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Posts from — May 2011

California’s Cap-and-Trade Illegality: CARB Rethink Necessary

Background:Earlier this year, I wrote about a new, tentative California Superior Court decision that threw a monkey wrench into California Air Resources Board’s climate regulatory scheme.

 a California superior court once again ruled against the California Air Resources Board (CARB) for failing to comply with environmental law pursuant to AB 32, California’s global warming law. The tentative decision directs CARB to rewrite its California Environmental Quality Act (CEQA) documentation, and to cease implementation of the AB 32 Scoping Plan until the violation is corrected.

The decision is based on violations of process only and does not address any scientific or economic substance of either the CEQA documentation or of the scoping plan. Reactions have been mixed from “no big deal” to “hallelujah.”

The judge’s decision states that CARB violated state environmental law with its 2008 plan to reduce greenhouse gases and its more recent cap-and-trade regulatory schema.

If the judge’s decision is made final without substantive change, the state would be ordered to stop the implementation of AB 32 until the CEQA process is fully complied with.

Update: Court Ruling Final

In March, the tentative decision was made final, except for orders and relief. Judge Ernest Goldsmith ruled that CARB had failed to conduct such an [alternatives] review but left open the question of whether the agency could conduct rulemaking, environmental studies or do any other work while the legal issues were being resolved. The state said at the time that it would appeal.

Well, the decision is now final and complete. California [CARB] must immediately halt work on its cap-and-trade program until it completes a review of alternative approaches to reducing climate change, the court ruled on May 20.

Cap-and-Trade was set to begin operating in January 2012, but the Court’s order could cause delays. Many participants hold the view that ARB dodged a potentially fatal bullet in its implementation of cap and trade. The Court could have ruled that a trading scheme was an unacceptable method of reducing emissions. The Court could also have stayed the entire suite of regulations that the state is pursuing, 69 in all, including a low-carbon fuel standard, local development and smart growth guidelines, and emissions reductions from ships and trucks. [Read more →]

May 31, 2011   3 Comments

Wisdom from T. Boone against Rent-Seeking Pickens (remember when you said ….?)

“The two greatest enemies of free enterprise in the United States … have been, on the one hand, my fellow intellectuals and, on the other hand, the business corporations of this country.”

- Milton Friedman. “Which Way for Capitalism?” Reason, May 1977, p. 21.

Special government favor. A little something for nothing at the other’s expense…. Sure, a particular business or industry can gain in the short run. But when everyone is getting the booty, almost all lose.

Just look where government is today. The chronic, gargantuan federal budget deficit is testament to the Enrons then, GEs now  receiving government subsidies from either the U.S. Treasury or the tax code. The rest of us pay (or will pay) what the rent-seekers are getting and not paying for (outside of their lobbying costs).

Business has been a force for regulation. In the twentieth century, the energy industry was behind the large majority of major government intervention with oil, natural gas, and coal. As I concluded in Oil, Gas, and Government: The U.S. Experience:

As a rule, the free market was the “default” situation into which government intervention was introduced to achieve business objectives. In the great majority of cases, identifiable industry coalitions led the way. The history of regulation of the oil and gas industry is the story of how compromise and pragmatism, in the absence of principle, created interventionist pressure at every turn. When it was costless, the industry proclaimed its support for the free market in principle. But this philosophical leaning meant little when more was at stake. (1)

The same is true with electricity, a story that my forthcoming book, Edison to Enron: Energy Markets and Political Strategies, will detail through the rise and fall of the father of the modern power industry, Samuel Insull.

And so it is with 21th-century energy interventionism. Whether Enron saving the domestic wind industry or Pickens trying to politically wedge natural gas in the transportation market by T. Boone Pickens, political capitalists are expanding the government side of the mixed economy.

T. Boone Pickens circa 1987, 2000

Guess what? The pre-Pickens Plan T. Boone gave ample warning against the very behavior that characterizes him today.

If I were a congressman questioning Pickens under oath, I would read him the following quotations and ask him for comment–and then get to the sour economics of whatever he is pushing for the government to push on consumers.

