MIT Professor Christopher Knittel has a new paper on the potential for the United States to reduce petroleum consumption.
From the paper’s abstract:
The United States consumed more petroleum-based liquid fuel per capita than any other OECD-high-income country– 30 percent more than the second-highest country (Canada) and 40 percent more than the third-highest (Luxemburg). This paper examines the main channels through which reductions in U.S. oil consumption might take place: (a) increased fuel economy of existing vehicles, (b) increased use of non-petroleum-based low-carbon fuels, (c) alternatives to the internal combustion engine, and (d) reduced vehicles miles traveled. I then discuss how the policies for reducing petroleum consumption used in the US compare with the standard economics prescription for using a Pigouvian tax to deal with externalities. Taking into account that energy taxes are a political hot button in the United States, and also considering some evidence that consumers may not correctly value fuel economy, I offer some thoughts about the margins on which policy aimed at reducing petroleum consumption would have the largest impact on economic efficiency.
Knittel begins by noting that fuel taxes differ tremendously across OECD countries.
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And these differences in taxes are associated with huge differences in per capita consumption. The graph below shows a pretty strong correlation: countries with lower fuel prices have higher fuel consumption. The slope of the fitted curve raises the possibility that, given time, long-run responses to higher gasoline prices could be substantially stronger than time-series correlations might suggest.
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Knittel feels that while raising gasoline taxes may be politically infeasible for the U.S., corporate average fuel economy (CAFE) standards are a reasonable alternative. Current standards call for an average fuel economy of 34 miles per gallon by 2016 and 54.5 by 2025. One of the reasons Knittel thinks these may be attainable is his earlier research (which we called to the attention of Econbrowser readers last year) showing that historically, technological improvements have gone more toward increasing weight and horsepower than to fuel efficiency. He thinks those CAFE standards could be attained by a combination of further technological improvements, modest reductions in size and horsepower, and more electric and hybrid vehicles.
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As U.S. oil consumption continued to increase during the oil price run-up over 2003-2007, I became pessimistic about how hard it would be to make adjustments in the quantity consumed, and indeed Knittel himself produced some earlier research consistent with that conclusion. However, the more recent data do suggest Americans have started to make some significant adjustments.
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Reasonable doesn’t sell now.
Energy efficiency standards for incandescent light bulbs was sold by the GOP as government restricting choice. We were even told incandescents were banned, when that was a lie; they had to meet a higher efficiency standard.
The only hope mileage rules have is that the auto industry now supports them because competition is driving them that way. Go to the Detroit Auto Show – or look up the materials on line. Hybrids everywhere. Electric cars multiplying. Chrysler is now owned by a company used to dealing with the high cost regime of the EU and Ford and GM have to run hard to keep up with Toyota et al. They aren’t the obstacles to efficiency they were. Ford knows they’ll need hybrid trucks because Toyota will eat F150 sales by selling a comparable vehicle that gets 15 mpg better.
But the GOP in Congress will likely stand against efficiency standards.
I found Chart 5 of Knittel’s paper fascinating. Perhaps a story behind that graph “Vehicle Miles Travelled per Capita from 1970 to 2009” illustrates the love affair with cars coinciding with the love affair of American’s pursing one of the tenents of the American dream: home ownership? The ever growing “average” family home and the growth of suburbs and the resulting urban sprawl has made the American consumer less resiliant to negative supply shocks –which should, in my opinion, be more prevalent as a growing planet wishes to emulate the lifstyle of the West– as she becomes more reliant on traveling to and from her home.
This horsepower/weight thing irks me so much. My wife had a 1994 Saturn sedan for years and years (original purchase price about $13,000, her aunt kept the documents in the glove box). That car got 24/34 mpg, and was rated at about 125 HP. It probably weight about 2400 lbs.
She recently upgraded to a 2011 Civic – $17,000. 140hp, and 25/36 mpg, 2750 lbs. We gladly would have paid the same for better mpg and less hp (and less weight).
17 years, similar sized vehicle/class, and about 1 mpg better. Progress?
Been waiting of Toyota to come out with a Pickup that will safely carry the camper and pull the loaded horse trailer and get 20mpg. For The World!
Knittel briefly and with little analysis dismisses “The Forgotten Channel: Reductions in Vehicle-Miles Travelled” as the very unlikely to reduce oil consumption. My belief is that there must come a time when efficiency gained from technology impacts miles traveled through telecommuting. High speed fiber networking to the home, high speed wireless, and low priced teleconferencing equipment are now common and allow a person to easily work from home, or from anywhere on the go. The government must be the catalyst to change old employer mind sets. Instead of subsidizing further highway and mass transit build out, the government should subsidize telecommuting by providing tax breaks to businesses with employees that do not leave the house in the morning.
Current fuel economy are not comparable to ones from pre-2008. New fuel economy numbers are lower than the old ones and also more realistic. The calculator linked to below gives estimated ratings under the new system for older cars. It looks the fuel economy for a 1994 Saturn would be 3 mpg less on average under the new system.
