More on the Gas Run

Gas prices surge as Ike moves in | ajc.com.

States warn gas stations against price gouging

These stories is just full of juicy quotes about indignant consumers (read: voters) about this gas run.  I’ll present some quotes:

Larry Ruiz of Duluth said it cost him $45 Tuesday to fill up his small pickup. Friday, it cost him $60. “It really is just too expensive,” he said. “The government has lost control of the gas.”

Larry, the government doesn’t have control over gas prices.  At all.  It controls one thing, the location and siting of oil refineries.  You know who has control over gas prices?  You.  But I bet you’re not willing to take responsiblity for your actions.  It’s alot easier to set blame on the government than yourself.

The wholesale price for a gallon of gasoline rose about $1, to $4.25, Thursday morning, topping the high price five years ago when hurricanes Katrina and Rita raked the Gulf Coast, said Tom Kloza, publisher of the Oil Price Information Service in Wall, N.J. It was uncertain whether that price spike will filter down to the retail level.

“It’s pure panic,” Kloza said. “It’s related to the fact that there are worries about whether there’s going to be enough (gasoline) in the distribution system to satisfy some of the September pumping needs on the Gulf Coast.”

More proof that this is a run.  People don’t know if there’s going to be supplies, so they hoard.  This will become a self-fulfilling prophecy.

“Every time there’s a hurricane this happens. They’re just doing this to rip people off,” said 19-year-old Megan Cohen, a South Carolina college student who settled for paying $4.11 a gallon after going to three stations.

Uh, this wasn’t the case in any other hurricane season except following Katrina, Megan.  It hadn’t happened with any of the hurricanes this year, including Gustav, which hit another large section of the oil and gas producing area of the country.  But Megan, you’re not helping by going to three gas stations and “settling” for $4.11 a gallon.  This means that you didn’t need gasoline (then why go to three stations unless they were out, and there’s an easy way to figure out if the station is empty: noone’s getting gas).  But Megan probably has never taken an economics class at her South Carolina college, otherwise she would know about SUPPLY AND DEMAND.  It’s not that hard people.  Less supply means prices go up.  Demand going up sharply because of panic buying means prices go up even futher.  Or, if they don’t go up quickly enough, there’s a shortage.

S.C. Gov. Mark Sanford asked residents to avoid filling up unless necessary. “Instead, this is a time to think of ways in which each of us can make a difference on what may come our way if refineries in Texas are significantly damaged,” Sanford said in statement. “It might mean riding to the football games with a neighbor or on Sunday riding to church with a friend. It might mean watching a video at home rather than going to the movies or riding to work with a co-worker.”

I know there’s not alot that can be done legally, but as the leader of a state, can’t Mark do something with a little more leadership?  Making a difference?  Throwing out silly suggestions?  This is wimpy politico talk here.  Man up, Mark!  Tell people to stop being so stupid and panicking, if this isn’t a problem.  If it is… be more forceful in telling them that this might be the case for a while.  But if this is his idea of leadership, then this state’s got problems.  This was also true of the Hanna situation, which was equally feeble in the public response.

In South Carolina – where gas prices increased about 20 cents a gallon on average Friday – Attorney General Henry McMaster said gas stations that price gouge would face criminal prosecution. He did not set a threshold, saying each case must be investigated separately to see whether prices were raised to an “unconscionable” level.

But putting the gouging laws into effect?  Now THAT’S going to make things better!  Making the suppliers walk on egg shells in pricing so that if some 19-year old tart with no clue of how things work gets pissed off and files a complaint, then you’ll have to deal with investigations for the next year.  Or you could price it so low that you’ll be out in 5 minutes, but you don’t have to deal with the state lawyers.  Or you could just go on vacation for the next 15 days until this expires.  Then you’re fine and it’s only the customers who get screwed.  But we already knew that about these types of laws.

North Carolina Republican Congressman Robin Hayes called for a federal investigation into some prices rising more than $1 per gallon in a day.

“I understand there is a substantial hurricane in a sensitive area of the country, but this dramatic spike in gas prices is breathtaking,” he said.

I just wanted to point out the party of the pandering politician here.  What’s a federal investigation going to do that the myriad of state investigations won’t?  Oh, that’s right.  Make it seem like you’re doing something about it.