Four quotations (with references) follow: [Read more →]

May 27, 2011   6 Comments

Electricity: The Master Form of the Master Resource

“Great are the powers of electricity,” commented a newspaper story in the late 19th century about the fascinating new energy source. “It makes millionaires. It paints devils’ tails in the air and floats placidly in the waters of the earth. It hides in the air. It creeps into every living thing.” (1)

Electricity is the most utilitarian of energies and the master form of the master resource, as explained below by leading experts and even some critics of energy. Just ask residential users, commercial establishments, or the manufacturing facilities if they want to pay more or less for power.

And so it was distressing to hear Barack Obama in a moment of ‘green’ candor declare that electricity prices would “skyrocket” under a cap-and-trade program to limit carbon dioxide (CO2) emissions.  In his exact words and phrasing from November 2008:

You know, when I was asked earlier about the issue of coal, uh, you know — Under my plan of a cap and trade system, electricity rates would necessarily skyrocket. Even regardless of what I say about whether coal is good or bad. Because I’m capping greenhouse gases, coal power plants, you know, natural gas, you name it — whatever the plants were, whatever the industry was, uh, they would have to retrofit their operations. That will cost money. They will pass that money on to consumers.

The quotations follow.

Erich Zimmermann

“Next to the increasing importance of hydrocarbons as sources of energy, the rise of electricity is the most characteristic feature of the so-called second industrial revolution.”

- Erich Zimmermann, World Resources and Industries (New York: Harper & Brothers, 1951), p. 568. [Read more →]

May 26, 2011   2 Comments

NAS Panel Backs Manufactured Crisis to Tame Climate Change

House Energy and Commerce Committee members Henry Waxman (D-Calif.) and Bobby Rush (D-Ill.) have requested a climate-science hearing in light of a just-released report from the National Academy of Sciences (NAS). This report, “America’s Climate Choices,” however, presents no new science.

Instead, as climate scientist Chip Knappenberger explains below, the NAS document lays out a strategy for manufacturing a crisis by exaggerating the climate threat and artificially raising fossil-fuel prices in an effort to compel American’s to emit less greenhouse gases.

Congress has heard all of this before and has been unmoved to pass legislation which will raise the price of living and doing business in America by taxing our primary energies–Editor.

Plentiful and inexpensive fossil fuels are the preferred energy source, whether it be to run your car, heat your home, or generate electricity. Oil, gas, and coal are relatively safe, readily portable, fairly efficient, and relatively energy dense. While fossil fuels perhaps are not the perfect energy source, they do go a long way towards meeting our current needs, and the infrastructure (and know how) is in place to allow for rapid expansion into the future. So, all in all, fossil fuels are pretty darn good now–and as far as the eye can see.

Hydrocarbon supplies are not depleting–just the opposite. New technologies (such as those used for hydraulic fracturing, tar sands, and deepwater drilling) are expanding our ability to retrieve fossil fuels from the earth, As a consequence, the supply is keeping up with the growing demand and more—a demand driven not only a growing population of humans, but a growing number of existing humans who are wanting more energy to improve their standard of living. Julian Simon lives!

But the final report from a just-completed investigative effort from the National Academy of Sciences (NAS) seeks to interrupt and reverse the natural improvement of human ingenuity applied to the master resource. Theirs is a manufactured crisis—and one that elevates concerns over climate change above energy reality and concern over the energy-dependent economy.

There are other forms of crisis however, such as that posed by an existing (or perceived) threat. From such crises, new technologies can emerge faster than they would have otherwise. Take the atomic bomb or the space race as an example.

For fossil fuels, the potential for a threat-based crisis arises from their role in climate change and the possible risks to our health and welfare there from. Alas (for some anyway), climate change does not carry the same sense of threat as, say that of a foreign enemy with its sights set on U.S. soil. So the notion of a climate crisis, either now or in the near future, has been slow to (widely) catch on.

The NAS Strategy

A committee assembled by the National Academy of Sciences (NAS), seeks to remedy that situation. [Read more →]

May 25, 2011   8 Comments

Natural Gas a Natural Winner? Let the (Transportation) Market Decide!

Four-dollar per gallon gasoline provides more margin for oil producers than four dollars per million British thermal units (MMBtu) provides for natural gas producers. Historically speaking, oil prices are high and natural gas prices low.

