September 2005 Archives

In The Long Emergency, James Howard Kunstler argues that "peak oil" will soon lead to apocalyptically high energy prices that will destroy the suburbs and put Wal-Mart out of business. "Finally!" says one anti-auto group, cheerfully.

Kunstler's peak-oil theory may be no more than wishful thinking. His case critically depends on four strong assumptions:

1. We are running out of oil;
   
2. There are no substitutes for oil;
   
3. Higher prices will lead people to drive less; and
   
4. Less driving will force people to return to the cities.

If any one of these assumptions is wrong, Kunstler's argument falls apart. A paper I have written questions all four assumptions.

1. While extraction costs may moderately increase fuel prices, the world has sufficient known reserves to last for many decades.
2. Substitutes include solar, nuclear, and coal, but the first "substitute" will be the use of more fuel-efficient cars.
3. Americans will respond to sustained higher fuel costs more by cutting back on other transport costs, such as by keeping their cars a little longer or buying less luxurious cars, than by driving less.
4. To the extent that people do drive less, they could actually accelerate the suburbanization and exurbanization trends that the New Urbanists oppose.

Government policies based on a presumption of peak oil are likely to do far more harm than good to our cities and our economy. For more information, see Does Peak Oil Spell Death for the Suburbs?

From today's WSJ here.

The Washington Post reports the House Resources Committee approved a rewrite of the Endangered Species Act (ESA) yesterday by a vote of 26-12, eight Democrats supported the measure. The bill aims to lessen the regulatory burdens imposed by the Act and provide incentives to landowners. (I have not yet read the bill text, so cannot give more detailed comments, but Amy Ridenour posted on it here.)

What happens in the Senate is key to whether the ibll actually becomes law. On that note, this part of the Post story is interesting:

Sen. Lincoln D. Chafee (R-R.I.), who chairs the Senate subcommittee charged with overseeing endangered species law, said yesterday he will not decide how to proceed until he hears back from an advisory group of environmentalists, landowners and government officials meeting in Keystone, Colo.

The House, Chafee said, "is moving quickly," adding that once the Keystone group reports to the Senate in 2006, he would be comfortable drafting a bill. Offering financial incentives to landowners will be key, he added. "If you care about protecting private property rights and protecting species, it's going to revolve around funding issues," Chafee said.

Post-Katrina, there has been underpricing by some major refiners and retailers in an attempt to avoid political or actual prosecution. This has resulted in out-of-gas situations at some gasoline stations, even as people try to flee Rita. This problem is likely to become much worse post-Rita. Gas prices will likely need to go a good deal higher to the extent that refining capacity is interrupted, yet there is a good chance that prices will not go high enough, given the policitcal circumstances. Closed service stations will tell the tale, and even with such underpricing there will still be charges of "price gouging" and "unconscionable pricing."

The clarion call to oil companies and politicians from economists, consumer advocates, and environmental groups (the last who believe that oil prices are below "social costs") should be "price to clear the market," not "hold the line on prices."

Consumers do not really save money when gas is not conveniently available and time is wasted in gas lines. There is mental strain just knowing that gas may not be available to support routine activities or for that emergency moment as is the case today.

We have a strong intellectual case for full pricing. Here are some points that come to my mind. This is likely to be a big issue for some time, and expect congressional hearings and calls for price controls, allocation controls, and windfall profits tax, which will make the disaster even worse.

Market-clearing pricing:

1) discourages tank topping, thus creating more effective supply; it discourages hoarding.

2) empowers consumers with optionality--the ability, the choice, of buying gasoline;

3) reduces gasoline lines, which waste fuel, wastes critical time during evacuation, and create unnecessary emissions (it is ozone season during hurricane season);

4) encourages conservation, where consumers see the real scarcity price and act accordingly (carpooling, etc.)

5) provides the correct market signal to refiners and other industry parties to eke out more supply in the short term and, longer term, increase total capacity.

"Buffer of Civility"
If oil pricing becomes more politicized and physical shortages/gas lines result, we are back to the summer of 1979. There will be civil disobedience in the gas lines, and it will bring out the worst in all of us. I would like to share a quotation from a Wall Street Journal opinion-age editorial of June 26, 1979, published in the wake of a fuel riot in Levittown, Pennsylvania. (Scattered gunfire, arson, vandalism, etc. were happening elsewhere in the shortage environment.)

Simply entitled "Buffer of Civility," the op-ed read in part:

"Classical economists used to list among the virtues of the price mechanism that it avoided social strife. It did not set group against group, they taught. In our lifetime … we have generally allowed prices to allocate goods among different end uses. It worked so smoothly we did not understand what the classical economists meant; today, we see. In addition to its economic virtues, the price mechanism is a vital buffer of civility."

It will be not only economically efficient but also civil to allow prices to work their magic in bad times, as in good.

The Bush administration's announcement Sept. 20 that it intends to encourage rights-based fishing represents significant progress. The administration wants 8 U.S. marine fisheries to adopt a form of "dedicated access privileges" by 2010. These privileges include individual fishing quotas and fishing cooperatives, among other rights-based tools. PERC (the Property and Environment Research Center) has been working with Environmental Defense and the Reason Public Policy Institute to acquaint policy makers with the environmental and economic benefits of such rights.

