Topic: Energy and Environment

Bloviating about “Boutique” Fuels

The House Energy & Commerce Committee held a hearing today on the subject of “boutique” fuels. Republicans are positively obsessed with this matter, convinced beyond sanity or reason that gasoline prices are high in large part because EPA is tolerating a large number of different gasoline blends around the country.

Ed Murphy, group director for downstream and industry operations at the American Petroleum Institute, gamely tried to introduce a bit of economic rationality into this debate. While there are certainly reasons to decry the proliferation of gasoline blends around the country, the recent run-up of gasoline prices has nothing to do with them. His testimony, however, apparently failed to impress Republicans according to the trade pub Greenwire.

Now, if EPA were making gasoline more expensive, I’m sure API would be the first bunch to say so. The fact that they are not speaks volumes. That is, it speaks volumes only to those interested in listening. Beating up on Greens is more important to the GOP than beating up on high prices. Having even a scintilla of evidence to back up their charges is apparently irrelevent.

Should We Criminalize OPEC?

Well, should we? An increasing number of Congressmen seem to think so. Last year, Sen. Mike DeWine (R-OH) introduced the “No Oil Producing and Exporting Cartels Act” (S. 555), aka “NOPEC,” which would make oil-producing and exporting cartels abroad illegal. Although the bill went nowhere, supporters have tried repeatedly to attach it to energy legislation moving through the House and Senate. The idea was last spotted when Sen. Arlen Specter (R-PA) embraced elements of the bill in his relatively unhinged “Oil and Gas Antitrust Act of 2006” (S. 2557), and the trade press is full of reports that the next GOP energy bill might well include NOPEC in its legislative basket of economic buffoonery.

You might think that imposing U.S. antitrust law on foreign, state-owned companies that (with the exception of CITGO) operate nowhere near U.S. borders is such a crackpot idea that only an American politician could entertain such a thing with a straight face. You would be wrong. The other day, Ariel Cohen and William Schirano at the Heritage Foundation gave NOPEC an enthusiastic thumbs-up. “If Congress is serious about alleviating the price-gouging that contributes to high gas prices,” they wrote, “it ought to begin by allowing the federal government to sue OPEC.”

The temptation is to simply ignore nonsense like this. But nonsense like this (particularly on the energy front) is increasingly the coin of the legislative realm. So let’s do what its proponents have obviously not done and give the idea a few moments of thought.

First, the obvious question arises—exactly how would the U.S. government enforce such a law? After all, I rather doubt that Saudi Arabia, Kuwait, Iran, Venezuela, et al will quickly disband the cartel in a panic once Uncle Sam deems their club illegal under U.S. law. “You and who’s army?!” is the natural response we might expect. Given that no army would be on the way to stamp out such illegal activity, which leaves trade sanctions or nothing. The former would be counterproductive while the latter would be embarrassing.

Next, exactly what gives the Congress the right to impose U.S. economic regulations on companies that aren’t doing business in the United States? Do all national governments have this right, or only the United States? If the former, what’s to prevent Saudi Arabia from declaring it illegal for U.S. banks to charge interest on loans (an activity ostensibly banned in many Islamic countries)? If the latter, then it’s a naked statement that U.S. policy is premised upon the idea that the biggest guy on the playground makes the rules for everyone else whether they like it or not—might makes right. And if so, then wouldn’t those forced against their will to live under U.S. law rightly argue that subjects of governmental power ought to have a right to vote about the laws they are compelled to live under? Or is that a right that only applies for some and not others?

Finally, there’s an economic principle of real importance at stake. To wit, who should have the final say over how much of a product or service is delivered by a commercial enterprise; the owners or the customers? If the latter, then companies are merely slaves of the state, dictated to produce as much as the public wants regardless of business considerations. Does the Heritage Foundation really want to plant their flag on that proposition?

One might argue that the state can prohibit price fixing and collusion without prohibiting companies from having the final say over their own production schedules absent coordination between firms. But there are a large number of oil economists who maintain that OPEC is not really a cartel at all—it’s simply a vehicle through which Saudi Arabia unilaterally exercises power over the market—and that collusion within OPEC is not particularly meaningful. If so, then NOPEC would have little effect even if by some miracle it could be enforced.

Even so, what if OPEC countries preferred to constrain production so that sufficient reserves would be available down the road when they would presumably be more valuable? In that case, production restraint might simply be another form of national savings. Should the U.S. Congress be in the business of declaring such trade-offs between present and future revenues “illegal”?