Go to
http://www.fueleconomy.gov/feg/ratings2008.shtml
Now this is only 4 mpg improvement over 17 years, but you could have bought a Civic Hybrid and improved to 41 mpg for an extra $5000 or so. That extra 10 mpg won’t make your investment worthwhile until you’ve driven between 150k and 250k miles at gas prices between $2.50 and $4.00. Thus, more expensive gasoline is needed.
Of course, a 1994 dollar is worth about $1.50 in 2011 dollars, so the car itself is cheaper.
What about per mile traveled and person-mile traveled?
I wonder if removing Fuel Tax and Oil Subsidies would give consumers the incentive to trade in their current vehicles for more fuel efficient ones…
The first graph is one of the more egregious uses of linear regression I’ve ever seen. It is obvious the the graph has 4 outliers (US, Canada, Australia and Luxembourg) and a large region of basically no correlation. Just because you can plug some data into Excel and get a straight line (or even a bent line like in the graph), doesn’t mean it means anything.
And when you realize that the 2 biggest outliers are the US and Canada, the two countries with the lowest population densities on the list, the attempted correlation becomes even more bogus.
That graph is embarrassing.
All of which is not to say that gas taxes are worthless. If we instituted even a $2 a gallon tax and used that to pay for bridges, road repair and public transportation, we’d have some pretty amazing infrastructure.
You know, just speaking as a car enthusiast here, choosing 1980 as the starting point for your graphs is cherry picking the data. There was a huge decrease in horsepower and weight in response to the introduction of CAFE standards in the 1970s. The nadir of horsepower and vehicle weight was 1981 or so.
Anybody alive in that time frame knows how awful those cars were. We need to be careful how much we let these CAFE regulations decrease vehicle horsepower and weight, lest we go back to those dark ages.
I’d like to also note that there is only one car sold in America that can currently meet the 2025 CAFE standards. That car is the Toyota Prius. Clearly, we CAN meet the 2025 CAFE standards, but only with expensive technology that does not meet the needs of every consumer. There is some substantial risk that we cannot meet these standards for the entire fleet, or even most of the fleet.
Also, keep in mind that Ford has some very nice new small cars (the Fiesta and the Focus) that are selling very poorly. Just because they build it doesn’t mean Americans will buy them.
Meanwhile, big German SUVs are selling like hotcakes. Go figure.
Here’s an easy solution: Ramp up a a $100/barrel tax over five years and distribute all the revenue to households. Businesses and households would come up with a million ways to economize that we can’t even imagine.
You could give businesses big tax incentives to invest in production methods that would be more efficient, so it would be stimulative too.
@Uber_snotling
I believe you about the re-calculation, but my given 25/35 was from my own measurement over probably 30,000 miles (on a car with 150,000 miles on it).
The price of the car, however, is pretty shocking – I nearly couldn’t believe it when i saw the receipt for the Saturn, because I thought a budget car would have retailed for much more back then. And for what its worth, Civic Hybrids start at about $24k. We looked at them, but like you said – not worth the investment at current gas prices.
Regarding the increase in miles traveled, many people like moving around and will spend their money on fuel to do so. The real question is whether that has resulted in infrastructure and living and work patterns that REQUIRE the consumption of that much transport. I fear the answer is yes, meaning many Americans have trapped themselves in high transport consumption lifestyles. Not a wise choice with 1 billion chinese eyeing that ability.
Ah… that last graph is really stupid. 2007-2012 represents the crash and current depression. So, all sorts of consumption is down. Basically an SUV parked in the driveway uses no gas.
I would suggest what I’ve been floating about for years is an EII, energy independence initiative. I’d like to see a tax credit on financing and cost of high mpg vehicles. Say up to 5k$ per vehicle per year. The idea is that we would increase the vehicle turn over rate and allow people to purchase additional low use vehicles to cut gas. This would allow you to purchase a car instead of paying tax.
the side benefits for all you liberal Keynes worshipers.
1)Increasing production at car companies should put a small dent in employment
2)Would put a dent in oil/gas consumption and possibly crash prices. In effect should help our trade deficit situation.
3)Basing this on lowering taxes so it might be more politically edible in DC
Second thing to do is allow an additional tax credit for moving closer to work independent of total distance and change of employment. Might have to tag it for less than 2 moves a year to make it less workable. That would work to cutting down distances.
Third make a business tax credit for moving more centralized.
Agree about the comment on hybrids. The technology is barely worthwhile over the long term but getting better.
I am saying offer rewards and there isn’t a cost to the government except they have less of our/your money.
I’d also like to lock in the deal for 10 years so we don’t borrow demand so much as give a powerful incentive.
Then we can look at technology investments.
Try to look at encouragement vs punitive taxation policy.
Americans are hilarious! The majority will cluelessly purchase pickups, SUVs, Crossovers, and Minivans, to display their prosperity and navigate the road system that is slowly crumbling. Their currency rapidly inflates because their trade balance sucks due to excessive oil importing. When the exponential rise in oil prices bite in another 10 years, all the investment in housing and transportation enabled by cheap gas will suddenly decompose, adding more losses to an already overstretched banking system.
