August 08, 2008
Cross price elasticity and Amtrak, continued
For more on the continuing story of Amtrak's growing popularity in the wake of higher gas prices, we turn to today's Wall St. Journal, which says...
WASHINGTON -- The number of people riding Amtrak surged 13.9% in July from a year earlier, as high gas prices caused more commuters to rely on intercity rail.
...
In July, Amtrak said, only one of its services saw fewer riders compared with the previous year. Elsewhere, there were major gains, such as a 33% jump on the Capitol Corridor between San Francisco and Sacramento, Calif.
Even on Amtrak's already heavily traveled Northeast Corridor line from Washington to Boston, passenger counts are up by nearly 8% over last year. Overall, Amtrak is on pace to serve a record 28 million passengers in its current fiscal year, up from the previous high of 25.8 million last year.
Amtrak's newfound popularity has made an impression in Congress, where lawmakers view the rail service as an environmentally friendly, energy-efficient approach to reducing gridlock and expanding transportation options.
The trains serving Macomb (the Illinois Zephyr and the Carl Sandburg) continue to sell out. The advice around here is to get your tickets well in advance.
Posted by William Polley at 02:38 AM | Comments (0) | TrackBack
July 17, 2008
Cross price elasticity
Gas prices are up. So is Amtrak ridership. (Macomb Journal)
If there is any good news about $4 per gallon gasoline, it is that ridership on Amtrak is booming.
...
Ridership on the Illinois Zephyr and Carl Sandburg routes was up 41.4 percent in fiscal 2007, compared to fiscal 2006. Ridership on Illinois state-subsidized routes increased another 180,823 passengers during the first two-thirds of fiscal year 2008, to a total of 670,605.
When I ride the Illinois Zephyr or the Carl Sandburg, it is typically packed. Last time I rode, there were just a handful of empty seats.
I enjoy riding the rails. It's faster than driving, and without the hassle of driving. We don't drive to Chicago anymore if we can avoid it. Take the train!
UPDATE: Stephen Karlson has much more.
Posted by William Polley at 09:07 PM | Comments (1) | TrackBack
May 05, 2008
Last post on gas taxes for a while (I hope)
A summary of all of my recent comments on the proposed gas tax holiday is as follows:
1. The benefit to the consumer would probably not be literally zero. (This is the part everyone has been seizing on as the most charitable thing being said about the proposal. Ok, so be it. If you call that charitable, you go ahead and run with it. See where it gets you.)
My reason for saying it would not be literally zero is that there is evidence that inventories are higher than usual and that capacity utilization is lower than a couple years ago. The system is probably capable of squeezing out a few more barrels, but not terribly many.
I would also add that the open letter signed by over 100 economists says, "...research shows that waiving the gas tax would generate major profits for oil companies rather than significantly lowering prices for consumers." I have already said that I agree with that letter, and I think they were correct (but subtle) in saying that it would not significantly lower prices, leaving open the very sensible possibility that there might be a very small benefit. I fully agree with their wording.
2. While not literally zero, the consumer benefit is likely to be very small. I'd say a third or less of the total (half of what these authors found concerning the Illinois tax holiday in 2000). And I would probably bet the "under" if it came to that.
3. Good public policy should be well outside of the neighborhood of "pointless". (That is, the effects should be economically as well as statistically significant.) This proposal fails, even under my most charitable assumptions.
4. A tax holiday at the federal level will have less impact than the state tax holiday Illinois had in 2000. Then, gasoline could be diverted to Illinois from other states. That's harder to do at the national scale.
5. The average consumer will absolutely NOT notice the difference. Differences in price between locations and over time in the last couple weeks have far exceeded my most charitable estimate of the gain. Econometric studies would be done after the fact. There would be t-statistics, p-values, arguments over assumptions, and in the end some very small, but probably positive, estimates.
In short, I stand by my statement that consumers would likely see a couple (maybe even a few) pennies worth of benefit. But most importantly, the point I was trying to make was that this: This proposal does not have to be literally pointless for it to be a really bad idea. I think that is a worthwhile point to make.
But again, the relevant question is how much the price would have to fall to get consumers to buy up whatever increase in production would optimally be obtained if the tax were temporarily gone. That is, I think, the clearest statement of the question--and the answer is not much.
UPDATE: I have sent a message adding my name to the open letter.
Posted by William Polley at 11:08 PM | Comments (0) | TrackBack
A simple restatement of the gas tax holiday question
I posted this as a comment at Angry Bear.
The real question is this: How much would gas prices need to fall in order to induce consumers to buy up whatever additional production would be optimally squeezed out of the refineries if the gas tax temporarily went away?
When you think about it that way for a little bit, it becomes easier to see that the answer is probably greater than zero, but not much.
Posted by William Polley at 06:53 PM | Comments (0) | TrackBack
Refinery capacity utilization
The most recent data point on refinery capacity from the EIA was 85% in February. Unless things have ramped up immensely in a way that hasn't been seen for years (which due to the higher than average inventories, I doubt is the case), then I am a little bit skeptical of claims that the supplies, even in the short run, are "fixed". (Get this data and more from the EIA.)
From the summer of 2006 to the summer of 2007, inputs of crude oil into the refineries went down, operable capacity went up, and idle capacity went up.
If capacity utilization were on the level it was in 2000, I'd be more inclined to see the supplies as fixed. Any extra capacity would suggest that the consumers would get some benefit from the tax holiday. But again, let me be very clear... the amount that the consumer would benefit would be a small fraction of the tax reduction--5 or 6 cents out of the 18.4 would be as high as I would be comfortable in guessing. Maybe more like 3 or 4 cents. That's just not enough to justify temporarily tinkering with the tax code to win political points. It's bad public policy. If you want to provide relief to working families, fine. There are a dozen better ways.
Posted by William Polley at 02:53 PM | Comments (2) | TrackBack
Despite what you may have heard, the CBO has not analyzed the gas tax holiday
While looking for something else, I came across this from the Congressional Budget Office...
Various media reports are incorrectly attributing to CBO a figure (that the average driver would save about $30 this summer) associated with a gas tax holiday. CBO has not published such a figure and the citations to CBO are inaccurate.
This misattribution raises a larger point. CBO is a nonpartisan organization, and we are not in the business of scoring or evaluating campaign proposals. In some cases, CBO may have previously estimated or evaluated a proposal similar to one subsequently proposed in a campaign and those estimates generally are available on our website.
The bottom line: If you read something suggesting that we have issued numbers or an analysis about a campaign proposal, you should be skeptical — and also let us know.
Posted by William Polley at 12:26 AM | Comments (0) | TrackBack
May 04, 2008
Economists against the gas tax holiday... why was that, again?
Jabberwonk posts the open letter signed by a number of economists opposing the gas tax holiday. Here's the key paragraph.
There are several reasons for this opposition. First, research shows that waiving the gas tax would generate major profits for oil companies rather than significantly lowering prices for consumers. Second, it would encourage people to keep buying costly imported oil and do nothing to encourage conservation. Third, a tax holiday would provide very little relief to families feeling squeezed. Fourth, the gas tax suspension would threaten to increase the already record deficit in the coming year and reduce the amount of money going into the highway trust fund that maintains our infrastructure.
