, the Los Angeles Times published an op-ed written by Indur Goklany and me about gasoline prices. Yesterday, it ran in the Minneapolis Star Tribune Today, that same piece has been posted at the Christian Science Monitor and it will appear in their print edition tomorrow. Our argument: Once you adjust gasoline prices in 1960 for both inflation and changes in per capita disposable income, you find that gasoline prices today are actually more affordable than they were back then. Faithful Cato@Liberty readers might well recognize this argument given that it was first offered in a blog post here a few days back by Indur Goklany.
While the predictable grousing on the newspaper comment boards followed (hell hath no fury like a motorist who thinks he was told to stop whining about pump prices), some commenters raised a legitimate issue: Would the picture change if we used median per capita income rather than mean per capita income in our analysis? Well, yes. But not by that much. Let’s walk through the numbers.
First some background. Income data come from two very different sources. Disposable income data are produced by the Bureau of Economic Analysis (BEA), an arm of the U.S. Department of Commerce, as part of its effort to estimate the gross domestic product (GDP). Data on family and household income come from surveys conducted by the Census Bureau.
Disposable income per capita or mean disposable income is simply total disposable income divided by the population of the United States. Median disposable income data, however, are not available because the GDP data do not come from household surveys. Only surveys allow us to rank order all the households (or families) and find the number that divides the bottom 50 percent from the top 50 — the definition of the median.
Median income estimates from Census data (the Current Population Survey or CPS) are available only for households and families. Data regarding median household income are only available from 1967 to the present, so the only measure available to us for longer term analysis is median family income. But BEA and CPS definitions of income differ. In 2001 for example, BEA personal income totaled $8.678 trillion while CPS money income totaled $6.446 trillion. The two income time series differ in important ways. For example, BEA data include property income and adjustments for underreporting of proprietor’s income.
With that out of the way, let’s get to the numbers.
(Leaded) Gasoline prices in 1960 averaged 31.1 cents per gallon. Median family income in 1960 was $5,620. In 2006 (the most recent year for which we have reliable data), median family income stood at $58,407. If the price per gallon were the same percent of median family income in 2006 as in 1960, the 1960 price would translate into $3.23 in 2006. Unfortunately, the (median family income) data aren’t yet available for calculations applying to 2007 or 2008.
Scientists Gone Wild
One of the oft-encountered talking points offered by the Left is the extent to which the Bush administration has alternatively ignored, intimidated, and done violence to the scientific community. The picture being painted is that of a know-nothing Christian fundamentalist in the thrall of corporate America waging unremitting war against the Enlightenment.
While there is enough truth to this charge to give it legs, the “science” lobby is scarcely blameless. For all the moral and ethical posturing surrounding the sanctity of “the scientific process” and the need to keep the same safe from assaults by power-hungry politicians and ignorant political mob action, climatologist James Hansen’s recent call to literally criminalize disagreement with him about climate change is a more radical assault on the the scientific process and the scientific method than anything forwarded by the Bush administration.
Now, James Hansen would probably argue that he’s not interested in criminalizing disagreement per se; he’s interested in criminalizing dangerous, life-threatening speech that the speaker knows is fraudulent. Perhaps. But exactly what is the nature of this special mind-reading power that allows James Hansen to determine that Rex Tillerson, head of ExxonMobil, believes X but says Y? Is it so beyond the realm of possiblity to think that Rex Tillerson actually believes what he says (pace, say, commentary by our own Pat Michaels on the subject)? Or does James Hansen presume to know Pat Michaels’ true and secret thoughts as well?
To the extent that James Hansen’s views are embraced by the self-appointed gendarmes of science, politicians are right to suspect that climate change alarmism is heavily influenced by the lust for power, the demands of ego, and the pursuit of political agendas that go far beyond a disinterested search for scientific truth. Moreover, one can’t help but wonder about the strength of an argument that requires the threat of force to silence critics.
Call me an idealogue, but criminalizing skepticism about scientific theories is probably not the best way to facilitate the quest for scientific truth.
