Radio: Marketplace: Glenn Hubbard: Oil Market Making Washington Crazy

Glenn Hubbard has a nice commentary at Marketplace about the politicians' attempts to "exploit" the gas price issue:

Marketplace: Oil market making Washington crazy: GLENN HUBBARD: Now, I know policymakers and economists don't always speak the same language. But Washington's recent rhetoric on oil is enough to make an economist's head spin.

Consider Congress' pandering offer of $100 tax rebates to help cover the cost of gas. Or President Bush's recent call to investigate "price gouging" while simultaneously pressing for greater investment in the oil industry.

These statements are sufficiently over the top to bring forth an involuntary Econ 101 reaction. You know what I mean -- supply and demand.

Tightening supply reflects continued low production in Iraq, supply disruptions in Nigeria, and investment-unfriendly politics in Venezuela and Bolivia.

At home, regional variations in environmental standards and recent mandates for blended ethanol that exceed production squeeze gasoline supply and raise prices.

On the demand side, we in our SUVs make too little effort to encourage energy efficiency. And abroad, China has leapt past Japan as the world's number two oil consumer.

Politicians' rhetoric notwithstanding, we repeal the laws of supply and demand only at our peril.

Think of the disastrous program of federal crude oil price regulation in the 1970s or Hawaii's recent repeal of its scheme to cap fuel prices that led to shrinking supply.

But there is an antidote to high prices. The answer is: high prices. High prices encourage conservation on the demand side. They also encourage the development of new oil reserves %u2014 and, importantly, alternative energy sources -- on the supply side.

And some policy activism would help.

We need to support basic research for new technologies and export energy-efficient techniques to emerging economies.

We need to clear out harmful domestic barriers to production and refining.

And at the broadest level, we need to coordinate the domestic and foreign policy sides of the nation's energy policy.

At the very least, ideas like "price gouging" and "$100 rebates" need to be, well, more refined.

Comments

[Padraig]

Once again, the market-istas assume that, juyst because a new equilibrium will inevitably arise from current disorders, that all is right with the world.

The US economy is predicated on cheap gas. Most of the stuff we buy is delivered via trucking, and increased gas prices can easily cause increases in general prices. Furthermore, most people who drive live on incomes that are relatively fixed in the short run - higher gas prices hurt their pocket books, which drives down demand for other goods. There are negative externalities to these price raises, especially in the form of trasiition costs, that Hubbard is not taking account of. this is hardly surprising - I suspect Hubbard, more than most, is insulated from these effects due to his above-average salary. He won't pay the cost, we will. Clearly our current economic structre of reliance on cheap gas in unsustainable, but relying on the market to sort it all out for us results in a distribution away from the middle class (who've been having quite a rough time of it recently) towards the oil companies. When there are alternatives to simple price-caps that we could be discussin,g it strikes me as a little oblivious to pretend that our only choices are command economics and an unfettered market.

[Jim S]

The other primary sin of the marketistas as you call them is that they are so full of it that they never admit to the possibility of how easy the "futures" market can be gamed by lies on the part of those who can profit from the resulting rise in prices. Remember how they assured everybody that it was all about the evil regulations that the socialist state of California had passed when there was a power crisis in the state? Notice that not one of them has admitted they were wrong after all of the market rigging of the energy trading companies came to light? Tell us Brad, how many honest economists are there, anyway?

[dsquared]

[Tightening supply reflects continued low production in Iraq, supply disruptions in Nigeria, and investment-unfriendly politics in Venezuela and Bolivia.]

one of these things is rather different, one of these things is not the same ...

Chavez is pumping the oil and Morales is pumping the gas. Neither of them are restricting supply at all (since PDVSA has been nationalised for years, I don't see what "investment-friendly" policies Chavez could possibly have carried out). This is just sneaking a bit of neo-liberalism 101 into waht was meant to be uncontroversial economics, a practice that I thought the neolibs had been laughed out of.

[Linkmeister]

I would be really interested in learning where Mr. Hubbard got the data he used to conclude that Hawaii's "scheme to cap fuel prices...led to shrinking supply." Not even in Hawai'i have we heard anything about a shrinking supply, certainly not from the gas cap's opponents. The opposition here, at least from the politicians, has used dogma alone to fight it. "The market knows best," they cried, with no evidence such as Mr. Hubbard claims to have. Have you or he got a pointer to where he got that?

[mauisurfer]

"Hawaii's recent repeal of its scheme to cap fuel prices that led to shrinking supply."
This is not true, plain and simple. There has NOT been a "shrinking supply" of gasoline in Hawaii. Hawaii DID repeal the "gas cap" law, but the law only limited the price which wholesalers charge based on a formula of mainland prices. Thus, there was NO RESTRICTION on prices that retailers actually charged at all. And our GOP governor was strongly opposed to the legislation , so she badmouthed it and undermined it. The result: we are already paying the highest price in USA, and will pay even more. There is no economic reason for this except of course the monopoly/oligopoly reality. Gasoline from asia is refined here by two refineries, and should cost LESS than California as shipping is actually closer.
The death knell of the gas cap law tolled when Hawaii wholesalers & refiners were able to raise their prices after Katrina, as Gulf Coast gasoline prices were part of the law's index. So rather than rewrite and improve the legislation, the law was trashed. And of course our governor promised an investigation of price fixing, cross your fingers, don't hold your breath.
The state Legislature first passed a gas price cap law in 2002 based on the average weekly price on the West Coast, but it was never implemented. Lawmakers in 2004 amended the law to peg the cap to an index of prices around the country.

