President Bush and gasoline prices

Unlike some other pundits, I see a number of good ideas in the President’s new proposals and actions announced on Tuesday.

Here are some of the President’s ideas that to me make a good deal of sense; for more details see the as always excellent summary from Green Car Congress.

1. Temporarily suspend additions to the SPR. President Bush stated in his speech Tuesday:

One immediate way we can signal to people we’re serious about increasing supply is to stop making purchases or deposits to the Strategic Petroleum Reserve for a short period of time. I’ve directed the Department of Energy to defer filling the reserve this summer. Our strategic reserve is sufficiently large enough to guard against any major supply disruption over the next few months.

We currently have 688 million barrels in the SPR. Loans and sales from this reserve of 21 million barrels last fall were in my opinion quite helpful in mitigating the effects of the hurricane, and, if used in an aggressive and timely manner, could be a very important tool for responding to potential future crises. On the other hand, I agree with the President that it doesn’t make sense to give up $70 a barrel to put more oil in. Temporarily suspending deposits might reduce demand by 70,000 barrels a day over the summer. Small, but I can’t quarrel with Bush’s summary: “Every little bit helps.”

2. Temporary waivers of reformulated gasoline requirements. Bush also announced Tuesday:

[S]tate and local officials in some parts of our country worry about supply disruption for the short term. They worry about the sudden change from MTBE to ethanol — the ethanol producers won’t be able to meet the demand. And that’s causing the price of gasoline to go up some amount in their jurisdictions. And some have contacted us to determine whether or not they can ask the EPA to waive local fuel requirements on a temporary basis. And I think it makes sense that they should be allowed to. So I’m directing EPA Administrator Johnson to use all his available authority to grant waivers that would relieve critical fuel supply shortages.

This proposal led Calculated Risk to worry that Bush intends to return to the air quality standards of 30 years ago,
and prompted Tim Haab to note sarcastically, “and if we put the lead back in it would be even cheaper.” But I think what Bush was responding to was requests like this one from Governor Edward Rendell (D-PA):

I am writing to respectfully request that the U.S. Environmental
Protection Agency (EPA) issue a “No Action Assurance” for the Reformulated
Gasoline (RFG) requirements in the five-county Philadelphia area [Bucks, Chester, Delaware,
Montgomery and Philadelphia counties] for two
weeks or until such time as adequate supplies of complying gasoline are
assured in the area….We have information indicating that a major gasoline supplier in the
Philadelphia area is reporting more than 160 delivery-needed alarms, and
many more fuel outlets reporting that supplies are nearly exhausted. In
light of the circumstances, the requested assurance is “clearly necessary
to serve the public interest.”

There is little doubt in my mind that temporary bottlenecks associated with the transition away from MTBE have the potential to create some significant local problems for which this is a very sensible solution.

3. Repeal energy company tax breaks. Here I quote from the related White House Fact Sheet:

Record oil prices and large cash flows also mean that energy companies do not need unnecessary tax breaks like the “geological and geophysical expenditure” depreciation acceleration provision in the Energy Policy Act of 2005. This unnecessary tax break allows energy companies to rapidly depreciate costs related to oil exploration. The President also calls on Congress to repeal the Energy Policy Act provision subsidizing energy companies’ research into deepwater drilling. The President is looking forward to Congress taking about $2 billion of these tax breaks out of the budget over a 10-year period of time.

The status quo, which the President is rightly resisting, is for Congress to muscle through a multitude of new tax incentives and subsidies to encourage certain behavior that suits its current fancy, as it did in last summer’s energy bill, and then pile on with a new series of equally poorly thought-through new taxes, such as current ideas for a windfall profits tax. The energy companies didn’t need any of these tax breaks. Eliminating the tax breaks is a far more sensible approach than adding a new tax on top of them.

How will this help lower gas prices? Only indirectly, insofar as it may help forestall a windfall profits tax or inefficient allocation of corporate energy budgets, which if unchecked ultimately would end up causing consumers to pay more. But in any case, it’s a good idea on any of a number of other grounds, such as making a small improvement in the budget deficit. For this reason, I’m all for the President including it in his list.

4. Renewed calls for other measures. The President is also calling for a number of other measures that I think could help, including directing EPA Administrator Steve Johnson “to bring together governors to form a new task force to confront the larger problem of too many localized fuel blends,” asking Congress to “simplify and speed up the permitting process for refinery construction and expansion,” and asking Congress to authorize exploration for oil in the Arctic National Wildlife Refuge.

