Topic: Energy and Environment

C. Boyden Gray on Oil Subsidies

By
Jerry Taylor

At a high-level, off-the-record meeting concerning energy security that I attended earlier this week in Washington featuring New York Times columnist Tom Friedman, former CIA director James Woolsey, and energy consultant Daniel Yergin, a study came up in the course of discussion that has been bobbling around for a while now just below the radar screen regarding oil subsidies. The study, co-authored by major Republican C. Boyden Gray and published in a conservative law journal out of the University of Texas, alleges that the oil industry is subsidized to the tune of $250 billion a year, and that claim was marshaled to support the case for countervailing ethanol subsidies. If a careful guy like Boyden Gray — no enemy of business community he — has come to this conclusion, then there must be something to it, right? At least, that’s what many of the attendees were telling each other.

Now, this is a pretty remarkable claim given that the most aggressive yet credible oil subsidy estimates I’ve ever seen come from economist Douglas Koplow of Earth Track. He argued in a 1998 study for Greenpeace (not available electronically as far as I know) that total oil subsidies range from $18-40.6 billion if you count not just subsidies targeted at the oil industry but (1) those that help multiple industrial sectors as well, and (2) embrace some pretty ambitious claims about the chunk of defense spending that would disappear if the military’s oil mission were to disappear.

Look, I like Boyden personally. He’s been a generous contributor to the Cato Institute over the years and he’s gone out of his way to help promote many of our scholars here in Washington. But a close look at this paper of his speaks volumes about the poverty of the policy conversation in Washington with regards to energy.

Boyden’s argument boils down to this: chemical substances found naturally in gasoline such as benzene and other aromatic hydrocarbon compounds are imposing severe health costs on society. In a perfect world, the oil companies would have to compensate victims for those harms, but the federal government largely protects those companies from liability. This constitutes an implicit subsidy to the industry.

Boyden alleges that the direct harms from the various toxic emissions from gasoline total about $64 billion a year. But those aromatics also contribute to the formation of particulate matter (PM) in the atmosphere, and the harms from PM that can be traced back to aromatic gasoline emissions totals at least $200 billion a year. Boyden rounds the sum to $250 billion a year (which works out to about $1.78 a gallon in 2005) and argues that “leveling the playing field” would justify an equivalent subsidy to the ethanol industry. Ethanol subsides, he says, amounted to only $1.4 billion a year (the CBO estimate of the lost revenue associated with the federal fuels tax credit which, by the way, represents only a fraction of the total subsidies going to ethanol), so there’s a lot of room left to justify ethanol subsidies to the moon.

Boyden is right that the aromatics found in gasoline impose human health risks, and the regulatory history he tells about how Congress has dealt with this issue in the past is rather good. But his cost estimates relating to these emissions are drawn essentially from the ether.

His $64 billion estimate for the benefits associated with reducing aromatic emissions is simply the costs associated with reducing past industrial toxic air emissions. Huh? How did costs become benefits? Well, there are no independent estimates of the benefits. But the EPA asserts that the benefits from those previous industrial emission reductions exceed the costs so… . Even if the EPA’s claim were correct, there’s no reason to assume that the cost of reducing toxic air emissions from point-sources x years ago has anything to do with the cost of reducing toxic air emissions from automotive tailpipes today.

Boyden’s estimate for the costs associated with PM formation that can be traced back to gasoline likewise emerges from a problematic set of assumptions. He posits that 40 percent of all fine PM mass is carbon based (which seems fair enough) and then assumes that half of this mass (when adjusted for population exposures) can be attributed to gasoline emissions (which is not so fair enough; his own footnote suggests that only 4-33 percent of PM 2.5 can be traced back to tailpipe emissions). Using the benefit estimates associated with ambient PM concentration reductions from the recently established off-road diesel fuel regulations allows Boyden to come up with about $200 billion in benefits, although it’s unclear how he traces those costs to aromatic tailpipe emissions out of the total universe of motor vehicle tailpipe emissions.

I doubt whether anybody who’s citing Boyden’s study with gusto has ever gotten around to reading this particular sentence on p. 52; “We emphasize that these are, necessarily, speculative estimated, based on various heuristic assumptions that cannot easily be proven (or refuted, given basic uncertainties).” I’ll say. Normally, claims that cannot be proven or disproven are called “baseless opinions” (or, alternatively, “religious beliefs”). Let’s posit that we shouldn’t use either as the basis for public policy.

