Topic: Energy and Environment

No Dice, Pickens!

Last Thursday on public radio’s Marketplace Morning Report, Bob Moon interviewed billionaire T. Boone Pickens about his highly self-publicized energy plan, which centers on using wind power to replace a portion of the natural gas used to create electricity, and then using that replaced natural gas to power cars. As it happens, Pickens has invested in a big way in windmills and is extremely well placed to profit from an increase in the use of natural gas-powered vehicles. But the part that bothers me most isn’t the fact that a billionaire is running a propaganda campaign in an effort to rig the regulatory structure to force consumers to buy what he sells – though that bothers me plenty. The part that bothers me most is the mixture of toxic nationalism and egregious economic illiteracy in the ads Pickens is airing to plump for his plan. Which brings us back to Moon’s interview with Pickens:

Moon: Let me ask you to respond to something that Will Wilkinson of the Cato Institute said in a commentary on Marketplace the other day. Here’s some of his criticism of you:

Will Wilkinson clip: He’s leaning hard on our worst nationalist impulses. What he’s really saying is, why buy the things you need from dangerous foreigners when you could be paying more to buy them from rock-ribbed Americans, like T. Boone Pickens.

Pickens: It’s more than me. I mean, this is about America. This isn’t about Boone Pickens and whether Pickens’ wind farm makes money or whatever happens to it. But I mean, here with $700 billion going out of the country, and let’s say that we could cut it in half – $350 billion in the United States, can you imagine how that would multiply for jobs here. I’d much rather that gonna $350 billion was being used here than to give some for foreign oil.

Allow me to point out that Pickens’ reply is nonsense. He continues to insist on characterizing mutually-beneficial exchange across borders as hundreds of billions of American dollars “going out of the country.” But, in a nutshell, the reason Americans bought all this oil from abroad was that they had no way to get more energy bang for their energy buck. Unless the prices of domestic energy sources decline relative to that of foreign oil, shifting domestic consumption to energy from domestically-produced sources will  require Americans to pay more for energy–leaving them less for everything else.

This is not a recipe for multiplying jobs. Rather, it would leave less money in the economy to start new businesses and to expand successful ones. This is a recipe to make ordinary American consumers poorer and energy corporations, like the ones Pickens owns, richer. If Pickens was making sense, the implication would be that Americans would be better off if we “in-sourced” everything. T. Boone Pickens, meet David Ricardo.

Either one of the world’s wealthiest men doesn’t understand elementary economics, which clearly tells us that his plan will make Americans poorer, or his plan is not really “about America.”

Here’s my July 31st Marketplace commentary on Pickens. And here’s Cato’s Jerry Taylor in March debunking “energy independence.”

Bipartisan Nonsense on “Energy Independence” and Trade

Sen. John McCain reinforced his bipartisan credentials Thursday evening by sounding as confused as the Democrats on the nation’s assumed need for “energy independence.”

In his acceptance speech at the GOP convention in St. Paul, McCain pledged federal support for alternative energy so the United States can reduce the amount of energy it imports from abroad. “When I’m president,” McCain told cheering delegates, “we’re going to embark on the most ambitious national project in decades. We are going to stop sending $700 billion a year to countries that don’t like us very much. We will attack the problem on every front.”

He then pledged his support for more offshore drilling, nuclear power plants, wind, tide, solar and natural gas.

Whoa! Before we embark on a project that could cost tens or hundreds of billions of dollars, let’s get the facts straight. Specifically, where did that $700 billion number come from?

That is far more than what we pay for imported energy. In 2007, Americans spent less than half that amount—$319 billion—for imported energy of all kinds, including oil and natural gas. Even with higher energy prices in 2008, our total bill for imported energy this year will be nowhere near $700 billion.

Contrary to popular perception, most of our oil imports come such friendly countries as Canada, Mexico, Colombia, Brazil, and the United Kingdom, or from more neutral suppliers such as Iraq, Kuwait, Nigeria, Angola, Chad and Congo (Brazzaville).  Only a third of our imported oil comes from the major problem countries of Saudi Arabia, Venezuela, Algeria, Ecuador and Russia. We don’t import any oil directly from Iran. [You can check out the latest Commerce Department figures here.]

The $700 billion that Sen. McCain probably had in mind is America’s total trade balance, known as the current account. Last year, Americans rolled up a $731 billion current account deficit with the rest of the world. That account includes not just energy but also manufactured goods, farm products, services, and income from foreign investments.

The current account deficit is not driven by energy imports but by the underlying level of savings and investment in the U.S. economy. We run a current account deficit because, year after year, more is invested in the American economy than Americans save to finance that investment. Foreign capital fills the gap, and the resulting net inflow of foreign investment more or less directly offsets the gap between what we import and what we export.

If the federal government dramatically increases spending on alternative energy, as Sen. McCain and his Democratic opponent both seem to want, the result will be a bigger federal budget deficit, a smaller pool of domestic savings, more foreign capital flowing into the United States, and an even larger current account deficit.

Great Moments in Subsidized Train Travel

I once ran out of gas in college, so I suppose I shouldn’t throw too many stones at Amtrak’s glass house, but presumably somebody actually gets paid to make sure that trains don’t leave stations without enough fuel to make it to their next destination. According to the AP report, Amtrak will be investigating how this happened on a trip from LA to San Diego. Needless to say, don’t expect anyone to be held accountable:

A quick train trip down the coast turned into a long haul for more than 80 Amtrak passengers when their train from Los Angeles to San Diego ran out of fuel Sunday night. …The train, which had left Los Angeles at 8:30 p.m., didn’t get there until 1:15 a.m. Monday, two hours late. A train running out of fuel is “an unusual occurrence” and Amtrak officials will be looking into how it happened, Cole said.

