Topic: Energy and Environment

Schumer’s 0.15 Cent Solution

On Wednesday, the Joint Economic Committee held hearings on gasoline prices and whether they are on the up-and-up. Sen. Chuck Schumer (D-N.Y.), the committee chairman, made his position — and the position of many of his fellow senators — perfectly clear. The oil companies should be busted up, he said, and lower prices will naturally flow.

Really? The best witness he had on hand to back him up was Thomas McCool, director of applied research methods at the U.S. Government Accountability Office (GAO). McCool contended that mergers and acquisitions in the oil sector in the 1990s have increased wholesale prices by 1-7 cents per gallon. Now, it would appear on its face that tossing the economic equivalent of an atomic bomb into the oil sector to reduce wholesale prices by a few pennies a gallon might not be the best idea in the world. Nonetheless, a close read of McCool’s testimony suggests that it’s an awfully thin reed to hang public policy on.

The first thing we notice is that McCool’s testimony relied exclusively on past GAO reports. The fact that there is a mountain of peer-reviewed academic work on this subject was unacknowledged in his testimony. This, unfortunately, is par for the course at the GAO. The implicit attitude over there is “if we didn’t do the study, the study isn’t worth looking at.” As a consequence, most GAO analysts are horribly ignorant about many of the issues they discuss. Now, I don’t know if Thomas McCool is familiar with the economic literature on these questions or not, but given his job title, I would doubt it.

Luckily, not all federal agencies act as if they are the font of all conceivable wisdom. The Federal Trade Commission recently published a thorough study on oil markets with due attention paid to the external literature on the subject. In a paper commissioned for that study from University of Iowa economist John Geweke, we find that academic researchers have been unable to lay down any good evidence that mergers and acquisitions have, on balance, increased consumer prices,” a finding all the more telling given the higher quality of that work. As Geweke notes in passing regarding an earlier GAO study on mergers and acquisitions in the oil business, which used roughly the same methodology as the more recent study, “assessment of the technical work in the GAO report is hampered by the fact that the report’s documentation of data and estimation methods does not generally meet accepted academic standards.” Geweke’s criticism was echoed in the FTC’s analysis of GAO’s 2004 study, which was savaged [pdf] by the commission’s economists (see the appendix).

Second, it’s important to note the distinction between changes in posted rack prices (which is what GAO used to reflect wholesale prices) and retail prices. The two are not the same. As the staff of the Bureau of Economics of the FTC noted back in 2004,

Rack wholesale prices and retail prices do not always move together, in part because rack prices do not necessarily measure actual wholesale transaction price, which are also affected by discounts, and in part because significant quantities of gasoline reach the pump without going through jobbers.

Hence, GAO did not find that retail pump prices increased by 1-7 cents per gallon. I didn’t even find that wholesale prices increased by 1-7 cents per gallon. It purported to find that posted rack prices increased by 1-7 cents per gallon. That may - or may not - have increased retail pump prices. FTC economists, for instance, agree with GAO that the Marathon-Ashland merger increased posted rack prices, but found no evidence that retail pump prices increased as a result.

In sum, what GAO found is equivalent to finding that this or that led Ford to increase the suggested retail price of a car by x. Maybe it did, but that “suggested retail price” has little to do with actual prices paid by new car buyers on car lots. Did McCool make this distinction clear? Not on your life.

Third, McCool’s depiction of GAO’s 2004 findings is highly suspect even in the particulars. The 2004 GAO study that McCool relied upon for his claims actually were two separate studies packaged under one binding.

One analytic exercise provided a total of 10 estimates of the effects of mergers and acquisitions on posted rack prices. Those estimates cover three types of fuel (conventional, reformulated, and specially blended gasoline for the California market) and different geographic areas. Seven of the 10 estimates — all involving either conventional or reformulated gasoline — found that mergers and acquisitions increased wholesale fuel prices by 0.15 cents per gallon to 1.3 cents per gallon. Although mergers and acquisitions were found to increase wholesale California gasoline prices by 7-8 cents per gallon, that finding was not at a level of confidence normally thought of as statistically significant. And interestingly enough, the GAO study did not find a statistically significant increase in wholesale gasoline prices in the eastern part of the United States.

Another analytic exercise examined eight of the 2,600 mergers and acquisitions that occured between 1994-1999. GAO provided 28 estimates of the effects of those mergers on posted rack prices for branded and unbranded conventional, reformulated, and California-specific gasoline. In 16 cases, GAO found a positive and statistically significant impact on posted rack prices ranging from 0.4 cents per gallon to 6.9 cents per gallon. In seven cases, they found a negative and statistically significant effect, ranging from a price decline of 0.4 cents per gallon to 1.8 cents per gallon. In five other cases, they found no statistically significant effects at all.