Read closely all of the reasons behind why so many economists oppose the gas tax holiday.
Now look at how the NY Times summarizes it.
An open letter signed recently by more than 100 economists said the proposed tax holiday would do little to reduce gas prices. In part, that is because a fall in prices would lead to more demand, which would cause prices to return to their earlier level. The result would be that overseas oil-producing governments would get money now flowing to the United States government in gas taxes.
The whole sentence about demand is the sort of circular statement that we caution our students not to make but that newspapers print all the time. Not only is it a terrible misstatement of demand vs quantity demanded, it's not even consistent with the claim (advanced by Krugman among many) that supply is fixed.
The Times' statement that oil producing countries would get some of the gain is only true insofar as gasoline production (and therefore oil consumption) would actually increase. As I have pointed out, that effect is likely to be small though positive. I wouldn't call it my main objection to the tax holiday. The open letter is careful to say that "it would encourage people to keep buying costly imported oil and do nothing to encourage conservation," in effect implying that it spending on oil could stay the same as the "fixed supply" adherents would suggest.
Students writing term papers often rephrase the words in an article that they cite, and occasionally the rephrasing ends up changing the economic meaning of the passage (sometimes with comic results). I see this all the time. If I had a nickel for every time I said to myself while grading, "That's not what that article really meant, was it?" I'd have a pretty big collection of nickels. Likewise when I read the Times article, I immediately said, "That can't be what was written in that open letter, can it? No economist would say it that way." Indeed, they did not.
I suppose the Times could say that the paragraph in question was not a summary of the letter but their own analysis. But that would be just as bad, wouldn't it?
Bottom line: Members of the media sometimes have trouble quoting economists correctly because we don't always fill in all the blanks. The media (and students writing term papers) want to fill in those blanks, and sometimes they get it quite wrong. Understanding that people want to fill in those blanks (and understanding the ways that they are tempted to do so) goes a long way toward making you a better communicator of economic ideas.
Posted by William Polley at 11:05 PM | Comments (0) | TrackBack
More fun with the gas tax
We've been tough on the "McCain-Clinton gas tax holiday". We economists, that is. Seems there's not one of us who thinks it's a good idea. It's just plain bad public policy. The actual effect will be small. A family that goes through two tanks of gas a week might see a difference of maybe a couple dollars a week under the best case scenario (full explanation here). If you want to give working families some relief there are certainly better ways to do so. A check for $50 for every family with less than $50,000 income would be better targeted, subject to less uncertainty, and would have a larger effect. Just about any economist would tell you this.
Ah, but what do they know.
“Well I’ll tell you what, I’m not going to put my lot in with economists,” -- Hillary Clinton
And...
“When the federal government, through the Fed and the Treasury gave $30 billion in a bailout to Bear Stearns I didn’t hear anybody jump up and say, ‘That’s not going according to the market, that’s rewarding irresponsible behavior.’ We’ve got to get out of this mindset, where somehow, elite opinion is always on the side of doing things that really disadvantage the vast majority of Americans.”
The market reference is strange. You see, I think many economists did have reservations about what happened with Bear Stearns, although many of us ultimately feel that it was necessary to prevent even further catastrophe--one which might have had a pretty sizable impact on "the vast majority of Americans." Rather than take that chance, the Fed decided to put its own credibility up as collateral--no small decision, that.
So suddenly Senator Clinton has all this concern for markets? Is she implying that her gas tax holiday should be supported by economists because it removes the tax that is somehow distorting the free market?
No, more likely it was just a convenient sound bite. But I do see one very troubling problem in this exchange and it's going to have me thinking for a while. These quotes by Senator Clinton show that economists have not done a very good job of explaining what we really know objectively and scientifically to be true. Though my previous post (as well as posts on other blogs) pointed out some caveats, the basic thrust of tax incidence theory is not in question. The questions deal with specific issues such as whether summer production quantities have been set and how costly it would be to change them. That's an objective scientific question. Once we know the answer to it, we know whether the market price of gas would go down by roughly half of the tax cut (as econometric research suggests) or not at all (if quantities are already set).
The level of economic literacy in this country is so low that few people know that this is a point of near 100% agreement among economists. But correct though it may be, it is a counterintuitive result. People expect that the tax cut would drop the price one-for-one. People will believe a politician who tells them that this tax cut will help them. In fact, other policies would help them more, but because this one is believable and strikes an emotional chord, they'll remember it at the ballot box.
To add insult to injury, the same politician can discredit the economists on this point of near 100% agreement and mountains of objective evidence by pointing to a more controversial and unsettled issue where our pronouncements seem to favor the "elites" for reasons that are hard to explain in a hundred words or less, hard to draw on a blackboard, and are based on more recent scholarship.
It's sort of like saying that the meteorologist who sees clouds, hears thunder, and predicts rain should not be believed because he's on the wrong side of the global warming issue for your tastes. That would be ridiculous and should be called out as such. The level of economic understanding necessary for good citizenship is a level that would enable a person to see that connection.
True economic literacy does require some understanding of the concept of elasticity.
Posted by William Polley at 09:42 PM | Comments (2) | TrackBack
May 02, 2008
Gas tax holiday: Who gets the benefit?
Let us begin with this short little post from Brad DeLong which sums it up nicely.
In my inbox right now, from a highly-respected public finance economist:
In the long and sad annals of truly bad ideas, it is unusual for one to receive bipartisan support at such high levels right in the middle of a campaign as this one has...
He is referring, of course, to what has come to be known as the McCain-Clinton gas tax holiday. Reuters has the summary.
"Score one for Obama," wrote Greg Mankiw, a former chairman of President George W. Bush's Council of Economic Advisers. "In light of the side effects associated with driving ... gasoline taxes should be higher than they are, not lower."
Republican McCain and Democrat Clinton, who is battling Obama for their party's nomination, both want to suspend the 18.4-cents-per-gallon federal gas tax during the peak summer driving months to ease the pain of soaring gas prices. The tax is used to fund the Highway Trust Fund that builds and maintains roads and bridges.
Economists said that since refineries cannot increase their supply of gasoline in the space of a few summer months, lower prices will just boost demand and the benefits will flow to oil companies, not consumers.
"You are just going to push up the price of gas by almost the size of the tax cut," said Eric Toder, a senior fellow at the Urban-Brookings Tax Policy Center in Washington.
Paul Krugman adds,
Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory: if the supply of a good is more or less unresponsive to the price, the price to consumers will always rise until the quantity demanded falls to match the quantity supplied. Cut taxes, and all that happens is that the pretax price rises by the same amount. The McCain gas tax plan is a giveaway to oil companies, disguised as a gift to consumers.
Is the supply of gasoline really fixed? For this coming summer, it is. Refineries normally run flat out in the summer, the season of peak driving. Any elasticity in the supply comes earlier in the year, when refiners decide how much to put in inventories. The McCain/Clinton gas tax proposal comes too late for that. So it’s Econ 101: the tax cut really goes to the oil companies.
The Clinton twist is that she proposes paying for the revenue loss with an excess profits tax on oil companies. In one pocket, out the other. So it’s pointless, not evil. But it is pointless, and disappointing.
