Topic: Energy and Environment

Does OPEC Run the World?

Last week, I appeared on CNBC’s Morning Call to discuss OPEC’s impact on the world oil market. On the show with me was Raymond Learsy, author of Over a Barrel: Breaking the Middle East Oil Cartel. Learsy argues that the OPEC cartel single-handedly sets the world price for crude oil, thoroughly manipulates petroleum markets and, presumably, fixes the World Series. I spent most of my time on the show qualifying those assertions. (If you want to watch the five-minute exchange for yourself, click here.)

Well, yesterday, Learsy posted over at “The Huffington Post” (where he’s something of a regular) and decided to initiate Round 2. OK, I’m game — not just because I hate letting someone else get the last word, but because the issues in play are quite interesting.

Let’s consider Learsy’s arguments in turn: 

First, he contends that OPEC sets price. Well, as I noted on the show last week, that’s not quite right. The cartel does not set price; it imposes production limitations on its members (theoretically, anyway). Price is established in world spot markets, where Mr. Supply and Ms. Demand come together to do the voodoo that they do so well. OPEC has a lot of say over the former (OPEC nations produce about 40 percent of global supply) but little say over the latter. OPEC nations certainly influence price, but they do not set price. 

Since Learsy is a former commodities trader, I assume he knows this as well as I do, so it’s a mystery to me why he insists on making this “OPEC sets price” claim. After all, if you believe that OPEC sets world crude oil prices, then you have to come up with some explanation for why OPEC set the price at $10 a barrel back in 1998–1999. Were the oil sheiks simply in a kind and generous mood? Were they so enamored of Bill Clinton that they decided to send him an economic love note? Did they get so thoroughly drunk over the course of several months that they had no idea what was going on in market? Similarly, why did OPEC’s ministers cut prices from $70 a barrel to $50 a barrel a few months back? Did they take a collective happy pill?

When I made those points on the show, Learsy shifted gears from “OPEC sets price” to “Big Oil sets price.” Well, beyond the fact that it can’t be both, he backed up this contention with the observation that British Petroleum is currently under investigation for manipulating the California oil market. With all the money and influence these big oil producers have, Learsy asked, “who says the exchanges are free of any kind of manipulation?” 

Well, one can’t prove a negative, so I’m not going to try. The right question to ask is, “What evidence do we have that oil markets are being systematically manipulated?” After all, by my count, there are 37 major oil futures markets, “over the counter” markets, and physical oil markets across the globe, all of which are quite transparent with thousands of well-informed buyers and sellers. Investigations of “Big Oil” and their market practices have been an around-the-clock phenomenon since the 1970s, so the fact that BP is currently under investigation in the state of California (land of business investigations) does not in itself suggest that there is fire to be found amongst the political smoke. 

Question: How many government investigations of “Big Oil” for price manipulation have been undertaken over the past three decades? Answer: At least 30 that I’m aware of, but that’s almost certainly an undercount. Question: How many government investigations of “Big Oil” have found any one of these major companies guilty of price manipulation? Answer: None. Zip. Zero. Nada.

Now, that doesn’t mean it’s not going on. But it does mean that there’s no evidence to suggest that it is. Once you combine that with a functional knowledge of how the oil market actually works, you can’t help but conclude that manipulation is a figment of the imagination.  Markets — believe it or not — sometime produce price increases, especially when instability rocks oil producing regions.

In sum, Learsy can believe what he wants. But belief without evidence is called faith, and organized faith is called religion.

The more interesting discussion, however, is whether OPEC even influences (much less “sets”) oil prices. I’m inclined to think that it does. After all, the whole point of the cartel is to collude with regards to production. As long as this collusion reduces production by more than zero, it will affect market prices.

But does it? The best evidence for that proposition comes from economists Robert Kaufmann, Stephane Dees, Pavlos Karadeloglou, and Marcelo Sanchez. In their 2004 paper “Does OPEC Matter? An Econometric Analysis of Oil Prices,” published in The Energy Journal, they examine quarterly data from the third quarter of 1986 to the third quarter of 2000 and find a statistically significant relationship between real crude oil prices, OPEC capacity utilization, OPEC quotas, the degree to which OPEC exceeds those production quotas, and OECD oil stocks. According to most laymen, this probably qualifies for a cover story in “Duh!” magazine.

