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Nothing Convenient About RFS

May 22, 2012 by Leave a Comment

 

A recent study by the National Association of Convenience Stores (NACS) found that two most prominent regulations affecting fuel use in the United States—the Renewable Fuel Standard (RFS) and the Corporate Average Fuel Economy (CAFE) standards—have competing requirements that will have a negative impact on the more than 120,000 convenience stores that sell motor fuel around the country, as well as the Americans that frequent them.

Under the RFS, which was set by Congress in 2005 and is administered by the Environmental Protection Agency, increasing amounts of biofuels like ethanol must be blended into our fuel every year, culminating in a target of 36 billion gallons per year in 2022.  However, under the CAFE standards that President Obama has set, automakers will be required to make automobile fleets with a combined average fuel economy of 54.5 miles per gallon by the year 2025.  As such, the ratio of ethanol to gasoline will increase, while fuel economy lessens the overall amount of gasoline we use.  An excerpt from NACS’ press release on the recent study notes, “The cumulative effect of the two mandates is that renewable fuels will be required to represent a significantly greater share of the market than originally anticipated — perhaps as much as 40%, or four times higher than today.”

According to the NACS, the combined impact of these two regulations is extremely problematic for the retail fuels market.  NACS Vice President of Government Relations John Eichberger said, “to meet such a high renewable fuels concentration, it is likely that most retailers in the country will have to replace their underground storage tank systems and fuel dispensers.  For the convenience industry alone, this will require a minimum infrastructure investment that will add nearly $22 billion to the cost of retailing fuels.”  These costs will ultimately be passed on to consumers in the form of higher prices.

Ironically, using CAFE to decrease consumption while increasing the ethanol mandate will  also have a significant impact on how much bang consumers get for their buck at the pump in terms of gas mileage.  A gallon of ethanol contains about 30 percent less energy than a gallon of gasoline; this is one of the reasons that  the May 15th AAA Daily Fuel Gauge report shows that, on an energy-output basis, gasoline containing 15 percent ethanol is 58 cents more expensive than regular grade gasoline.  If CAFE drops gasoline demand from 140 billion gallons per year to 100 billion gallons, and the RFS requires 36 billion gallons of ethanol by 2022, the current blend of E10 (gasoline with 10 percent ethanol) will need to be increased to E40 nationwide.

In addition to being much less efficient than gasoline, E40 cannot be used in most current car models, lawn mowers, and other small engines.  The U.S. Energy Information Administration forecasts that even in 2022, just 16 percent of on-road vehicles will be able to use flexible fuel.

Mandating the use of renewable fuels has, thus far, been a failed experiment; the lack of commercial-scale cellulosic biofuels plants in the U.S. has left it unclear if even a drop of cellulosic biofuel was blended into the fuel supply in 2011.  Nonetheless, refiners incur fines for not using fuel that isn’t available, and this situation will be exacerbated as CAFE standards and the RFS are ratcheted up.  NACS’s Eichberger notes that, “unless something dramatic happens, we will hit the ‘blend wall’ within the next two years and will not be able to meet RFS requirements. This will trigger massive fines throughout the petroleum distribution system that will increase the cost to sell motor fuels.”  Again, these are costs that are passed on at the pump.

The NACS’ findings show that, despite their stated goal of decreasing the amount of gasoline we use here in the United States, the Obama administration’s proposed RFS and CAFE standards conflict with each other, and in doing so the regulations negate the beneficial effects that they are supposed to provide.   And not only will these regulations make fuel more expensive for less miles per gallon, they reduce the ability of drivers to choose what is most appropriate for their needs. Selecting a vehicle that has the attributes they want should be a choice that Americans are able to make for themselves, rather than being forced to buy a car that is more fuel efficient over the long term but costs thousands more up front.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard Tagged With: , , , ,

EPA Staff’s Attempt to Regulate Greenhouse Gases Under the Clean Air Act

May 21, 2012 by Leave a Comment

 

Explaining the ANPR

The Environmental Protection Agency announced in 2008 that it was well on its way to regulating at least 85 percent of the energy used in America in the name of global warming (nevermind the fact that global temperatures have inexplicably not increased since at least 2001).[1] Because energy is an indispensable part of economic activity, if EPA’s plans go forward they will exercise some regulatory control over most of the American economy.

The problems created by regulating greenhouse gases under the Clean Air Act are legion. Nothing says it better than the following statement by former EPA Administrator Johnson himself:

If EPA were to regulate greenhouse gas emissions from motor vehicles under the Clean Air Act, then regulation of smaller stationary sources that also emit GHGs—such as apartment buildings, large homes, schools, and hospitals—could also be triggered. One point is clear: the potential regulation of greenhouse gases under any portion of the Clean Air Act could result in an unprecedented expansion of EPA authority that would have a profound effect on virtually every sector of the economy and touch every household in the land. [2]

Administrator Johnson is correct. Eighty five percent of the energy used in America comes from fossil fuels.[3] Carbon dioxide emissions are an unavoidable byproduct of the combustion of fossil fuels. EPA staff is seeking to regulate the most widespread sources of energy in the United States.

To understand the scope of EPA’s potential regulations, below is a diagram of the sources of greenhouse gas emissions in the United States. [4] To reduce greenhouse gas emissions, EPA’s regulations will affect all of these sectors, industry, transportation, commercial, residential, and agriculture. It will raise the price of energy and thereby increase the cost of doing business.

How did we get here?

Since at least the late 1990s, environmental activists have tried to get EPA to regulate greenhouse gases. [5] In 1998, EPA General Counsel, Jonathan Cannon, wrote a legal opinion stating that EPA had the authority to regulate greenhouse gases under the Clean Air Act. [6] Despite this opinion, EPA declined to regulate greenhouse gases. One reason EPA did not attempt to regulate greenhouse gases at the time is because Congress attached riders to appropriations bills forbidding EPA from spending any money on greenhouse gas regulations.

To force EPA to take action, in 1999, a coalition of environmental activists used Mr. Cannon’s opinion to sue EPA in an attempt to force EPA to regulate greenhouse gas emission from mobile sources. [7] These environmental activists realized that if a court would find that EPA had the authority to regulate greenhouse gases under §202 of the Clean Air Act (the section that regulates emissions from vehicles), then EPA would be forced to regulate greenhouse gases under the rest of the Clean Air Act and apply regulations to all fossil fuel use in the United States.

The Supreme Court Weighs in—Massachusetts v. EPA

A group of attorneys general, led by the Attorney General of Massachusetts, also sued EPA in an attempt to bolster the case against EPA. This case became Massachusetts v. EPA. [8] On April 2, 2007, in a 5-4 decision, the Supreme Court agreed with the environmental activists that EPA had the authority to regulate greenhouse gas emissions from motor vehicles under the Clean Air Act because they found that greenhouse gases are an “air pollutant.” Because greenhouse gases, in the Court’s opinion, are air pollutants under the Clean Air Act, the act then requires EPA to regulate greenhouse gases. The Supreme Court held that EPA had to regulate greenhouse gases or for EPA to justify its decision not to regulate greenhouse gases.