“The administration has taken an important step in supporting these tools, which throughout the world have led to environmental improvements, safer fishing, lower costs, and higher profits for fishermen,” says Donald R. Leal, PERC Senior Fellow and author of Fencing the Fishery and other publications featuring rights-based fishing tools.

“We wish that the administration had gone further by setting an earlier deadline and by making a firmer commitment to dedicated access privileges, but this is a start. Where they have been adopted, these privileges (DAPs) have proven to be a tool that is superior to government regulation,” Leal adds.

Those who are following the TESRA/Endangered Species Act debate may be interested to know that The National Center for Public Policy Research just posted a new press release on provisions of the ESA bill the Resources Committee will be taking a look at later today.

This press release is far from a complete analysis, but adds detail to what we posted on September 19.

The House Resources Committee has scheduled a hearing on TESRA for September 21, and plans to vote on the bill the following day.

It seems that Sierra Nevada bighorn sheep and domesticated sheep don't go well together. According to this article, the domesticated sheep seem to carry diseases that kill bighorn. Thus, grazing one is incompatible with grazing the other, necessitating stricter controls on sheep grazing where bighorn roam, or other measures to keep the two apart -- such as shooting bighorn that stray near grazing sheep herds, as one agency proposed. Neither land use -- sheep grazing or providing bighorn habitat -- is necessarily the "proper" use of any given plot of land. Both are reasonable uses of land, but the conflict endures in the Humboldt-Toiyabe National Forest .

Given that the land in question is politically managed, rather than privately owned, competing interests -- environmentalists who like bighorn and sheep ranchers -- must resort to the political process to resolve the dispute. Clearer rights to the lands in question, in either group's hands, would seem to resolve the problem. It would also encourage the development of alternative "fencing" or monitoring techniques to reduce the costs of trying to reconcile the two competing uses. The problem here is not that ranchers want to graze sheep, or that environmentalists want to protect bighorn (as a wildlife-loving meat eater, I'm in favor of both), but that the institutional mechanism with which we address such conflicts -- political management of land -- is not particularly well-suited to resolving disputes in a productive manner.

The Bush Administration has finally unveiled its legislation to reform the Magnuson-Stevens Act governing fisheries in U.S. territorial waters. As expected, the bill endorses the use of tradeable quotas for fisheries -- labeled "dedicated access privileges" in the bill -- a property-based approach to fishery management that is supported by nearly all serious fishery analysts.

Environmental organizations that do serious fisheries work, like Environmental Defense, support the use of tradeable quotas. The opposition, insofar as there is any, comes from local economic interests that are afraid of competition and liberal groups that are afraid of "concentration" within the fishing industry. Whatever the merits of such critiques, it is worth noting that they are not particularly environmental. That is, there is no serious environmental -- as opposed to social -- argument against the use of tradeable fishing quotas. There's a reason for this: Both extensive theoretical work and extensive practical experience have demonstrated that property-based management schemes are the key to fishery sustainability.

I've written on the value of tradeable quotas in fisheries here. for news coverage of the proposal, see here and here. I hope to post more on the specifics of the proposal once I've had more time to go over it.

One of the perverse reactions to the recent upsurge in crude oil and gasoline prices has been calls by some members in Congress, various State legislatures and the press to impose windfall profit taxes (WPT) on oil companies. These calls of course raise the question—just how profitable are oil companies compared to other sectors? The figure shows that oil (and natural gas) companies’ profit margins are actually lower than most other sectors of the economy. (Data from Business Week, August 22/29, 2005)

Imposition of WPT is bad public policy. It would keep oil in the ground when it is most needed in cars, trucks, planes, furnaces, and power plants. That, in turn, will increase prices, which will lead to further consumer unrest and political momentum for the worst quick-fix of all—price interference, albeit moral suasion or formal ceilings. The “slippery slope” of government intervention—one intervention leading to another and yet another—can be avoided by letting market forces work in emergencies as in normal times.

What would the government do with the revenues derived from the WPT—rebate it to gasoline or fuel oil buyers? Since oil demand is relatively inelastic, fuel rebates would result in higher energy demand and prices. Would the new oil tax be spent in ways to reduce overall tax burdens, or, as history teaches, would it just be spent on new pork? Government has not shown the ability to wisely spend any ‘windfall’ in tax revenues.

Energy companies were not responsible for the geopolitical events that led to 2005’s upsurge in prices, and certainly were not responsible for Katrina. Scapegoating is not good policy for oil or any other industry. Imposing WPT would start random tacking and jibing when a steady tiller is what we need.

The Seattle Post-Intelligencer caps off a silly editorial about Rep. Richard Pombo's plans to strengthen/weaken (depending on whom you ask) the Endangered Species Act with this concluding paragraph:

As critics point out, the [Endangered Species] act hasn't restored many threatened species to robust health. If consensus can be found, it's possible that Congress could craft better ways of restoring endangered species. But the starting point must be to prevent extinction. On that basic responsibility, Congress must not mess with the Endangered Species Act's great success.