Yet McCool glosses over these more careful observations in his oral presentation for the more arresting “1-7 cents per gallon” impact estimate. Media coverage might have been somewhat different had McCool said that GAO found no evidence that mergers and acquisitions have increased posted rack prices in the eastern half of the United States, but some evidence to suggest that mergers and acquisitions increased posted rack prices by somewhere between 0.15 and 3 cents per gallon in the western half of the United States (the findings of the more comprehensive study of the two undertaken by GAO) … but that posted rack prices and a quarter will buy you a cup of coffee for all the good they will do the analyst because posted rack prices and retail prices are two different things. But that wouldn’t have made the members of the committee very happy, and GAO is not in the business of going out of its way to offend the people funding their operations.

In McCool’s defense, at the back of the written testimony he submitted to the committee, he breaks down the study’s findings by merger. According to GAO, the Exxon-Mobil and Marathon-Ashland mergers increased posted rack prices by 2 cents per gallon and reformulated gasoline (posted rack) prices by 1 cent per gallon. The Shell-Texaco merger, however, reduced reformulated gasoline (posted rack) prices by about a half cent per gallon. The Tosco-Unocal merger increased California gasoline (posted rack) prices by 7 cents per gallon.

A note about the Tosco-Unocal merger that provides the upper-bound estimate offered by Mr. McCool - the GAO finding pertains to the (posted rack) price of branded gasoline. The (posted rack) price of unbranded gasoline was actually found to decline. Economists at the FTC note that

Tosco had a branded presence in few of the cities affected by the merger and, where it did, Unocal typically did not have a significant branded presence. Under these circumstances, it is virtually impossible to imagine an anticompetitive theory that would be consistent with a large increase in branded prices but no increases in unbranded prices. Had the GAO researchers understood this problem, they would have recognized that their result must be flawed.

Fourth, McCool’s discussion of the mergers and acquisitions in the 1990s leaves much to be desired. For instance, 2,600 mergers and acquisitions are dutifully noted without the proper context. To wit, the mergers and acquisitions occurred because oil companies were hemorrhaging red ink due to historically low oil prices. Many of these companies simply could not survive on their own. Thus, the mergers and acquisitions. That is a vital aspect of the story that colors the mergers and acquisitions in a far different way than they are being colored by “the trust busters.”

McCool testified that increased consumer prices that followed from a merger can either be good or bad. Mergers will prove bad, he said, if they allow companies to exercise market power. Mergers will be good, however, if they allow for more efficient operations. Unfortunately, he does not tell us whether the mergers and acquisitions in the 1990s that he flagged as having driven up price were “good” or “bad.”

That aside, this sort of argument is a primitive construct. If a merger or acquisition improves efficiency, it will give that company greater pricing power by definition, so this isn’t an “either/or” game. Nonetheless, the observation that it might well be economically healthy if a merger increased fuel prices is quite important and well worth making in a more aggressive manner than it was in the testimony.

Fifth, McCool’s riffs about the oil market were so dodgy that one gains little confidence in GAO’s ability to sort any of these issues out. For instance, McCool contends that domestic refining capacity has not expanded enough to keep pace with demand. I don’t know what that is supposed to mean. Demand for gasoline is only manifested in response to price. If gasoline prices were zero, demand would be nearly infinite. If prices are around $3.00 per gallon, demand for gasoline would be less. So McCool can only be arguing that we don’t have enough domestic refining capacity to meet demand given current prices. Well, that’s flatly wrong. We do indeed have enough gasoline to go around given today’s price. If it were otherwise, service stations would be shutting down because they could not get enough gasoline from wholesalers to keep the pumps flowing. Obviously, they do.

McCool buttresses his contention that refining capacity is seriously constrained by noting that no refinery has been built in the United States since 1976 and then making a big deal of the fact that utilization rates have increased from 78% in the 1980s to 92% in the 1990s. But those observations prove nothing. Regarding the former, investors find it a lot cheaper to expand capacity in existing refineries than to build new refineries altogether - and that’s what they’ve been doing. Regarding the latter, high utilization rates = efficient operations. Excess refining capacity means capital is being wasted. It’s certainly true that if we had more slack refining capacity that we could respond to unexpected supply disruptions more quickly, but it costs money to maintain that reserve and McCool offers no analysis to suggest that this sort excess refining capacity “insurance policy” would be a good buy.

Another example: McCool observes that gasoline inventories are low and then spends some time discussing why the industry is generally inclined to minimize inventory levels as a cost-savings device. This is true enough, but is not particularly pertinent to the present situation. Inventory levels over the three month period of February - April 2007 fell by 15 percent, the steepest drop in history. EIA reports that this occurred because of labor strikes in Europe that disrupted fuel imports and an unusually large degree of refinery maintenance of late. In short, McCool told the wrong story.