Pickens Continues to Use $700 Billion Myth

From a Cato Institute Blog Post by Will Wilkinson:

Pickens: It’s more than me. I mean, this is about America. This isn’t about Boone Pickens and whether Pickens’ wind farm makes money or whatever happens to it. But I mean, here with $700 billion going out of the country, and let’s say that we could cut it in half — $350 billion in the United States, can you imagine how that would multiply for jobs here. I’d much rather that gonna $350 billion was being used here than to give some for foreign oil.

As I’ve stated before, $700 billion is a falsehood. In fact, all we’ve done in the past is import $320 billion or so, and given current oil prices, are on track for something in that neighborhood, say $400 billion. So even if we do NOTHING, we’ll get to that $350 billion number that Pickens would “like to see happen.”

Here’s another issue with this argument. Lets say the Pickens Plan is successful and it cuts down on oil imports by half (to $150 billion, not $350 billion). He says that all that money would be going towards American jobs. Yes, but at what cost? That’s something that Pickens does not address at all (nor has anyone else for that matter). If it costs $150 billion in tax incentives, infrastructure and whatever else is needed to get his plan off the ground, then it’s a wash. Sure some workers are happy, but consumers are left in the cold. And that’s if his plan works exactly as he thinks it will. As I’ve pointed out before, on both transportation and electricity, that’s far from a given. But this is the point that Will makes rather well in his post.

But I’m glad that at least more people are starting to call out Pickens on his economically illiterate thinking.

I also recommend the Cato@Liberty blog as an excellent resource or non-partisan thinking on political and economic matters.

Proliferation of Protectionism

Has anyone noticed the noticeably increased amount of protectionist attitudes recently?

From Obama’s NAFTA gaffe to T. Boone Pickens “No Foreign Oil” shtick (this is the worst crisis the country has ever seen, ignoring 200 years of American History like the Civil War, for starters), there has been a marked changed in the amount of foreign bashing that’s been going on. I’ve noticed alot of this in the reaction to criticisms of the Pickens Plan, and is one of the reasons I’m writing this post.

Most people, when confronted with the issue of foreign import of oil, say “Yeah, that’s bad. We need to end it.” When confronted with issue, they come up with posts like this:

I guess you think you’re clever bringing all this supposedly accurate information to light. You’ve exposed the rich corporate fat cat for what he really is. Just a money hungry capitalist…. right?

Put this in your pipe and smoke it….

I DON’T CARE!!!

I guess you’d rather some “America hating” oil sheik to get that money. That way he can just funnel it to terrorists.

Pickens is what??? 80 years old? He’s got all the money he needs and even if your absolutely right and this is just a scheme to make him richer then I say FANTASTIC!!!!
At least the money and jobs stay here in America and thats just fine with me
In my America entrepreneurs have huge dreams, they put their money and hard work down on the table and risk it all with no guarantees and yet they do it anyway. That’s the America I love.

But what you failed to mention is that money aside, we import 70% of our oil from foreign countries. That is the true danger. A country that gets that much of it’s energy needs met by offshore concerns ceases to be a world power in short order. Want to bring the US to it’s knees? Everyone knows…. just turn off the tap

And the problem is that there are more people with ideas like this that don’t make any economic sense whatsoever. Ever since British economist David Ricardo came up with the theory of comparative advantage, there hasn’t been anything approaching a criticism of it that has gained legitimacy. In case you don’t know, the theory states that it is advantageous for a country to produce what it is best at making and sell it to everyone else, and then import what it isn’t as good at making from other people. Thus, in the US, we’re good at entertainment, so we produce alot of entertainment and ship it to the rest of the world. But we are inefficient at, let’s say, drilling for oil, because of… I don’t know, environmental and labor laws that dramatically increase costs for domestic producers. So we import oil from people who don’t have moral or political issues with drilling for oil. Thus, we export our entertainment (from sports to movies to television) and import oil.

Because the United States has become an “information economy” due to the rise (and government encouragement) of higher education, the US will be better able to do stuff that requires higher education. That’s OUR comparative advantage. So we’ll max out production of things that require education (and education itself), and import things that we will not do ourselves, like oil.

