C. Boyden Gray on Oil Subsidies

At a high-level, off-the-record meeting concerning energy security that I attended earlier this week in Washington featuring New York Times columnist Tom Friedman, former CIA director James Woolsey, and energy consultant Daniel Yergin, a study came up in the course of discussion that has been bobbling around for a while now just below the radar screen regarding oil subsidies. The study, co-authored by major Republican C. Boyden Gray and published in a conservative law journal out of the University of Texas, alleges that the oil industry is subsidized to the tune of $250 billion a year, and that claim was marshaled to support the case for countervailing ethanol subsidies. If a careful guy like Boyden Gray — no enemy of business community he — has come to this conclusion, then there must be something to it, right? At least, that’s what many of the attendees were telling each other.

Now, this is a pretty remarkable claim given that the most aggressive yet credible oil subsidy estimates I’ve ever seen come from economist Douglas Koplow of Earth Track. He argued in a 1998 study for Greenpeace (not available electronically as far as I know) that total oil subsidies range from $18-40.6 billion if you count not just subsidies targeted at the oil industry but (1) those that help multiple industrial sectors as well, and (2) embrace some pretty ambitious claims about the chunk of defense spending that would disappear if the military’s oil mission were to disappear.

Look, I like Boyden personally. He’s been a generous contributor to the Cato Institute over the years and he’s gone out of his way to help promote many of our scholars here in Washington. But a close look at this paper of his speaks volumes about the poverty of the policy conversation in Washington with regards to energy.

Boyden’s argument boils down to this: chemical substances found naturally in gasoline such as benzene and other aromatic hydrocarbon compounds are imposing severe health costs on society. In a perfect world, the oil companies would have to compensate victims for those harms, but the federal government largely protects those companies from liability. This constitutes an implicit subsidy to the industry.

Boyden alleges that the direct harms from the various toxic emissions from gasoline total about $64 billion a year. But those aromatics also contribute to the formation of particulate matter (PM) in the atmosphere, and the harms from PM that can be traced back to aromatic gasoline emissions totals at least $200 billion a year. Boyden rounds the sum to $250 billion a year (which works out to about $1.78 a gallon in 2005) and argues that “leveling the playing field” would justify an equivalent subsidy to the ethanol industry. Ethanol subsides, he says, amounted to only $1.4 billion a year (the CBO estimate of the lost revenue associated with the federal fuels tax credit which, by the way, represents only a fraction of the total subsidies going to ethanol), so there’s a lot of room left to justify ethanol subsidies to the moon.

Boyden is right that the aromatics found in gasoline impose human health risks, and the regulatory history he tells about how Congress has dealt with this issue in the past is rather good. But his cost estimates relating to these emissions are drawn essentially from the ether.

His $64 billion estimate for the benefits associated with reducing aromatic emissions is simply the costs associated with reducing past industrial toxic air emissions. Huh? How did costs become benefits? Well, there are no independent estimates of the benefits. But the EPA asserts that the benefits from those previous industrial emission reductions exceed the costs so… . Even if the EPA’s claim were correct, there’s no reason to assume that the cost of reducing toxic air emissions from point-sources x years ago has anything to do with the cost of reducing toxic air emissions from automotive tailpipes today.

Boyden’s estimate for the costs associated with PM formation that can be traced back to gasoline likewise emerges from a problematic set of assumptions. He posits that 40 percent of all fine PM mass is carbon based (which seems fair enough) and then assumes that half of this mass (when adjusted for population exposures) can be attributed to gasoline emissions (which is not so fair enough; his own footnote suggests that only 4-33 percent of PM 2.5 can be traced back to tailpipe emissions). Using the benefit estimates associated with ambient PM concentration reductions from the recently established off-road diesel fuel regulations allows Boyden to come up with about $200 billion in benefits, although it’s unclear how he traces those costs to aromatic tailpipe emissions out of the total universe of motor vehicle tailpipe emissions.

I doubt whether anybody who’s citing Boyden’s study with gusto has ever gotten around to reading this particular sentence on p. 52; “We emphasize that these are, necessarily, speculative estimated, based on various heuristic assumptions that cannot easily be proven (or refuted, given basic uncertainties).” I’ll say. Normally, claims that cannot be proven or disproven are called “baseless opinions” (or, alternatively, “religious beliefs”). Let’s posit that we shouldn’t use either as the basis for public policy.

If Boyden was familiar with the literature on tailpipe emissions, he wouldn’t need to go through such analytic contortions. The man who probably knows more than any other person in the United States about the issues surrounding the environmental cost estimates associated with gasoline consumption is Mark Delucchi, a research scientist at the Institute for Transportation Studies at the University of California at Davis. His own economic calculations based on epidemiological work by others finds that environmental costs associated with toxic air emissions from motor vehicle tailpipes ranges from a lower-bound estimate of $87 million a year to an upper-bound estimate of $1.62 billion a year in 1991 dollars (which translates to $116 million-$2.16 billion in 2005 dollars) – a tiny fraction of the $64 billion estimate coming from Boyden.