The Supreme Court’s Tortured Logic

To reach this result the Supreme Court had to use some tortured logic. Section 202 of the Clean Air Act requires EPA to regulate “any air pollutant” . . . “which may reasonably be anticipated to endanger public health or welfare.” [9] The question is, what is the definition of an “air pollutant” under the Clean Air Act? The majority decided that an air pollutant was any “airborne compound of whatever stripe.” [10] They even went so far to say that the CAA was unambiguous on this point.[11] Sadly they are unambiguously wrong.

The Clean Air Act defines a pollutant as, “any air pollution agent or combination of such agents, including any physical, chemical, … substance or matter which is emitted into or otherwise enters the ambient air.” [12] For something to be a pollutant, therefore, it must be an “air pollution agent,” not merely anything in the air.

Carbon dioxide sure doesn’t sound like an “air pollution agent.” It is inert, colorless, odorless, and it isn’t toxic to human at 20 times ambient levels. Justice Scalia in dissent explained how flawed the majority’s misconstruction of this term was. He wrote from the majority’s opinion “it follows that everything airborne, from Frisbees to flatulence, qualifies as an ‘air pollutant.’ This reading of the statute defies common sense.” [13] Regardless of Massachusetts v. EPA defying common sense, it is the law.

EPA’s Renewed Efforts to Regulate Greenhouse Gases

After Massachusetts v. EPA, EPA had a few options: 1) promulgate a new rule regulating greenhouse gases from vehicles; 2) attempt to extend their authority in the Clean Air Act to the fullest extent and try to regulate all U.S. greenhouse gas emissions; or 3) provide a “reasonable explanation” of why they weren’t going to regulate greenhouse gas emissions. [14]

The problem with declining to regulate greenhouse gases is that EPA has in the past essentially stated that greenhouse gases are harmful to human health and welfare. The Supreme Court also made it somewhat difficult for EPA not to regulate greenhouse gas emissions. For example, the Court wrote:

Under the clear terms of the Clean Air Act, EPA can avoid taking further action only if it determines that greenhouse gases do not contribute to climate change or if it provides some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether they do. [15]

The real question is not if greenhouse gases contribute to climate change (greenhouse gases obviously contribute to the greenhouse effect), but whether greenhouse gases “endanger public health and welfare” as defined by the Clean Air Act. For EPA to avoid taking further regulatory action, they would need to rebut the Supreme Court’s claims of alleged harms from global warming and EPA’s past claims of harms from greenhouse gas emissions.

The Advance Notice of Proposed Rulemaking

Instead of taking the difficult path of explaining the latest climate science and data and refusing to regulate greenhouse gases, EPA instead is attempting to expand their regulatory reach. In late 2007, EPA unofficially announced that it was going to find that greenhouse gases endangered public health and welfare and should therefore be regulated under the Clean Air Act. Before this rule came out, however, other Administration officials questioned the wisdom of such a move. Because of the complexity of potentially regulating 85 percent of all energy use in America, EPA decided to ask the American public for comments on how to proceed. To do this, they put out an “Advance Notice of Proposed Rulemaking” (ANPR). [16]

In many cases, an ANPR is a short document that asks the public for comment without revealing an agency’s policy preferences. But instead of a small request for comment, EPA released an enormous 588 page ANPR explaining some of the possible ways to regulate greenhouse gases using the Clean Air Act. The worst part of the ANPR is that EPA staff has essentially predetermined their course of action—regulating greenhouse gases.

What will the ANPR Lead To?

The ANPR envisions massive amounts of regulation on all forms of greenhouse gas emissions and the activities that lead to greenhouse gas emissions. Massachusetts v. EPA dealt with the regulation of mobile sources and EPA will likely start by regulating anything that has an engine such as automobiles, light-duty trucks, heavy-duty trucks, motorcycles, planes, ships, boats, recreational vehicles, farm tractors, construction equipment, garden equipment, and even lawnmowers just to name a few.

And what will these potential regulations look like? EPA is proposing to require a 10 percent reduction in the output of America’s energy-intensive industries, lowering the speed limit back to 55 mph, and requiring ocean-going vehicles to take 10 percent longer to deliver their cargo.

EPA’s regulation will not be limited to mobile sources. By starting to regulate greenhouse gases under one section of the Clean Air Act, EPA would be forced to regulate it under other sections, including a program called Prevention of Significant Deterioration. This program regulates sources that emit 100 tons or more of emissions a year. [17] This may sounds like a lot, but a 100,000 square foot building (more or less 10 stories) would emit that much in a year. This means that EPA would regulate the energy use of all large buildings, and any buildings, such as computer data centers, which use large amounts of energy. There are likely one million new sources that EPA would have to regulate [18] and require the buildings to use “Best Available Control Technology”—whatever EPA decides that is for the buildings. [19]

These regulations could extend to the heating sources of large single-family homes, as well as stores, church, hospitals, and police stations.

EPA would also likely regulate all large beef or dairy operations in the country because cows emit (to put it delicately) large amounts of the potent greenhouse gas methane. Who knows how EPA will propose to control these emissions.

EPA Regulation of Greenhouse Gases Will Lead to Higher Energy Prices

Reducing the greenhouse gas emissions from 85 percent of the energy used in the United States would require tremendous amounts of regulation. The form of these regulations is unclear, but what is clear is that the regulations would dramatically increase energy prices and the price of everything that uses energy, including computers, cars, trucks, washing machines, lawnmowers, and air conditioning units. The economy is already suffering from high energy prices and EPA’s plan will just make that worse.

EPA Regulation of Greenhouse Gases Will Not Affect the Climate

Maybe the most amazing thing about EPA plan is that it won’t affect the global temperature unless the developing world reduces their greenhouse gas emissions. China, not the United States is the world’s largest emitter of carbon dioxide. The U.S. will emit a smaller and smaller share of the world’s total greenhouse gas emissions. [20] If the U.S. were to reduce our carbon dioxide emissions from the transportation sector to zero, the rest of the world would replace those emissions in less than 2 years. [21] A unilateral U.S. reduction in greenhouse gas emissions from the transportation section will have not have a noticeable impact of global climate because of the increases from other countries.

The developing world’s carbon dioxide emissions are far outpacing the emissions from the United States. From 2000 through 2007, China’s carbon dioxide emissions increased 98%, India’s increased 36%, the global total increased 26%, Russia’s increased 10%, the U.S.’s increased 3%. [22]

Worldwide emissions continue to increase, however, because the developing world is more concerned about the health and welfare of their citizens than greenhouse gas emissions. For example, India recent released its National Climate Action Plan on Climate Change. In the plan they stated, “It is obvious that India needs to substantially increase its per capita energy consumption to provide a minimally acceptable level of well being to its people.” [23]

India and other developing nations are not going to limit their energy consumption to pacify EPA. Because they won’t, EPA’s regulation of energy use will only drive up energy prices in America without having any affect on global temperatures.

[1] The Intergovernmental Panel on Climate Change (IPCC) projected that temperature should increase about 2 degrees Celsius per century because of greenhouse gas concentrations and temperatures should increase linearly. So far this century global temperatures have not increased. See http://rankexploits.com/musings/2008/result-of-hypothesis-tests-very-low-confidence-2ccentury-correct/ The lack of warming is especially evident in the satellite temperature record. The satellite temperature data from the University of Alabama at Huntsville is available here: http://vortex.nsstc.uah.edu/public/msu/t2lt/tltglhmam_5.2 and the satellite temperature data from Remote Sensing Systems is here: ftp://ftp.ssmi.com/msu/monthly_time_series/rss_monthly_msu_amsu_channel_tlt_anomalies_land_and_ocean_v03_1.txt.