Is it?
Maybe not totally pointless, but definitely in the neighborhood. This is Econ 101--tax incidence theory. This is bread and butter for economists. But our pronouncements are only as good as what we really know about the relevant supply and demand elasticities. To make things even more interesting, the question of incidence (i.e. whose price will rise or fall) is not just a matter of absolute elasticities, but of the relative elasticities of demand and supply. Supply may be relatively fixed in the summer, but if short run demand is also inelastic, it is not a foregone conclusion that the suppliers will get all the benefit.
We take as one of our stylized facts that gasoline demand is fairly inelastic in the very short run. A 10% change in gas prices this month will probably not cause me to change my driving habits much. A permanent 10% increase will cause me to change my habits more over time. The federal excise tax of 18.4 cents is roughly 5% of the going price. In fact, I think we can expect that the fluctuations in price over the summer due to refinery maintenance, hurricanes, pipeline problems, etc. could be as large or larger in magnitude. I wouldn't expect it to change driving habits much at all. In other words, the demand is inelastic. Not perfectly inelastic, but quite inelastic.
Krugman suggests that the supply is practically fixed. If he's right in the extreme case (i.e. perfectly inelastic supply) then the game's over. The oil companies get all the benefit. But that's probably not the case either. A commenter at Angry Bear posts a link to the ever useful Energy Information Administration, or EIA. They point out in a recent newsletter that gasoline inventories are currently at the high end of the normal range. Given that production of the summer formulations has probably not fully ramped up yet, they probably have a little more wiggle room than Krugman is assuming. I'm not saying that they have a lot. But if demand is also quite inelastic, they wouldn't need an awful lot of wiggle room for the tax incidence to be split more equally.
The most recent piece of academic research on this that I could find is in Economics Letters (2004) by Hayley Chouinarda and Jeffrey M. Perloff (non-gated version here). They find that the incidence of the federal tax is split roughly equally between suppliers and consumers. The state taxes fall more on the consumers, and the burden on consumers is smaller in large states.
That last fact might have been useful for Obama to have known back in 2000 when he supported a statewide gas tax holiday in Illinois. As a resident of Illinois then as now, I can tell you that I didn't notice much of a difference. All I remember is seeing the signs on the pumps that told us that the legislature had suspended the sales tax on gas and that this should be reflected in the price.
I remember how I chuckled about it each time I filled up.
You did notice a few cents difference in the immediate run (i.e. shorter than the short run... first few days), but as time went on, elasticities and tax incidence theory did their thing. It was hard to see the difference with the naked eye. So was there any academic research on it?
Funny you should ask... in fact there was. (Hat tip to Daily Kos). Joseph J. Doyle, Jr. and Krislert Samphantharak of MIT and UCSD, respectively, found that the elimination of the 5% tax was associated with about a 3% drop in the retail price, or 6 cents on the (now) quaint sounding average price of $2 per gallon. But again, with the normal market fluctuations going on in the background, this was hard to see without your econometric glasses on.
But that's actually a reasonable conclusion. Given that Chouinarda and Perloff find that the consumer incidence of state taxes was quite high (close to 100%) but definitely smaller in the larger states (like Illinois), I would not be surprised to see that the breakdown was maybe somewhere between 50 and 75% for a state like ours. Doyle Jr. and Samphantharak put it at 60%. So like I said, it's reasonable.
But if Chouinarda and Perloff are correct in that the burden of the federal tax is more evenly split, then you'd notice it even less than we did in Illinois in 2000. If Krugman is even somewhat correct that it is too late in the game for quantity adjustments to be made, then the consumer's benefit shrinks further. Just guessing at a number, say maybe the consumer gets 5 or 6 cents out of the 18.4. With gas at $3.50 and perhaps more than 5 cents of variation across local markets and over time... you're going to need to have super-powered econometrics glasses to see the effect.
My conclusion: Maybe you would benefit 5 or 6 cents per gallon, give or take a couple pennies. Maybe a couple dollars a week. Better than nothing, I suppose, but only a tiny fraction of the "fiscal stimulus" check that I received this week. But then there's the issue of how to replace the lost revenue (revenue that is used to maintain the crumbling roads and to create jobs in a seasonal industry that is going to need to take up some of the slack from the slowdown in construction and manufacturing). Clinton proposes a tax on oil company profits. That's the part that Krugman calls not evil, but pointless. In one pocket and out the other. Maybe not totally pointless, but definitely in the neighborhood.
UPDATE: The Wall Street Journal's Real Time Economics blog says that my comments (specifically the last sentence above) are "probably the strongest show of support available". That may be. Though I meant it to be a bit of "damning through faint praise." My criteria for good public policy is that it be well out of the neighborhood of "pointless." Still, I'll bet others would agree that the consumer might benefit a few cents, but I think it is safe to say that we stand firm in agreement that this is a bad, bad idea.
Posted by William Polley at 10:35 PM | Comments (5) | TrackBack
Demand curves slope downward (airline edition)
From MSNBC:
NEW YORK - Drivers have long known that slowing down on the highway means getting more miles to the gallon. Now airlines are trying it, too — adding a few minutes to flights to save millions on fuel.
Southwest Airlines started flying slower about two months ago, and projects it will save $42 million in fuel this year by extending each flight by one to three minutes.
On one Northwest Airlines flight from Paris to Minneapolis earlier this week alone, flying slower saved 162 gallons of fuel, saving the airline $535. It added eight minutes to the flight, extending it to eight hours, 58 minutes.
Kind of reminds me of when American Airlines took an olive out of every salad and saved loads of money. Of course, that was not a response to the price of olives, it was just a general cost cutting measure. But the idea is similar. By decreasing their speed (i.e. decreasing the thrust from the engines) they save a few dollars on each flight. Multiply it by many flights a day over many days and before long it does potentially save a respectable amount of money.
As the price goes up, there does come a point where the airlines decide to try to reduce the quantity of fuel purchased. The demand for fuel by airlines is "derived demand" meaning that it also depends on the market (i.e. the price) of the output. But derived demand curves slope downward too, ceteris paribus.
Posted by William Polley at 12:32 AM | Comments (0) | TrackBack
February 20, 2008
Compact fluorescents in college dorms = big savings
College newspapers usually report the same old fluff. But every now and then, they report some interesting news. This from my very own campus...:
Back in August, 30 RAs replaced nearly 5,100 incandescent bulbs in the building with an energy-saving alternative. The move began a pilot study to determine how compact fluorescent light bulbs can lower electric output in a residence hall.
Months later, Interim Director of Residential Facilities Matt Bierman said the study has found an average savings of $2,000 per month in electric bills compared to last year.
"I think it's been pretty successful," he said. "As more people bring electronics, that's going to cause kilowatts to go up - cell phone chargers, iPod docks, iPods … all that stuff gets plugged in. For the first time in awhile, the kilowatts have dropped."
$2000 per month for one residence hall. Way to go!
Posted by William Polley at 02:52 PM | Comments (4) | TrackBack
February 06, 2008
Compact fluorescents might not be that bad after all
Brendan Koerner tells us why in Slate.