In the face of low prices, the natural gas industry can practice self-help in a free market–or resort to political shenanigans. Self-help means producing less (hard to do in a technology boom!) or selling more. Whether converting fuel oil customers to natural gas in the home heating market or building gas-to-liquids plants to convert natural gas into petroleum products, including gasoline, natural gas companies and their trade groups can work to be their own best friend.

But segments of the natural gas industry, led by master rent-seeker T. Boone Pickens, has turned to the political means to bolster demand and thus price. After all, if wind, solar, and biomass can get special government favor (a favorable regulation or special tax-code provision), why not natural gas?  And enigmatic T. Boone‘s large ownership interest in natural gas refueling stations would just happen (sshhhh!) to win big from his political activism.

Specifically, Pickens is fronting and bankrolling legislation to provide a generous government subsidy for converting transportation vehicles from petroleum (gasoline or diesel) to natural gas. Too bad if there is not a national refueling infrastructure . . . too bad if the natural gas tanks are heavier and take up more space than a gasoline tank . . . and too bad if the extra engine expense doesn’t work despite natural gas’s lower relative cost per BTU.

What is the Subsidy?

A Wall Street Journal article, “Natural-Gas Trucks Face Long Haul,” went over the sour economics of natural-gas-driven 18-wheelers.

As veteran energy writer Jeffrey Ball explains, the extra cost for a dedicated natural gas vehicle differs from a low of around $10,000 (+5 percent) for a trash truck to a high of $100,000 (+105 percent) for a long-haul cab truck. United Parcel ordered 48 natural gas cabs–but only by applying $4 million of Obama stimulus money. So taxpayers paid about $83,300 (83 percent) of the premium. [Read more →]

May 24, 2011   6 Comments

Energy Subsidies and Big Wind: Sen. Alexander Sets the Record Straight (renewables 50x that of fossil fuels)

Editor note: The full text of the May 18 floor remarks of Senator Lamar Alexander (R. Tenn.) as reprinted in the Congressional Record last week. Subtitles have been added.

“So I ask the question: If wind has all these drawbacks, is a mature technology, and receives subsidies greater than any other form of energy per unit of actual energy produced, why are we subsidizing it with billions of dollars and not including it in [the energy subsidy] debate? Why are we talking about Big Oil and not talking about Big Wind?”

“We have been debating tax subsidies to the big oil companies. The bill proposed by the senator from New Jersey would have limited it to just the big five oil companies even though many of the tax breaks or tax credits or deductions they receive are the same tax credits that every other company may take– Starbucks, Microsoft, Caterpillar, Google, and Hollywood film producers, for example. Many of the other credits look a lot like the [research and development] tax credit or other tax credits all American businesses may receive.

Well, I am one Senator who is very intrigued with the idea of looking at all of the tax breaks in the tax code. There are currently about $1.2 trillion a year in what we call tax expenditures, and those are intended to be for tax breaks we think are desirable. I am ready to look at all of them and use the money to reduce the tax rate and/or reduce the Federal debt. But if we are going to talk about energy subsidies — tax subsidies — we ought to talk about all energy subsidies.

Renewables vs. Fossil-energy Subsidies

Senator John Cornyn of Texas has asked the Congressional Research Service to do just this. It is an excellent study, and I commend Senator Cornyn for asking for it. This is some of what it finds: According to the report, fossil fuels contributed about 78 percent of our energy production in 2009 and received about 13 percent of the Federal tax support for energy. [Read more →]

May 23, 2011   13 Comments

Standard Oil: A Centennial Evaluation (Part IV: A free market, not political company)

[Ed. note: This post is taken from Robert Bradley's conclusion in chapter 18 of Oil, Gas and Government: The U.S. Experience. In this series, Part I summarized the manifold contributions of John D. Rockefeller to a fledgling, powerhouse industry; Part II critically interpreted rebates and other 'unfair' practices of Rockefeller's Trust; and Part III critically reviewed other complaints about unfair practices against Standard Oil.]

The Standard Oil Trust of John D. Rockefeller qualifies as a free market company, not a political one. The major mistake of Standard Oil in its distinguished history was not a failing of economic performance. It was underestimating the need to present information to explain to the public and critics the virtues of integration and scale economies, particularly in petroleum. (This was an intellectual problem of critics too–see the Appendix below.)