But not so fast! The evidence forwarded by Kaufman et al. does not settle the matter. After all, Learsy’s case is that the cartel delivers less oil to the market than would be the case if the cartel did not exist — which is, after all, the very definition of the claim that “OPEC sets/influences oil prices.” That’s a tricky matter to establish because we can only guess what production levels would be absent the cartel. Economist James Smith noted in 2005, “Despite a strong consensus among experts and laymen alike that OPEC operates as a cartel, very little conclusive statistical evidence of collusive behavior has appeared in the economics literature to date.” His 2005 paper ”Inscrutable OPEC? Behavioral Tests of the Cartel Hypothesis,” likewise published in The Energy Journal, comes closest to answering the question. His econometric investigation of monthly OPEC production data from January 1973 to December 2001 finds strong evidence that OPEC “acts as a bureaucratic syndicate; i.e., a cartel weighed down by the cost of forging and enforcing consensus among its members, and therefore [is] partially impaired in pursuit of the common good.” 

OK, we’ve now found empirical reason to believe that OPEC is indeed the clumsy economic cartel that oil economists long suspected. But that doesn’t tell us whether this cartel succeeds in its mission or not. As Smith writes: 

This paper has examined the conduct of members of an alleged cartel, not the performance of the cartel itself. Any conclusions regarding the effectiveness of OPEC’s cooperative actions, or the organization’s impact on market prices and member profits, is beyond the scope of this research. A cartel’s actions may be in vain if it lacks either the information base to anticipate, or the operating flexibility to respond to market forces. Whether the rewards reaped by OPEC have actually gone beyond what one could expect of a non-cooperative oligopoly is not clear. That part of the question remains. 

Like Learsy, I suspect that the cartel produces some net economic benefit for its members. That is, I suspect that the cartel serves to increase prices above where they would be absent the cartel. But I don’t KNOW that. And if you think countries like Saudi Arabia, Venezuela, Kuwait, and the UAE have a significant amount of unilateral power in world crude oil markets given their large reserves and low production costs, then it’s perfectly reasonable to suspect that formalized collusion in the form of a cartel is not the root of the (price) problem.

But

“I’m for free enterprise, but –” You can hear it coming. “I’m against all these government giveaway programs, but –” It’s a common and frustrating experience for a libertarian, hearing a ringing declaration of principle followed by a qualification that the speaker doesn’t have any intention of giving up his own subsidy, regulation, tariff, or pet project.

Years ago, when I was raising money for a free-market business group, I remember one of those letters: “I agree with everything you say. Government is too big. Subsidies and regulation are impeding the operation of our free enterprise system. But the Hawaiian sugar industry is unique.” A friend told me once that he’d persuaded his father, a dentist, to become a consistent libertarian–except on licensing for dentists. What about licensing for brain surgeons? I asked. No, my friend said, I think he’s OK with letting the free market work there.

And now NPR has brought us the latest example. On the way home, my mind wandered as “All Things Considered” reported on a biodiesel refinery in Washington state. And then I heard a familiar opening line from the tech millionaire who is now the CEO of Imperium Renewables, which built the refinery.

I’m a pretty conservative guy, generally. I’ve voted Republican my whole entire life. And I’m very skeptical of the government’s role in any kind of market.

Wait for it, wait for it – you just know there’s a “but” coming.

But, in this case, there’s no other way to do it but with government support and mandates.

Turns out biodiesel is profitable with a federal tax subsidy of up to a dollar a gallon, and with the anticipation of restrictions on greenhouse gases. So a guy who’s normally “very skeptical of the government’s role” supports subsidies in this case because there’s “no other way to do it.” But that’s the whole point of markets and prices–to tell us what economic endeavors make sense. If Hawaiian sugar, or South Carolina textiles, or biodiesel fuel isn’t economically viable without subsidies, then that means it’s not the best use of our limited resources.

One of the values of a political philosophy–sometimes dismissed as “ideology” or “dogma”–is that it gives us a rule, a set of principles, for deciding such questions. We don’t have the time to look at all the data and decide what we think about every issue, and we’re certainly all subject to personal biases on the issues that touch us. There are lots of speakers I’d personally like to shut up, but if I remember that I do believe in the First Amendment, I realize I have to allow even offensive speech. I may want Amtrak to run fast trains between Washington and New York, or I may want to keep my own factory in business. But if I remember that the free-market economy produces the best results for all of us, then I will accept the outcomes of the market process.

People should think about the benefits of the whole libertarian system–free markets, free speech, freedom of religion, constitutional limits on government–whenever they’re tempted to say “I’m for freedom, but–”.

Why Won’t Al Gore Debate?

Former vice president and Oscar winner Al Gore is scheduled to testify to both House and Senate committees today about global warming. For the past few years Gore has traveled across America speaking to audiences that range from friendly to worshipful, from journalists in New York and Washington to actors in Hollywood. If he has ever faced skeptical questions, it hasn’t been reported.