But what about the mercury? The toxic heavy metal is integral to the design of current CFL bulbs: Electricity agitates the mercury molecules, causing them to emit ultraviolet light. That light then spurs a bulb's phosphor coating to give off visible light. But the amount contained in each bulb is barely enough to cover the tip of a ballpoint pen, and won't cause any bodily harm as long as simple precautions are taken. The National Electrical Manufacturers Association has voluntarily imposed a limit of 5 milligrams per bulb on all CFLs sold in the United States—about 1 percent of the mercury contained in an old home thermometer. Since manufacturers are well aware that health fears are preventing the widespread adoption of CFLs, most have committed to making bulbs with even less mercury than NEMA's standard. The average CFL bulb now contains around 4 milligrams of mercury, and that figure should drop closer to 2 milligrams in the very near future. Much of the credit for these reductions goes to Wal-Mart, which has pressured GE, Royal Phillips, and Osram Sylvania to cut down on the quicksilver.
I'm glad they're working on the mercury problem. Now about the quality of the light from CFLs, it is my opinion that it varies not only across the brands, but also across bulbs of the same type and style from the same brand. I've been gradually replacing most of our incandescents as they burn out. For the most part, they're ok. I do like the fact that you get more lumens per watt. In the right kind of fixture, like a sconce where the lighting is indirect, I don't notice any real light quality issue. For direct lighting, they do take some getting used to.
Anyway, I'll use them until they figure out how to make LED lights that aren't blue. I keep hearing how LED lights are the next great thing and that they will solve all of the problems people have with CFLs. LEDs will last virtually forever. They are dimmable. They can be made to change color.
They just can't change them to a color that approximates light from incandescent light bulbs. I have a couple of LED flashlights. They are a very annoying shade of blue. Solve that problem, and our lighting issues are history.
I'm waiting.
Posted by William Polley at 12:09 AM | Comments (4) | TrackBack
December 18, 2007
Inelastic gasoline
Today's howler is from CNN/Money:
Gasoline is one of those items that some economists consider "inelastic," that is, people will buy it no matter what the cost. But the recent drop in demand puts that into question, and suggest people will cut out unnecessary trips if they are too expensive.
As I try to tell my students, a good or service is not elastic or inelastic--the demand for or the supply of it is. Second, inelastic demand doesn't mean that people will buy it no matter what the cost--budget constraints ensure that eventually the curve slopes back to the left as you go up higher in price. Third, if you want to get really pedantic, it's not a drop in demand, but a drop in the quantity demanded as this is a change induced by higher prices (caused by increased input costs which reduced the supply). Fourth, one should consider short-run vs. long run demand for gasoline since it takes a while for habits to change.
When I read that I had flashbacks to grading exams.
No wait, I did not grade any exams this term that packed this many errors into two sentences. My students are better than that.
Posted by William Polley at 09:22 PM | Comments (1) | TrackBack
August 06, 2007
Still more on "food miles"
From the NY Times, this op-ed is by James E. McWilliams, author of “A Revolution in Eating: How the Quest for Food Shaped America”. I will highlight a few key points.
But is reducing food miles necessarily good for the environment? Researchers at Lincoln University in New Zealand, no doubt responding to Europe’s push for “food miles labeling,” recently published a study challenging the premise that more food miles automatically mean greater fossil fuel consumption. Other scientific studies have undertaken similar investigations. According to this peer-reviewed research, compelling evidence suggests that there is more — or less — to food miles than meets the eye.
It all depends on how you wield the carbon calculator. Instead of measuring a product’s carbon footprint through food miles alone, the Lincoln University scientists expanded their equations to include other energy-consuming aspects of production — what economists call “factor inputs and externalities” — like water use, harvesting techniques, fertilizer outlays, renewable energy applications, means of transportation (and the kind of fuel used), the amount of carbon dioxide absorbed during photosynthesis, disposal of packaging, storage procedures and dozens of other cultivation inputs.
Incorporating these measurements into their assessments, scientists reached surprising conclusions. Most notably, they found that lamb raised on New Zealand’s clover-choked pastures and shipped 11,000 miles by boat to Britain produced 1,520 pounds of carbon dioxide emissions per ton while British lamb produced 6,280 pounds of carbon dioxide per ton, in part because poorer British pastures force farmers to use feed. In other words, it is four times more energy-efficient for Londoners to buy lamb imported from the other side of the world than to buy it from a producer in their backyard. Similar figures were found for dairy products and fruit.
...
“Eat local” advocates — a passionate cohort of which I am one — are bound to interpret these findings as a threat. We shouldn’t. Not only do life cycle analyses offer genuine opportunities for environmentally efficient food production, but they also address several problems inherent in the eat-local philosophy.
Consider the most conspicuous ones: it is impossible for most of the world to feed itself a diverse and healthy diet through exclusively local food production — food will always have to travel; asking people to move to more fertile regions is sensible but alienating and unrealistic; consumers living in developed nations will, for better or worse, always demand choices beyond what the season has to offer.
Given these problems, wouldn’t it make more sense to stop obsessing over food miles and work to strengthen comparative geographical advantages? And what if we did this while streamlining transportation services according to fuel-efficient standards? Shouldn’t we create development incentives for regional nodes of food production that can provide sustainable produce for the less sustainable parts of the nation and the world as a whole? Might it be more logical to conceptualize a hub-and-spoke system of food production and distribution, with the hubs in a food system’s naturally fertile hot spots and the spokes, which travel through the arid zones, connecting them while using hybrid engines and alternative sources of energy?
Please do read the whole thing. I would just offer that it is probably unnecessary to conceptualize a hub-and-spoke system as if that is something that planners need to create. We do a pretty good job of that with the various distribution networks used by processors and supermarkets. Aside from that, McWilliams seems to be pretty much in agreement with the way I view the situation.
Posted by William Polley at 12:51 AM | Comments (2) | TrackBack
August 05, 2007
More fun with carbon footprints
This earlier post generated some comments. Let's see what happens this time. I tip my hat to Marginal Revolution for the link. (TimesOnline UK)
Walking does more than driving to cause global warming, a leading environmentalist has calculated.
Food production is now so energy-intensive that more carbon is emitted providing a person with enough calories to walk to the shops than a car would emit over the same distance. The climate could benefit if people avoided exercise, ate less and became couch potatoes. Provided, of course, they remembered to switch off the TV rather than leaving it on standby.
The sums were done by Chris Goodall, campaigning author of How to Live a Low-Carbon Life, based on the greenhouse gases created by intensive beef production. “Driving a typical UK car for 3 miles [4.8km] adds about 0.9 kg [2lb] of CO2 to the atmosphere,” he said, a calculation based on the Government’s official fuel emission figures. “If you walked instead, it would use about 180 calories. You’d need about 100g of beef to replace those calories, resulting in 3.6kg of emissions, or four times as much as driving.
...
Catching a diesel train is now twice as polluting as travelling by car for an average family, the Rail Safety and Standards Board admitted recently. Paper bags are worse for the environment than plastic because of the extra energy needed to manufacture and transport them, the Government says.