By following an explicit policy of secrecy until the late 1880s, Standard allowed opponents to get the upper hand in a public debate that for Standard would worsen at almost every turn, culminating in the 1911 Supreme Court dissolution decree.

Successful consumer service was considered by the company as its best strategy; it was not understood that competitors would be dissatisfied by the very fact that the public was so well served by Standard Oil. Given the precedent of intervention at all government levels, offense would have been the best defense.

Prior to the onslaught of state antitrust activity, political action by Standard was occasional and defensive. Eminent-domain rights, tailored to the needs of Standard’s pipeline competitors, and rate regulation of company pipeline and storage facilities, prompted Standard’s entrance into state politics in the 1880s in Pennsylvania, Ohio, Maryland, and elsewhere to financially support friendly politicians. In the late 1890s, federal politics became important to Standard, and company pesident John Archbold made large contributions to favored candidates until a 1907 law prohibited corporate political contributions.

By this time, Standard regularly spoke for the public record, but it was too late. Numerically powerful producer interests, who blamed their cyclical difficulties on Standard, joined by hard-pressed independent refiners and marketers, inspired muckraking journalism that nudged the public to the “little man’s” side.

Ida Tarbell’s standard of goodness was not superior consumer service but “the right to do an independent business” and “free and equal transportation” for all. The idea that consumers decide the structure and form of business and that in a free market less efficient firms – which she realized existed in the independent sector – must conform or perish had no part in her ethics, understanding or sympathy. [Read more →]

May 20, 2011   No Comments

Wind Turbines Offshore North Carolina: Look Before You Dive (Part I)

[Part II by Mr. Droz looks at North Carolina's onshore wind development.]

The Governor of North Carolina recently selected a Scientific Advisory Panel on Offshore Energy to make recommendations regarding offshore energy. At the official state site, information is given about who is on the panel, submissions received, and so on.

Three public hearings have been held regarding coastal Carolina. I spoke in the Morehead City hearing. My brief (two minutes allowed) comments were aimed at the proper process that North Carolina should take to resolve which energy options should be implemented. Not surprisingly the majority of inputs received at these meeting were people and organizations advocating offshore wind energy. (What is that political science insight about concentrated benefits and diffuse costs?)

The Panel is now digesting the inputs received. I have been advised that it would be helpful to email them a follow-up correspondence that focused on the economics of offshore wind energy.

Below is my draft version; I welcome comments for improvements, additions or deletions from MasterResource readers. [Read more →]

May 19, 2011   4 Comments

Standard Oil: A Centennial Evaluation (Part III: Monopoly, Monopoly Profits, Subterfuge, and Obstructionism Reconsidered)

[Ed. note: This post, taken from Robert Bradley's Oil, Gas and Government: The U.S. Experience, rebutes the textbook criticisms of the business practices and economic consequences of the Standard Oil Trust. Part I summarized the manifold contributions of John D. Rockefeller to a fledgling, powerhouse industry. Part II provided a critical interpretation of rebate and other 'unfair' practices of Rockefeller's Trust. (Documentation for this post can be found on pp. 1099–1103.)]

If Standard is labeled a monopoly because of its large market share, a liberal application of the “single seller” criterion, it should be recognized that outside of oil tariffs that Standard neither wanted nor needed, Standard was a free-market, not a governmental, monopoly. Standard had to continually offer quality products at competitive prices to gain and keep its dominant market share. Lewis Galantiere observed with puzzlement that “this monopolist always produced as if he had competitors,” incognizant of the fact that without domestic barriers to entry (such as restrictive charters or siting permits), competition is omnipresent whatever the number and size of individual firms. This is because entrepreneurial ideas, awaiting fruition with the emergence of profit opportunities, can never be monopolized.

Standard Oil had competitors throughout its history–and increasingly so in the period of its antitrust troubles. In 1904, Standard’s twenty-three refineries, although claiming over 80 percent of the market, competed against seventy-five independents. By 1908, the number of independent refineries swelled to 125; three years later, the total was 147.