The Endangered Species Act is not working very well.

Congress may be able to craft an Endangered Species Act that would do a better job.

The Endangered Species Act is a great success.

Congress should not mess with the Endangered Species Act.

I have an article in today's TechCentralStation about a proposed "electricity strike" in Italy. 4 major consumers associations are asking Italians to stop using electricity tomorrow at 11,30 am, for 5 minutes, as a way to protest against high oil prices that translate into high prices of electricity, gas, etc. Protesters call for political measures aimed at counterbalance the effect of rising oil prices, including a shift in our "energy mix" (the sources through which energy is generated) and possibly price controls. What they doesn't seem to realize is that free market provide a built-in mechanism to react to high prices: demand will eventually fall and prices will have to decrease. If government gets into the process it may simply make the problem harder to solve, as a cap on prices might lead to further scarcity - i.e., waiting lines at gas stations or blackouts. Consumers should understand that that is not their best interests.

Rob Bradley has analyzed crude oil and gasoline prices and makes some lucid observations amidst the hype and alarmism. Prices are in 2004 dollars--i.e. adjusted for inflation (except the most recent 2005 prices)

• Katrina severely interrupted the Gulf Coast oil industry as described by the Department of Energy’s Energy Information Administration.

• Post-Katrina crude-oil prices around $65 per barrel compare to the all-time spot high in March 1981 of $72 per barrel. This compares to the 1913-2004 average of $21 per barrel.(see fig.1)

• The average crude price can be divided into pre-1973 and post-1972, the more recent period covering the ARAMCO nationalization (1973/74) and a variety of geopolitical events driving up oil prices. The “free market” price (1918-72) is about $17 per barrel; the “nationalism” era (1973-2004) about $30 per barrel. Government ownership and control of oil outside of North America is keeping the world oil price above finding costs for new supplies, making subsoil and infrastructure privatization an attractive public policy reform.

• Domestic retail gasoline prices in 2004 were below the 1918-2004 average of $2.08 per gallon. Post-Katrina, prices are above their long-term average. Labor Day spot gasoline at $3.07/gallon is just below March 1981’s peak, reported EIA. See fig.2) Moreover, today’s gasoline is a superior, specialty product with much lower emissions than in decades past.

• The good news is that even with the recent surge in crude prices, gasoline for consumers has increased much less than crude oil. Comparing $65 crude oil and $3.07 gasoline, crude is 223% above its historic average and gasoline only 44% higher. (see fig.3) This reflects improved efficiencies in “midstream” and “downstream” sectors: crude-oil transportation, oil refining, oil-product transportation, and marketing.

• Gasoline shortages were the exception and not the rule over Labor Day weekend even with hurricane’s disruption of vital industry infrastructure. 1970s-style gasoline shortages from price and allocation controls were averted. Three dollar gasoline rationed available supply to demand and encouraged motorist conservation, a textbook example of market forces at work.

by

Indur M. Goklany

We are constantly bombarded with claims that weather-related events will get worse over time, at least in part because of global warming. So one should expect that aggregate deaths and death rates due to weather-related extreme events worldwide would have trended upward in recent decades.

But do they?

The following bar chart shows (approximate) aggregate trends in these critical measures between 1900 and 2004 for "weather-related extreme events", namely, droughts, extreme temperatures (both extreme heat and extreme cold), floods, landslides, waves and surges, wild fires and wind storms of different types.[1]

Yes, there is a trend here, but is it upward?

This, of course, begs the question as to why, if the globe is warming, matters aren't getting worse?

Curves like this illustrate that due diligence requires that analyses and/or claims of future impacts should be accompanied, at a minimum, by checks of whether their future projections match with past reality. Of course, as your mutual fund advisor will tell you, "past results are not necessarily indicative of future performance." True, but one should have to reconcile the two, matching the past and the present with the future. And this goes not just for impacts (e.g., deaths and death rates) but also assumptions that feed into impacts assessments. For example, how reasonable is an assumption of 1 percent growth per year in carbon dioxide concentrations when historically it has averaged 0.40 percent per year from 1959 to 2004, during which period it only once exceeded 0.75 percent (year-to-year increase)?

Indur Goklany's post (below) is accurate, but I want to explore further why death rates from disasters have declined. What is it about our wealth that makes us more resilient?

One of the most important factors is mobility. In 1900, few people in Galveston could quickly get out of the way of a hurricane. Today, most Americans own autos and can evacuate a city before a storm or leave after the storm to a safe place.

New Orleans is the exception that probes the rule. We have heard that 60 percent of New Orleans residents are black, but it has been little noted that a third of those black families do not own a car -- nor do 15 percent of white families.It is these people who were left behind when those with cars evacuated. (See this table from the 2000 census for data on auto-ownership rates by race in New Orleans, Biloxi, and Gulfport.)

This is one more example of the benefits of automobility -- benefits forgotten by those who urge people to give up their cars for expensive rail transit systems, etc.