John McCain’s SimCity Energy Plan
For those of you not in the cultural “know,” Sim-City is a long-standing series of computer games which asks the player to essentially play the role of a Stalinist super-planner. What to build, where to build, and how people are to relate to all those buildings in your custom-designed city is up to you, the all-knowing, all-powerful uber-planner.
It’s all good fun in the privacy of your own home (I guess), but is this the sort of game we want the next President to play? I’m going to go out on a limb and say no. John McCain, however, seems to disagree.
Consider, for instance, John McCain’s call earlier this week for the United States to build 45 new nuclear power plants by 2030 and another 55 sometime after that. The first question that comes to mind is, why 45? Did the McCain brain trust engage in some high level economic computer modeling to discover that the optimum number of new nuclear power plants is not 42, 47, or some other number … but the nice, round number of 45? I’m going to guess that they did not. I’m going to surrender to my cynical alter-ego and posit that, if one were to ask the question, “Sen. McCain, how exactly did you come to the determination that the economically optimal number of new nuclear power plants is 45 new facilities over the next 22 years?” the answer you would get would likely be totally incomprehensible.
There are two ways we can go on energy policy. We can leave the decisions about what to build and when to build to market actors (disciplined as they are by hard costs and incentivized as they are by the pursuit of profit), or we can leave that task to political uber-planners who are not disciplined by either but are disciplined by campaign contributions, polling data, and periodic popularity contests. Call me a crazy ideologue, but I suspect that the economy would prove more efficient with the former rather than the latter approach.
Note: The reason we hear politicians like John McCain talk so much about the need for the federal government to promote nuclear power is because investors in the private sector take one look at the economics and run screaming for the hills. Investment banks tell utilities who want to borrow money to build these things that not one red cent will be coming their way unless and until the federal taxpayer guarrantees that the entire loan will be repaid in case of default. If nuclear power were such a good economic bet, those taxpayer guarantees would not be necessary.
Filed under: Energy and Environment; General; Tax and Budget Policy
Hydrogen Car Hooey
One of my pricier trade newsletters, Greenwire, reports today that Honda is manufacturing a “zero emission” vehicle. Their source? A story in today’s New York Times which spills a great deal of ink on the environmental promise of these sorts of vehicles. Well, nonsense. The hydrogen has to come from somewhere, and the emissions associated with producing that hydrogen are far from zero. In fact, hydrogen-powered vehicles are, on balance, even dirtier than conventional internal combustion engines.
Next time you see Jamie Lee Curtis tooling around in one of these things, tell her to buy some carbon credits. A lot of them.
Sustainable Architecture – A (Real Life) Straw Man?
If you’re free Friday morning, you might want to hop on over to the Russell Senate Office Building to learn about the amazing, inexplicable, short-sighted market bias against straw-bale buildings and the need for the feds to do something about it. The Environmental & Energy Study Institute, the sponsor of this event,
Invites you to learn how the ‘new but old’ method of straw-bale construction can help address some of our most serious national policy challenges, such as record energy prices and unemployment, inadequate supply of affordable housing, the threat of climate change, and pressing needs in transportation and infrastructure funding. The modern building industry places heavy demands on the energy and transportation sectors. Straw is a locally-sourced, widely available, and renewable resource that builders, architects, engineers, and home owners are turning into affordable, safe, durable, and energy-efficient buildings in many climates. The following presenters will discuss the benefits of using this American invention, the regulatory barriers and institutional biases against straw-bale construction, and the role of the federal government in resolving these issues.
And that parable about the three little pigs? A PR smear spun by “Big Brick” no doubt.
Filed under: Energy and Environment; General; Government and Politics
I Have a Dream …
… that one day, corporate executives will tire of being bullied by demagogic politicians. I was reminded of that dream by a press release issued yesterday by Sen. Pete Domenici, ranking member of the Senate Energy and Natural Resources Committee and long-time Republican major-domo on energy policy. Sen. Domenici asked the heads of the five largest oil and gas companies in America (BP America, Chevron, ConocoPhillips, ExxonMobil, and Shell America) to promptly send reports to his office “explaining” their individual corporate investment strategies with particular attention to their work in the “clean energy” sector.