5. Protecting consumers from unfair pricing. The White House Fact Sheet describes these measures this way:

The Federal Trade Commission (FTC) is investigating whether the price of gasoline has been unfairly manipulated since last year’s hurricanes. The President is also directing the Department of Justice to work with the FTC and the Department of Energy to conduct inquiries into cheating or illegal manipulation related to current gasoline prices. The FTC and Attorney General are contacting all 50 state attorneys general to offer technical assistance and to urge them to aggressively investigate illegal price manipulation within their jurisdictions.

Perhaps this is part of what led James Glassman to summarize the speech as “a sad example of political capitulation by a former Texas oilman who certainly knows better.” But I think there is another way to read this. There is currently an almost religious conviction by many Americans that the price of oil, rather than being determined by world markets, is controlled by a few big oil companies, as if the 2.5 million barrels of crude oil per day that ExxonMobil produced last year somehow give it the ability to control the price of the other 82 mbd that got sold. The certainty with which people hold this conviction seems directly related to the complete absence of any supportive facts. Surely the best way to confront this prejudice is to shine a clear, bright light on the hypothesis and investigate its premises in full public view. If that’s the outcome of these investigations, it could be a good thing.

Now the domestic U.S. market for refined gasoline is another matter, where it is less clear to me what detailed and multi-sourced investigations might end up concluding. My personal view is that there is less competition in many local markets than there should be, partly as a result of the “boutique fuel” issue raised above, though I doubt that this adds more than 10 cents a gallon to the average price customers pay. Nor am I persuaded that the American press, fanned on by politicians’ hyperbole, would succeed in helping Americans to understand some of the subtleties of this question or even the difference between the global market for crude and the local market for the particular gasoline they buy. But there’s nothing for it at this point– the public is clamoring for investigations, so investigations they shall have, and hopefully the truth will emerge.

There are other aspects of Bush’s proposals for which I have less enthusiasm. The reader may note that those I have described, at least the way I have described them, are fundamentally quite modest, for which a legitimate reaction might be, “yes, those may be good ideas, but they really won’t change that much.” But this in fact is exactly why I like them. I think there is an overwhelming political instinct in the current situation to do something huge, drastic, and ultimately quite harmful. Far better, in my opinion, to do a little bit of good rather than a whole lot of harm. In the rare cases that our elected officials opt for the former, they deserve our praise.


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21 thoughts on “President Bush and gasoline prices

  1. odograph

    I think my reaction was fairly positive, but I do worry about the (predictable) knee-jerk ANWR thing.
    Does anyone in government think of this as a timeline, with the idea that they should time the opening of ANWR (and other domestic sources) for optimal long-term strategic and economic value?

  2. CalculatedRisk

    Professor, perhaps I’m senstive to suspending environmental rules because of where I live. From today’s paper: O.C. air still unhealthful
    Last year, after Hurricane Katrina, I supported your view: “I too applaud the EPA decision – as long as it remains temporary.” That was clearly a temporary situation. But this time the timing is uncertain. If it is just a local issue – to avoid spot shortages – why did that even make Mr. Bush’s speech?
    Mostly I agree with you, but I remain skeptical on the suspension of environmental rules.
    Best Wishes!

  3. Robert Schwartz

    I guess nobody is going to join my in my call to increase the federal gasoline tax by $2.50/gal.

  4. Joseph

    Robert, I think this graph from Professor Pollkatz will show you why no politician will ever advocate increasing the gasoline tax.

  5. Aaron Krowne

    The investigations into oil company market manipulation will do nothing to change the minds and hearts of the people. They just hate paying a crapload for oil, and they won’t let inconvenient annoyances like “facts” get in the way of their venting.

    I suppose there could be legitimate discussions about whether oil (or energy in general) is a “public good”, and therefore should be devoid of profits. However I’m not aware of any similar situation where nationalizing the sector led to an overall decrease in costs compared to the privatized+profits method (see Milton Friedman’s debunking of the TVA’s “benefit”, for example).

  6. wcw

    Mr. Krowne, I give you health care costs: http://www.nybooks.com/images/tables/20060323img2.gif
    If I could wave a magic wand and nationalize the US into single-payer, even if I had to accept a middlin’-quality Canadian version, I can effectively guarantee that it would lead “to an overall decrease in costs compared to the privatized+profits method” with similar-or-better health outcomes.
    I wouldn’t nationalize extractive industries, though. Some more-careful regulation of parts of it, perhaps, that’s all.