Sure, it would be wonderful if private companies owned oil reserves, not national governments. And it would be nice from the consumers’ point of view if those companies produced as many barrels of crude as a normal profit would allow. And it would be wonderful if OPEC disappeared tomorrow. But Congress’ ability to translate those wishes into reality as far as foreign petroleum operations are concerned is probably nonexistent.

The best we can do is to refuse to help the Cartel or its members in the course of their enterprise. Sending the Texas Rangers or some such after them would render us an international joke.

They Don’t Make Trade Associations Like They Used To

For those of us who tire of witnessing British Petroleum apologize for being in the oil business, or roll our eyes over Chevron PR campaigns dedicated to telling us how we can and should buy less of their product, it may seem that it was always thus. But it was not. Check out this 1956 short film produced by the American Petroleum Institute. Now THAT’S what a self-confident, take-no-guff industry looks like. Someone should tell “Big Oil” to take it’s thumb out of it’s mouth and start defending their right to exist.

Smeared by Krugman

Well, Paul Krugman sure smeared me in his May 29 column (sub. req’d.) where he accused me of “fraud pure and simple” in congressional testimony eight (!) years ago.

Krugman’s screed was just another salvo in the current global warming charm offensive, coinciding with Al Gore’s screeching movie, demonstrations against Max Mayfield, director of the National Hurricane Center, because he had the audacity to NOT blame last year’s Hurricane Katrina on global warming (which would have been “fraud pure and simple”), and multiple smearings of any climate scientist who dares to speak out against the current hysteria.

Krugman was incensed with my July 27, 1998 testimony before the House Committee on Small Business.  In it, my purpose was to demonstrate that commonly held assumptions about climate change can be violated in a very few short years.

One of those is that greenhouse gas concentrations, mainly carbon dioxide, would continue on a constant exponential growth curve.  NASA scientist James Hansen had a model that did just this, published in 1988, and referred to in his June 23, 1988 Senate testimony as a “Business as Usual” (BAU) scenario.

BAU generally assumes no significant legislation and no major technological changes.  It’s pretty safe to say that this was what happened in the succeeding ten years.

He had two other scenarios that were different, one that gradually reduced emissions, and one that stopped the growth of atmospheric carbon dioxide in 2000.  But those weren’t germane to my discussion. Somehow, Krugman labelled my not referring to them as “fraud.”

The BAU scenario produced a whopping surface temperature rise of 0.45 degrees Celsius in the short period from 1988 through 1997, the last year for which there was annual data published by the United Nations’ Intergovernmental Panel on Climate Change at the time of my testimony. The observed rise was 0.11 degrees.

I cited the reasons for this.  In fact, the rate of carbon dioxide increase in the atmosphere was quite constant–rather than itself increasing like compound interest–during the period.  Ten years later, Hansen published a paper in which he hypothesized that “apparently the rate of uptake by carbon dioxide sinks, either the ocean, or more likely the forests and soils, has increased.”  This was not assumed in any of his scenarios. In fact, the general hypothesis has been that, as the planet warms, the ocean takes up carbon dioxide at a slower rate.

Then, contrary to everyone’s expectation, the second most-important global warming emission, methane, simply stopped increasing.  Some years have shown an actual drop in its atmospheric concentration. To this day, no one knows why.

There’s also the nagging possibility that we haven’t yet figured out the true “sensitivity” of surface temperature to changes in carbon dioxide.  Scientifically, that’s a chilling possibility.

On May 30, Roger Pielke, Jr., a highly esteemed researcher at University of Colorado’s Center for Science and Technology Policy Research, examined Hansen’s scenarios.  Of the two “lower” ones, he concluded, “Neither is particularly accurate or realistic. Any conclusion that Hansen’s 1988 prediction got things right, necessarily must conclude that it got things right for the wrong reason.” (italics in original)

That’s precisely the keynote of my testimony eight years ago:  in climate science, what you think is obviously true can literally change overnight, like the assumption of continued exponential growth of carbon dioxide, or how the earth responds.

EPA Witchdoctors Get No Peace

A coalition of unions representing U.S. EPA scientists and other specialists sent a letter to EPA chief Stephen Johnson on Wednesday asserting that agency managers and pesticide industry officials are exerting political pressure to allow the continued use of organophosphates and carbamates, which are used in many industrial pesticides. The letter complains that EPA scientists are being pushed to skip steps in their regulatory testing of the chemicals, arguing that ”the integrity of the science upon which agency decisions are based has been compromised.”