Fresh research published in New Scientist last month suggested that 1kg of meat cost the Earth 36kg in global warming gases. The figure was based on Japanese methods of industrial beef production but Mr Goodall says that farming techniques are similar throughout the West.
What if, instead of beef, the walker drank a glass of milk? The average person would need to drink 420ml – three quarters of a pint – to recover the calories used in the walk. Modern dairy farming emits the equivalent of 1.2kg of CO2 to produce the milk, still more pollution than the car journey.
So I guess we are supposed to sit really still and not eat meat or drink milk.
Isn't this just an extension of my previous post? Rail is more fuel efficient than automobile. Automobiles are apparently more fuel efficient than cellular respiration.
Oops, but did he say that "catching a diesel train is now twice as polluting as travelling by car for an average family"? Does that shoot a hole in my theory? Read to the end of the article...
Diesel trains in rural Britain are more polluting than 4x4 vehicles. Douglas Alexander, when Transport Secretary, said: “If ten or fewer people travel in a Sprinter [train], it would be less environmentally damaging to give them each a Land Rover Freelander and tell them to drive”
Nope. It sounds like my theory is still ok as long as more than 10 people are on the train. Yes, volume matters. You want to be able to spread those carbon emissions over as many people as possible to minimize the average carbon footprint. For what it's worth, I live in a rural area and occasionally take the train. I would estimate that the number of riders on every trip that I've taken probably peaked at around 100 (sometimes quite a bit more). I don't know how our trains compare with Britain's for fuel efficiency, but I like to think that I'm helping the environment.
Mr. Goodall continues:
“We have industrialised our food production. We use an enormous amount of processed food, like ready meals, compared to most countries. Three quarters of supermarkets’ energy is to refrigerate and freeze food prepared elsewhere.
...
The ideal diet would consist of cereals and pulses. “This is a route which virtually nobody, apart from a vegan, is going to follow,” Mr Goodall said. But there are other ways to reduce the carbon footprint. “Don’t buy anything from the supermarket,” Mr Goodall said, “or anything that’s travelled too far.”
I think there is something very important to remember here, and it applies to my previous post on the subject as well. Taxing carbon is not the same as taxing the food or the mechanism that transports the food. If the point is to reduce carbon usage, then tax carbon. Let the market adjust to the new energy prices and continue to bring the food to market in the least costly way. If it's still cheaper to bring large volumes of food long distances than small volumes short distances, then a carbon tax does not equate to a "buy locally" campaign. A carbon tax probably isn't going to mean the end of supermarkets either. In fact, if Mr. Goodall is right, it's probably better for the planet to load up the minivan at the supermarket than to carry the same amount of food (which might take you several trips if you're walking) from the corner grocer.
If you're going to tax carbon, then tax carbon. Don't make judgments about which uses of carbon are better. Tax carbon and let the market sort out which uses have the most social value. Don't let carbon be a back door for protectionist or other agendas. If foreign fruit from the supermarket is still a good buy for the consumer (relative to the alternatives) even with a carbon tax, then so be it.
UPDATE: On a similar note, here's a New York Times article on recycling plastic bags.
“It was illustrated vividly at a hearing where a stack of 500 paper bags was two feet high and heavy and 500 plastic bags was two inches high,” Mr. Christman said. “It requires seven times as many trucks to move an equivalent number of paper bags. The environmental profile of plastic is better than alternatives. It is an environmentally responsible choice to reuse them and recycle them.”
Posted by William Polley at 10:36 PM | Comments (6) | TrackBack
July 11, 2007
Like a thunderstorm at O'Hare
Everyone knows by now that when a thunderstorm passes through Chicago, it can cause airport delays across the country. Air traffic is all about the flow. Disrupt the flow at one major hub and everyone feels it.
KANSAS CITY, Mo. - Consumers are beginning to pay more at the pump because flooding at a southeast Kansas refinery has reduced fuel supplies and sent wholesale prices soaring, industry experts said.
...
Jon Callen, president of the Kansas Independent Oil and Gas Association, predicted the states most affected by the Coffeyville flooding would be Kansas, Missouri, Arkansas, Oklahoma, Nebraska, Iowa, Minnesota, north Texas and parts of the Dakotas.
"Effectively, the market was balanced before Coffeyville had to shut down. There's now a big hole in the entire market centered in Coffeyville, so the gasoline that Coffeyville was providing the region now is going to want to be made up from other refineries that already have been balanced and had people wanting to buy their gasoline," Callen said.
Posted by William Polley at 12:56 PM | Comments (3) | TrackBack
June 29, 2007
State management of production and the forces of the market (or, what should be the price of gas in Iran anyway?)
On Wednesday, I posted a story on how Iranians are upset about gasoline rationing. A key point which figures into what follows is this quote from the article:
The new rules limit drivers of private cars to 100 liters, or 26 gallons, every month at the subsidized price per liter of 1,000 rials, or 10 cents. Taxicab drivers are limited to 800 liters a month. (Emphasis mine)
So we are to take away from this article that gasoline is offered for sale to Iranian citizens at the price of 10 cents per liter and that this price is the result of a government subsidy. (NOTE: 10 cents per liter would be 38 cents per gallon. However, another article cites it as 42 cents. It depends on how you round your exchange rate and your gallon to liter conversion. I will use 40 cents from this point on.)
One of my frequent commenters, spencer, raises an objection that essentially boils down to this. Is that 40 cents per gallon price really a subsidy if, as a major oil producer, they are able to produce the gasoline for just pennies per gallon? Don't OPEC countries have lower gasoline prices anyway? Is that a subsidy, or just price discrimination (supplying the domestic market at cost before putting the rest of the supply on the world market as an oligopolist)?
First of all, spencer points out that the domestic refining and distribution network in Iran is nationalized. I should have pointed that out, and I am grateful that he reminded us of that fact. So, the question is would they be within their power to produce their domestic supply of gasoline cheaper because they can extract the oil at a cost that is much below the $70/barrel the oil fetches on the world market? Absolutely.
How much cheaper? For that, I refer to this MSNBC analysis piece by Robert Windrem from January with the provocative headline: Are Saudis waging an oil-price war on Iran? The entire article is worth a read, but here's the part that matters for us:
The trader notes that Iran, OPEC’s second largest producer, is “in trouble” both in the short and long term. Iran’s oil reserves, he notes, are declining more rapidly than Saudi Arabia’s and are more difficult to extract. While a barrel of oil costs the Saudis $2-3 to get out of the ground and to market, that same barrel costs Iran as much as $15-18.
“Iran does have some oil that costs them $8-10 but most of it is in that upper range,” he said.
Moreover, Iran has a large domestic market for oil, particularly fuel oil, which Saudi Arabia, with its smaller population and milder climate, does not.
Perhaps more important, because Iran has limited refining capability, it must import more than 40 percent its gasoline, making it the second largest importer of gasoline in the world after the United States, according to the Department of Energy’s Energy Information Agency.
And since Iran sells gasoline at a rate comparable to the rest of the Gulf states — around 33 cents a gallon — it must subsidize the price on a massive scale. In fact, say traders, Iran is paying about $1.50 per gallon to subsidize domestic gasoline consumption — the world market price of gasoline minus the tiny price per gallon — a practice that is costing Iran billions of dollars annually and eating up most of the state-run oil company’s discretionary funds.