If Boyden was familiar with the literature on tailpipe emissions, he wouldn’t need to go through such analytic contortions. The man who probably knows more than any other person in the United States about the issues surrounding the environmental cost estimates associated with gasoline consumption is Mark Delucchi, a research scientist at the Institute for Transportation Studies at the University of California at Davis. His own economic calculations based on epidemiological work by others finds that environmental costs associated with toxic air emissions from motor vehicle tailpipes ranges from a lower-bound estimate of $87 million a year to an upper-bound estimate of $1.62 billion a year in 1991 dollars (which translates to $116 million-$2.16 billion in 2005 dollars) – a tiny fraction of the $64 billion estimate coming from Boyden.

Delucchi does not break down the PM emissions associated with gasoline aromatics, but he does report that the environmental costs associated with all the particulate emissions from motor vehicle tailpipes ranges between a lower-bound estimate of 16.7 billion and an upper-bound estimate of $266.4 billion. However, Delucchi reports that “we are uneasy with this result, even as an upper-bound,” because it’s heavily weighted by one study in the literature (Pope et al.) and that study is both anomalous and methodologically problematic. Regardless, keep in mind that Boyden is concentrating his fire not on all the particulate matter coming out of automotive tailpipes, but that subset of particulate matter formed as a consequence of the aromatic emissions. Given the small percentage by weight and volume that aromatics constitute within a gallon of gasoline, it’s clear that Boyden’s estimate is wildly off even if we use Pope et al.

By the way, it’s worth noting that the toxic air emissions associated with ethanol are even greater than the toxic air emissions associated with conventional gasoline, so even if Boyden’s estimates were correct, they do not justify countervailing subsidies for ethanol, the remedy for the problem suggested in Boyden’s paper.

One could spend a lifetime swatting down papers like this. That such weak arguments have no problem gaining currency in Washington demonstrates that policymakers simply cannot differentiate between analytic wheat and chaff. But such is the stuff that policy is made, particularly when the analytic “chaff” is politically convenient.

Topics: 
Energy and Environment, General, Regulatory Studies

More Energy Security Gibberish (Wall Street Journal Edition)

By
Jerry Taylor

Yesterday, the Journal ran a long, page one story featuring claims by retired Air Force General Charles Wald that oil production facilities around the world are dangerously vulnerable to terrorist attack and that the U.S. hasn’t done enough about it. General Wald is primarily worried about unguarded pipelines and chokepoints for tanker traffic and believes that the U.S. military needs to make “oil security” one of its chief concerns.

I was invited this morning by producers at CNBC’s Kudlow & Co. to debate General Wald, but alas, the General turned out to be unavailable, so the spot was scrapped. That’s too bad, because I was looking forward to engagement.

In short, General Wald is arguing that:

  • Market actors - who have spent billions of dollars on these facilities - are underinvetsting in security;
  • Producer states - who rely on oil revenues for most of their state revenue - are underinvesting in security as well; and finally:
  • If the U.S. military doesn’t do something about this, nobody will.

This is all pretty hard to swallow. Why would investor-owned oil companies be so carefree about their multi-billion-dollar facilities and capital assets? Are those companies run by stupid or myopic individuals? Likewise, poor governments have even more reason to be worried about securing oil production facilities and transit lanes than does the United States, because the economic harms caused by disruption would be far greater on the former than the latter.

While it’s certainly possible that oil companies and producer states are investing suboptimally when it comes to security expenditures, they have every incentive to make reasonable security investments. What makes General Wald think his assessment of the costs and benefits of those investments are better than those of investor-owned oil companies or the incumbent governments in question?

Now, let’s assume for the sake of argument that General Wald is indeed the master of this informational universe. If the U.S. taxpayer steps in via the U.S. military to undertake needed investments, what incentive do companies or governments have to make future security investments? Why wouldn’t both parties subsequently free-ride off the U.S. taxpayer for the rest of time?

And, not to put too fine a point on it, but is it really the military’s job to protect private corporate property? Shouldn’t the oil companies be paying those costs themselves? They, after all, are making a somewhat risky bet when they put their money into these regions. If that bet pays off, they make billions. If it doesn’t, then they should bear the loss alone if they’re going to reap the gain alone. Likewise, why should the U.S. military protect the economic assets of state-owned oil companies controlled by dubious regimes?

General Wald’s justification for all of this is that an oil supply disruption threatens the foundation of the American economy. That’s bunk. Recent research suggest that GDP is simply not affected that much by oil price spikes.

The contention that “we” aren’t doing enough to hedge against the possiblity of terror attacks on the oil supply infrastructure invites the question of just exactly who is this “we”? Market actors are building up oil inventories at a breakneck pace and an unprecidented amount of money is flowing into oil futures contracts. In other words, people in the market aren’t dumb. They know that a supply disruption is possible. And they’re acting on that possiblility by putting oil in the storage facilities for a rainy day.