[2] Environmental Protection Agency, Regulating Greenhouse Gas Emissions under the Clean Air Act, p. 5.

[3] Energy Information Administration, Greenhouse Gases, Climate Change, and Energy, http://www.eia.doe.gov/bookshelf/brochures/greenhouse/Chapter1.htm.

[4] Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990–2006, p. ES-16, http://www.epa.gov/climatechange/emissions/downloads/08_CR.pdf.

[5] One of the first attempts was the International Center for Technology Assessment’s petition for EPA to regulation greenhouse gases in 1999. See http://www.icta.org/doc/Chronology%20Short%208-31-06.pdf.

[6] Jonathan Z. Cannon, The Significance of Massachusetts v. EPA, May 21, 2007, http://www.virginialawreview.org/inbrief.php?s=inbrief&p=2007/05/21/cannon.

[7] The groups which sued are: Alliance for Sustainable Communities, Applied Power Technologies, BioFuels America, California Solar Energy Industries, Clements Environmental Corporation, Environmental Advocates, Environmental and Energy Study Institutes, International Center for Technology Assessment, Friends of the Earth, Full Circle Energy Project, Inc., Green Party Rhode Island, Greenpeace U.S.A., Network for Environmental and Economic Responsibility of the United Church of Christ, New Jersey Environmental Watch, New Mexico Solar Energy Association, Oregon Environmental Council, Public Citizen, Solar Energy Industries Association, and the SUN DAY Campaign.

[8] www.supremecourtus.gov/opinions/06pdf/05-1120.pdf.

[9] 42 U.S.C. § 7521(a)(1).

[10] Mass. v. EPA, 127 S.Ct. at 1460.

[11] Id.

[12] 42 U.S.C. § 7602(g).

[13] Mass. v. EPA, 127 S.Ct. at 1476.

[14] Id. at 1462.

[15]Id. at 1462.

[16] Environmental Protection Agency, Advance Notice of Proposed Rulemaking: Regulating Greenhouse Gas Emissions under the Clean Air Act, http://www.epa.gov/climatechange/anpr.html

[17] Specifically this is defined as a source that emits at least 100 tons per year of an air pollutant of any other source with the potential to emit 20 tons per year of an air pollutant.

[18] Portia M.E. Mills & Mark P. Mills, A Regulatory Burden: The Compliance Dimension of Regulating CO2 as a Pollutant, http://www.uschamber.com/assets/env/regulatory_burden0809.pdf.

[19] For a more complete explanation of the issue with Prevention of Significant Deterioration see William Kovacs’ testimony before the United States Committee on Environment and Public Works: http://epw.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=9cc4d7e4-f066-4534-9337-9bf53154b0e1 and Marlo Lewis’ testimony before the same committee: http://epw.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=38ed7b76-2817-4f03-9e51-537515c9ffd2.

[20] According to the Global Carbon project in 2007 China emitted 21% of the world’s carbon equivalent and the U.S. emitted 19%.

[21] Calculated using the emission data from the Global Carbon Project. According to the ANPR, the GHG emissions from the transportation sector total 28% of total U.S. emissions. ANPR at 44403. Twenty eight percent of the U.S.’s 2006 carbon dioxide emissions are 436,141 GgC. From 2005 to 2007, the world’s emissions, with the emissions from the U.S., grew by 476,324 GgC.

[22] Calculated using the emission data from the Global Carbon Project. In 2000, China emitted 910,950 GgC, India 316,804 GgC, Russia 391,652 GgC, and the U.S. 1,541,013 GgC. By 2007, China emitted 1,801,932 GgC, India 429,601 GgC, Russia 432,486 GgC, and the U.S. 1,586,213 GgC.

[23] Government of India, National Action Plan on Climate Change, http://pmindia.nic.in/Pg01-52.pdf

 

Filed Under: Facts, News, Products and Power, Threats Tagged With:

Fracking and Job Creation

May 17, 2012 by 1 Comment

One of the few booming sectors in the U.S. economy is oil and natural gas. Domestic development has been helped by high worldwide prices for crude, but the improvements in horizontal drilling and hydraulic fracturing—“fracking”—have also been very important. In a new report, researchers at the University of Texas at San Antonio (UTSA) estimate that the Eagle Ford shale alone generated $25 billion in economic activity in 2011 alone, in addition to creating over 47,000 jobs. These gains could be increased if federal policies opened up more of the country’s natural wealth to development—eventually adding $273 billion to annual GDP and 1.2 million jobs, according to a 2009 study.

An E&E article by Nathanial Gronewold summarizes the report’s findings:

Researchers at the University of Texas at San Antonio (UTSA)…estimate that the oil and gas industry in the Eagle Ford generated around $25 billion in economic activity for the region in 2011, leading to the addition of 47,097 full-time jobs that year.

…

Oil and gas exploration through horizontal drilling and hydraulic fracturing began there in 2008, when Petrohawk Energy Corp. is said to have first drilled into the formation. The zone’s close proximity to the well-established Texas oil and gas industry and related infrastructure has seen activity there spreading rapidly.

UTSA figures presented in the new study show that from 2010 to 2011, natural gas production has doubled, while crude oil production from the Eagle Ford zone has increased by a factor of six in one year. Natural gas liquids output is estimated to have tripled.

…

By 2021, the shale oil and gas field is seen as generating total economic activity of $90 billion and adding about 117,000 full-time jobs to the region. By then, total wage and salary benefits are seen as more than doubling, to $7.7 billion, while the state of Texas will enjoy an added $1.76 billion in tax revenue just from that one shale oil and gas play.

Unlike the dramatic increase in production on private and states lands in 2011, production on federal lands fell because the federal government is dragging its heels on allowing the development of domestic oil and gas resources, as the following chart clearly shows:

 

Americans are currently suffering from high unemployment, high gas prices, and a monstrous federal budget deficit. Unshackling entrepreneurs to develop oil and gas on federal lands would help on all three fronts.

Filed Under: Emissions Standards, Facts, Products and Power, Renewable Fuel Standard, Threats, Tier 3 Standards Tagged With: , , , ,

Federal Intervention in Energy Markets Isn’t SAFE

May 16, 2012 by Leave a Comment

The proponents of laissez-faire in energy markets keep winning argument after argument, but their critics keep moving the goalposts. For decades, Americans have been warned that they needed to wean themselves from oil because the U.S. would always be dependent on hostile foreign regimes. Now that new technological developments and further discoveries have shown that North America has centuries’ worth of fossil fuels, the argument is shifting. Now the alleged danger—“proving” that we still need the federal government to shift American energy consumption away from traditional sources—is volatility in prices.

