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Why Gasoline Prices Are Volatile

Andrew Morriss and Donald Boudreaux have an op-ed in today’s WSJ explaining why gasoline prices have become more volatile. The short version: Boutique fuel requirements have balkanized the gasoline market, magnifying the effects of local supply disruptions.

For most of the 20th century, the United States was a single market for gasoline. Today we have a series of fragmentary, regional markets thanks to dozens of regulatory requirements imposed by the federal Environmental Protection Agency (EPA) and state regulators. That’s a problem because each separate market is much more vulnerable than a national market to refinery outages, pipeline problems and other disruptions. . . .

The role of regulators in fuel formulation has become increasingly complex. The American Petroleum Institute today counts 17 different kinds of gasoline mandated across the country. This mandated fragmentation means that if a pipeline break cuts supplies in Phoenix, fuel from Tucson cannot be used to relieve the supply disruption because the two adjacent cities must use different blends under EPA rules.

To shift fuel supplies between these neighboring cities requires the EPA to waive all the obstructing regulatory requirements. Gaining permission takes precious time and money. Not surprisingly, one result is increased price volatility.

Another result: Since competition is a key source of falling gas prices, restricting competition by fragmenting markets reduces the market’s ability to lower prices.

While most of the fuel standards were adopted in the name of the environmental protection, many are actually the result of special interest pleading. Producers of various products, ethanol in particular, sought fuel content mandates or performance requirements that would benefit their particular product. (I detailed part of this history in “Clean Fuels, Dirty Air,” in Environmental Politics: Public Costs, Private Rewards.) Worse, some of the content requirements are irrelevant for new cars due to modern pollution control equipment. Federally imposed boutique fuel requirements have outlived whatever usefulness they ever had.

Cross-posted at The Volokh Conspiracy.

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Whose Fracking Rights?

Denis and Barbara Prager fear the day that hydraulic fracturing takes place on their land in the Shields Valley of Montana. The threat of ‘fracking’ is real and there is nothing they can do. While the Prager’s own the surface rights to their property, the state owns the subsurface and mineral rights. The state has the right to use the land as is ‘reasonably necessary’ for drilling or can lease the mineral rights to a private company. Those rights are presently open for bid.

Hundreds of millions of acres of property across the nation have secure property rights that are split; different entities own the surface and subsurface rights. Battles over split estate rights emphasize the importance of well specified and defined rights. Perhaps most important is the knowledge of what rights the surface owner does and does not have.

Under split estate rules, subsurface owners have the right to use surface land as is ‘reasonably necessary’ to develop subsurface assets. Private oil and gas companies often lease rights from subsurface owners regardless of whether the estate is split or under single ownership. Either way, drilling and extraction companies are responsible for unnecessary harm done, impacting water quality, for example.

Though hydraulic fracturing has been going on for more than 60 years, it has gained recent attention due to its affordability in the current global economic and technological climate. It is interesting that while many environmentalists vie to decrease carbon emissions, they are also opposed to fracking. In truth, natural gas may be one of the greatest boons to keep America energized at low cost with fewer emissions. Given secure property rights and market transparency it can be environmentally friendly, to boot.

Cross-posted at Environmental Trends.

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Energy Independence: A Proverbial Icon

According to Steven Chu, the U.S. Secretary of Energy and a Nobel physicist, “The most direct way to reduce our dependency on foreign oil is to simply use less of it.”  That makes sense. The arguments in support of energy independence, however, do not.

We hear that “[e]nergy independence means energy security (supply and price stability).” But restricting oil supply to within U.S. borders is more likely to increase instability than decrease it. We typically think of a diversified financial portfolio as stabilizing investment value. A shock impacting one market sector and, hence, investments in that sector, is less likely to have a significant impact on a diversified portfolio. The same is true with energy. If there is a shock in one region, say, the United States (remember Hurricane Katrina), having a diversified supply portfolio can help stabilize available resources and therefore price. Restricting supply to a specific region means shocks to that region are likely to have a significant impact on resource availability and price.

Consider this:

Despite its immense appeal, energy independence is a nonstarter—a populist charade masquerading as energy strategy that’s no more likely to succeed (and could be even more damaging) than it was when Nixon declared war on foreign oil in the 1970s.

Sounds right-wing but this statement is from Mother Jones. The author, Paul Roberts, is smart enough to have figured out that many of the government backed alternative energy sources have secondary consequences that may in fact be worse than energy dependence.

He goes onto say:

nearly every major energy innovation of the last century—from our cars to transmission lines—was itself built with cheap energy.

Indeed, cheap energy and innovation have brought us great prosperity.

Nonetheless, “between 2001 and 2006 the number of media references to ‘energy independence’ jumped by a factor of eight,” and energy independence is continually emphasized by politicians. Why is energy independence so appealing? “[B]ecause it offers political cover for a whole range of controversial initiatives,” says Roberts. Though the Mother Jones article is four years ago, these statements still make good sense. Energy independence is a proverbial icon that provides votes for politicians but does little to stabilize energy prices or supply.

See additional “Charticle” on energy independence here.

Originally posted at Environmental Trends.

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No New Coal: New Source Performance Standards Don’t Clear the Air

The current administration continues to push for cleaner air. That means reducing carbon emissions according to the 2009 EPA ruling that defines carbon dioxide as an air pollutant. It should be no surprise then, that the New Source Performance Standards (NSPS) on newly constructed power utilities reduces allowable carbon emissions.