This is rich. The methodology being employed by the EPA to ascertain human health risks for these and other chemical substances has long been discredited by academics, who, at best, suggest that it holds promise but has a long way to go, or, at worst, suggest that it is akin to astrology or palm reading. If the environmental Left were serious about allowing scientific concensus to dictate federal policy (a proposition they ardently embrace when the topic turns to global warming), the tests at issue would have been junked long ago.

But by all means, let’s not disturb the witchdoctors!   

Fear Not, Tom Friedman

Yesterday’s New York Times op-ed page had a couple of rather interesting pieces on global warming that merit some thought. The first, by Thomas Friedman, discussed how American capitalists – motivated as much by the hunt for profit as they are by the quest so save the world – are undertaking a “distributed Manhattan project” to develop economically attractive alternatives to fossil fuels. No centralized government program is necessary, thank you very much. The second, by environmental writer Gregg Easterbrook, described why he has switched sides in warming debate, moving from skeptic to cautious activist. Both are far more sensible than the usual screeds on those subjects published by the Gray Lady.

The Friedman piece was spot-on. Thousands of rather brilliant minds and billions of private dollars are being devoted to ambitious alternative energy R&D. While government sprinkles money here and there, the real work is being done by venture capitalists and entrepreneurial visionaries. If anything emerges from that creative soup, it will be primarily due to the fact that capitalism is the most powerful engine of technological change and innovation ever created by man. Waiting for the Congress or the Department of Energy to come up with something would be a triumph of hope over experience.

Friedman worries, however, that it won’t be enough. “If we want to see these alternatives move from little start-ups to large-scale commercial ventures, ‘we need to get the price mechanism right.’ When you’re talking about oil, you can’t just say ‘Let the market work’ because there is no free market in oil: the producers have a cartel, and governments – like ours – subsidize oil so we don’t pay the full cost.” Friedman proposes a price floor for gasoline ($3.50-$4.00 per gallon) and green purchasing practices for the federal government.

Fear not, Tom Friedman. The alternative energy revolution (if one is to come) will indeed be televised. First of all, to say “there is no free market in oil” is to say “I don’t know a damn thing about oil markets.” One would be hard-pressed to find a freer market on this planet than the one that trades in oil. There are a multiplicity of buyers and sellers who are free to sign long term contracts or to buy and sell in futures markets and spot markets with little regulatory interference. Secondary markets are likewise robust. Prices in wholesale markets are established by supply and demand and the only reason they don’t translate directly to the consumer is because governments are fond of taxing the hell out of the product at the retail level.

To the extent that there is governmental interference in those markets, it has been to artificially raise oil prices above what the market would otherwise deliver. Were it not for OPEC price fixing through production quotas, world oil prices would normally float around $5.50 per barrel according to Francisco Parra, a former Secretary-General of OPEC.

Now, you may not buy that number, but the overall point is hard to argue. Production costs in the Persian Gulf are so low – and economically recoverable oil is so plentiful – that only government conspiracy prevents a torrent of this stuff from hitting the market. Subsidies to the oil sector do indeed exist, but they do not affect marginal production costs, which is to say they do not affect consumer prices.

In sum, the claim that oil prices would be higher were it not for governmental favoritism has it exactly backwards. Competitors need no further help.

Gregg Easterbrook’s piece makes the point that there are few credentialed scientists left who publish in the peer-reviewed literature who are willing to argue that industrial emissions aren’t warming the planet. Fair enough. But the bulk of the so-called “skeptics” (like MIT’s Richard Lindzen or UVA’s – and Cato’s – Pat Michaels) never argued that point in the first place. Instead, they have argued that warming will likely be modest and of no particular consequence. Easterbrook acknowledges that this might well be true, but that he would prefer to hedge his bets with some sort of emission control policy.

Again, fair enough. Particularly risk averse people are more inclined towards this sort of thing than those less worried about such things, and there is no “correct” answer to the question of how much one should hedge against risks given that our risk preferences are all different and risk preferences are subjective.

But bear in mind that, over the past several years, the market has essentially slapped a huge tax on hydrocarbons. If environmentalists were asked back in 2002 if they would declare victory and go home with the passage of a $50 per barrel tax on oil as a means to tackle global warming, I’m pretty sure the answer would have been “yes – hell yes!” Well, that’s essentially what has happened. It may well be that the market has already delivered Easterbrook’s greenhouse insurance policy.