But this is just more of the same-old same-old. Superficial bilge about energy security is the currency of the intellectual realm these days, and General Wald’s naval-gazing represents nothing new. What really got my attention was this:

In late 2002, he [Wald] was named deputy chief of the U.S. European Command in Stuttgart, which also oversees parts of Central Asia and most of Africa. The command wasn’t on the front lines of the fight then about to begin in Iraq, and officers were searching for a mission.

Well, if the U.S. European Command has no mission and nothing to do, then why not shut it down? If it’s got to cast about looking for something to worry about, it can at least pick something that it can handle. Given how thinly stretched our troops are at the moment, is it really the best use of our resources to perform this nearly unimaginable task of defending thousands of miles of foreign pipelines from rifle-fired pot-shots?

Topics: 
Energy and Environment, Foreign Policy and National Security, General

Do as We Say, Not as We Do (Enviro Edition)

By
Jerry Taylor

If you want pure, unadulterated, gibbering environmental madness, you want to visit the Guardian or the Independent. Within those pages, you’ll find more over-the-top, doom-saying hysteria than in virtually any other collection of newspapers combined. And naturally, if you read the Guardian or Independent, you’re statistically quite likely to be among the most stone-cold envronmental extremists on planet Earth. 

What you won’t be, however, is someone who is statistically likely to live the life you propose to force others to live. In fact, you’re likely to be a far bigger environmental villain (at least, as Guardian readers would define the term) than those evil conservatives who read other U.K. newspapers and broadsheets. You’re less likely to invest in energy efficiency, less likely to economize on fuel, and, well, less likely to do just about anything that you want the government to force your fellow man to do. 

That, anyway, is the conclusion of a striking series of recently released studies reported, with some obvious chagrin, in the Guardian itself.

I’m not particularly surprised. A few years ago, I was in Aspen and had dinner with a friend and a large group of his acquaintances. One of them was quite exercised about the fate of the planet and quite proud of his solar-powered house … until my friend pointed out that his house was bigger than anything outside of a Third World palace and that the solar panels could scarcely keep his energy bills south of the annual GDP of half the counties in the United States. OK, I think that was an exaggeration, but after seeing the house from a distance, it probably wasn’t by much.

Topics: 
Energy and Environment

Global Warming — What Would Rawls Do?

By
Jerry Taylor

If we accept the simplistic version of Rawls’ Theory of Justice — that we should measure the moral and ethical fiber of any society based upon the well-being of its worse off (and I’m sure Will Wilkinson will correct me if I screwed that up) — then what should we make of this story hot off the wires suggesting that global warming means more sex for weaker grey seals?

Whether we’re talking about John Rawls or Lou Rawls, I think you know the implications of this….

Topics: 
Energy and Environment

Another Blue Ribbon Energy Report Falls Flat

By
Jerry Taylor

Yesterday saw the publication of yet another blue ribbon style report on energy policy, this one called Recommendations to the Nation on Reducing U.S. Oil Dependence, from the Energy Security Leadership Council.  The press went wild.  Color me unimpressed.

The authors of the report are convinced that America’s reliance on foreign oil is a dangerous thing.  But why?  Panicky narratives abound, but none of them are particularly well informed.

Consider the widespread concern about the prospect of being cut off from supply.  Relying on foreign producers for oil means that we might find ourselves without physical access to petroleum if those foreign producers were to decide to shut us out.  But that worry is only plausible if you fail to understand and fully appreciate the fungible nature of the global oil market.  As MIT oil economist M.A. Adelman once wrote:

Rarely has a word [“access”] been so compact of error and confusion. Nobody has ever been denied access to oil: anyone willing to pay the current price could have more than he wanted. One may assume what he likes about future demand, supply, and market control, and conclude that the future price will be high or low, but that price will clear the market in the future as in the past. The worry about “access” assumes something queer indeed: that all of the producing countries will join in refusing to sell to some particular buyer—for what strange motive is never discussed … it takes only one other country, with a desire for gain, to cure this irrationality. 

The 1973 oil embargo proves the point.  As Adelman notes,  

The “embargo” of 1973–4 was a sham. Diversion was not even necessary, it was simply a swap of customers and suppliers between Arab and non-Arab sources… .  The good news is that the United States cannot be embargoed, leaving other countries undisturbed. 

In short, the only way for producers to keep their oil out of America is to impose a military blockade of U.S. ports.  Market agents – not agents of the producer states – decide where oil goes when it enters the market.  As long as someone is willing to buy oil from a producing state and then sell it to the United States, no shut off is possible absent military force.