Consider the recent report on “The New American Oil Boom,” issued by the cleverly named group, Securing America’s Future Energy (SAFE). The following excerpt from its own summary gives the flavor:

Between 2009 and 2011, the United States experienced three consecutive years of crude oil production increases for the first time since the early 1980s, as well as the largest surge in output within a three year period since the late 1960s. This marks a sharp reversal from conventional wisdom of only a few years ago, suggesting U.S. crude oil production was in a decades-long state of decline.

[T]his shift in domestic production is substantial, and has profound positive implications for the domestic economy.…However, these benefits are tempered by the realities of the global oil market, especially in light of continued instability in oil-producing regions, and soaring demand from China, India, and other emerging markets. Most importantly, the paper examines the myth of “energy independence,” underlining that even dramatic increases in domestic production cannot fully insulate the country from the costs of oil dependence, such as high prices and continued volatility, capital flows overseas, and the burden to the military in securing global oil supplies.

…

[W]hile encouraging policymakers to support increased domestic oil production, SAFE presents a number of long-term policy recommendations. To complement the benefits of the oil boom, vehicle fuel-economy standards, and a long-term transition away from petroleum based fuels in the transportation sector are essential steps the country must take towards breaking oil’s stranglehold over our economic and national security.

Contrary to the report, it wouldn’t be “safe” at all to allow the federal government to steer the U.S. energy and transportation markets. The arguments in the report fail to understand the resilience of a market economy, and the dangers of government intervention.

First of all, the reason the market gravitates towards fossil-based energy sources—particularly for vehicles—is that they are far cheaper and more convenient than alternatives, at least with current technologies and consumer preferences. Talk of “price volatility” is silly in this context. It is much better to have a fossil-price bounce around between low and medium, rather than switch to an alternative-energy price that is consistently high. If it really were the case that in the long run, consumers would end up paying more on average for fossil-based energy, then it wouldn’t take government measures to effect a transition. The market would naturally move to the cheaper (on average) energy sources.

The people pushing the SAFE line apparently don’t understand how market economies use futures and other derivatives markets to anticipate future interruptions in supply. The basic function of speculators in a market is to do just that—to provide a “shock absorber” as it were, and smooth out price volatility. So long as the government stood back and let people in the energy sector and the financial do their respective jobs, without threats of punishments whenever somebody made an “unconscionable” amount of money, then market prices would give the proper information as to where investments should go, for future energy development.

As a final observation, the SAFE argument about military action is also nonsensical, from an economic viewpoint. Without taking a stand on the diplomatic and strategic motivations for various military operations by the U.S. government, we can safely say that it is simply not true that U.S. consumption of oil is based upon large military expenditures. After all, if you are a foreign dictator and seize control of vast stockpiles of oil, what are you going to do with it? Drink it? Of course not. The whole point of seizing oil reserves is that you now get to pocket the money when you sell it on the world market.

People have been decrying America’s alleged vulnerability to OPEC nations for decades. So far, the world hasn’t collapsed on that score. Had Americans back in, say, 1980 implemented a full-scale switch to electric cars and wind power, the U.S. standard of living would be far lower today than it is. Ironically, faulty government policies themselves—in the form of uncertainty over future penalties on carbon emissions, on-again-off-again bans on offshore drilling, and of course the Keystone Pipeline decision—contribute to the volatility in the petroleum markets, and make oil prices higher than they otherwise would be.

The market economy has many in-built mechanisms for properly anticipating supply interruptions and guiding entrepreneurs to make the most profitable long-term investments. There is no reason to think that government officials can steer the economy more wisely than the combined knowledge of everyone in the worldwide market.

 

 

Filed Under: Emissions Standards, Facts, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , , , ,

Growing Skepticism About Government Regulations

May 14, 2012 by Leave a Comment

 

Results of a new national survey conducted for the American Energy Alliance reveal healthy skepticism among likely voters regarding the real value of Federal Government regulations. According to the survey results,  a large majority of Americans now believe that increasing regulations on energy and manufacturing companies often result in more cost than benefit.

Sixty five percent of survey respondents agreed that federal regulation result in more cost than benefits. The President has argued that federal regulations spur innovation and technological progress, however just 22% of respondents believe that is true.

“Federal regulations are increasingly onerous, and a growing majority of the American people recognize how overregulation costs them every day,” said Thomas Pyle, President of the American Energy Alliance. “Consumers clearly understand that when the federal regulators increase the cost of doing business for energy and manufacturing industries, ultimately those costs are going to be paid by the consumers themselves.”

The survey also revealed sentiments regarding the dysfunctional nature of federal rulemaking More than half (52%) strongly agree (77% total agree) that the federal government needs to adopt a more reasonable approach to regulation.  Almost all respondents (87%) think that the government should allow time to determine if existing regulations are effective before adding additional burdens on industry.

These sentiments about overreaching government regulation were even present among self-identified liberals. For example:

  • 78% of moderates and 55% of liberals think that the federal government must adopt a more reasonable approach to regulations;
  • 64% of moderates and 49% of liberals think that federal agencies sometimes demand changes that result in little or no environmental benefit;
  • 29% of moderates and 17% of liberals think that federal regulations get in the way of innovation and technological progress all or most of the time;
  • 58% of moderates and 36% of liberals think that federal regulation results in more costs than benefits.

“It’s clear that the days of people supporting big government regulation are over,” said Pyle.  “Policy makers should understand that people see the benefits of high paying energy and manufacturing jobs and a revived economy, not more bureaucracy and needless burdens on our energy industry,” Pyle added.

The national survey of 1,000 self described likely voters was conducted by MWR strategies April 6-13. The survey has a margin of error of +/- 3.1%.

To read the full survey results, click here.

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Filed Under: News, Products and Power

Does Ethanol Make Gasoline Cheaper?

May 14, 2012 by 1 Comment

 

The federal mandate to blend corn-based ethanol into the U.S. vehicle fuel mix is an economically absurd practice. On a level playing field, conventional gasoline would be used for the foreseeable future, as it is the most efficient method (all things considered) to deliver energy to U.S. vehicles. At most ethanol would have a small share of the market in the absence of federal government support.

However, a study from Iowa State University argues that the growth in ethanol production from 2000 – 2010 has suppressed gasoline prices by an average of 25 cents per gallon and 89 cents per gallon in 2010. The study also warns that if ethanol production were suddenly halted, gasoline prices could rise a shocking 41 to 92 percent.

As we’ll see, these figures are very misleading, because they look at the history of conventional gasoline refinery capacity (in the face of government-supported ethanol output) and assume it wouldn’t have been any different over the last ten years, had the government never supported ethanol. Once we realize the trick involved, the study’s pro-ethanol conclusions fall away.

The Iowa Study’s Claims

The study is heavy on econometrics jargon; quoting portions of it would be virtually useless in conveying to the layperson how the study actually gets its results. The closest to a plain English explanation comes in the authors’ discussion of their final result:

In the scenario in which ethanol is totally eliminated from domestic supply, the system [of equations] specified [earlier in the paper] is used to simulate the gasoline price responses after taking into account (i) the gasoline stocks at the level of 2010, and (ii) the full utilization of the spare capacity of US oil refineries in 2010. Three sets of simulation results are generated under different levels of elasticities (high, medium, and low). The results summarized in Table 4 indicate that if the ethanol supply were eliminated from the domestic gasoline market, wholesale gasoline prices may change by 41%– 92% in the short run depending on the sensitivity of producers and consumers to prices. (“The Impact of Ethanol Production on U.S. and Regional Gasoline Markets: an Update to May 2009,” [.pdf], p. 5.)