If you want to get to work, I’d suggest you move to Portland…If you want something left in your bank account too, you might want to try Stockholm.
Craig Jackson The government must be the catalyst to change old employer mind sets. Instead of subsidizing further highway and mass transit build out, the government should subsidize telecommuting by providing tax breaks to businesses with employees that do not leave the house in the morning.
Interesting. In fact, the govt already provides govt workers with a voucher if they use public transportation. And the govt has been pretty aggressive with telecommuting. Bosses even have quotas. I don’t telecommute because I have a 16 y/o daughter and even though I love her dearly, I’d probably kill her if I had to be around her 24/7 during the summer break. Still, I get a lot of pressure to telecommute.
Another idea being pushed by the govt is work station satellite offices. The resistance here is actually coming from workers who are concerned that lack of face time with the boss might hurt their promotion chances. Those are the kinds of disincentives that need to be overcome.
So what exactly are these troubling externalities that Prof. Knittel says we need to mitigate?
He starts with local air pollution. (As we know, we always start with the heavyweight problem at the top.) Local air pollution is a huge problem. Really. And CAFE standards can save us.
OK, but wait, there’s more. Number 2 problem: CO2. More oil equals more CO2. What’s next?
US dependence on foreign oil. Ah, yes. Those blasted Canadians. First they want to sell you oil, then they insist on pipelines!
And military intervention! If only those pesky Arabs didn’t have oil, we’d let the Chinese and the Russians have their run of the place.
And of course, if you use oil, you could be subject to…wait for it, oil shocks.
And there are all those myopic consumers. They all bought the wrong car!
All pretty heavy issues, and Prof. Knittel has given them all their due: “[T]his paper neither focuses on these various externalities and social costs, nor delves into the literature about quantifying them. Instead, I take their existence as largely given, and instead focus on understanding the policy tools that seek to reduce gasoline consumption.”
Ah, so we don’t actually have to show externalities exist. Heaven help us! What effort that might involve! Perhaps even research and quantitative analysis. No! Let us start from the conclusion and then build some policy around that!
So, let me take these problems in turn.
Is local air pollution a huge problem? I don’t know. I don’t really experience it, but maybe there is this huge, lurking monster that just somehow hasn’t hit the radar screen and is best addressed by CAFE standards.
CO2: Since we’re effectively at peak oil, it matters precious little whether we consume less or not. US per capita consumption is off 15% in the last five years; down 1.6% in the last twelve months. And, because of it, the oil field services business is…running at full tilt! It’s all going to get produced, whether the US consumes the oil or merely cedes it to the Chinese.
Foreign dependence. Oil prices are set (mostly) globally. Thus, whether we consume 20 mbpd or 2 mbpd, we’re subject to the same market forces. The vulnerability is not to quantity, it’s to price. And unless we get off oil entirely, we cannot escape price vulnerability. Is that the author’s intent?
Macroeconomic risks. Saying that oil can cause oil shocks is a bit like saying antibiotics can cause antibiotic resistance. Sure. So you want to live without antibiotics? And does lower oil consumption decrease macro-economic risk? If so, why is Europe struggling and the US economy showing some life? (Couldn’t be that shale gas and oil have propped up the US economy, could it?) Oh, and by the way, all those fine European countries consuming 60% of our oil per capita–they all have GDP per capita 75% of ours. They not only consume less, they’re also poorer.
Maybe the issue that we’d like to save some oil for our children. But that won’t work either, because our lack of consumption will do nothing more than allow Chinese consumption to increase a bit faster.
Is it a moral issue, that somehow consuming oil is ‘bad’? Why? Is consuming, say, Granny Smith apples bad? Or is oil different? Why? Are somehow being selfish? With respect to whom? To Europeans? Well, if they lowered their taxes, they could consume more as well. (By the way, it seems to me that Europeans will be unable to maintain their fuel taxes, and that a reduction of such taxes would be a potentially good stimulus.)
As for CAFE standards, they will by definition lead to a loss of welfare (they are Pareto suboptimal by design), unless offset by market failures. These can be difficult to quantify. To wit: A vehicle is a series of options, and these are devilishly difficult to value. For example, my car waits for me all day at the train station and only leaves when I’m ready. How much is that worth? How much is the trunk worth? The back seat? I could get by without these most days, but I still use them from time to time. What are they worth to me? What about driving range? The ability to accelerate quickly? (New Jersey speeding ticket: $120. Blowing down the Turnpike at 90 mph: priceless.) And something else. My car makes 29 mpg at 80 mph. And it gets 35 mpg at 65 mph. So in an hour, I could save something like $1.70 in gasoline, but at a cost of 11 minutes of my time, which is worth about five times as much. So saving gas is irrational for me. My time is worth more.
In any event, CAFE standards by definition lead to a loss of welfare unless i) there are significant externalities to oil consumption–possible, if you’re an AGW proponent, but otherwise quite hard to determine; or ii) myopic consumers have made a mistake in their car puchase options (but then you’d have to trot out a study on the topic which also considers government myopia), or iii) that oil producers are selling their goods too cheap for some reason.