But protectionists see just one side of the issue (the large importation of oil) and fail to see the other side (the focus on the information economy and expanded education). Note that the US exports oil drilling services and equipment, again enforcing the comparative advantage in the US of knowledge-based industries.

But there’s no one defending free trade in general, and the move from industrialized production to knowledge based production. Not National Review or Reason. Not Marginal Revolution or Cafe Hayek. Not the Heritage Foundation or the Cato Institute (though Cato has been the best on this, but only marginally so).

The point is that all of these supposedly free traders are silent when it comes to the distortions of the Pickens Plan. Nobody is going to stick up for free trade and for the benefits of allowing the US to import what it doesn’t want to produce.

So you want the solution to oil imports. Ending government regulation of the oil industry completely. That includes all labor and environmental standards. But I bet even the most nationalistic people wouldn’t dare to say that.

Pickens Gives Another Unsourced Figure

From Boone’s Blog:

Last year we sent more than $300 billion to countries controlled by oppressive or unstable regimes.

Now, let’s see if he’s somewhat right here…

Last year we spent $360 billion on foreign petroleum products (more than just oil, BTW). Of that, we sent the following amounts just on crude oil:

Canada: $41 billion
The United Kingdom: $2.6 billion
Norway: $1.5 billion
Mexico: $ 30.2 billion
Columbia: $3.5 billion

Total for these five: $78.8 billion

So we’re below $300 billion before factoring in other petroleum products (like natural gas). And this doesn’t even include other stable countries like the Virgin Islands, Aruba, Brazil or the Netherlands. Looks like T. Boone is playing with the numbers once again.

How Did the Pickens Plan Calculate $700 Billion?

Everyone today is throwing around the number $700 billion.  Obama, McCain, Hannity, Limbaugh, the media.  And presumably, the source of the figure is from T. Boone Pickens and the Pickens Plan.

But where did that figure come from?

Pickens himself says its “At current oil prices, we will send $700 billion dollars out of the country this year alone”. But he doesn’t cite any sources for that information, nor does he calculate how he got that number. A search of the internet doesn’t come up with any answers either. So I’ll have to do it myself.

The end result: It’s the highest possible price for all petroleum imports (not just crude), but is a flawed number that is at least 8% too large and probably off by even more.

How I got those results are under the fold.

Weekend Post – Obama Doubles Down on Stupid Ideas

Just when I thought Obama might just leave well enough alone and just encourage conservation through words, he comes out with six pages of emphasizing the really bad part of his strategy to give the appearance of his caring for high gasoline prices.

An “Emergency” Economic Plan by Obama

Here’s just a rundown of the faults:

• Another stimulus/rebate check. This time $500 a person. This time paid for by a 5 YEAR windfalls profit tax. This isn’t temporary, it’s permanent. And what happens if there aren’t “windfall profits” four or five years from now?
• $50 billion slush fund in the form of two congressional pork troughs, a direct grant to states and a “jobs and growth” fund.
• He asks for a “reasonable share of profits”… reasonable by what definition of the word
• Obama completely ignores economics. McCain has at least admitted his ignorance on the issue, but Obama’s is completely ass-backwards in terms of economics. Imposing a tax 5 years from now is just going to make prices higher NOW and IN THE FUTURE. Suppliers are going to cut back on supply (because they can, and why take a tax hit now when you can wait 5 years and get all of the profit on pumping oil), and that’s going to raise the price of oil.
• Then there’s Obama’s construction slush fund. This is going to be spent well, and there’s absolutely no room for corruption with having $25 billion to throw around on roads and school construction.

Now, I wouldn’t have a problem throwing money at road construction, except Congress has ZERO credibility in spending the money it has now. Where was all the construction when oil prices were low (lower asphalt costs) and consumption was high (greater revenues)? Oh yeah, being sent for study upon study and mass transit systems. And not for these critical repairs Obama says are needed.

I’m now currently reading Henry Hazlitt’s “Economics in One Lesson”. It covers many of the topics involved here, including taxation and public works. Perhaps Obama should read the first 50 pages and see where that takes him. Probably nowhere, but then maybe he won’t put out drivel like this proposal.