  7. kelvin

    Why don’t we demand that every city, town, and community in the country be required to remove 25 % of all stop signs and traffic lights. We could fudge a little if the locals can show that they have reduced by 25 % the number of vehicles they needlessly grind to a halt each day. Synchronization of traffic signals on major arteries would do the trick.
    Anyone that has ever driven a car with an onboard instantaneous fuel consumption computer has seen their gasoline mileage plummet from 25 – 30 mpg at cruising speed of 45 mph to 3-6 mpg while accelerating back to cruising speed before being stopped again two blocks later at the next non-synchronized traffic light. The number one pollutant and green house gas emitter is car exhaust which increases proportionately with the rate of acceleration multiplied by the number of times the vehicle stops/starts.
    All you indignant greenies should be up in arms about this. Your city government is the worst pollution causing, gas waster on the face of the planet.

  8. T.R. Elliott

    OK. I’ll grant that Bush has met the letter and intent of the Hippocratic oath in this case: do no harm.
    But, that said, his sensible approach in this circumstance does not detract at all from his strong front-runner position as Worst President Ever.

  9. Vishnu V Menon

    President Bush,
    You are the coward and the most stupid president America has ever had.Can this president someday tell how many civilians died in the WTC war and how many American soldiers died in the Iraq War?
    How America has nuclear weapons and uses them as they please and other nations are not supposed to acquire the tech.?
    How the president interfers into each nation’s internal matters and gives a comment for that?
    The country is gud and i think its time they changed the president

  10. Grzegorz

    In regard to point number three; Repeal energy company tax breaks.

    Tax credits, accelerated depreciation scheduled for hard assets, and other subsidies shows that the current tax system and corporate greed (re: legions of lobbyists) is broken. Why not strike at the heart of the problem and initiate tax reform and then the lobbyist issue?

    In regards to domestic ethanol production, imaging the cost of the switching from MTBE to ethanol is the government didnt provide a huge tax credit to domestic ethanol producers.

    In the same vain of leveling the global ethanol production playing field, what about ridding ourselves of the tariffs on ethanol imports? I know the tariffs keeps the domestics and their lobbyists happy, but why not have the domestics compete globally?

    These Senators we have in congress are clueless; I have NO faith in them whatsoever. What a pathetic bunch.

  11. calmo

    Scary graph Joseph, could it be this simple? Does W know that to improve his polls all he needs to do is issue some gas rebates? Will Bolten discover this before he turns over all the WH staff?
    I’m glad Jim agrees with the measures that W is taking so we don’t have to pay the $5/gal gas that our friends around the globe are paying…sometimes for their very own oil (Canada). But how good are these measures?
    1. SPR suspension of some 70,000 bl/day illustrates what ‘strategic’ means: a buffer that can be manipulated for purely political motives; it can be topped up later should W’s polls improve. The ‘little bit’ that counts here is the marketing: we don’t pay at the pump, we pay later when we top up the SPR.
    2. The temp lifting of EPA standards to allow the introduction of ethanol in some local areas means those environmentalists have over-reached. If point 1. was a “little bit”, this one is a “micro bit” if one looks at the size of the impact ethanol on this issue. One might as well advise increasing your tire pressure to 50 lb to get a similar saving.
    3. Removing the tax breaks for the oil companies, but who believes this administration (with this (cough) Energy Policy) will in fact adopt legislation that actually repeals any legislation that is benefitting the oil companies? This is not even a micro bit that could help –it’s a phantom (Lucy) bit that promises (Charley) to ignore oil lobbyists this time.
    4. Renewed calls for ideas. But avoiding this one: where is Shooter Cheney and his Energy Policy? Not at the fuel boutique I presume. In any other administration this would be received as an admission of incompetence, but with polls so low, they know they will be received not with open arms maybe, but with relief.
    5. Gouging at the pump needs investigation. It aint the shareholders of Exxon who happen to be recieving windfalls, it’s the service station attendants weaseling another $10 out of your wallet. It just happens that CEOs earn, (not just receive or abscond with, but EARN with sweat and tears) plunderous amounts of money. And you’re just jealous. As Scotty (2nd rate according to Bolten who drives a 2nd rate Harley and therefore knows what 2nd rate is all about) tells us, special taxes on these profits is Un-American.
    Ok, kevin rescues me from complete depression with the suggestion that we remove the stop signs and lights at intersections.
    I went to ‘Demolition Derby’ once but I never got hooked, you?

  12. embutler

    >>
    nonsense,most of the private gas station use gasoline sales to lure you to their mechanic services ,the oil-company stations just pass the money back to the oil companies.