In my dream, Senator Domenici would get a reply like this:
Dear Sen. Domenici:
We appreciate your interest in our corporate operations, but we are too busy at the moment to expedite your request as outlined in your letter dated April 30. You write in that letter that you are interested in a compilation of all previously released, publicly available data on this matter. Accordingly, we suggest that you put some staffers on the job and compile those reports for yourself. To help you on your way, you will find enclosed our 2007 Annual Report.
That having been said, Senator, we answer to our stockholders, not to you. Our investment strategy is our business, not yours. While we are happy to discuss our perspective on the energy market and the merits of existing and proposed public policy, we are not interested in encouraging the idea that our investment strategy is a legitimate matter of interest to the United States Senate.
Cordially,
Big Oil CEO
Alas, it is only a dream.
The Global Warming Hysteria that Isn’t, Part II
Last week, a Gallup poll was released revealing that about one-third of Americans worry “a great deal” about global warming, a number that hasn’t changed much since 1989. Less than half of the respondents believed that climate change would pose a serious threat to them in their lifetimes. The trade publication ClimateWire (subscription required) quotes a Gallup official as noting that “there has been no consistent upward trend on worry about global warming going back for decades.”
Today, ClimateWire reports that a new study from the Pew Research Center for the People & the Press has even worse news for environmentalists: climate change is at the absolute bottom of the public’s list of priorities for the federal government (oddly enough, there’s no trace of the report on Pew’s website). When given a list of issues and asked to state whether the issue should be a “top priority” for President Bush and the Congress, those surveyed responded as follows:
Strengthening the nation’s economy: 75%
Defending the country against terrorism: 74%
Reducing health care costs: 69%
Improving the educational system: 66%
Securing social security: 64%
Improving the job situation: 61%
Securing Medicare: 60%
Dealing with energy problems: 59%
Reducing the budget deficit: 58%
Protecting the environment: 56%
Reducing crime: 54%
Providing insurance to the uninsured: 54%
Dealing with the problems of the poor: 51%
Dealing with illegal immigration: 51%
Reducing middle class taxes: 49%
Dealing with moral breakdown: 43%
Strengthening the military: 42%
Reducing the influence of lobbyists: 39%
Dealing with global trade: 37%
Making tax cuts permanent: 35%
Dealing with global warming: 35%
Surprised? You shouldn’t be. The political strength of the environmental lobby is almost entirely based on the proposition that they represent a large number of well organized swing voters who will reward and/or punish politicians for their position on environmental issues in general and climate change in particular. Hence, a great deal of hard work and effort goes into the Green campaign to scare hell out of politicians regarding the political risks associated with saying no to things like a cap & trade program to reduce greenhouse gas emissions. To be fair, all special interest groups have the same incentive to talk-up their alleged public support. Regardless, this particular political Green emporer has no clothes.
Evil Exxon
Bill Dunkelberg, a professor of economics at Temple University and former dean of the Fox school of business there, periodically issues random thoughts on public policy as it relates to his arena of academic interest. His April 24 “Notes on the Economy” includes this gem regarding that Great Economic Satan, Exxon Mobil:
Some presidential candidates have decided that Exxon is a symbol of what is wrong with America. Recent ads complain of Exxon’s 40 billion in profits as if Exxon is some evil entity. First of all, Exxon is not a person, it is millions of owners owning over 5 billion shares in their investment portfolios. Vanguard holds over 160 million shares for its clients, Fidelity over 100 million shares. Taking Exxon’s profits for hair-brained government schemes will just mean millions of people will have to work longer to accumulate their retirement assets. And, doesn’t return on investment count? 40 billion may not represent a particularly good return on the capital invested in the company. Size is not the issue, the percentage return is what counts.
And the government takes over 40 cents a gallon in tax, far more than the profit per gallon made by refiners. And the government doesn’t make any gas for you.
Hopefully voters will catch on to this sham. The last thing we need is government confiscating private sector profits and driving stock prices down. No help for our retirement and no help for the economy.
