Topic: Energy and Environment

Stealing Property

A headline in the Saturday Washington Post reads:

Russia’s Gazprom Purchases Siberian Gas Field From BP

The story begins:

The state-controlled energy giant Gazprom on Friday bought a vast natural gas field in Siberia from a unit of British-based petroleum conglomerate BP, continuing the Kremlin’s policy of shifting control of the country’s major energy projects from foreign to state hands.

The last part of the sentence begins to hint at what really happened, a truth that is concealed by words like “purchases” and “bought.” In fact, the Russian government and its giant energy firm Gazprom forced BP to sell, as it has forced other companies to turn valuable properties over to Gazprom and the oil company Rosneft, often through the use of trumped-up tax or regulatory issues.

Journalists should be straightforward about such things. Gazprom did not “purchase” a gas field from BP. This was no “willing buyer, willing seller” transaction. It would more accurately be described as a seizure, a confiscation, or at best a forced sale.

The Wall Street Journal used similar language. The New York Times, to its credit, was more honest and clear: Its headline read, “Moscow Presses BP to Sell a Big Gas Field to Gazprom,” and the story began, “Under pressure from the Russian government, BP agreed on Friday to sell one of the world’s largest natural gas fields to Gazprom, the natural gas monopoly, in the latest apparently forced sale that benefited a Russian state company.”

Footnote: Today is the second anniversary of the Kelo decision, in which the U.S. Supreme Court ruled that states could take private property for the benefit of other private owners such as developers. In a stinging dissent, Justice Sandra Day O’Connor wrote:

The specter of condemnation hangs over all property. Nothing is to prevent the State from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory. …Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random. The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms. As for the victims, the government now has license to transfer property from those with fewer resources to those with more. The Founders cannot have intended this perverse result.

The United States is not Russia. But O’Connor’s warning that “the beneficiaries [of forced takings] are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms” is certainly borne out — not just by a new Institute for Justice report on eminent domain in action — but by the actions in Putin’s Russia.

Of Tax Credits and Government Subsidies

Previously on Cato-at-Liberty, Michael Cannon (post 1, post 2) and Andrew Coulson (post 1, post 2) argued with Jason Furman (on health care) and Sara Mead (on education) about the nature of tax credits and tax breaks.

Furman and Mead claim that tax credits and breaks, because they represent forgone tax revenue, are little different than government subsidies (with a raft of implications). Cannon and Coulson (for various reasons) disagree.

The great “a-ha” moment of the discussion came when Mead pointed to Cato scholars’ criticism of ethanol tax credits as subsidies or “tax expenditures.” Even other Cato scholars agree that ‘tax credit’ equals ‘government subsidy,’ she says.

Surprisingly, up to this point, the argument has largely ignored the use of the credited money/forgone government revenue. I would argue the use of the credited money is fundamental to determining if the credit/tax break is a subsidy.

In the case of an education credit, it is true that government would lose revenue because of the credit. But government has also assumed the obligation to educate the nation’s children, and government would be released from that obligation in the case of the child whose schooling is funded by the credited money. Is the credit, thus, a subsidy?

Consider: If Joe owes his bank a $10 fee for its services and, instead of sending Joe a bill, the bank simply deducts that amount from his account, we wouldn’t describe Joe as subsidizing the bank (or the bank as subsidizing Joe). Likewise, if government has assumed the obligation to educate little Johnny, but instead Joe pays Johnny’s tuition and receives a government tax credit as a result, it seems incorrect to say that Joe has received a subsidy. Instead, just as with the bank and Joe, the education credit represents a net adjustment of Joe’s obligation to government and government’s obligation to little Johnny.

Now, there may be reasons why government should not make this adjustment, but those reasons would not include that the adjustment is a subsidy to Joe. The only subsidy in this system is government’s taking on the obligation to provide little Johnny with schooling — a subsidy that I assume Mead finds acceptable.

Parenthetical #1: I suppose there is one condition under which Joe’s education tax credit should be considered a subsidy: if government education expenditures aren’t about educating Johnny, but about providing jobs for unionized public school workers. Thus, Joe’s paying for Johnny’s tuition at a private school wouldn’t be fulfilling government’s intended obligation. But surely, no one thinks that government education policy is about benefiting unions and bureaucrats instead of educating kids, right?

Health care tax benefits (e.g., HSAs, tax deductions for medical expenses, the tax-free status of employer-provided medical coverage) are a murkier subject. There is no explicit government financial obligation to provide the entire nation with health care (though supporters of socialized medicine claim there should be such an obligation — and, I assume, they are intellectually consistent and support tax breaks and credits for the private provision of health care).

