Tuesday, August 30, 2005

Smart Guys In The Room?

by Tom Bozzo

Is it me, or did it seem (pre-Katrina) like there were a lot of stories in the news about refinery outages and mishaps while gasoline prices were most recently spiking? See, e.g., here among a large number of returns from this Yahoo! news search timed to eliminate Katrina-related stories; unfortunately this search feature really doesn't allow a good comparison of the density of articles, and the MU budget doesn't include a Lexis/Nexis subscription.

The news story metric is not without problems. Clearly, there's a considerable likelihood of news-selection bias. The onset of the NWA mechanics strike, for instance, brought with it stories mentioning mildly scary but basically routine incidents that wouldn't otherwise have been nationally newsworthy. It's arguable as to the intrinsic newsworthiness of air safety incidents (drama!) versus energy supply shocks (hits everyone's pocketbook!).

Still, consider me suspicious. I read plenty before the damning Enron tapes came to light to the effect that it was just ridiculous to think that people might be trying to manipulate the California electricity supply. It seems that conditions for manipulation in gasoline markets— strained refinery capacity, short-term demand inelasticity — are ripe.

Addendum 9/1/05: As I noted in comments on Ken Houghton's Economics Question of the Day blog, the magnitude of the Gulf Coast refinery outages are big enough (~11% of capacity) to cause at least local gasoline supply disruptions, as well as more than to eliminate such spare domestic refining capacity as there was nationwide, and so the attendant price spikes needed to equate demand with the available supply are not unexpected without (necessarily) any "price gouging." See also Mark Kleiman's good post on the economics vs. politics of market clearing, though I think he should recognize that the market feature(s) that provide the potential to earn a windfall from withholding supply are hardly unique to the Enron manipulations of the California electricity market.
Comments:
I'm confused. Do liberals want high gas prices or don't they? From stories about evil SUVs to global warming, we hear that we are using too much fossil fuel - and we should increase the gas tax to reduce consumption. But when gas prices get higher, we hear that we should open up our strategic oil reserves and ensure that no one is bilking us at the pump.

It seems to me that from the perspective of an environmentalist, whether gas prices are high from taxes, high demand, Middle East turmoil, or oil company profiteering, who cares? The objective has been met to start getting people to drive less and/or buy more efficient cars, move to alternative energies as they become more cost effective, etc.

Er, maybe they are for higher gas prices, so long as the evil oil companies don't make a buck?
 
The ends do not justify the means, my friend.

Just because I have the economist's desire to see fuel prices that internalize the various external costs of oil-burning -- and, in fact, I don't support a policy of "low gas prices" for its own sake -- doesn't mean I have to accede to oil companies (if they are doing so) jamming $3/gal. gasoline up grandma Millie's a-- so that already overpaid executives can become more so.
 
Well, if the means justify the ends, then I guess the current policy of criticizing people for driving SUVs will continue to be as successful as it already has been!
 
The operative word from your initial comment w/r/t this post is "bilked." Much as I might wish that Hummers didn't befoul the streets, it's still wrong to steal from those whose penis adequacy/envy issues lead them to drive Hummers.
 
Not that I'm advocating a conspiracy theory, or anything, but isn't there an important vote coming before Congress in September about ANWR? The timing of the pre-Katarina spike in gas prices, and in media stories about spiking gas prices, couldn't be better if you're an oil company executive.
 
Personally, I'm having more trouble rationalizing the post-Katrina spike.
 
Jeez, the oil companies sell a product that basically anybody is willing to pay any price for, and we think there's a conspiracy? We're lucky the price of gas has been so low for so long, and historically it's not even at an all time high right now (adjusted for inflation).

My coworkers from countries like Korea pay $7/gallon. We have it pretty good in the US.
 
Well, I have lexis-nexis and I'm procrastinating.

Searching "refinery outage" in full text of articles in major newspapers:

August 15 - 22, 2005: 14 stories
August 23 - 29, 2005: 2 stories

August 15 - 22, 2004: 1 story
August 23 - 29, 2004: 0

August 15 - 22, 2003: 3 stories
August 23 - 29, 2003: 3 stories

I could do a more extensive search if you had specific period comparisons you'd like done (I could even make a pretty chart).
 
Kim: Welcome! Yes, a vote on ANWR is expected next month (see here). While I'd expect the recent spike in oil and gas prices to be trotted out as an argument in favor of opening ANWR to drilling, I'd expect some other argument of convenience to be trotted out were prices to collapse (or, counterfactually, not to have spiked in the first place). ANWR drilling is one of the administration's idées fixes, after all, and those only die for want of a better marketing program.

Ken: I figure the post-Katrina spike should be given a couple of days to see if it isn't just excess liquidity trying to get on the bandwagon.

Bryan: I agree that we've "had it good" in that policies have encouraged free-wheeling car-centric lifestyles. That isn't bad if you're (as we are) in a part of the country where you rarely have to spend lots of time idling in traffic. But there's a difference between high prices elsewhere (due mainly to fuel taxes) and a hypothetical spike here resulting from anticompetitive practices.

Isaac: That's pretty much what I had in mind, thanks! I won't assign you any additional blog homework, though if you wanted to put that together with the m/m change in the CPI motor fuel component and/or crude oil futures...
 
I don't disagree with Bryan--as I noted elsewhere on this blog, I agree conceptually with the Bozzo/Kyle statement that the social cost of gasoline is not reflected in the price--but note that the places where gas is priced at $7/gallon are those that tax it to that level. (That is, in those countries, people who buy gas pay the cost of using that gas.)

I paid just over $1/liter ($4/gallon) for gas in Israel in 1999, due to taxes. If I lived in CA or IL, I might be paying $3.50/gallon now, but comparatively little of that money would be going directly to the commonweal.

Is Bryan advocating higher gas taxes in the U.S.?
 
I'm not advocating higher gas taxes, I was just saying that many people complain about the US burning too much fossil fuel, but then also complain when the gas price starts to get high, thereby limiting how much they can burn themselves. A person who believes that burning fossil fuels is causing environmental damage should be in favor of higher gas prices. It seems to me that many people on the left want others to cut down on their gas usage to save the environment, but also want to ensure they have cheap gas for themselves to use.... kind of like Barbara Streisand telling everyone to dry their clothes outside on a clothesline to save energy. But does she do that? Of course not.

Personally, I'm for letting the free market work its course. I've already cut back on my gasoline usage. I don't really care what anyone else does.

ps. if the US were to do something terribly stupid like sign the Kyoto Treaty, I would be in favor of significantly increasing the gas tax to both pay for the Treaty and to hopefully reduce co2 emissions, but I don't see that happening.
 
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