Had Prof. Knittel focused on some of these issues, I would have applauded the effort. But to suggest policy on the back of flimsy assumptions is like beginning a paper with, “Assuming Herman Cain were elected President…” In other words, it’s a complete waste of time reflecting an unwillingness to think critically and grapple with the data as it exists. This was a very weak paper overall.
It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.
An Inquiry Into The Nature And Causes Of The Wealth Of Nations;
By Adam Smith, LL.D. and F.R.S. of London And Edinburgh:
Formerly Professor of Moral Philosophy in the University Of Glasgow
Edinburgh: 1776
BOOK II. Of the Nature, Accumulation, and Employment Of Stock.
CHAPTER III. Of the Accumulation of Capital, Or Of Productive and
Unproductive Labour.
Even though transportation was 71% of oil consumption in the U.S. in 2010, only 63% of that was motor gasoline. That means only about 45% of oil consumption was motor gasoline for transportation. Although reducing consumption in this largest segment of of oil use is important, and CAFE is a good way to get there, it is not the lowest hanging fruit for reduction of U.S. oil/liquids consumption.
Easier ways to reduce oil consumption starting from the 55% that is NOT motor gasoline for transportation:
Just 6 percent of oil is used in residential, commercial, and electric power sectors. Oil use in these sectors is very easy to displace via fuel switching. For instance, 3/4ths of Hawaii’s electricity is provided by petroleum, as opposed to less than 1% nationally. The state could displace this easily with geothermal and if the capital cost were financed at a reasonable rate, electricity prices in Hawaii would plummet. In the process of just that one project, 0.18% of U.S. oil consumption would be displaced. This single project (which would cost a couple billion dollars) is the equivalent of replacing about 1 car out of every 250 nationally with a renewable fuel vehicle (which would cost about ten times as much and last about 1/4th as long).
Kopits: If your marginal hour of time (out of all 24 hours) is worth ~$46 of after-tax money, or about ~$75/hr pre-tax, you should pay a driver so you can sleep in the car and cut your time in bed short. Instead of saving 11 minutes and making $8.5 bucks minus $1.70, you could save the whole hour and make $46 minus the wage for the driver. In addition you’d be creating income (and savings) for someone else who has to commute anyway. Wow, car-pooling is lucrative.
The lack of understanding of markets where externalities exist and /or the apparent flawed belief that externalities never exist is really shocking—especially on an economics blog. I would have thought that someone that has read Adam Smith or someone that has consulted in the oil industry would have a firmer grasp of Econ 1. If you read the paper, Knittel is negative on CAFE and supports pricing the externalities. Seems pretty reasonable to me, and would most likely seem pretty reasonable to Adam Smith.
“And these differences in taxes are associated with huge differences in per capita consumption. The graph below shows a pretty strong correlation: countries with lower fuel prices have higher fuel consumption. The slope of the fitted curve raises the possibility that, given time, long-run responses to higher gasoline prices could be substantially stronger than time-series correlations might suggest.”
Couldn’t the direction of causation be the other way around – consumptions with higher per capita fuel consumption resist higher fuel taxes?
“Here’s an easy solution: Ramp up a a $100/barrel tax over five years and distribute all the revenue to households. Businesses and households would come up with a million ways to economize that we can’t even imagine.”
Yes but I would phase that in over 10 years with the rate of tax increase accelerating over time. Hard to do with the US political system of course (no policy lasts that long).
How come only the United States taxes diesel at a higher rate than gasoline?
Have you noticed that the poor wife of the African farmer doesn’t think very much about the US ethanol subsidy? She is more concerned with feeding her children.
Here in the US we are so rich that we can waste time, energy, and resources worrying about things without spending the time to answer the question about whether they are reall worth the cost.
This is a fine article but its foundational premise is that we must find a way to satisfy the left-wing concern with environmental concerns, without ever addressing the cost benefit of addressing those concerns. It is this arrogance that brings down large corporations and nations.
As I have periodically suggested, our work and recent data suggest that the US has no real choice regarding whether or not we have to continue to reduce our petroleum consumption.
Following is a graph for production, consumption and net exports for a simple mathematical model of a hypothetical oil exporting country, “Export Land,” assuming a production peak in 2000. Note that on the upslope, the rate of increase per year in net oil exports exceeded the rate of increase in production, but on the downslope, the rate of decline in net exports exceeded the rate of decline in production:
http://i1095.photobucket.com/albums/i475/westexas/Slide1-17.jpg
Following is a graph for production & consumption for the top 33 net oil exporters and for Chindia’s net imports, from 2002 to 2010. As the model predicted, the rate of increase in top 33 net exports (Global Net Exports or GNE) exceeded the rate of increase in production from 2002 to 2005, but from 2005 to 2010, the rate of decline in net exports exceeded the (very slight) rate of decline in production:
http://i1095.photobucket.com/albums/i475/westexas/Slide09.jpg
If we simply extrapolate the 2005 to 2010 rate of change numbers on this graph, the 2010 to 2020 rate of decline in Available Net Exports (ANE) would accelerate to about 5%/year, and if we extrapolate the other rates of change, and assume a 1%/year production decline rate for the top 33, the ANE decline rate would accelerate to about 8%/year from 2010 to 2020:
0.1%/year Production Decline (2010 to 2020), Top 33 Net Oil Exporters:
http://i1095.photobucket.com/albums/i475/westexas/Slide10-1.jpg
1.0%/year Production Decline (2010 to 2020), Top 33 Net Oil Exporters:
http://i1095.photobucket.com/albums/i475/westexas/Slide11.jpg
I estimate that there are about 157 net oil importing countries in the world. If we extrapolate the Chindia region’s rate of increase in their combined net oil imports, as a percentage of Global Net Exports of oil (GNE), in 19 years just two of these oil importing countries–China & India–would consume 100% of GNE.