There are, however, legally established government obligations to provide health coverage to the poor (Medicaid, SCHIP, et al.), the elderly (Medicare, Medicaid, et al.) and to guarantee everyone access to care. It may be that the various medical tax credits and insurance tax breaks help government to fulfill those obligations at lower cost than other policies. If that is the case, then tax breaks and credits may be part of the optimal policy for fulfilling that obligation (and Furman would be arguing for a policy change detrimental to welfare).

Parenthetical #2: Full disclosure here — I’m of the camp that health care expenditures should be treated no differently, tax-wise, than other expenditures, and that government has no special a priori obligation to provide health care or health coverage.

Now, juxtapose the above two situations with ethanol tax credits and the other sorts of tax breaks that Cato scholars regularly decry. While there are legally established government obligations to provide schooling for children and health benefits to certain sub-groups of the population, there is (that I’m aware) no government obligation to provide American citizens with corn-based energy for transportation.

Parenthetical #3: I ignore the wacky claim that the U.S. government has an obligation to provide ”energy security” so the nation is protected from evil Canadian and Mexican oil sheiks.

This means that there is no government obligation that ethanol producers can fulfill privately, and thus receive a tax credit or tax break. The ethanol industry’s tax breaks and benefits are not simply “squaring accounts” in the manner as Joe, little Johnny, and the government. The ethanol tax benefits seem to be clear cases of government subsidy, and they should be criticized as such.

Where does this reasoning leave the discussion between Cannon and Coulson on the one hand, and Furman and Mead on the other? At the very least, it seems Coulson’s position is fully consistent with Cato’s general critique of subsidies. Further, given the premise that government has some special obligation to provide health care, Cannon’s position also seems consistent with Cato’s general critique of subsidies.

I am curious, though, whether the Left’s sudden concern over subsidies is consistent with positions they take on health care, education, and other policy areas….

Sharks and the Tragedy of the Commons

The global shark population may be sharply declining, according to an article in the Washington Post. Actually, the article never quite gives a number for the global population, but it does warn that “something must be done to prevent sharks from disappearing from the planet.” And there are suggestive reports like this:

In March, a team of Canadian and U.S. scientists calculated that between 1970 and 2005, the number of scalloped hammerhead and tiger sharks may have declined by more than 97 percent along the East Coast, and that the population of bull, dusky and smooth hammerhead sharks dropped by more than 99 percent. Globally, 16 percent of 328 surveyed shark species are described by the World Conservation Union as threatened with extinction.

Post reporter Juliet Eilperin notes that shark attacks can be big news, but in reality sharks kill about 4 people a year worldwide, while people kill “26 million to 73 million sharks annually.”

Why kill sharks? To make money, of course, mostly for the Asian delicacy shark-fin soup. Shark fins are much more valuable than shark meat. Mexican shark hunters say they get $100 a kilogram for shark fins but only $1.50 a kilo for meat.

Unlike fish that reproduce in large numbers starting at an early age, most sharks take years to reach sexual maturity and produce only a few offspring at a time. Shark fishermen also tend to target pregnant females, which are more profitable because they are larger. As a result, said Michael Sutton, director of the Monterey Bay Aquarium’s Center for the Future of the Oceans, “there is no such thing as a sustainable shark fishery.”

So OK, here’s where Eilperin should have said, “Wait a minute … if there’s money to be made, why would greedy capitalists want to destroy the goose that lays the golden egg? Shouldn’t they want to maximize their long-term profits?” And if she had, she might have run into a concept called “the tragedy of the commons.” Owners try to maximize the long-term value of their property. Timber owners don’t cut down all the trees and sell them this year; they cut and replant at a sustainable rate. But when people don’t own things, they have no incentive to maintain the long-term value. That’s why passenger pigeons went extinct, but chickens did not; why the buffalo was nearly exterminated but not the cow.

But Eilperin says that “sharks take years to reach sexual maturity.” Maybe that’s why they can’t be profitably farmed. Maybe. But elephants also mature slowly, and African countries that allow ownership and markets are seeing booming populations of previously threatened wildlife (pdf).

Oceans, of course, present even more challenges: how do you create private ownership in fish or sharks or sea turtles that can easily move through vast and unfenced bodies of water? It’s a more difficult challenge, but attempts to create private solutions that overcome the tragedy of the commons are being studied and experimented with, especially in Iceland.

Eilperin reports on many proposals for “tight new controls” and legislative bans and endangered species lists and catch limits. Those proposals provide no incentives for sustainable harvests, they leave shark hunters every reason to try to evade them, and they failed to protect elephants and tigers. The Post’s readers — and the world’s sharks — would benefit if Eilperin would do a follow-up article on property-rights solutions that might properly line up incentives and create sustainable shark markets.

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.