Delucchi does not break down the PM emissions associated with gasoline aromatics, but he does report that the environmental costs associated with all the particulate emissions from motor vehicle tailpipes ranges between a lower-bound estimate of 16.7 billion and an upper-bound estimate of $266.4 billion. However, Delucchi reports that “we are uneasy with this result, even as an upper-bound,” because it’s heavily weighted by one study in the literature (Pope et al.) and that study is both anomalous and methodologically problematic. Regardless, keep in mind that Boyden is concentrating his fire not on all the particulate matter coming out of automotive tailpipes, but that subset of particulate matter formed as a consequence of the aromatic emissions. Given the small percentage by weight and volume that aromatics constitute within a gallon of gasoline, it’s clear that Boyden’s estimate is wildly off even if we use Pope et al.

By the way, it’s worth noting that the toxic air emissions associated with ethanol are even greater than the toxic air emissions associated with conventional gasoline, so even if Boyden’s estimates were correct, they do not justify countervailing subsidies for ethanol, the remedy for the problem suggested in Boyden’s paper.

One could spend a lifetime swatting down papers like this. That such weak arguments have no problem gaining currency in Washington demonstrates that policymakers simply cannot differentiate between analytic wheat and chaff. But such is the stuff that policy is made, particularly when the analytic “chaff” is politically convenient.

More Energy Security Gibberish (Wall Street Journal Edition)

Yesterday, the Journal ran a long, page one story featuring claims by retired Air Force General Charles Wald that oil production facilities around the world are dangerously vulnerable to terrorist attack and that the U.S. hasn’t done enough about it. General Wald is primarily worried about unguarded pipelines and chokepoints for tanker traffic and believes that the U.S. military needs to make “oil security” one of its chief concerns.

I was invited this morning by producers at CNBC’s Kudlow & Co. to debate General Wald, but alas, the General turned out to be unavailable, so the spot was scrapped. That’s too bad, because I was looking forward to engagement.

In short, General Wald is arguing that:

  • Market actors - who have spent billions of dollars on these facilities - are underinvetsting in security;
  • Producer states - who rely on oil revenues for most of their state revenue - are underinvesting in security as well; and finally:
  • If the U.S. military doesn’t do something about this, nobody will.

This is all pretty hard to swallow. Why would investor-owned oil companies be so carefree about their multi-billion-dollar facilities and capital assets? Are those companies run by stupid or myopic individuals? Likewise, poor governments have even more reason to be worried about securing oil production facilities and transit lanes than does the United States, because the economic harms caused by disruption would be far greater on the former than the latter.

While it’s certainly possible that oil companies and producer states are investing suboptimally when it comes to security expenditures, they have every incentive to make reasonable security investments. What makes General Wald think his assessment of the costs and benefits of those investments are better than those of investor-owned oil companies or the incumbent governments in question?

Now, let’s assume for the sake of argument that General Wald is indeed the master of this informational universe. If the U.S. taxpayer steps in via the U.S. military to undertake needed investments, what incentive do companies or governments have to make future security investments? Why wouldn’t both parties subsequently free-ride off the U.S. taxpayer for the rest of time?

And, not to put too fine a point on it, but is it really the military’s job to protect private corporate property? Shouldn’t the oil companies be paying those costs themselves? They, after all, are making a somewhat risky bet when they put their money into these regions. If that bet pays off, they make billions. If it doesn’t, then they should bear the loss alone if they’re going to reap the gain alone. Likewise, why should the U.S. military protect the economic assets of state-owned oil companies controlled by dubious regimes?

General Wald’s justification for all of this is that an oil supply disruption threatens the foundation of the American economy. That’s bunk. Recent research suggest that GDP is simply not affected that much by oil price spikes.

The contention that “we” aren’t doing enough to hedge against the possiblity of terror attacks on the oil supply infrastructure invites the question of just exactly who is this “we”? Market actors are building up oil inventories at a breakneck pace and an unprecidented amount of money is flowing into oil futures contracts. In other words, people in the market aren’t dumb. They know that a supply disruption is possible. And they’re acting on that possiblility by putting oil in the storage facilities for a rainy day.

But this is just more of the same-old same-old. Superficial bilge about energy security is the currency of the intellectual realm these days, and General Wald’s naval-gazing represents nothing new. What really got my attention was this:

In late 2002, he [Wald] was named deputy chief of the U.S. European Command in Stuttgart, which also oversees parts of Central Asia and most of Africa. The command wasn’t on the front lines of the fight then about to begin in Iraq, and officers were searching for a mission.