OK, so physical access isn’t the problem – our vulnerability to producer-induced price spikes is the real worry.  Or is it? 

Recent macroeconomic studies suggest that the economy is nowhere near as vulnerable to oil-induced recessions as once thought.  How else to explain the world’s gangbuster economic performance in the teeth of the present price spike?

Nor is it reasonable to fear that producers might shut down drilling platforms in an act of global economic spite.  Producers need oil revenues more than consumers need the oil.  Even vitriolic anti-American regimes such as revolutionary Iran, Iraq under Saddam Hussein, and Libya prior to our recent rapprochement, have shown no interest in committing the economic and political suicide entailed in shutting down the only significant source of revenue they have.

Supply disruptions can and do happen, but they have historically tended to be modest and temporary.  Over the past 50 years, we’ve had 12 supply crises with an average of a 5.4 percent reduction in global oil supply for each event, and none of those supply disruptions lasted for more than 9 months.

Question #1 – don’t market agents have every incentive to insure against such events?  That, after all, is what futures contracts, oil inventories, and energy efficient technologies are for.  To argue that government must act to hedge against such possibilities is to argue that governmental actors are better risk managers than market actors.  And that is a fairly dubious proposition.

Question #2 – what sense does it make to say goodbye to an energy source that is cheap most of the time but expensive some of the time (oil) and hello to an energy source that is expensive all of the time but presumably more price stable (biofuels)?  If any individual company or consumer wants to go that route, then fine.  But why should the government dictate energy choices for every single person and corporate entity in the United States?  Are market actors so incapable of making intelligent decisions about what to buy that the feds have to step in?  And if so, why not have the feds grab the reins in other sectors of the economy?  

The final worry is that our dependence on foreign oil requires military expenditures and foreign policy contortions to keep producers safe and friendly.  But this is nonsense.  If the U.S. didn’t pay to secure oil production and tanker traffic abroad, producers would do so as long as the marginal costs associated with security expenditures were less than the marginal benefits associated with oil production – as they certainly are.  The U.S. military “oil mission” is really a welfare program in disguise.  And friendly relationships have nothing to do with it.  As noted above, without oil revenues, producing states could not pay their troops, fund their secret police, build luxurious palaces, or even feed their people (read: keep riots from breaking out).  Whether they like us or not, they have to produce, and as long as they produce, we will have oil to buy as long as we are willing to pay the market clearing price.

All of this is well known and completely uncontroversial to oil economists of the Left, Right, and Center.  But it’s a complete revelation to foreign policy mavens and military professionals, who simply do not understand a single thing about the oil market.  Unfortunately, too many people in Washington listen to the latter but not the former.

And yes, it simply kills me to see that Cato board member Fred Smith (CEO of Federal Express) is one of the two co-chairmen of the group that issued this report. 

Topics: 
Energy and Environment, General, International Economics and Development

NYT Nails Stern Review

By
Jerry Taylor

OK, The New York Times per se has not weighed in with harsh criticism, but Prof. Hal Varian of U. Cal. Berkeley, a contributor for the NYT’s excellent “Economic Perspectives” column, weighs in today with a nice summary of the problematic assumptions made by Sir Nicholas Stern in the oft-quoted Stern Review on the Economics of Climate Change.  For those who don’t recall, Stern argued that it makes sense to spend 1 percent of the world’s GDP to reduce greenhouse gas emissions because the costs associated with those emissions might total anywhere between 5-20% of global GDP some time down the road.

Regular readers here will notice that Prof. Varian’s arguments closely mirror those I made earlier on this page (for the curious, here and here, with a minor correction to the latter here).

So it’s not just me folks …..

Topics: 
Energy and Environment, General

Cheer Up, Kirk Douglas

By
David Boaz

Kirk Douglas is celebrating his 90th birthday with a new book and a jeremiad on the state of the world.

“Let’s face it,” he writes to “America’s young people”:

“THE WORLD IS IN A MESS and you are inheriting it. Generation Y, you are on the cusp. You are the group facing many problems: abject poverty, global warming, genocide, Aids, and suicide bombers to name a few. These problems exist, and the world is silent. We have done very little to solve these problems. Now, we leave it to you. You have to fix it because the situation is intolerable.”

I ponder his analysis and recommend Indur Goklany’s book The Improving State of the World: Why We’re Living Longer, Healthier, More Comfortable Lives on a Cleaner Planet to him at the Guardian’s Comment is free.

Topics: 
Energy and Environment, General

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