Yes. You see, as I said in a follow up comment to spencer on the previous post, Iran imports around half of its gasoline. The world wholesale price for gasoline is in the neighborhood of $2/gallon. Being as charitable as I could to spencer's argument, I allow for the fact that they may be able to negotiate a better deal than the U.S. can. Even so, the half of the gasoline supply that comes from overseas surely must cost them more than 40 cents per gallon. Maybe they're not losing their shirt, but I don't see them breaking even. Today's research on the subject suggests I might not have had to be so charitable. They might be losing their shirt, if Windrem's sources are correct.
So I think we can safely lay to rest the claim that this really isn't a subsidy. If the oil coming out of the ground costs $15/barrel, then the cost of producing a gallon of gasoline probably exceeds 40 cents per gallon. (It is commonly stated that a barrel of oil yields 19.5 gallons of gasoline among other products. If the other products fetch a high enough price, you might break even overall, but I'm not sure this is the case.)
The fact is that Iran is facing a lack of refinery capacity. Welcome to the club. The question is how will they deal with this. If this was more of a competitive market situation, the answer would be that prices would rise, refinery profits would increase, capacity would be added and price would head back down towards marginal cost.
Yeah, that's textbook theory. It doesn't work literally here in the U.S. because there are a lot of frictions caused by imperfect competition, regulation, externalities, etc. It certainly won't happen in a state controlled monopoly situation as Iran has. But are they immune to the forces of the market. Absolutely not.
So spencer writes, "First, refining is a public sector industry so the economics are secondary."
I'd prefer "non-market".
He continues, "Second, Iran has budgeted a doubling of refining capacity."
So they are responding then? In fact, that seems like a no-brainer. Of course, if domestic demand is building, oil extraction costs are going up, and you're losing your shirt paying for imports because your nationalized firm can't satisfy your domestic consumers, then yeah, I'd say it's time to think about expanding that line in the budget.
But this is not going to be easy for them. If you are a company that builds refineries, is Iran a place where you want to be building them right now? If you are the government of Iran, where is the money going to come from? This is what I meant when, in the first post, I said:
...I would suppose that more comprehensive solutions will be politically difficult.
So in the end, I have to take issue with spencer's final comment,
But what it comes down to is standard economic theory has little to do with the issue and refinery profitability is not really an issue.
That's true only if you think that standard economic theory begins and ends with the perfectly competitive model. In that model, profitability is the main issue. The market fixes imbalances by sending signals to expand or contract and to enter or exit.
However, governments can and do contravene the operation of the market. They do this for good or for evil, but regardless of the reason behind it, the effect is to obscure the signals. Nevertheless, the forces are still there, and they ignore them at their peril. In setting a fixed market price for gasoline, Iran has committed the resources of the state to supply its citizens with the gasoline they demand at that price, even if that means the state's resources will be drained away from other uses. This they can do because profitability is not the main issue. Political economy is. However, there are still no free lunches, even for nationalized firms. Now, both market and non-market forces outside of Iran have combined to increase the drain on its treasury caused by its commitment of resources.
They must now make a choice. They could allow it to continue and supply at a price that is below cost. (A private firm that did so would soon find itself bankrupt.) They could make a long term investment in capital to lower the marginal cost of supplying the product to bring it in line with the price. (Just as a private firm might invest in the ability to perform a task "in-house" rather than pay a high market price.) But as I pointed out, this may be easier said than done.
Of course, they could just raise the price--doing by committee what the markets usually do. If they get it right, bravo. If they get it wrong, well...
Or they could renege on their commitment to their citizens and reveal that the gasoline is too expensive to obtain and supply to them at the established price, so they will not be able to have as much as they want at that price. This has been known to make people violently angry.
I know that spencer and probably some of my other readers think that I've never seen a problem that the market can't fix. That's simply not true. I tend to favor market solutions, but readily admit that government intervention is sometimes necessary. I'm not even suggesting that a move to a free market is desirable or even possible for Iran without a lot of other considerations.
No, my message here is simpler. You can obscure the signals of the price system with the stroke of a pen. But escaping the forces of the market is more difficult by orders of magnitude. The rigidity of Iran's price controls have allowed this problem to "slow-cook" for a long time in a way that doesn't happen in a free market. They must now deal with the consequences of their choices.
Posted by William Polley at 02:33 PM | Comments (5) | TrackBack
June 27, 2007
Isn't it ironic?
Iran, awash with crude oil, is finding itself short on refinery capacity. The results aren't pretty.
TEHRAN: Angry drivers set fire to some gasoline stations here after the government announced that fuel would be rationed beginning Wednesday.
The government first planned to start the rationing a year ago, but put the decision off repeatedly out of fear that it would lead to unrest. The plan was announced only a few hours before it took effect. State television reported Wednesday that "several gas stations and public places had been attacked by vandals."
...
The new rules limit drivers of private cars to 100 liters, or 26 gallons, every month at the subsidized price per liter of 1,000 rials, or 10 cents. Taxicab drivers are limited to 800 liters a month.
And then there's this...
The government is still considering whether to allow drivers to buy additional fuel at higher prices.
At 10 cents per liter, I can understand why they have issues with low refinery capacity. Even if the crude oil was free, the cost of running the refinery would make it a rather dicey proposition. Since the government subsidizes gasoline to keep the prices low, one would have to expect that only government subsidies will rectify the refinery capacity issue. Meanwhile the economy continues to grow and demand increases. Something has to give.
Allowing additional purchases at a higher price might be warranted as a stop-gap measure. I would suppose that more comprehensive solutions will be politically difficult.
Posted by William Polley at 04:36 PM | Comments (6) | TrackBack
May 31, 2007
America's fragmented gasoline market
Roll the tape.... On May 10, I wrote:
Of course, the Balkanization of the U.S. gasoline market into geographic regions with different fuel requirements contributes to the market power of the remaining refineries in different geographic regions. If the U.S. gasoline market was really one large market with 142 refineries, would it be profitable for a firm (probably an existing one) to build a new refinery? Talk about a "good question"... that's the one they should have asked.
I was referring to this article from WCCO (Minneapolis).
Anyway, Don at Cafe Hayek today spotlights this paper by Andy Morriss that is apropos to the question. Here is the abstract:
Rising gasoline prices have brought energy issues back to the forefront of public policy debates. Gasoline markets today are the result of almost a hundred years of conflicting regulatory policies, which have left them dangerously fragmented. In this article, I analyze that regulatory history, highlighting the unintended consequences of regulation that have pushed the United States into a series of loosely connected regional markets rather than a broad, deep national market. This fragmentation leaves the American economy is vulnerable to natural disasters, terrorist attacks, and foreign dictators in ways that it need not be. It also produces higher prices for consumers and reduced innovation by refiners.
I intend to read this paper with great interest.
UPDATE: I have now read the paper. Frequent commenter "spencer" takes me to task and I respond in the comments.