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.

A complete history of fuel prices for 1949-2006, adjusted for changes in median family income, can be seen in the figure below.

Offsetting the fact that the price of gasoline as a function of median family income is probably (somewhat) higher today than it was in 1960 is the important fact that vehicle fuel economy is better today than it was then.  The gasoline consumed by passenger cars in 1960 was 14.26 miles per gallon.   By 2006, it was 22.4 mpg.   Even the mileage for all other 2-axle 4-tire vehicles (lights trucks, etc.) in 2006 was 18.0 mpg — higher than the fuel efficiency of cars in 1960.  Hence, the cost of the fuel necessary to drive a mile might well be less today that it was in 1960 if we’re adjusting for changes in median family income.  Again, I say “might” because 2007 and 2008 data are not yet available to provide concrete numbers.

On the other hand, it is certainly true that people have responded to higher incomes and better fuel efficiency by driving more.  Vehicle miles per capita in 1960 were 3,249; in 2006, it had increased to 9,171 (the numbers are author calculations based on vehicle miles traveled data from National Transportation Statistics table 1-32 and population data from Statistical Abstract of the United States Table 1. The 2006 VMT figures includes passenger cars and other 2-axle 4 wheeled vehicles).   Vehicle miles traveled is a function of individual decisions about where to live, where to shop, and how to spend discretionary income.  Many people, of course, made decisions about those things when fuel prices were at their historic lows (the late 1990s) and now find that those decisions are now more costly.  Adjustments are and will continue to occur on this front.

A comprehensive measure of how these various factors — higher fuel prices, higher incomes, better mileage, more miles traveled — work to affect the cost of driving is the percent of disposable personal income spent on gasoline and on all user-owned transportation expenditures over time.  And what do you know?  The percent of income we spend on transportation has been remarkably constant over time even though the distance we travel per capita has nearly tripled (The data for this calculation come from the GDP data available from the National Income and Product Accounts Table 2.5.5 line 69 (total user-owned transportation expenditures) and line 75 [gasoline and oil expenditures] and table 2.1 line 26 [disposable personal income]).

  • In 1960, gasoline expenditures were 3.3% of disposable personal income.  In 2007, gasoline expenditures constituted 3.4% of disposable personal income.
  • In 1960, total user-owned transportation expenditures were 10.8% of personal income.  In 2007, those costs constituted 10.5% of personal income.

So no matter how you slice the (available) data, it tells more or less the same story.  All things considered, the cost of driving is reasonably affordable today relative to what it has been in the past.

Update: Data links added.

The Answer to High Oil Prices and Global Warming? More Global Poverty, Less Immigration

Opponents of immigration are now trying to hitch their wagon to worries about high oil prices and global warming.

An ad on page A12 of today’s Washington Post asks, “If foreign oil has us over a barrel now, what happens when our population increases by another 100 million?” The text of the ad tries to provide the answer: “With America’s population at a record 300 million today, [oil] supplies are again tight in spite of record high prices. And the U.S. Census Bureau projects that another 110 million people will be added to our population between 2000 and 2040.” So, if we want lower oil prices, we need to reduce America’s population growth and that means reducing immigration. Get it?

The ad is sponsored by five anti-immigration, anti-population-growth groups, including the Federation for American Immigration Reform (FAIR) and Californians for Population Stabilization.

The ad provides no evidence that rising global demand for oil has been driven primarily or even significantly by population growth in the United States. In fact, our total oil consumption has actually declined compared to last year, while demand continues to rise in developing countries. The two previous big spikes in global oil prices, in 1973 and 1979, occurred when the U.S. population was 80 to 90 million LOWER than it is today.

The future direction of oil prices will be determined by such factors as energy efficiency, economic growth in emerging economies, oil production, and development of alternative energy sources. Immigration rates to the United States won’t matter.

As though on cue, the Center for Immigration Studies released a report this morning with the headline, “Immigration to U.S. Increases Global Greenhouse-Gas Emissions.” The report argues that immigration “significantly increases world-wide CO2 emissions because it transfers population from lower-polluting parts of the world to the United States, which is a higher-polluting country.”

What the CIS study is really arguing is that rich people pollute more than poor people, so the world would be better off if more people remained poor. The same argument could be used to oppose economic development in places such as China and India that has lifted hundreds of millions of people out of poverty in the past two decades.

Through the dark lens of CIS, the world is a better place when poor people remain stuck in poor countries, and poor countries remain poor.

Cato Unbound: Jim Manzi on the Costs and Benefits of Climate Policy Alternatives

In the lead essay for August’s Cato Unbound, Jim Manzi weighs various climate proposals and finds them wanting. He begins by putting the economic costs of global warming in perspective:

This is the central problem for advocates of rapid, aggressive emissions reductions. Despite the rhetoric, the best available estimate of the damage we face from unconstrained global warming is not “global destruction,” but is instead costs on the order of 3 percent of global GDP in a much wealthier world well over a hundred years from now.

It should not, therefore, be surprising that formal efforts to weigh the near-term costs of emissions abatement against the long-term benefits from avoided global warming show few net benefits, even in theory. According to the modeling group led by William Nordhaus, a Yale professor widely considered to be the world’s leading expert on this kind of assessment, an optimally designed and implemented global carbon tax would provide an expected net benefit of around $3 trillion, or about 0.2 percent of the present value of global GDP over the next several centuries. While not everything that matters can be measured by money, this certainly provides a different perspective than the “Earth in the balance” rhetoric would suggest.

This month’s issue should be a lively one, with responses on the way from Joseph Romm, Indur Goklany, and Michael Shellenberger and Ted Nordhaus. We hope you’ll find much to think about as the debate unfolds.