Obama half-right, half-wrong

The last day or so has had alot of people jumping on Barack Obama for his “we can save enough energy by keeping our tires inflated and engines tuned to prevent drilling off-shore” comment. I, for one, applaud Obama, as a free market conservative, for suggesting that people can save money by reducing their own consumption. This isn’t the same as telling people not to drive or what to drive (ie his people can’t drive SUVs because the world hates them comment). It cuts waste, which isn’t a bad thing. The same thing with driving slower, having more aerodynamically efficient cars, and the like.

But that choice is for the consumer to make, not for the government to make. Which is where Obama then goes off the deep end, trying to use government policies to drive consumption patterns. But consumption of gas often flies in the face of what a politician wants to have done.

It seems that in the course of Obama’s Ivy League education, he never learned about the incidence of taxation. This basic part of public economics states: the tax burden of a tax on a commodity will fall on the group that responds less to price.

(Guess who that is for gasoline?)

Laws of Economics Still Work

Crude oil settled down at $128.73 today, completing a $14 fall over the past three days.

There are some out there who say this is because of George Bush’s announcement dropping the ban on oil exploration and development on the outer continental shelf. And by some, I mean noted political hack, Larry Kudlow.

One of the biggest problems with analysis out there is that everyone ignores the first rule of statistics: correlation does not mean causation. Just because A went up at the same time B went down, doesn’t mean that A caused B to go down. They could be completely unrelated items. Most medical “studies” do exactly this.

Saying that Bush caused oil markets to go down completely ignores other much more pertinent information. Such as demand dropping, more information coming available that was the opposite of what those evil speculators were betting including increased supply and oil imports, not to mention a strengthening dollar.

Note that in not one of those stories was the Bush did anything mentioned. In fact, all of those things happened independently of some inconsequential announcement that the President made. In fact, as long as the law on the books says that no new areas are open to exploration, then the price shouldn’t change one penny.

(Note: the fact that the President can make law is pretty much unconstitutional. If Congress repealed the ban and the President still had the executive order, then I’m pretty sure that the presidential order would be unconstitutional).

So the lesson to take out of all this is that, the markets still work, and the laws of supply and demand say nothing about what the role of a president at all.

Simple answers to silly questions

Question: How does the United States attain energy independence?

Answer: Ban energy imports.

Oh, you don’t like that answer? Well, that’s the only way we’ll get there.

Of course, it depends on what you mean by energy independence. First there’s the neo-mercantilist/conservative view, which is independent from foreign energy. Because the foreigners have lower labor and production costs, any reduction in cost as a result of moving to a different energy plan will drive out domestic suppliers first. Look to the 1980’s and remember all the wildcatters in Texas capping the wells. That’s what will happen when prices go down when demand decreases while supply increases (e.g. late 70’s to the early 90’s). So the only way to not let those dirty, anti-American foreigners get our money is to not buy their goods. So you have to ban energy imports.

Or you’re a liberal/environmentalist, who believes energy independence is being independent from any energy. Here, there’s a couple of ways of doing it. The most harmful is to tell people to not use energy. It’s anti-freedom and will be costly to enforce (you try being the one to tell people they can’t use their AC in the South during the summer). The second-best option is to make people want to use less energy. Right now, there’s the going green movement, which is basically a way of shaming people into using less energy. It’s working, but it can only go as far as people are willing to believe the guilt. The more powerful motivator is economics, more specifically prices. Using gas prices as an example, during the Hurricane Katrina aftermath, people were alot more willing to carpool and use less gas when gas was at $4.50 a gallon (remember this is 2005). More to the point, it was a sudden increase that forced people to change. Drivers can adapt their habits when the price doubles over a span of many years (prices went from $1 to $2 between 1996 and 2005), but are in much more of a shock when the price increases much faster ($2 to $4 between 2005 and now). When you’re in shock, you’re more willing to make more drastic changes. If you’re in favor of decreasing the use of gasoline, then faster increases are preferable to slower ones (Yes, I’m talking to you, Sen. Obama).

So no matter if you’re Sean Hannity or Nancy Pelosi, there’s one fast and easy solution to energy independence. Make the US an island. That is, if you’re really interested in the idea and not using it as a political point. Somehow, I think that may just very well be the case with “energy independence”.

Critique of the Pickens Plan – Part 2 (Transportation)

In Part 1, I looked at how the Pickens Plan has problems in his goal of converting natural gas electricity generation to wind and solar powered generation.  In this part, I’m going to look at the second half of his plan: using natural gas as a power source for transportation in the US to reduce reliability on foreign oil.