Posted by William Polley at 09:24 PM | Comments (11) | TrackBack
May 30, 2007
Most intriguing sentence I've read today
From In-Forum (Fargo, ND)
If you can hold a flame to your faucet and the water catches fire, the North Dakota Geological Survey wants to know about it.
Indeed.
Posted by William Polley at 02:24 PM | Comments (2) | TrackBack
May 21, 2007
Fight the power
Usually we hear about big corporations telling the "little guy" to cease and desist because of an alleged trademark infringement. As the saying goes, turnabout is fair play. But can they lay claim to all possible variants of "capture" in their slogan?
General Electric will likely get a cease and desist letter from a Moorhead [Minnesota] Public Service Commission attorney requesting that the corporate giant stop using the phrase “Capturing the Wind.”
“Capture the Wind” is the trademarked name of Moorhead’s wind energy program, Public Service Commission General Manager Bill Schwandt said. He believes GE is infringing on the commission’s trademark of the phrase.
Via In-Forum
Posted by William Polley at 01:23 PM | Comments (0) | TrackBack
May 10, 2007
Gas prices and refineries
The website for WCCO-TV has a "Good Question" feature. They ask, "Why not build more oil refineries?"
Average gas prices in the Twin Cities are flirting with $3 per gallon again. They have already topped that in other states and hit a new national average record of $3.07 per gallon. Experts said it's a supply problem. We're paying more because our refineries can't pump out enough gas to meet our demand. So why don't we just build more of them?
"We're dealing with the same spigot," said Dr. Akshay Rao, a business professor at the University of Minnesota.
He said the last refinery built in the United States was in 1976 and many have since closed. In fact, in 1985 there were 254 operating refineries. Today, there are approximately 142.
"There were marginal refineries that weren't making enough money closed," said Rao.
I would imagine that many of those were just too costly to maintain.
...
A new refinery would cost $2 billion to $3 billion. Today's environmental regulations help keep our air clean but also make it much more expensive to run a refinery. Finding land is tough because nobody wants to live near a refinery.
Indeed. It is not the cost that is the barrier. $2 billion to $3 billion is the price tag for an offshore oil platform too, and those are being built. Finding a suitable location is certainly a problem. Environmental regulations probably increase the initial outlay somewhat, but mostly affect the operating cost over time. Those two factors are probably enough to discourage that sort of investment.
...
There's also no doubt that current gas prices are making oil companies and refiners gallons of money. So some speculate that they don't want to build more refineries because that would increase supply and depress prices. That would cost them money.
"They would be in effect be depressing prices and margins and hurting themselves," said Rao.
If they have market power, this is certainly the case. Of course, the Balkanization of the U.S. gasoline market into geographic regions with different fuel requirements contributes to the market power of the remaining refineries in different geographic regions. If the U.S. gasoline market was really one large market with 142 refineries, would it be profitable for a firm (probably an existing one) to build a new refinery? Talk about a "good question"... that's the one they should have asked.
Yes, the firms have market power. Is it due to market failure, government failure, or both? My vote is for both, and the government failure here is not trivial.
...
However, not all American refineries are owned by oil companies. Some are owned by refining companies and that business isn't as good as it used to be. In fact, the energy department said refineries' profit margins peaked in the 1980s.
That actually doesn't surprise me.
As for the present situation, spring maintenance will finish up and we'll be switched to the summer blend of gasoline. This too shall pass, at least in the short run. But the refinery situation isn't going to change anytime soon, except that with each passing year it is only going to get worse. Given the way that gasoline markets are divided up, one or two refineries wouldn't be the solution (even if they could be built). Reversing the tide of geographical restrictions on various types of gasoline is probably not going to happen. The price system will provide the right signals and incentives to explore alternative fuels and so forth. But no one said it would be easy.
Posted by William Polley at 01:18 AM | Comments (8) | TrackBack
August 07, 2006
Bad news on the oil front
Eight percent of U.S. oil production just got shut down. It is already affecting European markets. We'll see how this plays out. (Bloomberg)
Aug. 7 (Bloomberg) -- Crude oil surged 1.7 percent to $76 a barrel after BP Plc shut Alaska's Prudhoe Bay field, the largest in the U.S., because of corrosion in a pipeline.
An inspection completed in July found a leak in a pipeline, London-based BP said in a statement today. The shutdown will take ``days'' to complete, a company spokesman said. The BP- operated Prudhoe Bay field produces 400,000 barrels a day, about 8 percent of U.S. production.
UPDATE: Expect about a 3 to 5 cent increase in gas prices in the short term, according to this CNN article. James Hamilton has more.
Posted by William Polley at 02:18 AM | Comments (0) | TrackBack
February 15, 2006
Will gas prices fall in the near future?
Maybe. See this Reuters story,
NEW YORK (Reuters) - Oil prices slumped on Wednesday, extending a 15 percent slide over two weeks, as dealers focused on brimming U.S. fuel stockpiles.
A U.S. government report on Wednesday showed gasoline inventories climbed to the highest level since 1999, when energy prices were near historic lows.
"This is a situation where you've got a lot of supply on hand, leading to a drop in prices," said Jason Schenker, energy analyst at Wachovia.
...
"The question is where do we go from here? We've fallen so quickly in recent sessions, will there still be momentum to go down to the low $50s?" said Phil Flynn, analyst at Alaron Trading.
The U.S. Energy Information Administration reported Wednesday that U.S. gasoline stockpiles rose 2.2 million to 225.5 million barrels last week, the seventh weekly build in a row, thanks to strong imports and slow demand growth.
Click here for more from the EIA. Retail prices have fallen almost 6 cents in the past week. If oil prices continue to stay low and inventories stay high, there is definitely room for the retail price of gas to fall a little more--maybe a few cents a week for a couple weeks until it finds the new equilibrium. Of course it always seems like the retail price of gas is slow to respond to changes like this. The next few weeks might give us one of the best opportunities in some time to observe the dynamics. Unless, of course, there is another shock.
UPDATE: Maybe not. Spring maintenance at refineries could reverse the trend starting sometime next month. But the fact that prices have fallen during a time of year when prices have tended to rise in the last couple years is worth noting.
UPDATE (2/23/06): Retail prices are down about another 4 1/2 cents from the prices reported when I posted this. This page has the current data.
Posted by William Polley at 03:06 PM | Comments (2) | TrackBack
September 22, 2005
Price gouging: The beat goes on
Lynne Kiesling finds that this issue just will not go away.
Many thanks to jeffrey.d for alerting me to the letter signed by eight governors asking for a federal gasoline pricing probe, and possible refunds of "excess profits" (remind me to add that to the list of economic non-concepts, right behind "price gouging" and "windfall profits").
The WaPo article mentions a study by Don Nichols at the University of Wisconsin, but because I could not find any such study online I cannot comment on it. I can comment on what the WaPo article says, though:
Historically, Nichols said, the markup between the price of a gallon of crude and a gallon of gasoline is about 85 to 90 cents a gallon, including refining, distribution and taxes.
The study estimated that for pump prices to reach $3 a gallon, the price of crude oil would have to be about $95 a barrel, but crude prices have been holding around $65 a barrel, and Katrina has not caused a surge in crude oil prices.
"The disconnect between gasoline and crude oil prices is quite remarkable," Nichols said.