I continue to be mystified that the GNE/ANE situation is not the #1 story in the world.
I don’t know about Geothermal replacing anything. The technology is very difficult and expensive and large scale cost isn’t justifiable at this time. We are getting a lot of wind stations and potentially offshore wind out in the channel. Geothermal has lots of promise just like solar has lots of promise. I’d think nukes are the way to go along with wind but risking a calamity out here where we are earthquake prone seems stupid.
Another major user of power for my crazy little EII scheme is oil heat for homes. A large scale change over to natural gas would help there too.
I see the best chance, CAFE stands going to die and not be implemented for decades aside, as major incentives to increase turn over rate or making very cheap to purchase high MPG vehicles. Considering families generally only have two vehicles and one will be large, I’d prefer family friendly format to proposals.
Externalties are just too difficult to get a number for.
On the CAFE standards, annoying and they are always tied to beyond the current presidents time frame. That is, they are meaningless. Way to go Obama in following tradition of throwing the dead cat into someone else’s back yard.
I’ll be interested in seeing the gas and diesel fuel consumption and VMT this spring. In the winter, usually gas consumption goes down, and VMT goes down even more. Diesel consumption goes up (probably because of road maintenance and heating).
With this mild winter, I bet people are driving more, fuel economy is a lot better, and people have more time. If this mild winter persists, it will be a boon for our economy.
As to why don’t the bodies take steps in avoiding this rot. It appears to me personally that having motor scooter and moped owners reduced access to the streets is smart. Especially at the tariff of single truck drivers.
The lowest hanging fruit for greatest potential reductions in US petroleum consumption occurs from passenger vehicle energy efficiency improvements. Passenger vehicles are automobiles, Light Trucks, SUVs (and motor cycles).
To Wit, if half of current VMT by passenger vehicles were converted to pure EV’s, then ~7.5% of Petroleum based energy consumed for passenger vehicle transport would be eliminated … replaced by energy obtained dominantly from coal fired electrical energy generation. Petroleum based consumption would drop by 7.5%.
Whether the 7.5% reduction comes from 50% of VMT converted to EV use, or by a 7.5% improvement in ICE (Internal Combustion Engine) efficiency gains (for example 31 mpg average to 34 mpg average) or by combinations of ICE efficiency and weight / wind resistance reduction, is actually immaterial as far as reductions in Petroleum based energy consumption is concerned.
Private enterprise incentives to make these kinds of gains with ICE vehicles doesn’t exist unless consumer demand issues drive it — as in much higher fuel prices for example, or competition for sales volumes from Hybrids & EV’s, or as has been well proven to work already for decades now, by gov’t mandates for fleet average mpg (efficiency) improvements.
Since substantially higher real fuel prices still haven’t occurred in the US the increased fuel cost incentive for consumer’s hasn’t been there. (Iin real price terms after inflation and real increases in household disposable incomes, gasoline prices in the US are still nearly as cheap now as they’ve been for the last 30 years).
Until very recently, and with gov’t rebate, tax & other incentives (tax-payer subsidies, SOV passes during commute times), hybrids didn’t exist either. Only recently has there been anything beyond a niche market for the Hybrid vehicle market…. and this we all note was driven not by US auto manufactures for domestic consumption, but by Japan’s manufacturers — Honda’s Insight was the first, followed by Toyota’s Prius… now everybody and their brother are producing a few Hybrids — though still not mainstream by any stretch yet… and still at prices (even after gov’t economic incentives) that equal the approx. life-time savings in gasoline fuel costs… so no net life-time ownership cost advantages yet either.
Thus it is that the only proven and certain incentive to reduce petroleum based energy consumption in the US remains by gov’t mandates to private enterprise manufactures to do so.
Perhaps, just perhaps, competitive based incentives now that there are more EV’s and Hybrids coming to market will increase so that ICE vehicle energy consumption efficiencies will drop even more than the CAFE mandates reqiure by the time they’re required to be achieved… but I’m not holding my breath for that eventuality yet.
Converting just 25,000 vehicles to LNG would save 1% of U.S. oil consumption, as long as those vehicles were diesel locomotives.