McCool also indulged in the kinds of things that constantly grate on the nerves. For instance, he contends that “most of the increased U.S. gasoline consumption over the last two decades has been due to consumer preferences for larger, less-fuel efficiency vehicles ….” This is true in a sense but is a reflection of the underlying fact that real (inflation adjusted) gasoline prices in the 1990s were the lowest in U.S. history. Consumer preferences for gas guzzlers didn’t come out of the clear blue sky. Accordingly, it would be more accurate to say that “most of the increased U.S. gasoline consumption over the last two decades has been due to historically low gasoline prices in the 1990s.” But that would have been less pejorative.

GAO’s analysis is a lot less helpful to the mob than one might think given the number of times it has been offered up as a rationale for Hugo Chavez-style assaults on the U.S. oil sector.

Gore Outrage on Larry King: Some Inconvenient Facts

Here’s the transcript of a Q/A by Al Gore last night on Larry King Live

UNIDENTIFIED FEMALE: Vice President Al Gore, what issues caused by climate change globally are likely to affect the United States security in the next 10 years?

KING: Al?

GORE: You know, even a one-meter increase, even a three-foot increase in sea level would cause tens of millions of climate refugees.

If Greenland were to break up and slip into the sea or West Antarctica, or half of either and half of both, it would be a 20-feet increase, and that would lead to more than 450 million climate refugees.

The direct impacts on the U.S. have already begun. Today, 49 percent of America is in conditions of drought or near drought. And we have had droughts in the past, but the odds of serious droughts increase when the average temperatures go up, as they have been going up.

We have fires in California, in Florida, in other states, unprecedented fire season last year, directly correlated with higher temperatures, which dry out the soils, dry out the vegetation.

We have a very serious threat of losing enough soil moisture in a hotter world that agriculture here in the United States would be greatly affected. Now, the list is too long to give you here, but look, these issues are more important that Anna Nicole Smith and Paris Hilton, and they are not being talked about.

FACT 1. There is not one shred of evidence in the refereed scientific literature speaking of a three-foot increase in sea level in ten years. The best estimates from the United Nations Intergovernmental Panel on Climate Change range from 0.8 to 1.7 INCHES.

FACT 2. There is no trend towards increasing drought area in the United States that is related to planetary warming. We have good data on drought area back to 1895. The correlation between the area of the U.S. under drought and planetary temperature is statistically ZERO.

FACT 3. As the mean planetary temperature has warmed since 1975, U.S. crop yields have INCREASED significantly, just as they did during the period of cooling from 1945 through 1975, or during the warming from 1910 to 1945.

It is a true outrage that Gore can get away with this on live television and not be called out by the inconvenient facts.

Pet Rocks, Leisure Suits, and Oil Companies

The often sensible business columnist at the Washington Post, Steven Pearlstein, has a really bad idea today: “Put the government into the oil business.” He wants to create a federal oil company that would be required to “operate at only a modest profit, while doing everything in its power to expand supply, smooth prices and expose collusive behavior.”

I can only wonder if the maid cleaned his desk and accidentally left a 1970s folder on top. Back in the ’70s Democrats kept talking about creating a national oil company to “use as a yardstick” to measure the performance of the oil companies. One wag noted at the time that Gulf Oil was going to buy Ringling Brothers and Barnum & Bailey Circus to use as a yardstick by which to measure the federal government.

Gas prices go up and down, as Jerry Taylor and Peter Van Doren have discussed. If prices are being held above market levels by some sort of collusion, then you wouldn’t need a tax-funded government company to offer lower prices; profit-seeking entrepreneurs could do it. Let’s leave the 70s be, and watch for high prices to stimulate conservation, exploration, and alternative sources of energy.

Ad Hominem Absurdum

A little story popped up in the press today that offers what my wife and I, in the context of our responsibilities toward our 4 year-old son, often refer to as “a teaching moment.” That opportunity is afforded by an accusation out of Greenpeace this morning that Cato, along with 40 other policy organizations, are wholly-owned subsidiaries of Exxon-Mobil and thus should not be trusted.

The contention that Exxon-Mobil funding colors Cato’s analysis (with contributions, by the way, that accounted for less than 1/10th of 1% of our budget in 2006) is compelling only if Greenpeace has some sort of “motive detection device” that can be produced for public inspection. For instance, I say I’m motivated by genuine skepticism that industrial greenhouse gas emissions will usher in the Book of Revelations. They say I’m motivated by greed. We can settle this argument to the satisfaction of some third-party observer … how exactly? Even administering me with liberal doses of sodium pentathol is unlikely to settle this little spat about the nature of my character.