On its face I find this statement naive. People who study this industry have known for the past seven or so years that increasingly the refining capacity in the US is a bottleneck. If you are analyzing price effects along a vertical supply chain, and you have a capacity bottleneck in the middle of that chain, how can you expect historic relationships between the price of the initial input and the price of the final product to persist? That is incredibly naive and reflects a lack of understanding of how vertical supply chains work.
Shall we review? Stephen Karlson said this about three weeks ago.
There are conditions on the elasticities of supply, demand and resource supplies sufficient to ensure that the equilibrium retail price maintains a constant ratio to the wholesale price of a single input. Those sufficient conditions are unlikely to hold in the presence of at the moment inelastic supplies of gasoline, particularly summer grades in ozone-impact areas, and relatively inelastic demands for gasoline.
Keep that quote at the top of the pile. I have a feeling we'll be able to re-use it often.
Posted by William Polley at 03:35 PM | Comments (0) | TrackBack
September 12, 2005
Bryan Caplan gets cynical
Bryan Caplan responds to James Hamilton's post.
Bottom line: No one is going to listen to the politician who says "Do nothing." Under the circumstances, I can't think of a single politically viable policy that would be better than cutting the gas tax. Maybe it would mildly reduce the price of gas. But even if supply is so inelastic that 100% of the tax cut goes to suppliers, it is easy to overlook a big social benefit: Tax cuts have a good chance of politically crowding out price controls and worse.
I have to admit that there's a part of me (the cynical part) that wants to stand up and cheer. And I will face up to the fact that if price controls were being seriously considered, to the point of a bill in the legislature, I would stand shoulder-to-shoulder with Caplan in arguing for tax cuts instead.
Most of the discussions of this issue are in states that only have excise taxes. What about states that put an ad valorem sales tax on gasoline?
Full disclosure: I happen to live in one of those states.
In Illinois, the big debate now is what to do with all that tax revenue. (WBBM-CBS 2 Chicago) Quoting from the last part of the article,
“I say put the money into the road fund and begin to replenish that billion and a half dollars,” said Ron Gidwitz, a Republican candidate for governor.
“We should eliminate the state sales tax on gasoline,” said State Sen. Kirk Dillard (R-Hinsdale).
But because tax receipts from Illinois casinos and on the sale of cigarettes are falling short of projections, the governor's budget boss claims total tax collections will come out even with no windfall.
“To do the kind of things that they're proposing is giving no eye to the future and making sure that Illinois remains fiscally stable, which it now is,” said John Filan, state budget director.
But a legislative commission sees a gasoline tax windfall with receipts jumping from $359 million to $439 million to the $615 million projected for the current fiscal year 2006.
“We should maintain the current tax on gasoline because eventually the market's going to level out,” said Jeff Schoenberg (D-Evanston).
Both Democrat and Republican lawmakers would like to see this gasoline sales tax windfall go to a special account to attract matching federal transportation dollars.
But the governor's budget boss says the gas tax money is needed for rising health costs and that the state's road fund is healthy enough already to draw the matching federal bucks, despite what legislators say.
We pay 19 cents per gallon in excise taxes and then from 6.25 to 9.25% in sales tax depending on where you live (fortunately the low end where I live). That could mean up to 45 cents total for the state (then you have the 18.4 cents in federal gas taxes). No wonder the state's gas tax revenue is booming! The sales tax component has approximately doubled since prices were $1.50/gallon. (Those were the days!)
Aside: Another source (Center on Budget and Policy Priorities) lists the per gallon tax in Illinois at 20.1 cents. They are against lifting state taxes, by the way.
The effect of Hurricane Katrina on gas prices is likely to be somewhat short lived as the refineries come back on line. Furthermore, the market may have overreacted a little bit initially. As a result, the price of gas should come down, albeit slowly, over the next few weeks. That's not a situation in which I would ordinarily argue for getting the political machinery in place to temporarily reduce taxes.
Of course, the cynic in me says that if they eliminate the gas tax when prices are trending down, the politicians will certainly claim credit for what was going to happen anyway--even if the tax holiday only helped the suppliers and not the consumers.
After all, being able to claim credit for something good that was going to happen anyway is a politician's dream come true.
Post hoc ergo propter hoc, anyone?
Posted by William Polley at 10:16 PM | Comments (0) | TrackBack
September 09, 2005
Demand curves do indeed slope downward (elasticity does not equal zero)
Hat tip: The Big Picture, who quotes the Wall St. Journal:
Guess what happened as Gasoline prices soared last week? We used 4% less than the prior week -- with a travel holiday included:
Americans used 4% less gasoline amid skyrocketing pump prices last week than they did the week before Hurricane Katrina hit, the federal government reported. But whether that indicates consumers have decided to conserve or merely that they couldn't find all the gasoline they wanted isn't clear.
A commenter at The Big Picture writes that the price went up considerably more than 4%, so it would seem that the short run demand for gasoline is still fairly inelastic. But the elasticity is not zero. People respond to incentives.
As Tim Shaughnessy writes at Division of Labour:
I pass a Diamond Shamrock (DS) and a Chevron station on my way to school. I told my class the other day I was a bit confused why the Chevron, with its cheaper gas, never seemed to have many customers while the DS, with its more expensive gas, had a lot. I thought I was clever when I pulled into Chevron this morning to fill up. Nope! Little plastic bags over the nozzles (not visible from the road, BTW) and the lady telling me they were out of gas. So I grumbled my displeasure and filled up with more expensive but plentiful gas down the street.
Now I can relate to my parents' buying gas in the 70s (I didn't get to kindergarten until 1980, so I don't remember the gas lines). Which made me more upset? Buying plenty of more expensive gas or buying zero gallons of cheap gas?
See also James Hamilton's post today with many good links.
UPDATE: More econ blogs are picking up the "demand curves slope downward" theme. No wonder. It's a central idea we teach. Nice to see it in action, though it's often presented as being somewhat surprising. But people do respond to incentives.
For more, see: A Constrained Vision, SCSU Scholars, Econbrowser, and Calculated Risk.
Posted by William Polley at 08:48 PM | Comments (0) | TrackBack
August 31, 2005
$4 gas around the corner? Perhaps.
Econbrowser (James Hamilton) with the latest:
But then I look at the size of the challenges we face today. The price of the September gasoline futures contract went as high as $2.92 a gallon today before closing at $2.61. That $2.92 high would be $1 more than the price of the same contract last Friday. Contemplate the consequences if the retail price were to move $1 per gallon in a few days, and you grasp the magnitude of the situation we're in.
Bloomberg found at least one person who has contemplated it:
"We're going to be over $4 a gallon retail by the end of next week," said William Shireman, executive vice president of Gas City Ltd., a 50-station chain based in Frankfort, Illinois. Shireman said major oil companies have stopped selling unbranded gasoline to independent retailers in Illinois and have cut back on contract allotments. He declined to say which companies were halting unbranded sales. The wholesale price he pays for gasoline has "gone up about 80 cents a gallon in two days," he said.
Are you ready for that, America?
Indeed.
Posted by William Polley at 09:50 PM | Comments (0) | TrackBack