If CAFE mileage standards are increased, won’t consumers (at least some) simply increase their mileage, holding somewhat constant their overall fuel expenditure? This type of analysis ignores the possibility that some folks would like to drive their car more, but with the cost of driving their vehicle with its MPG capabilities, they are restricted. A reduced cost on a per mile basis may unleash hidden demand in terms of total miles traveled.
James: My comments with respect to geothermal are specific to Hawaii, which is highly atypical of the U.S. grid in quite a few ways: existing resource mix and price, grid size, cheap geothermal resource availability, etc. I was not calling for geothermal in Iowa or New Jersey. Incidentally, I am an electric utility engineer and have some familiarity with geothermal generation, as my grid has most of the geothermal in the U.S. connected to it and I have been involved in project eval and interconnection studies. From the perspective of the plants I see the output of, geothermal is steady as a rock conventional baseload generation without the fuel or emissions problems, and which avoids most of the grid problems associated with other renewable generation technologies. The plants I am familiar with are more reliable than most fossil generation.
Ricardo: “Here in the US we are so rich that we can waste time, energy, and resources worrying about things without spending the time to answer the question about whether they are reall worth the cost.”
If you think Americans are more concerned about environmental issues than China, India, Brazil, Europe, etc. you need to get out more often.
benamery21 –
There’s a case for what you say. Many high wage executives do use drivers and work in the car.
The cost to drive to New York from Princeton is about $70 round trip (incl parking); a limo: $240. I tend to drive in when I have overseas call to make, which I can do very early in the morning from the car. Limo doesn’t help me there. And there’s another option to consider: When exactly will I leave the office? I might have to wait 20 min for a driver, so again, I have to value that option.
In general, I take the train ($30 all in with parking and subway). It’s faster and cheaper, and I can choose to work or not. But I can’t make business calls and it’s really slow late at night.
The point I am trying to make, however, is that transportation decisions can involve the implicit and subtle valuation of myriad options, and the attempt to impose a blanket, one-size-fits-all solution like a CAFE standard is likely to lead to a loss of welfare on average.
The strongest argument for a CAFE standard (and the reason we’re discussing it now, really) is the high price of oil and myopic consumer choices (ie, car buyers failed to anticipate high oil prices and would have bought a more economical car if they had known how high the price of gasoline would be.) This is no doubt be at least partially true. (See my article, “Rigs, Recessions and the Tyranny of the Futures Curve” for why it might not be true.) But can the government anticipate oil prices better than anyone else? Well, we actually know the answer to that. Take a look at the EIA’s price forecasts for 2005-2008. They were well behind the curve. If Prof. Knittel had devoted 90 minutes to diligencing the issue, he would have known that.
If consumers are myopic and making mistakes, they are making mistakes at all oil prices. The government doesn’t need to forecast oil prices to improve the market at a general level. The “right” level of CAFE might depend on oil price projections, but your premise that high oil prices are required for CAFE to be beneficial is false.
Spend 90 minutes reading the paper and you will see that you are complaining about things that aren’t in the paper.
Ben, Geothermal would be nice for hawaii. Unfortunatly, I doubt environmentalists would ever allow it.
Anon –
Mostly I discuss externalities. The paper does not focus on those, but it is built on them and seems to take the implicit view–as does the post–that reduced oil consumption is somehow intrinsically desirable.
I caution against normative targets for oil consumption, unless you have made a really strong case for substituting the government’s judgment for that of the consumer. Knittel has not done that, and in the end, his paper is somewhat ambivalent about cap-and-trade, fuel taxes, CAFE standards and the rest, and he concludes that maybe prices have to do the work.
OK, fine. But then the paper title should not be “Reducing Petroleum Consumption from Transportation”, but rather something like: “Fuel Taxes, Cap-and-Trade, CAFE Standards? For the Transportation Market, Don’t Bother.” It would be a quite libertarian paper–not the author’s intent, I suspect.
Steven Kopits The cost to drive to New York from Princeton is about $70 round trip (incl parking); a limo: $240. I tend to drive in when I have overseas call to make, which I can do very early in the morning from the car.
Your last couple of posts have been very revealing. It’s obvious that the reason you don’t understand externalities is because you seem to think that the only costs to trade against are the costs that you personally face. Notice that you do not even consider the cost to others of your driving while conducting business over your cell phone. In the quote above you completely ignore cell phone hazard costs that you create when you drive.
Look, markets only work if prices internalize all of the costs. If some of the costs get shifted away and don’t show up in the price of the commodity, then producers end up producing too much and consumers end up consuming too much of that commodity. What’s happening here is that you are trying to rationally balance a set of costs, but the costs you are trading against do not capture all of the costs. As a result you are rationally arriving at an irrational result. The preferred solution is to tax the externality, but Tea Party types and GOP politicians won’t hear of it, so we start looking at second, third, and fourth best choices. A CAFE standard is, at best, a second best solution. Reducing the speed limit back to 55 mph is another option, but I don’t think it would be anyone’s first choice. But this is what happens when political ideology categorically rules out first best solutions; you’re left arguing over a set of bad alternatives.
Alan How come only the United States taxes diesel at a higher rate than gasoline?