Potential entrants were virtually as important as actual entrants. In the 1880s and 1890s, Standard’s efficient performance kept would-be competitors on the sidelines and encouraged consolidation. This resulted from a competitive process entirely consistent with the market virtue of lowest cost provision of goods and services. There was also substitute competition; Standard’s kerosene had to compete with coal gas and electricity in the all-important illuminant market. As John Chamberlain stated:

Buyers always liked the company’s product – they proved by rushing to substitute petroleum kerosene for the old coal-oil and whale-oil illuminants. And buyers did not have any particular reason to complain of Standard’s pricing policy; not only did kerosene cost less than older fluids, but it had to meet the competition of the Welsbach gas burner and Mr. Edison’s carbon-filament electric light bulb. Standard could not have imposed a lighting monopoly even if it had tried. [Read more →]

May 18, 2011   No Comments

Standard Oil: A Centennial Evaluation (Part II: ‘Unfair’ practices and rebates reconsidered)

[Ed. note: This post, taken from Robert Bradley's Oil, Gas and Government: The U.S. Experience, rebutes the textbook criticisms of the business practices and economic consequences of the Standard Oil Trust. Part I yesterday summarized the manifold contributions of John D. Rockefeller to a fledgling, powerhouse industry. (Documentation for this post can be found on pp. 1094–1099.)]

Critics of Standard Oil, while conceding many of the aforementioned points about how Standard Oil advanced consumer service and resource efficiencies, might accuse the author of painting the picture with only bright colors. What about the other side of Standard’s drive to power? Did the ends justify the means – preferential treatment from third parties over competitors, monopsony power to purchase crude at prices detrimental to producers, predatory pricing to eliminate rivals and raise prices, and excess profits gained at the expense of consumers?

And what about land right-of-way obstructionism, buying into rivals to tame competition, establishing bogus companies, and spying on competitors? If these practices were legal, were they ethical? These points are considered below except for the monopsony argument, which was rebutted in chapter 14 of Oil, Gas, and Government.

It is worth noting at the outset that the complaints did not originate from consumers but from special interests within the industry. The critics were independent (non-Standard) producers, refiners, and marketers and sympathetic academicians and journalists who often had ulterior motives for their views.

Rebates

Price differentiation and individualized bargaining are essential aspects of competition. This is particularly true with railroads and other industries with relatively high fixed costs and low variable costs. Prices vary widely in such instances because incremental business covers at least variable costs. The railway industry in Standard’s day was very rivalrous, and railroads attempted to maximize revenue in each unique situation.

Before railroad interests passed protective legislation to discourage rebates (see chapter 11), the industry custom was to set book rates that were discounted for special customers who provided steady, high-volume business, Standard was the prototype special customer. Rebates off the book rate were, in Rockefeller’s words, “the railroads’ method of business.”

As part of the competitive process, discounts were often kept secret and paid after the fact as rebates. Railroads did not desire to trigger open price wars, and customers preferred to keep their rivals guessing. Whether the rebate was money returned from a book price (rebates) or money received from competitors’ shipments (drawbacks) was academic; preferred customers received lower rates than less preferred customers. Shippers with such scale economies were thus able to cheapen goods for consumers. If discounts could be prohibited by law, railroad interests would gain instead.

Critics of rebates have swallowed the railroad-industry line that rebates were “cutthroat” and bad, and therefore Standard was wrong for asking and receiving them. But rebates are price discounts that qualifying shippers and their consumers are entitled to negotiate in a free market. Moreover, as Standard stressed, rebating did not originate with them; was widely used by other shippers, competitors included; and was stopped once it became illegal in 1887. Before rebates were replaced by regulatory-induced price cartelization, Standard’s ability to negotiate them must be favorably viewed if consumer welfare and the interest of the recipient company are placed above the special interest of less able competitors and the railroad industry.

The last word on rebates was stated by Rockefeller in his memoirs when he called an oft-quoted statement: “ ‘I am opposed on principal to the whole system of rebates and drawbacks – unless I am in it.’ “

Predatory Pricing

The most infamous practice associated with the Standard Trust, predatory pricing, was popularized by Henry DemarestLloyd, Ida Tarbell, and other critics. The charge was that in marketing and particularly in refining, Standard initiated price wars by selling at below cost to weaken competitors and buy them out at depressed prices. Then, with control of the market, prices could be raised to enjoy monopoly profits. This alleged practice attracted so much popular support and political attention that the Clayton Act extended anti-trust law to ban “predatory” price discrimination in 1914. [Read more →]

May 17, 2011   1 Comment