As this quotation explains, the study takes as a given that U.S. refining capacity and gasoline stocks start at their actual values for 2010, and then combines them with traditional measures of how gasoline prices move in response to increases in demand, in order to estimate the impact of a sudden disappearance of the entire ethanol industry. Not surprisingly, such an unexpected and massive event would lead to massive spikes (in the short run) of gasoline.

Does the Iowa Study Justify Government Favoritism for Ethanol?

Clearly the groups promoting this study want the reader to draw the inference that the U.S. government’s preferential tax treatment of ethanol is good for U.S. consumers. Yet the study doesn’t prove this at all. The reason conventional gasoline refining capacity is at its current level, is the existence of such a massive program of support for ethanol over the years.

If the U.S. government didn’t give special tax treatment and other mandates to guarantee ethanol a fraction of the market, gasoline would have filled the gap. In other words, government policies have displaced conventional gasoline from the market, and that’s why a sudden removal of all the ethanol would lead to a temporary shock in the gas market. Yet the fact remains that consumers would have been better off, had the government never intervened to support ethanol in the first place.

For an analogy, suppose Chick-fil-A begins running commercials touting the advantages of eating white meat over burgers. In response, the burger joints put out statistics claiming that if all the McDonald’s and Burger King franchises magically disappeared next Tuesday, then there wouldn’t be enough chicken sandwiches to feed Americans at lunchtime. Therefore, the burger joints would conclude, Americans should disregard the Chick-fil-A ads, because clearly there aren’t enough chickens to go around.

Such an argument would be absurd. If American consumers stopped eating burgers and switched to chicken, then McDonald’s and Burger King franchises would close down (or revamp their menus) and be replaced by Chick-fil-A and other such restaurants. The nation’s cattle ranchers would lose business, but the chicken farmers would see growing business. The market would switch over to cater to what consumers wanted.

A similar process would occur if the government treated ethanol the same way it treated gasoline. On a level playing field, it would be unprofitable for refiners to blend billions of gallons of ethanol into their mix, certainly in the long run. The market would gradually adapt to what made economic sense, namely the refining of oil into conventional gasoline. The share of ethanol would shrink, and ultimately consumers and taxpayers would be richer than they otherwise would have been.

While ethanol would have likely penetrated the market without government subsidies, its production would not have reached the levels that were mandated by the government by the Energy Independence and Security Act of 2007.

Explaining the “Regional Effect” of Ethanol Production on Gasoline Prices

The best way to see that the ostensible benefits of ethanol are due to its displacement of traditional gasoline refining, is the regional effect noted by the paper. The authors note in the abstract:

This report…concludes that over the sample period from January 2000 to December 2010, the growth in ethanol production reduced wholesale gasoline prices by $0.25 per gallon on average. The Midwest region experienced the biggest impact, with a $0.39/gallon reduction, while the East Coast had the smallest impact at $0.16/gallon.

The wording in the quotation above is extremely misleading. The reader gets the impression that gasoline prices were zooming upward, only to be held back by the farsighted politicians who fortunately kickstarted an ethanol program.

In particular, since the “Midwest region experienced the biggest impact” of 39 cents per gallon, while the East Coast “had the smallest impact” at only 16 cents, the innocent reader might get the idea that over the period in question (from January 2000 to December 2010), gasoline prices increased more in the East Coast than in the Midwest. After all, the quotation above makes it sound as if ethanol “helped” drivers in the Midwest 23 cents more than it helped drivers on the East Coast.

Yet the data don’t show this at all, as illustrated in the following table (constructed from EIA’s interactive database) of average refiner prices (through retail outlets) of regular gasoline over the period and regions in question:

Region

Jan 2000 Price

Dec 2010 Price

Price Difference in Same Region, Across Dates
Midwest $0.905 $2.504 + $1.60
East Coast $0.863 $2.508 + $1.65
Price Difference on Same Date, Across Regions – $0.04 $0.00

As the table above demonstrates, motorists in the Midwest got nowhere near the ostensible 23-cent relative advantage from ethanol, compared to the poor saps on the East Coast. In reality, the roughly 4-cent advantage held by the East Coast (in terms of cheaper wholesale gasoline prices) prevailing on January 2000, had been whittled away to basically zero by December 2010. Looking at the data from a different angle, wholesale prices increased about 5 cents per gallon more in the East Coast, than they did in the Midwest, over the period in question. (The two approaches are yielding apparently different numbers—namely 4 cents in the bottom row versus 5 cents in the far-right column—because of rounding. The two approaches actually give the same number.)

When we step back and think about it, the result reported by the Iowa study couldn’t possibly be right—at least not in the way most casual readers would have interpreted it. If the boost in ethanol production really held wholesale gasoline prices in the Midwest down by 39 cents, versus a smaller impact of only 16 cents in the East Coast, then retailers in the East Coast would have wanted to buy Midwest-produced gasoline because of the 23-cent-per-gallon advantage.  Special environmental regulations particular to each region would not have permitted that purchase directly (i.e. East Coast gas stations can’t literally use gasoline currently produced for Midwest specifications), but if the price discrepancy were large enough, it would make sense for the Midwest refiners to cater to the East Coast market. Competition between regions would still tend to suppress the large gaps in wholesale prices implied by the Iowa study results.

As the data in the table above show, the alleged 39-cent versus 16-cent savings of ethanol don’t exist out in the actual price histories. So where do these numbers come from, and why is the “advantage” to the Midwest so much higher than for the East Coast?

As we explained in the previous section, the study generates its estimates by looking at conventional gasoline refining capacity, inventories of gasoline, and other factors for a certain region (or the country as a whole), and then simulating what would happen if the ethanol production in that region (or country) disappeared.

The reason the effect appears so much more dramatic in the Midwest—thus giving rise to the high 39-cent figure, versus the low 16-cent figure on the East Coast—is that there is naturally more ethanol production in the Midwest. Consequently, industry in the Midwest adapted over the period 2000-2010 to the ethanol availability, which only existed because of federal support. That’s why the Iowa study’s technique spits out the “fact” that ethanol production has held down gas prices more in the Midwest than anywhere else in the country, because the conventional oil refining system there has been relatively displaced by the (artificial) growth in the ethanol sector.

One way to see this in the data is to look at the change in refining utilization rates between the Midwest and the East Coast over the period in question:

Utilization of Crude Oil Refinery Operable Capacity

Source: EIA

As the chart shows, since 2005 oil refinery utilization rates have dropped more in the East Coast than in the Midwest. Loosely speaking, when it comes to refining oil into gasoline, the situation in the Midwest is much “tighter” than on the East Coast.

More investigation would be needed to determine exactly how these different paths of adaptation played out. Yet the numbers show the sense in which the Midwest currently has less “room for error” with respect to conventional refining of crude oil. This factor is partly responsible for the Iowa study’s regression results, showing that ethanol “held down” gas prices more in the Midwest than on the East Coast.