We have several times invited the former vice president to present his famous slide show at the Cato Institute, in conjunction with a slide show prepared by Patrick J. Michaels, who takes a more benign view of climate change. Michaels is senior fellow in environmental studies at the Cato Institute and research professor of environmental sciences at the University of Virginia. He is the state climatologist of Virginia, a past president of the American Association of State Climatologists, and an author of the 2003 climate science “Paper of the Year” selected by the Association of American Geographers. His research has been published in major scientific journals, including Climate Research, Climatic Change, Geophysical Research Letters, Journal of Climate, Nature, and Science. He received his Ph.D. in ecological climatology from the University of Wisconsin at Madison in 1979. His most recent book is Meltdown: The Predictable Distortion of Global Warming by Scientists, Politicians, and the Media, which has been number one on Amazon’s global warming bestseller list for months at a time and has been reprinted twice this year.

Gore’s office has declined our invitations. If Vice President Gore is committed to public understanding of climate change, why will he not demonstrate to a Washington audience composed of both supporters and skeptics that his ideas can carry the day in a dialogue with a leading critic? He wiped the floor with Ross Perot; does he fear that the case for catastrophic climate change is not as strong as the case for NAFTA?

The invitation is still open. Mr. Vice President, please come to the Cato Institute and present your slide show to an audience of journalists and scholars with a knowledgeable climate scientist also on the dais.

Ten Billion Served (and 300 Million Fleeced)

The American Public Transportation Association (APTA) just announced that the U.S. transit industry carried more than 10 billion transit trips in 2006, the first time the industry has exceeded 10 billion trips since 1957. Naturally, APTA – the transit industry’s leading lobby group – sees this as “10 billion reasons to increase local and federal investment in public transportation.”

The 10-billion milestone looks a lot less impressive when compared with the growing population of urban residents. It works out to just 42.7 trips per urban resident in 2006. (A trip, incidentally, is a transit boarding: if you get on a subway, then transfer to a bus, that is counted as two trips.)

While 42.7 trips per urbanite is more than were carried in 2005, it is not more than 2001, and it is less than in any year between 1907 (the first year for which transit data are available) and 1993.

In the meantime, transit subsidies already average 64 cents per passenger mile, compared with less than 0.4 cents for subsidies to auto driving. Over the past decade, APTA’s transit factbook says that the U.S. has “invested” more than $100 billion in public transit capital improvements, mostly for expensive rail transit projects. Many of the cities that have built rail transit lines have actually seen transit ridership drop because the high cost of rail has forced them to cut bus services.

As I explain in more detail in my Antiplanner blog, the real problem with the transit industry is too much money. Because transit agencies get the vast majority of their funds from taxpayers rather than transit riders, their incentives are to build expensive, glitzy urban monuments rather than provide economical transit services to those who need them. The solution is to stop subsidizing transit agencies an instead give vouchers to transit users, who can use them for buses, taxis, or any other public conveyance.

Eco-Fascism Plagues Britain

Tony Blair is deeply unpopular and has already announced that he will soon step down as England’s prime minister. But that does not mean he will go quietly into that good night. As reported by the Daily Mail, the UK government has announced a series of totalitarian steps to compel less energy use:

Homeowners who refuse to make their properties energy efficient will face financial penalties under drastic government plans to transform Britain into the world’s first ‘green’ economy. …The Government said that every new home should be “carbon neutral” within ten years — and existing properties subject to a “home energy audit” to assess how green they are.

Critics correctly note this is a massive intrusion into the private lives of homeowners:

Blair Gibbs, of the Taxpayers’ Alliance, said: “It’s bad enough that politicians want to take so much of our money away in tax. For them also to intrude into our homes in order to have the ability to penalize us even further is simply unacceptable.”

But the government is undaunted, and, in a classic case of the pot calling the kettle black, Tony Blair even has the gall to state that his totalitarian initiative is akin to the fight against fascism:

People are to be encouraged to make “more sustainable” travel choices, including greater use of public transport, walking and cycling. The Government is also to invest in solar, wind and wave power. …Mr Blair compared the fight against climate change to the battle against fascism.

Sadly, the British people cannot count on the Tories to defend individual freedom. Under the feckless leadership of David Cameron, the Conservative Party is even further to the left than Labor. The Party of Margaret Thatcher has become a hollow shell, judging from the Daily Mail’s reporting:

Opposition politicians and green campaigners said the Government’s proposals did not go far enough, insisting binding targets on emissions should be annual. Tory spokesman Peter Ainsworth said: “There is a danger that the fiveyear approach will enable responsibility for failure to be shunted on from one government to another.”