Because in the US (but not in Europe) diesel tends to mean heavy trucks, and heavy trucks do a LOT more road damage than cars. The diesel tax goes towards road maintenance. There is a reasonable case to be made for rebating some of the diesel tax for diesel cars, but there here in the US diesel cars are relatively uncommon.
I think that Arijit Banik, F, and Steven Kopits are on the right track. We would expect relatively small countries with higher population densities to use less gas per capita. Whoopdedoo.
The question is not whether we can use less gas but whether we can use less gas and maintain reasonable welfare and economic growth. As long as our economy is as dependent on housing construction as it is, I doubt it.
The way to reduce liquid fuel usage in the U.S. is to copy the Europeans: put in more electric trains. Per ton mile trains are five times more efficient than trucks. They are regenerative and never need to stop at red lights. The US government subsidizes trucks and taxes rail. This needs to change.
Items linked on Drudge about gasoline prices approaching $5 this year:
http://chicago.cbslocal.com/2012/01/13/gas-outlook-most-painful-year-at-pump-ever/
Slugs –
I have bluetooth in my car, so it’s hands free. You could argue that I drive too fast, but I can assure you, that cost has been fully internalized. I think the greater risk is the mappy thing on your iphone.
Personally, I believe we should move more aggressively to incorporate smart phone technology safely into the car, rather than trying to ban them. They really increase productivity, so trying to eliminate them is regulating uphill. Better to think how to incorporate them safely–see, now if Knittel had written about that, I would really have thought it an interesting topic.
As for externalities, in New Jersey, I would suspect these are re-treads and deer. Half the repair claims in NJ are from deer strikes. Odds of hitting a deer in any given year: about 1:200. That’s very high.
Also, re-treads from trucks splitting off. I hit one in the dead of the night. Didn’t see it until I was on it. Very dangerous, poorly regulated, endemic. Next time you’re on the highway, see how many re-treads are on the road. In NJ, there are lots. And how did they get to the side of the road if they didn’t land there in the first place? Someone’s car hit them.
So there certainly are some simple steps we could take to improve safety. In any event, I am aware of externalities.
And to change the subject back to the post, I also know something about oil. If you like, I can tell you pretty close how much oil the US will consume. I’ve been pretty accurate in the last three years. But if you ask me how much we should consume, that’s a much trickier question, and to me, the analysis would hinge primarily of the elasticity of oil consumption wrt to GDP. Knittel didn’t even remotely look at that issue.
There is a huge literature measuring the externalities associated with oil use. In addition, as Jon Stewart recently showed every President since Nixon has called for a reduction in US oil consumption. So, starting with the premise that the US wants to reduce its oil consumption and externalities exist—something some here seem to not want to admit—seems like a worthy pursuit.
Should every paper written about oil have to re-prove the externalities associated with: climate change, local pollution, military expenses, macroeconomic downturns, etc? Are there really people that believe all of these are zero? I can understand that some people place little weight on the views of 96% of atmospheric scientists, and instead “have looked at the numbers” themselves and view themselves as superior to the top scientists actually working in the field, but to think that all of these others are also not externalities is just baffling.
Kopits, you say “Is it a moral issue, that somehow consuming oil is ‘bad’? Why? Is consuming, say, Granny Smith apples bad? Or is oil different? Why?”
If this isn’t obvious, there is no hope, but let me try: Yes, Granny Smith apples are different from oil. Why, you ask? Because of externalities!!! Stick you mouth on an exhaust pipe, then put an apple in your mouth? You’ll now know why they are different.
It is not a moral issue. It is an efficiency issue. When markets have negative externalities, too much is consumed/produced. Should Knittel have proved that result too?
Kopits: On driver cellphone usage, you should be aware of the research indicating that most of the safety risk involves distraction and is present even with hands-free use. However, given the productivity gains, I tend to agree with you that banning cellphone use by drivers, has a higher cost per life saved than many other possible regulatory interventions and technical innovations. We haven’t banned the automobile, and we won’t anytime soon, despite the auto accident still being the number one cause of death for folks from ages 3 to 33 in the U.S. Why? Because as rude as it is to say so, we place higher value on convenience and productivity than on those lives.
benamery21 As you know, the existence of negative externalities rarely means that the activity generating that externality should be banned, only that the cost of the externality should be included in the price. Since the market fails to internalize the price, it’s up to government to impose some kind of tax. Pigovian taxes reduce production and consumption at the margin. As a practical matter a Pigovian tax on cell phone use while driving might be difficult to implement, but that does not mean the cost of using a cell phone while driving is zero. To put the issue in a more philosophical context, there is a question of whether cell phone use should be banned following John Stuart Mill’s “rule utilitarian” principle or if its proscription should follow Mill’s “act utilitarian” principle. The problem with the “act utilitarian” formulation is that without an external Pigovian tax individuals are not able to make the correct calculation. As a result you end up with that clever Allstate “mayhem” commercial with the teenage girl talking on the cell phone about how Becky isn’t even hot.
I’ve read enough of your posts to know that you understand this, but others may not.