  13. bal

    I don’t believe too many gas stations make much money on gas, otherwise they wouldn’t all have bothered to become medium-sized grocery stores. The gas station ‘attendent’ gets $8.75 an hour no matter what the price of gas is. I suppose his wage correlates to gas prices insofar as if gas prices goes down enough he would lose his job.
    That said, I agree windfall profit taxes are too blunt and counter-productive. Frankly, if they use the money to find ways to make unprofitable oil reserves profitable and diversify into renewables, I would grumpily let them have the money. And unfortunately, they need to see the money coming for a while in order to agree to do this. I think the windfall profit tax proposals are just a political game- congress sending a signal to oil companies that we would *like* them to do something nice with all our money.
    Re: lights and stop signs, it definitely would help *IF* cities had the money to conduct proper studies of traffic timing. Planning traffic patterns is probably the penultimate example of unintended consequences, so pros really have to do it. For example, the vaunted lightrail in Minneapolis makes the north-south Hiawatha Avenue it parallels and any road that crosses Hiawatha Avenue slower than before because of the screwed up timing from closing crossings for the trains. Otherwise, it’s a pretty slick train.

  14. calmo

    Ok, that does it. You want my little bits that help?
    Alright.
    1. Coast downhill (like my late Scottish papa always advised).
    2. Knock off those sideview mirrors that just eat gasoline as soon as you are coasting faster than 10 mph.
    3. Always get into the slip stream of someone passing you.
    4. Travel at night when the traffic is light so your chances are better at going through those traffic lights unimpeded by other like-minded drivers.
    5. Over-inflate your tires to reduce the tread-road contact to that of a bicycle –you’ll be amazed at the difference.
    6. Never motor with the windows down no matter how aerodynamic you think your car is.
    7.Always travel with just enough gas in the tank. You are not the delivery truck.
    8. Throw out the spare tire and back seat if you never use them. You are just carrying extra gas gobbling weight.
    9. Slim down yourself and become that 90lb weakling that you always secretly admired –the less of you the better for this cause.
    10. If you must economize further, travel with someone who will share the cost of the gas. Who knows maybe he’ll have some more of those little bits that help.

  15. Don

    Remove the mirrors, eh? Well, most folks don’t use em but I hardly consider that a good state of affairs.
    My crackpot fuel saving idea would be to mandate automatic tire inflation Systems for all new cars and trucks and all trailers above a certain GVWR (say 10K). Proper tire inflation is important for economy. Not to mention all the oil that would be saved by tires lasting their design life (rather than failing early due to underinflation). The safety benefits would be icing on the cake (not to mention reducing the number of big truck tire fragments scattered along the interstates).

  16. Robd

    “5. Over-inflate your tires to reduce the tread-road contact to that of a bicycle –you’ll be amazed at the difference.”
    Why not just use a bicycle…..save 100% gas and less need to go to the gym.
    And for all you american weenies complaining about high prices, here in Holland we are paying almost $7 per gallon. Yet, rush-hour is worse than last year.
    You will also get used ti it……

  17. Joseph

    The Republicans, who have never found a problem that could not be solved by tax cuts, have proposed a tax rebate of $100 to each taxpayer to ease the gas crunch.
    I like Daniel Gross’s comment “In other words, they want the taxpayers to borrow $20 billion from the Saudis at 5 percent a year, so they can use the cash to buy oil from the Saudis at $72 a barrel.”
    Where are the adults in this administration?

  18. calmo

    Where are the adults? –from BDL’s “the grown ups” maybe.
    Well, I used to think this was a fair characterization –the implication being that they were children, selfish, grasping, spoiled-rotten indulgent children.
    But it has occured to me that they are post-adults, beyond mature, slightly senile even…ok, chronically demented, decadent beyond public observance.
    It is a moot point maybe given the polls are sinking to the low 30s.

  19. Bill

    I used to work for Petro-Canada the formerly state owned Canadian integrated oil producer.
    At that time, around 1998 the profit margin on a litre of regular gas was said to be about $0.05. So roughly 20 cents per US gallon.
    Obviously if the oil company produced and refined all of the gas they sell there is profit at every level, but that isn’t necessarily the case with every gallon sold.
    The profit margin on chocolate bars is much higher which is why all the gas stations are turning into convenience stores.
    I now work for a different Canadian company , and I can assure you that we are reinvesting almost every penny we make in the oil sands. Most companies are doing something similar. Part of the problem is that costs are also rising steeply, because so much money is pouring in.
    The other interesting point is that even at these high prices we are doing projects that are just marginally economic. Higher prices allow us to exploit thinner reservoirs with lower production and higher operating costs. In the unending quest for production we just keep re-investing our cash flow.
    The public perception is that we are evil but we are just trying to make money for our shareholders the same as any other business.

  20. calmo

    Bill is not evil, but just trying to make money for his shareholders the same as any candy bar business.
    Shoot, I even like Bill and his candy bars, but let me tell you the minute candy bars double in price, there will be no sale.
    Hear me: No sale.
    I can see we are really prepared for this Post Peak Oil Period.

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