An Extra $15 Billion for Farm Programs

Further to David’s post yesterday, some telling details about the Senate Budget Committee’s ideas for “fiscally responsible” farm policy. Starting on page 54 of this document, section 306 the “Deficit-Neutral Reserve Fund for the Farm Bill” (which is a cute name – what chances do you give of this staying a “reserve fund”?) states that:

The Chairman of the Senate Committee on the Budget may revise the allocations, aggregates, and other appropriate levels and limits in this resolution for a bill, joint resolution, amendment, motion, or conference report that- 

  1. reauthorizes the Food Security and Rural Investment Act of 2002;
  2. strengthens our agriculture and rural economies;  
  3. provides agriculture-related tax relief; 
  4. improves our environment by reducing our Nation’s dependence on foreign sources of energy through expanded production and use of alternative fuels; or 
  5. combines any of the purposes provided in paragraphs (1) through (4); 

by the amounts provided in that legislation for those purposes up to $15,000,000,000 over the total of fiscal years 2007 through 2012, provided that such legislation would not increase the deficit over the total of the period of fiscal years 2007 through 2012.

Farm lobby groups were relatively happy with the 2002 Farm Bill, and would be still were it not for the inconvenient fact that market prices of some commodities are so high, and projected to remain high, that government spending on price-linked subsidies will probably be relatively low over the next few years (falling from about $15 billion annually to about $8 billion). Apparently, high market prices are not sufficient to please some farm groups, hence the extra $15 billion of your money that the Senate has seen fit to allocate to “any of the purposes provided in paragraphs (1) through (4).”

On today’s agenda, a group of congressmen are introducing a bill regarding the reauthorization of the farm bill. From the press release (via Ken Cook):

The bill reforms the Farm Bill to make a major new investment in the development of renewable energy on American farms, promote resource conservation, provide consumers with healthier food choices, and boost farm profitability. The Healthy Farms, Foods, and Fuels Act of 2007 also includes provisions to reduce greenhouse gas emissions on farms and fight global warming, and to expand programs to bring healthier foods to school cafeterias.

That’s quite a wish list.

Cato’s Center for Trade Policy Studies is on the case, though. Stay tuned for our alternative ideas for the farm policy, released shortly.

The Grey Lady Strikes Again

Did Al Gore really deserve that Oscar for “An Inconvenient Truth”?  The Left says yes - only the ideologically disabled or intellectually dishonest deny that the four horsemen of the environmental apocalypse (drought, disease, sea rise, and hurricanes) will soon devastate our fair planet.  Reporter William Broad in the New York Times today, however, says not so fast - a backlash is brewing among REAL scientists who are getting sick and tired of bed-wetting hysteria surrounding climate change.

The gist of their concern is this: while most (but not all) scientists are willing to accept that industrial emissions are an important driver in the planetary warming we’ve experienced since the late 1970s, they aren’t anywhere near so eager to embrace politically inspired warnings from non-scientists about how “the end is near.”  Al Gore, according to many of the scientists interviewed by William Broad, is too shrill and too apocalyptic given the scientific evidence. 

Case in point: Al Gore warns in his documentary that sea levels will rise over 20 feet if warming continues.  Yeah, well maybe in a thousand years or so if trends continue indefinitely, but the former Vice President leaves that little bit of perspective out of the movie.  What might happen during our lives and the lives of our children and grandchildren?  A sea rise of 23 inches, max, according to the new report just out from the Intergovernmental Panel on Climate Change.  That’s hardly going to flood Manhattan, but acknowledging that would spoil the wonderful special effects visuals offered in the slideshow, now wouldn’t it? 

Gore’s scientific advisors, friends, and admirers defend the documentary and the book that followed by conceding that he may be a bit dodgy here and there, but that he gets the big picture right.  That’s ridiculous.  The fact that the planet is warming and that industrial emissions might well have something to do with it is not what this debate is ultimately about.  This debate is whether we should or should not care.  And if the former, how much should we be willing to sacrifice to do something about it? 

To say that Al Gore is to some extent out to lunch on the “should we care” argument but relatively sound on the question about whether we’re warming the planet (at least, if we measure these things by that most holy of metrics, the “scientific consensus” as defined by the IPCC) is akin to saying that the fellow proclaiming that a wrathful God is about to incinerate the planet is contributing to social welfare by usefully pointing out to the unbelievers that there is a God.  That bit about God being particularly angry or plotting to destroy the world - Well, that’s a bunch of nonsense, but hey, he got the big picture right.

One of the scientists interviewed in the article - Roger Pielke, Jr. - wrote an essay recently for our own Regulation magazine pointing out that science is inevitably corrupted when politicians decide to effectively delegate policymaking power to those who wear white frocks.  So if you want to know why scientists aid and abet this kind of thing, go there.