The truth is that my colleagues at Cato and I are skeptical about the end-of-the-world scenarios bandied about by zealots like Greenpeace, we anchor that skepticism in the peer-reviewed scientific literature, and that skepticism naturally attracts funding from those parties who like what they hear. Arguing that causality actually works the other way is not only an unproved and unprovable assertion (let’s call it “faith-based argumentation”), it is impossible to square with all the work we’ve published arguing against many of the things the oil industry is known to support.

For instance, we have vigorously argued against President Bush’s national energy strategy and the resulting Energy Policy Act of 2005, called for the dismantlement of the Strategic Petroleum Reserve, railed against federal oil and gas subsidies, argued for the elimination of the Clean Air Act rules that allow older refineries to escape tough anti-pollution standards, suggested giving the Arctic National Wildlife Refuge to the Greens to do with as they wish, argued against allowing cost-benefit analysis to dictate environmental standards, and defended the government’s right to renegotiate drilling leases in the Gulf of Mexico that provided highly favorable contractual terms to some oil companies.

Regardless, Greenpeace’s assertions — even if true — are founded upon a classic logical fallacy. For those who never took a course in logic, it’s called ad hominem. Despite what the body politic might otherwise believe, the merit of an argument has nothing to do with the motives of the person making that argument.

For instance, if the Institute for Policy Studies argues that minimum wage laws have little net effect on unemployment and produce citations in the literature to back that up, the reply that “IPS is staffed by a bunch of socialists who simply want to bring down capitalism and should thus not be listened too” persuades only those people who are too intellectually lazy or mentally impaired to think straight. Similarly, if Cato argues that it’s very hard to justify tight greenhouse gas emissions controls using strict cost-benefit analysis — and provides academic citations to back that up — the charge that “Cato is paid by Exxon-Mobil to take that position and thus shouldn’t be listened too” is likewise a variation of the argument made famous by Joe McCarthy. “He’s evil — and thus a liar.”

And in that vein, notice the thinly veiled smear entailed in Greenpeace’s constant use of the phrase “climate denial” and its related cousins. In this context, it’s obviously meant to echo the ugly “climate denial is like Holocaust denial” charge rampant at some high-decibel quarters on the Left. Greenpeace’s strategy here is to leave no insult or character smear off the table in its drive to censor the policy debate.

That Greenpeace resorts to such a tactics does not surprise. Those with good arguments pound the arguments; those with poor arguments pound the table. God forbid Greenpeace grant that people of good will might actually disagree with them. And God forbid that we ask people to judge an argument by the facts rather than some schoolyard game of “you stink.”

Tony Blair on Global Warming

This morning on NPR’s Morning Edition, we were treated to an interview with outgoing British Prime Minister Tony Blair. The conversation touched on a number of rather predictable subjects, but the discussion of global warming is worth noting. Here, we find Tony Blair at his best — and worst.

Tony the Sensible: Even if Great Britain were to shut down its economy and zero-out all greenhouse gas emissions, growth of those emissions in China would wipe out Britain’s greenhouse gas reductions within about two years. So without an international agreement binding all global actors of note, nothing that any OECD government might do will have much effect on future temperatures.

Tony the Lunatic: The world’s inability to execute a global agreement to seriously reduce greenhouse gas emissions is fueling Islamic terrorism.

Huh? I didn’t know that al Qaeda, Hezbollah, or Hamas has linked up with Greenpeace. Must have missed that in those periodic tirades coming out of Pakistani caves.

I can see it now:

Abdul: “We must strike out at the Crusader/Zionist oppressors and impose the word of Allah and the Koran on the nonbelievers and the Arabic lackeys of the Christian imperialists.”

Muhammad: “Wait Abdul! The Kyoto Protocol has been ratified by a new American admistration and China and India are likely to cut back on their coal consumption as a consequence! I no longer have the heart for jihad. Let us open a falafel business instead.”

Public Opinion?

This week I’m getting emailed press releases telling me that “94% of international teens want the US to address global warming more aggressively. “If you read waaaay down in the email, you discover that it was an online survey of 250 teens who – it appears – mostly attend U.S. schools. So maybe the striking headline is just a teensy bit of a stretch.

But if it were a scientifically valid survey of actual teenagers around the actual world, one might still say: So 94 percent of teenagers in other countries – that is, respondents who don’t pay taxes and haven’t studied either climatology or economics and aren’t looking for a job – and if they did pay taxes or look for a job, wouldn’t do so in the United States – think that the United States should hobble its economy in the name of something that vaguely sounds scary. And we should care because…?