Well, if the U.S. European Command has no mission and nothing to do, then why not shut it down? If it’s got to cast about looking for something to worry about, it can at least pick something that it can handle. Given how thinly stretched our troops are at the moment, is it really the best use of our resources to perform this nearly unimaginable task of defending thousands of miles of foreign pipelines from rifle-fired pot-shots?

Gerson’s “Vision Thing”

How can the G.O.P. get its groove back?  Michael Gerson, former speechwriter and top policy advisor to President Bush, has an idea: purge the small-government conservatives.  As he puts it in the current issue of Newsweek, “any political movement that elevates abstract antigovernment ideology above human needs is hardly conservative, and unlikely to win.” 

As Justin Logan has pointed out in this space before, Gerson finds the “small government” aspect of conservatism “morally empty.”  Gerson expands on that theme here:

As antigovernment conservatives seek to purify the Republican Party, it is reasonable to ask if the purest among them are conservatives at all. The combination of disdain for government, a reflexive preference for markets and an unbalanced emphasis on individual choice is usually called libertarianism. The old conservatives had some concerns about that creed, which Russell Kirk called “an ideology of universal selfishness.” Conservatives have generally taught that the health of society is determined by the health of institutions: families, neighborhoods, schools, congregations. Unfettered individualism can loosen those bonds, while government can act to strengthen them. By this standard, good public policies—from incentives to charitable giving, to imposing minimal standards on inner-city schools—are not apostasy; they are a thoroughly orthodox, conservative commitment to the common good.

Campaigning on the size of government in 2008, while opponents talk about health care, education and poverty, will seem, and be, procedural, small-minded, cold and uninspired. The moral stakes are even higher. What does antigovernment conservatism offer to inner-city neighborhoods where violence is common and families are rare? Nothing. What achievement would it contribute to racial healing and the unity of our country? No achievement at all. Anti-government conservatism turns out to be a strange kind of idealism—an idealism that strangles mercy.

A speechwriter’s job is to make the president talk pretty; it’s generally a bad idea to give him a policymaking role.  Yet Gerson had one in the Bush White House.  “He might have had more influence than any White House staffer who wasn’t chief of staff or national security adviser,” according to Bill Kristol.  As the Washington Post reported upon Gerson’s departure last summer: 

He was a formulator of the Bush doctrine making the spread of democracy the fundamental goal of U.S. foreign policy, a policy hailed as revolutionary by some and criticized as unrealistic by others. He led a personal crusade to make unprecedented multibillion-dollar investments in fighting AIDS, malaria and poverty around the globe. He became one of the few voices pressing for a more aggressive policy to stop genocide in Darfur, even as critics complained of U.S. inaction.

This is the Gerson vision: armed uplift abroad, compassionate statism at home, and boundless generosity with other people’s blood and treasure.  If you think the problem with American foreign policy is that it hasn’t been ambitious enough in the last five years, if you think the problem with the Great Society was that there wasn’t enough hymn-singing, then it may be for you.  But for those of us who favor limited, constitutional government, Gerson’s views are instructive.  That a man with such contempt for small-government conservatives had the ear of the president explains a lot about the wreckage that surrounds us.

Kings, Dukes and Earls

Here’s a gem about officialdom from The Adventures of Huckleberry Finn.

Excerpt:

I read to Jim about kings and dukes and earls, and how they called each other “your majesty” and “your grace” and “your lordship,” instead of mister.  Jim’s eyes bugged out, he was so interested.

“I didn’t know dey was so many of ‘em, he said.  “I ain’t heard about none, but old King Solomon, and dem kings in a pack of cards.  How much pay do a king get?”

“Why they can have just as much as they want.  Everything belongs to them.”

“Ain’t dat gay?  And what have dey got to do, Huck?”

“Why nothing! How you do talk. They just lazy around.”

“Is dat so?”

“Of course it is.  They just lazy around—except maybe when they go to war.”

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The Pentagon Is Not Reporting the Good News from Iraq

The Pentagon said yesterday that violence in Iraq soared this fall to its highest level on record and acknowledged that anti-U.S. fighters have achieved a “strategic success” by unleashing a spiral of sectarian killings by Sunni and Shiite death squads that threatens Iraq’s political institutions.

In its most pessimistic report yet on progress in Iraq, the Pentagon described a nation listing toward civil war, with violence at record highs of 959 attacks per week, declining public confidence in government and “little progress” toward political reconciliation.

The Washington Post

Milton Friedman Days

The Loudoun County, Virginia Board of Supervisors is meeting today to pass a resolution recognizing Milton Friedman’s contributions to the nation and to the principle of human liberty – and they are naming July 31st, his birthday, Milton Friedman day.  Interestingly, the University of Chicago and others have designated January 29, 2007 as Milton Friedman Day.

As someone who was very fond of Milton, and committed to the same ideals, all I can say is: two down, 363 to go.

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