I have three issues with using natural gas as a fuel in transportation: economical, political and technological.

1. Political ProblemsWhile most people complain about gas prices quite heavily, the retail gasoline market is probably of the few markets today that fit the definition of a Competive Market. Illustrating this point is the fact that most retailers of gasoline make a very small profit on each gallon of gasoline, which is what economic theory would predict for a competitive market. So much that ExxonMobil doesn’t want to have anything to do with it anymore.

   So what problem do I have moving to natural gas distribution? We’re moving from a competitive market with lots of choices to a market with lots of monopolies and run at almost every part of the supply chain by government bureaucrats. Let me explain. Natural gas is lot like electricity where one company has dominion over a certain territory and controls all of the sales in the area. There are certain areas where you can choose whom you get the physical gas from but not who delivers it. That is controlled by the government. Contrast this with gasoline, where no one company has dominion over a territory (by anti-trust law) and there are many players in each market, from national brands to mom and pop stores selling generics.

   While government has involvement in the composition and selling of gas, it has very little say in the pricing of gas. This is not the case for natural gas, where local companies have their prices SET by the government. (This doesn’t apply to states that have open-choice markets, see a list here). So there would be further government involvement in the use and consumption of transportation fuel, with completely new territory of regulating the PRICE of these fuels. This will not be a positive transition for those who believe in limited government. Those who think consumers are getting shafted will welcome the change, no matter what the consequences (shortages mostly).

2. Technological Problems

   While using natural gas for propulsion is alot further along than, let say electricity, there’s still mostly infrastructure issues to be dealt with. Mostly the dearth of fueling stations, but also some safety issues. There’s a reason that natural gas has the rotten egg smell added to it. It’s a gas, and there’s the risk of explosions, which gasoline does not have. There’s a fire risk with gas, but not with natural gas. Also there’s the accident factor, which could make both filling tanks and collisions alot more… spectacular and less likely to survive in (just imagine the shrapnel). I’d imagine that the self-serve natural gas station may start off being the case, but is one or two high-profile accidents from making natural gas like gasoline in New Jersey and Oregon. Which will only serve to increase costs, both from wasted time and wasted money.

   Finally, there’s the running out of natural gas issue. The idea of running out of gas is problematic but solvable. You get a gas can and you bring it to the car, problem solved. Bringing a tank of natural gas might be a bit more of a problem. I could see it being like a propane tank, but there’s connection issues and how much would be needed to get the car to the nearest filling station (again bringing up the issue of the development of distribution infrastructure, especially in rural areas).

3. Economical ProblemsOne of the benefits that Pickens uses in his commercials to tout his plan is that natural gas is cheaper than gasoline, so moving to this technology will make things cheaper. However, it’s pretty ignorant to use today’s situation and pricing to extrapolate to what things will look like when everyone is using natural gas to power their vehicles. The transportation demand is extremely weak, and even suggesting that moving all of natural gas from electricity to transport will result in no net gain in demand is kinda silly. Especially if the technology takes off.

   In addition, there’s no current incentives for developing more natural gas in the US. Natural gas is found and developed in the same way that oil is. So when Pickens says “We can’t drill our way out of this problem,” he’s making the assumption that we’re not bringing more natural gas online, in the same way that we’re not bringing more oil online. So supply remains the same… well at least in the US.

   Which brings us to the other economic criticism of Pickens’ Plan, which is the transfer of money overseas. Combining increasing demand with non-increasing supply will mean a big gaping hole in the market. Which means that prices will rise further OR other suppliers will enter the market. Like those nasty foreigners that Pickens’ complains that are causing economic ruin in the US. Currently, 16% of natural gas consumption is taken in by imports and that figure has been rising along with oil imports. Of course, most of this right now is coming from Canada, but there’s only so much we can get from Canada. So this limited supply will only go to further increase reliance on foreign sources of energy in the future.

   So what’s the end result of the Pickens’ Plan? Definitely increased prices with increased government control of energy use, especially in the transportation sector, in exchange for cleaner emissions. If that’s the trade you want, that’s fine. But don’t think of Pickens’ Plan as a panacea to all things energy related.