To reiterate the most important point: When the Iowa study says ethanol “held down” gas prices, it is very misleading. The actual wholesale prices between the two regions have stayed within 5 cents of each other over the decade. Rather, what happened is that the development of the (federally supported) ethanol sector retarded the development of the rest of the market, either in capacity or its ability to import gasoline produced elsewhere (such as Canada).  We should not conclude that if the government had never supported ethanol, then drivers in the Midwest would currently be paying 39 cents more per gallon.

Conclusion

The Iowa State study claiming that ethanol production has suppressed the growth in gasoline prices is very misleading. It takes for granted the current refinery capacity and other infrastructure that industry uses to deliver gasoline to motorists, without realizing that federal policies over the years have distorted the development of these markets. Ethanol only survives in the market place at its current levels because it is propped up by artificial mandates and preferential tax treatment.

The regression analysis of the Iowa study doesn’t accurately capture the timeline that would have occurred had the free market been allowed to operate. Of course a sudden disappearance of all ethanol would cause a bigger price spike in the Midwest than in the East Coast. That’s because the artificial federal support has displaced the development of oil-based gasoline delivery in the Midwest more than in other regions. The fact still remains that ethanol (at its current market share) is very inefficient. Taxpayers and consumers would be richer if the government dropped its support programs for it.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard Tagged With:

CBO Wants to Launch Preemptive Strike on American Energy Prices

May 11, 2012 by 1 Comment

Those who have followed the political debates over energy through the decades have observed a familiar pattern: The critics of American “dependence” on oil will keep coming back with new arguments, no matter how many times their earlier arguments are refuted. So it is with a new Congressional Budget Office (CBO) study on “Energy Security in the United States.”

In its introduction the CBO paper explains that it “examines energy security in the United States—that is, the ability of U.S. households and businesses to accommodate disruptions of supply in energy markets—and actions that the government could take to reduce the effects of such disruptions.”

Now this is a lengthy study and there are many comments we could make about it. However, for the present blog post let’s focus on this gem:

Policies that promoted greater production of oil in the United States would probably not protect U.S. consumers from sudden worldwide increases in oil prices stemming from supply disruptions elsewhere in the world, even if increased production lowered the world price of oil on an ongoing basis. In fact, such lower prices would encourage greater use of oil, thus making consumers more vulnerable to increases in oil prices. Even if the United States increased production and became a net exporter of oil, U.S. consumers would still be exposed to gasoline prices that rose and fell in response to disruptions around the world. [Page vi, bold added.]

The part put in bold shows that the rules of the debate have shifted yet again. For years, the standard objection to allowing for drilling in ANWR and the Outer Continental Shelf was that (allegedly) the U.S. didn’t have enough oil reserves to provide relief at the pump for motorists. This objection, however, was refuted by what happened to crude prices when President George W. Bush in July 2008 lifted the Executive Branch moratorium on offshore drilling, and further when Nancy Pelosi announced in September 2008 that the Congress would not be renewing its own ban:

In light of this history of the debate, and the stunning chart above, the CBO’s position is very interesting. They are now saying that even if the United States found so much domestic oil that it became a net exporter of crude, then it still would be a good idea to “wean” Americans from their “dependence” on oil.

The logic here is astounding. It would just as well “prove” that the people right now in Saudi Arabia should start developing alternative forms of energy, rather than use the incredibly dense energy source that is literally flowing up from the ground all around them.

In a sense, the CBO is recommending a preemptive strike on American energy prices. Notice that it says falling oil prices would make Americans more vulnerable to—wait for it—rising oil prices! Yes, that is true. By the same token, a man who starts eating healthy and going to the gym, is “more vulnerable” to a sudden increase in body fat if he should abandon the program and go back to junk food.

Although couched in the language of prudence, the CBO analysis implicitly admits what proponents of laissez-faire energy markets have been saying all along: Given current technologies and relative resource supplies, it is cheaper and more convenient for Americans to consume large amounts of fossil-fuel-based energy. The government isn’t “protecting” Americans from potentially high oil prices at some unknown future date, by preemptively imposing high energy prices from alternative sources on them today.

Filed Under: Facts, Products and Power, Renewable Fuel Standard, Tier 3 Standards Tagged With: , ,

Second Thoughts on Electric Vehicles

May 10, 2012 by 1 Comment

 

One of the problems with making purchases based on “the greater good”—as opposed to the direct benefits and costs—is that your estimate might turn out wrong. For example, many people simply assumed that electric vehicles were “good for the environment” and so were willing to spend more, and put up with more hassles, thinking that they were helping future generations. Yet some recent studies suggest that the environmental case for electric vehicles is more dubious.

Electric Cars Can Create More Carbon Dioxide Emissions Than Gas Cars

In June 2011, an auto-enthusiast blog found a British study finding that electric cars may not necessarily reduce carbon dioxide emissions:

[E]lectric cars can create higher emissions over the car’s lifetime than their gasoline-powered equivalent, partly due to the pollution created from the factories that manufacture electric car batteries…

[The study] found that while in the past, tailpipe emissions have been used as the main measure of an electric car’s carbon footprint, when the emissions from the car’s total lifespan are taken into consideration, including the car’s production and disposal, some of the CO2 savings made from driving the car are offset. The study contends that “overall electric and hybrid vehicles still have lower carbon footprints than normal cars.”

…

The study found that compared with 24 metric tons for a gasoline-powered car, a mid-size electric car produces 23.1 metric tons of CO2 over its lifetime. But an electric car would have to drive about 80,000 miles before it would start saving more CO2 than a gasoline-powered car. Many electric cars will never reach 80,000 miles in their lifetime[;] electric cars get less than 90 miles on a charge, so they’re typically driven only short distances…Additionally, electric car batteries must be replaced after about four years. When the emissions connected with replacement batteries are added in, the total CO2 from producing an electric car increases to 12.6 metric tons, compared with 5.6 metric tons for a conventional car. Because recovering and recycling the metals in the battery consumes a great deal of energy, disposal produces double the emissions.

We may be witnessing the beginning of a process similar to what happened with ethanol: Initially beloved by environmentalists, ethanol soon fell into disfavor once people took into account the full consequences of turning food into fuel.

Alt-Energy Analyst Admits: “I Was Wrong About Lithium-Ion Batteries”

In addition to new doubts on the superior environmental bona fides of electric vehicles, it seems that consumers just aren’t that eager to support a transformation of the vehicle sector. An alternative energy analyst, in a refreshingly candid post, admitted recently that he had been wildly optimistic in his assessment of the demand for batteries for electric vehicles:

In February 2010 I wrote an article titled “Why I Don’t Expect A Lithium-Ion Battery Glut” that’s shaping up as one of the worst predictions in the history of my blog. This week Lux Research published a report titled “Using Partnerships to Stay Afloat in the Electric Vehicle Storm” that has me convinced that the capacity glut in lithium-ion batteries will be massive for at least a decade.

I humbly and sincerely apologize to any readers who bought shares in lithium-ion battery developers based on my starry-eyed optimism for the EV battery market.

The basic premise of my February 2010 article was that while plug-in electric vehicles would almost certainly die a slow and agonizing death from the congenital birth defects that have doomed every generation of EVs to the scrap heap of history, booming sales of electric two-wheeled vehicles, or E2Ws, and Prius-class hybrid electric vehicles, or HEVs, would be enough to absorb the slack. With eighteen months of history to look back on, it’s just not working out the way I thought it would.