And finally one for Jeffrey –
I made my annual presentation–“Global Offshore Prospects”–for the Society for Underwater Technology in Houston this past Thursday. As part of my presentation, I of course cover Petrobras.
So, some Petrobras statistics:
– Brazil petroleum liquids production fell by 1.3% last year (EIA)
– Petrobras crude exports declined by 17% over the last two years.
– Campos Basin decline rates appear to be quite high at 13-16% (this is one of the big pre-salt basins).
– Petrobras capex budget is essentially unchanged over last year. Why? The government felt that additional spend would lead to inflation. And why? Because local content laws require the oil business to buy local, and of course, supply is limited. So extra spend just ends up as cost inflation.
– Petrobras has been trading at 0.9x book, meaning that, if you give Petrobras $1 bn in cash, the market assumes it will destroy $100 m of that right out of the gate.
– To meet plan, Petrobras must increase oil production at 9.9% average annual growth to 2020. The best the company has ever managed in the last five years was 6.3%, last three years’ average was 4.2%.
– Even if Petrobras grows at 6%, essentially, exports will be unchanged. Domestic growth will consume virtually all of increased production.
In short, it appears Petrobras incremental contribution to ANE might be pretty well zero.
This should not be construed as criticism of Petrobras per se. It’s a fine company. But to make it carry Brazilian industrial and social policy is looking counter-productive. The Brazilian industrial policy model–built around local content, Petrobras as monopsony, rigid labor laws and high taxation–is creating substantial bottlenecks, distorting selling and buying practices, increasing costs (to the point of subtracting value), and frankly, probably increasing operating risks in deepwater.
Anon –
I don’t believe the value of negative externalities is zero. Nor do I believe positive externalities are zero either. Indeed, price inelastic demand suggests that consumers think the value of positive externalities (like being able to get to their jobs) is high indeed.
Unemployment remains high; vehicle miles traveled continues to decline. Our mobility is eroding, making everything that much harder overall, including re-employing people. Do I think seven million unemployed are worth any externality you care to show me? No.
As for reduced consumption: US per capita consumption is down 15% since 2005; national consumption down 8% to 2010 and another 1.6% in 2011 alone, and it will likely decline at that rate indefinitely. Just how fast does consumption have to decline to make you happy?
One of the most dangerous things you can do when driving is have passengers in your car.
Kopits: it’s clear you don’t understand markets and efficiency. I won’t go thru all of your errors only to point out that falling consumption when consumers don’t face the right price is not evidence the market is getting efficient me valuing a gasoline because it gets me to work is NOT an externality. Please read up on the difference between private and social benefits and costs.
Steven,
One of my favorite Bloomberg columns from 2009 discussed Brazil, a net oil importer, based on petroleum liquids, taking market share away from OPEC.
Not only is Brazil a net oil importer, their net oil imports have increased in recent years.
But the media seem to believe otherwise, so when I compile a list of net exporters in the Americas, I usually include Brazil, as a courtesy to our friends in the MSM.
Total net exports from Canada, Mexico, Venezuela, Colombia, Argentina and Brazil fell from 5.1 mbpd in 2005 to 4.0 mbpd in 2010 (BP data base, total petroleum liquids).
Cell-related auto accident costs alone are probably on the order of $15/month per cellphone in the U.S. These are not trivial costs. Unfortunately, it is virtually impossible to discriminate between rapid motion of a cellphone due to driving and rapid motion due to riding as a passenger with present technology. However, if it were possible, something on the order of a 50 cent per minute/text tax might be just the thing to get folks to think before doing this. Direct accident cost is probably about 10 cents/min. No problem for high-powered exec, no-go for teenybopper or most soccer moms.
Quite a go onside topics away from using less gas. I have some incomplete analysis aimed at major reduction in oil use by change of habits. Keys are using local gasoline salesby county or even zip code and comparing use with urban sprawl and lack of viable mass transit. High gasoline use density is from slow moving car trips on interstate highways used for communting, like big Texas cities and california cities versus New York and even Washington/Baltimore.
How about more push for mass transit along with overdue gasoline tax increases as a means to reduce the deficit by reducing the trade deficit?
Ben – Amtrak is hideously expensive. Want more people on trains? Cut the ticket price by half. Or cut it by three quarters, and you have the bus. These are indeed taking market share from cars.
Anon – As regards positive externalities: According to Wikipedia (the ultimate source of human knowledge), “increased education of individuals can lead to broader society benefits [positive externalities] in the form of greater economic productivity, lower unemployment rate, greater household mobility and higher rates of political participation.”
So can oil.
Kopits, the irony is pretty thick here. With all of your arguing that the government shouldn’t adopt gas tax, CAFE standards, etc, and that oil is like education, can you tell me who wrote this?
“So Obama may well find himself the United States’ first peak-oil president, with all the challenges that entails. Not only will the world order be realigning before him, but the constrained global oil supply will mean that finding alternatives to America’s gas-guzzling ways is a matter of national survival.”
How exactly did you want Obama to reduce America’s gas-guzzling ways? Or, will the market do that by itself? If so, what are these challenges for Obama?