[falcone]

Arguably, the rebate is the best idea of the lot. If you see that prices have increased, which is hurting consumers, but that you don't want to interfere with the market, you don't tinker with the market. You simply give people $100, which they are free to use however they want. There is no reason for them to use it to buy more gas, which seems to be the implication. The $100 rebate leaves in place the high price of gas, and therefore, the market incentive to use less, and the market incentive to find new sources of energy.

[Barry]

"Tightening supply reflects continued low production in Iraq, supply disruptions in Nigeria, and investment-unfriendly politics in Venezuela and Bolivia. "

As dsquared pointed out, Hubbard is lying.

[bakho]

"High" price is a vague term. What is a high price? My calculation of the price it would take to make a real impact on energy conservation is at minimum $10 / gal gasoline. Current prices can only be considered "Moderate". At $3 /gal, less that half of current car buyers consider fuel efficiency one of their top considerations. At current gas prices we find automakers scrambling to improve fuel efficiency. (NOT!)

In the 1970s and 1980s, we proved that it was possible to greatly increase fuel economy at "moderate" gas prices by enacting fuel efficiency standards. We could do the same today and get similar results. Or we could twiddle our thumbs and wait for gas to hit $10 per gal so we can get started on conservation.

Would the economists who claim that price alone could be used to drive conservation care to discuss the impact of $10 gal on the US economy?

[bakho]

New CAFE standards are the best way forward, because that is the best way to back demand for oil away from capacity. When demand reaches supply capacity, prices will skyrocket, shortages will appear, etc. Since the cheapest oil is produced first, increasing capacity means bringing more expensive oil to market. Thus increasing capacity will not decrease price.

We have efficiency standards for appliances and the economics is well documented:

Appliance efficiency standards can save consumers over $200 billion, or $2,000 per American household. These savings produce new jobs and enhance the global competitiveness of American industry.

"Appliance efficiency standards benefit industry also--at least that is what companies subject to these standards tell their shareholders. Appliance efficiency standards encourage technological innovation. Indeed, NRDC believes that this is the primary reason they have become controversial. The primary argument is not between advocates of efficiency and advocates of industry's interests, or between proponents of regulation versus proponents of market forces. Rather, it is between supporters of technology advancement, both in the public interest sector and in the affected industries, and those in industry who are content to rest on their laurels. Standards encourage American companies to be technology leaders in global competition. This is good for the economy, good for job growth, and good for the environment....

NRDC has worked closely with utilities -- both public and investor owned, including electric, gas, and water companies -- a s well as government agencies in developing such market-based programs and making them succeed. Yet, virtually everyone who has tried to implement such a program recognizes that, in most cases, it is costlier to the consumer, directly or indirectly, and less effective than a standards program. For example, many utility-based programs have used rebates as a way of promoting new technologies and encouraging their acceptance in the market place. These programs have been successful, often achieving market penetrations well over 25%.

But, there is a price to pay: the cost of rebates must be borne by other utility customers, and some customers object to paying such costs. In California, NRDC has worked with others to develop a mechanism that allows utility participation in market-based programs even in a deregulated electricity sector. But in other states, less broadly accepted methods of deregulation are feared to undercut utility efforts to support market-based programs.

And in all cases, if the issue were obtaining savings through utility-based programs versus obtaining the same fractional savings but with higher market penetration through programs that cost nothing to the non-participants, they would clearly prefer the latter. Thus, even with an effective, broad-based market incentive program, there would still be a need for energy efficiency standards."

http://www.nrdc.org/air/energy/tdg0796.asp

[paul245]

I think one priority we can all agree on is to plan for the future, so we do not find ourselves in this situation again. We need to realize there is no magic solution to the energy crisis facing America. The only way to limit the cost of oil in this economy is to cut back on demand. Over the long run, a policy that favors developing alternative fuel and energy sources should be implemented.

However, in the near future, the only way to deal with the oil crisis is to increase the supply on our side of the table. We can’t expect alternative fuel sources to pan bring results in the immediate future, so it is important that we find alternative ways to limit any increase in our dependence on foreign oil. One solution is to open exploration in areas like ANWR and the Rockies. The amount of potential oil in these regions is enough to help cover our expanding oil for demand while sensible energy policies are developed.

[wetpuppy]

Even if ANWR or any other source of oil in the US isn't enough to meet our growing demand, just the simple fact of bringing those resources on line helps to drive down the price of oil. Just as it did when the North Sea and other recently developed areas did when they came on line. Because the ones who control the price aren't the Exxons and Chevrons but rather the commodities markets and oil cartels. And these entities respond to the threat of their market share being threatened.

[RS]

Another important thing to consider is our current regulations on oil companies. Right now, it takes a lot of hoop-jumping for them to expand their operations and technologies. If we could loosen up on them, they may be able to increase supply faster and more efficiently.