As I expected, plug-in vehicles are drawing breathless reviews from the press and EVangelicals, and indifference or outright scorn from the car buying public.

…
Can you believe it? Cheap is beating cool. Who could have predicted such an outcome in the depths of the worst financial crisis since the 1930s?

Here too we see a familiar pattern: Proponents of electric vehicles (as well as energy sources such as wind and solar) keep assuring everyone that they just need government support to get over the next little hump…then they will be profitable and self-sufficient. Yet they’ve been saying that for thirty years.

Why Don’t Consumers Like Electric Vehicles?

The simple fact is that electric cars right now are very inconvenient compared to gas-powered cars. Consider the journal entry of the BBC’s Brian Milligan who drove an electric car from London to Scotland, charging it only at public stations:

It took 4 days, some serious thermal underwear, and copious amounts of waiting.

But my electric car and I finally made it to Edinburgh.

There were plenty of nervous moments, and a rather low-key entry to the Scottish capital.

After all, I was driving at 30mph and was shivering with cold.

On the last leg I’d got suddenly over-confident, and had a serious dose of range anxiety.

It has been a slow journey but Brian and the mini finally made it to Edinburgh

At one point my range indicator showed 48 miles charge left on my battery, with 50 miles still to go.

Hence the slow speed, and the lack of heater.

…

Including the time spent both charging and driving, I managed an average speed between London and Edinburgh of just 6mph.

With reports such as these, we can see why electric vehicles need a shot in the arm from a carbon tax or other government policy.

Government Can’t Pick Winners and Losers

The point here isn’t to relish in the floundering of a particular sector—people make mistaken forecasts all the time. A market economy works when investors try to pick the most profitable area to plow their money. Sometimes they hit it out of the park, and other times they strike out. Successful investors will make more money, and will have more influence over time on the allocation of scarce resources. On the other hand, investors who consistently make bad calls will eventually run out of money and will no longer pose a threat.

The one exception to this rule is government. When resources are directed through the political process, we have little reason to expect success. After all, policymakers haven’t earned their position through past profitability (the way rich investors in the private sector have). Even worse, the political authorities don’t stand to personally gain or lose, based on the success or failure of their “investments.” This is why government spending is so often seen as a corrupt boondoggle.

To take one example, consider the fate of Green Vehicles:

A Salinas car manufacturing company that was expected to build environmentally friendly electric cars and create new jobs folded before almost any vehicles could run off the assembly line.

The city of Salinas had invested more than half a million dollars in Green Vehicles, an electric car start-up company.

All of that money is now gone, according to Green Vehicles President and Co-Founder Mike Ryan.

The start-up company set up shop in Salinas in the summer of 2009, after the city gave Ryan a $300,000 community development grant.

When the company still ran into financial trouble last year, the city of Salinas handed Ryan an additional $240,000. Green Vehicles also received $187,000 from the California Energy Commission.

Salinas Mayor Dennis Donohue said he was “surprised and disappointed” by the news. City officials were equally irked that Ryan notified them through an email that his company had crashed and burned.

Conclusion

We don’t know what the efficient vehicle will be 20 years down the road. Perhaps at that point, most new cars really will be electric or hybrids. Yet we ostensibly live in a free society with a market economy. Government officials aren’t supposed to make these choices for us; let consumers spend their money without being influenced through the tax code or direct subsidies. Finally, if consumers are basing their decisions partly on feelings of saving the planet, they should do some research first to make sure their actions really are helping.

Filed Under: Facts, News, Products and Power Tagged With:

Rising Gas Prices and the U.S. Refining Industry

May 9, 2012 by 1 Comment

 

WASHINGTON D.C. — The American Energy Alliance released a white paper today detailing the factors that contribute to the rising cost of gasoline — a combination of crude oil costs, taxes, distribution and marketing, refining costs, infrastructure issues, and regulations. The white paper, entitled “Rising Gasoline Prices and the U.S. Refining Industry” combines the scholarly research of the Institute for Energy Research with the public policy advocacy of the American Energy Alliance as a part of the two organization’s joint initiative, “American Products. American Power.”

“Gas prices today are more than double the national average in January 2009, the beginning of President Obama’s administration and the reversal of bipartisan-backed policies that promised to expand energy development on federal lands. The non-partisan Energy Information Administration now predicts that administration policies will result in 90,000 barrels per day lost in the Gulf of Mexico this year, and Alaskan fields are projected to fall by 20,000 barrels per day in 2013. These domestic supply shortages will doubtlessly continue to apply upward pressure on gas prices,” AEA President Thomas Pyle noted.

“Instead of opening new areas for production,” Pyle continued, “the Obama administration’s new five year plan for offshore drilling has closed the majority of the Outer Continental Shelf and essentially imposes an embargo on energy development when an abysmal 3 percent of our offshore lands are currently leased. Add President Obama’s rejection of the Keystone pipeline, reduced leasing activity, and the frantic pace of regulations aimed at crippling the domestic energy and refining industries, and the agenda becomes clear — an all-out war on fossil fuels that is driving the retail costs up for American consumers.”

Included in the white paper’s assessment of gas price factors are:

  • Crude Oil Prices: According to the Energy Information Administration (EIA) 67 percent of the price of gasoline is a direct result of the price of crude oil.
  • Taxes: According to EIA, federal, state, and local taxes make up 11 percent of the price of gasoline.
  • Distribution and Marketing Costs: Transporting the oil and refined products along with the cost of sell the productions amount of 5 percent of the price of a gasoline according to EIA.
  • Refining Costs: EIA reports that refining costs—which include all manufacturing costs like wages and benefits, operations costs, and taxes— amount to 12 percent of the price of gasoline, but refining is a low‐profit margin industry and refineries are closing.
  • Infrastructure Issues: Prices vary from region to region in the U.S. because of where oil is produced domestically, the availability of pipelines to transport the oil, and because of the location of refineries.
  • The Impact of Regulations: Regulations play a huge role in the price of gasoline. Despite the fact that air quality in the United States is now the best since EPA starting keeping records, U.S. refiners have spent $128 billion complying with federal environmental regulations since 1990.

To read the white paper, click here.
For the executive summary, click here.

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Filed Under: News, Products and Power Tagged With: , , , , , , ,

Parsing Obama’s Remarks on Fuel Standards

May 8, 2012 by Leave a Comment

 

In July 2011, President Obama announced yet another federal intervention into the economy: increased fuel-efficiency mandates for vehicles. Although his speech was jocular and peppered with humor, it was also filled with very misleading “facts” about energy markets. In the present piece I’ll address some of the biggest whoppers.

The President Agrees: Rising Oil Prices Are Bad!

Although we won’t have many kind things to say about the speech, at least the president acknowledged what many interventionists refuse to concede: rising oil prices hurt Americans, in particular working families with kids. Here is the president on this presumably obvious point:

Now, for the last few months, gas prices have just been killing folks at the pump.  People are filling up their tank, and they’re watching the cost rise — $50, $60, $70.  For some families, it means driving less.  But a lot of folks don’t have that luxury.  They’ve got to go to work.  They’ve got to pick up the kids.  They’ve got to make deliveries.  So it’s just another added expense when money is already tight.