Couldn’t have said it better myself. And in case you’re curious, Cato receives no money from Exxon Mobil … although we’d be happy to take a big check if they were to offer one.
Attention Sen. McCain: Moderation in the Pursuit of Tax and Spending Cuts is No Virtue
Reporters are lighting up my voice mail and inbox with queries about what I make of Sen. John McCain’s call today for suspending SPR fill orders and the federal gasoline tax from Memorial Day to Labor Day in a bid to get gasoline prices down. Color me tepid.
Let’s take these issues one at a time. John McCain is absolutely correct to blame the SPR for helping to drive-up world crude oil prices. Oil economist Phil Verleger, for instance, thinks that federal fill orders for the SPR has driven up the price of crude by at least $10 a barrel and perhaps as much as $30. But why only temporarily stop the madness? Now’s a good time to dump the all federal inventories on the market and shut the SPR down once and for all. If we’re lucky, we’ll burst what may be an oil price bubble along the way and finally have something positive to show for the tens of billions of dollars of taxpayer funds that have been sunk into this white elephant.
The same goes for the federal gasoline tax. John McCain of all people should know that federal gasoline tax revenues are steroids for localized pork and special-interest subsidy. Road construction and maintenance (and the taxes that pay for them) should be turned back to state and local governments. A short-term moratorium on taxes, however, would probably have little impact on pump prices. If gasoline supplies are relatively fixed over the next several months (as I suspect they are), any service station that tried to pass the tax cut on to consumers would find demand increasing beyond where it otherwise would have been, and that increased demand would bid prices back up to where they were before federal taxes were cut. Over the long term, a cut in federal gasoline taxes would indeed reduce pump prices, but that’s not what John McCain is talking about here.
Sen. McCain is on the right track. But half-measures won’t accomplish much.
Is There an Oil Price Bubble?
I’m not sure exactly what a “bubble” is. The popular view is that a “bubble” exists when the fundamental value of an asset (the present value of the stream of cash flows that one might expect to receive in the future) deviates significantly from the market price of that asset. But future cash flows are by definition uncertain. Because market fundamentals are based on expectations regarding future events, I don’t know how one can know a priori when a bubble exists unless one has access to a time machine or crystal ball. There are plenty of citations I could offer (like this paper from the Federal Reserve Bank of New York and this paper from Brookings) from very credible economists arguing that the rise in housing prices was perfectly consistent with “non-bubble” economic fundamentals.
Moreover, “bubbles” (that is, market expectations regarding future returns that turn out to be incorrect) can last a long time. Economist Robert Shiller, for instance, analyzed approximately 400 years worth of housing data and concluded that, over time, housing prices track increases in income. But housing markets can – and have – deviated markedly from that fundamental price trajectory for as many as 50 years before reversion to the mean.
Two questions naturally arise. First, is a 50-year bubble really a bubble? Second, are investors irrational (or engaged in irrational speculation) if they invest based on solid data regarding returns from a multi-decadal economic trend? It may be perfectly rational to invest in an over-valued asset if one has good reason to think that one can take the profits and run before the bubble bursts. And it may be perfectly rational to believe that market fundamentals have changed so much that 50 year-old data is no longer relevant to the market at present or future.
I am unsure whether we’re witnessing a bubble in oil markets today. Two “non-bubble” explanations for the price run, after all, are perfectly plausible. First, it may very well be that low-cost crude is running low and/or that demand will continue to surge to such an extent that prices have nowhere to go but up. Second, OPEC member states may continue to invest modestly in upstream capacity in order to maximize revenues, so even if there is plenty of low-cost oil still available in the world, the cartel will prevent new supply from reaching the market. For the record, I am skeptical of both propositions, but I do not dismiss them out of hand.
The initial driver for the oil price increases we’ve seen since 2003 appears clear to me. A combination of tight production capacity and a surge in demand provided the foundation for the current price run. The oil market moves in rather predictable boom and bust cycles, and historic market patterns foretold the timing of this event if anyone was paying attention. For that trend data, see chapter 3 in this book by my colleague Peter VanDoren.
Cato on Facebook
Cato on Twitter
Cato on YouTube
Cato Tweets