We’ll be sure to place this quotation in the file, to deploy it the next time someone from the Obama Administration touts the wonders of a carbon tax or cap-and-trade scheme.

Are Tax Hikes the Way to Boost Production?

Although he started strong by acknowledging the importance of lowering fuel prices for Americans, Obama then strayed into trouble when diagnosing the causes of this dire situation:

[T]his is not a new problem.  For decades, we’ve left our economy vulnerable to increases in the price of oil.  And with the demand for oil going up in countries like China and India, the problem is only getting worse.  The demand for oil is inexorably rising far faster than supply.  And that means prices will keep going up unless we do something about our own dependence on oil….

At the same time, it’s also true that there is no quick fix to the problem.  There’s no silver bullet here.  But there are steps we can take now that will help us become more energy independent….

So I’ve laid out an energy strategy that would do that.  In the short term, we need to increase safe and responsible oil production here at home to meet our current energy needs.  And even those who are proponents of shifting away from fossil fuels have to acknowledge that we’re not going to suddenly replace oil throughout the economy.  We’re going to need to produce all the oil we can.

But while we’re at it, we need to get rid of, I think, the $4 billion in subsidies we provide to oil and gas companies every year at a time when they’re earning near-record profits, and put that money toward clean energy research, which would really make a big difference.  (Applause.)

We at IER agree that the federal government shouldn’t be subsidizing oil and natural gas production; it was the first plank in our recommendations to the new Congress early this year. But neither should the government be subsidizing solar, wind, biomass, electric vehicles, or any other energy technology. Also, when it comes to the matter of subsidies, people need to remember that adjusted for the energy output, subsidies to oil and natural gas are dwarfed by those to the politically-favored techniques. According to new data from the Energy Information Administration, solar is being subsidized by over 1200 times more than coal and oil and natural gas electricity production, and wind is being subsidized over 80 times more than the more conventional fossil fuels on a unit of production basis (ie. the amount of energy output per dollar of subsidy).

Yet if we put aside the principled issue of whether the government ought to be picking winners and losers, there is an inconsistency in Obama’s rhetoric. On the one hand, he argues that the supply of oil is having trouble keeping pace with increases in demand, and that the government should do everything it can to encourage domestic oil production. Then he states matter-of-factly that raising the tax bill on U.S.-based energy companies is the right thing to do.

Just because a firm is having a profitable year, doesn’t mean that the laws of economics suddenly stop applying. By effectively raising taxes (through ending the “subsidies” in the tax code etc.) on oil and natural gas companies, President Obama would reduce their incentives to find and develop new deposits to meet the rising demand. By the same token, if the government suddenly imposed a 50% surcharge on the incomes of Hollywood actors, they would make fewer movies per year, even though their after-tax income would still make them “obscenely rich” compared to most Americans. Incentives matter.

Obama: Taking Credit for Something Companies Would Have Done Anyway?

Let’s return to Obama’s speech and specifically the role of fuel economy standards:

And that’s why we’re here today.  This agreement on fuel standards represents the single most important step we’ve ever taken as a nation to reduce our dependence on foreign oil.  Think about that.  (Applause.)

Most of the companies here today were part of an agreement that we reached two years ago to raise the fuel efficiency of their cars over the next five years.  And the vehicles on display here are ones that benefited from that standard….

And today, these outstanding companies are committing to doing a lot more.  The companies here today have endorsed our plan to continue increasing the mileage on their cars and trucks over the next 15 years.  We’ve set an aggressive target, and the companies here are stepping up to the plate.

By 2025, the average fuel economy of their vehicles will nearly double to almost 55 miles per gallon.  (Applause.)  So this is an incredible commitment that they’ve made.  And these are some pretty tough business guys.  They know their stuff.  And they wouldn’t be doing it if they didn’t think that it was ultimately going to be good business and good for America.

Think about what this means.  It means that filling up your car every two weeks instead of filling it up every week.  It will save a typical family more than $8,000 in fuel costs over time.  And consumers in this country as a whole will save almost $2 trillion in fuel costs.  That’s trillion with a T. [Bold added.]

We’ve asked this before and we’ll repeat the question: If a government intervention into the energy markets is supposed to be so good for business…then why does the government have to force the businesses to do it? Obama should simply fax his suggestions to these “pretty tough business guys” and then, once they see the light (that it took government officials to discover), they’ll gladly produce the more fuel-efficient vehicles without government prodding. After all, it’s good for business, right? Why would the government have to force companies to do something that is profitable, especially if they agree with the claim, as the president is here saying?

CAFE Standards Kill

What Obama is ignoring with his claims of saving trillions of dollars is that there are downsides to raising fuel efficiency standards. The automakers aren’t dumb. They know that gasoline is expensive and that, other things equal, a more fuel-efficient car is more desirable to their customers.

Yet other things aren’t equal. Engineers have already plucked the “low hanging fruit” when it comes to vehicle design. In order to make vehicles more fuel efficient, the increase must come with a sacrifice in some other desirable feature, such as size or weight of the vehicle. That is why interfering with the optimal tradeoff—as it would be determined in a free market—will lead to undesirable consequences, such as more traffic fatalities.

Writing for The American Thinker last year, J.R. Dunn summarized the lethal legacy of CAFE standards:

Fuel standards are the longest-lived of an entirely futile array of attempts to address 1970s oil shortages. They first went into effect in the 1975 Energy Policy and Conservation Act as the Corporate Average Fuel Economy program, better known as CAFE. Under the CAFE standards, domestic and foreign automobile manufacturers had to meet a certain mileage standard in their cars and light trucks. They were allowed a very short time to carry this out before fines were levied, so they met the challenge in the easiest way possible: by designing small engines that used less fuel while lowering the size and weight of new vehicles to preserve performance.

…

The new regulations did accomplish one thing — they killed drivers and passengers in large numbers. By lightening cars and removing material, auto companies were inadvertently discarding the armor that protected motorists in the event of a crash. Similarly, the compressed new models lacked space for impact forces to attenuate before causing damage and injury. Drivers in lightweight cars were as much as twelve times more likely to die in a crash. It was once said about American autos that they were “built like tanks.” Many of the new models from the late ’70s onward more closely resembled go-carts — and proved to be about as sturdy.

…

How many deaths have resulted? Depending on which study you choose, the total ranges from 41,600 to 124,800. To that figure we can add between 352,000 and 624,000 people suffering serious injuries, including being crippled for life. In the past thirty years, fuel standards have become one of the major causes of death and misery in the United States — and one almost completely attributable to human stupidity and shortsightedness.

Conclusion

Consumers desire fuel efficiency in their vehicles, but that isn’t their sole criterion—if it were, we’d all be riding bicycles or skateboards to work. The president’s claim that higher fuel efficiency mandates will be good for business is absurd on its face, because if that were true, no mandate would be necessary. In order to comply with the new regulations, automakers will produce vehicles that will be more dangerous. Americans may save money at the pump, but fewer of them will be alive to enjoy the savings.

Filed Under: CAFE, Facts, News, Products and Power, Renewable Fuel Standard Tagged With:
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