The new emission levels, however, are below what is technologically feasible for coal burning plants. This effectively means that no new coal power plant can be constructed until new technology is developed and economically feasible. That is estimated to be ten or more years away. “[I]t is odd that they [the EPA] think it’s a good idea to ban new coal-fired power plants,” says Jeff Holmstead, former EPA air chief.

There are multiple consequences from this ruling. Whether they are good, bad, or otherwise depends on your perspective.

1. Increased power demand will have to be satisfied from alternative fuels. Coal currently provides about half of all US electricity consumption.

2. Natural gas is presently the most cost effective substitute for coal. Gas powered plants already meet the new emission standard. An increase in demand for electricity will increase the demand for natural gas. (Natural gas providers have an interest in this ruling.

3. Renewable energies, such as wind and solar, are more than twice as expensive as gas and coal and we do not have the technological capability to store the power during down times. These renewable energies require backup power sources.

4. Natural gas, similar to coal, is a fossil fuel that must be ‘mined’ from underground. Each has their own environmental consequences.

5. Unless new supply meets increasing demand, electrical rates will rise. (At present the slow economy has kept demand relatively low and natural gas production has been booming.)

6. The rule impacts only new emission sources. Existing coal fired plants remain regulated under the old rules; they can continue to produce at current emission levels.

7. Because new plants cannot be built to meet the standards, existing plants with older technology, hence more emissions, will stay online longer.

8. The fastest growing countries continue to build new coal powered electric utilities to energize manufacturing at the lowest cost and compete at the global level.

The new emission standards are similar to previous regulations in a couple of ways. First, there are some “strange bedfellows” lobbying for the new air regulations. Alternative power providers benefit from reduced competition, regardless of environmental consequences. Second, by discouraging new coal burning facilities, the rule discourages investment in cleaner coal and keeps existing utilities online longer.

Originally posted at Environmental Trends.

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EPA to Release More Greenhouse Gas Regulations

The Washington Post reports the Environmental Protection Agency will release proposed regulations governing the emissions of greenhouse gas emissions from power plants this week, perhaps as early as today.  As described by the Post, this New Source Performance Standard regulation could put a halt to the construction of new coal-fired power plants unless and until carbon sequestration or some other GHG-emission-reducing technology becomes economically viable.

The proposed rule — years in the making and approved by the White House after months of review — will require any new power plant to emit no more than 1,000 pounds of carbon dioxide per megawatt of electricity produced. The average U.S. natural gas plant, which emits 800 to 850 pounds of CO2 per megawatt, meets that standard; coal plants emit an average of 1,768 pounds of carbon dioxide per megawatt.

Industry officials and environmentalists said in interviews that the rule, which comes on the heels of tough new requirements that the Obama administration imposed on mercury emissions and cross-state pollution from utilities within the past year, dooms any proposal to build a coal-fired plant that does not have costly carbon controls.

“This standard effectively bans new coal plants,” said Joseph Stanko, who heads government relations at the law firm Hunton and Williams and represents several utility companies. “So I don’t see how that is an ‘all of the above’ energy policy.”

The rule provides an exception for coal plants that are already permitted and beginning construction within a year. There are about 20 coal plants now pursuing permits; two of them are federally subsidized and would meet the new standard with advanced pollution controls.

These new regulations are but one piece of the surge in GHG regulations the EPA is adopting under the Clean Air Act as a consequence of Massachusetts v. EPA.

Originally posted at The Volokh Conspiracy.

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Pipeline Dreams

The Center for Biological Diversity announced that they, together with some 40-plus other organizations, were able to rally 793,000 signatories for a petition against the Keystone XL pipeline. The proposal is building a pipeline from Alberta, Canada to the Gulf Coast where it can be refined and distributed in the United States and abroad. What is troubling isn’t the number of signatories, or the method to garner attention, rather the complacent view.

The group claims that the pipeline will “increase US dependence on fossil fuels.” The Wilderness Society comments that U.S. politicians are forcing unwanted oil on American consumers. The recent increase in gas prices leads me to believe there is still plenty of demand for auto fuel in the US. In fact, we have few good substitutes to fill the tank.

U.S. demand for fossil fuels is not going to decline as a result of blocking the Canadian pipeline proposed by TransCanada. Sans the Keystone line crossing America, gas will be transported in other ways from other places with their own environmental impacts.

TransCanada has made clear intentions to mine the oil and send it to be refined, whether across the US. to the Gulf Coast, across the Pacific to China, or both. The claim that stopping the Keystone pipeline will reduce carbon emissions is merely a pipe dream.

Originally posted at Environmental Trends.

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Between a rock and a hard place: The Mining Law of 1872

by Brennan Jorgensen

In the New York Times, Robert M. Hughes and Carol Ann Woody call for the end of the Mining Law of 1872 as a means to protect fragile ecosystems from invasive mining practices. They cite the Environmental Protection Agency’s estimates that headwater streams in 40 percent of Western watersheds are polluted by mining.

Originally established in response to the California Gold Rush, the Mining Law allows United States citizens and firms to explore for minerals and establish rights to federal lands without authorization from any government agency. The only cost to mining companies is an annual $100 holding fee for each claim, with a maximum claim size of 20 acres. Claimants may then acquire outright title to the land by obtaining a patent, at a per-acre cost of $2.50-$5. Mining firms do not pay royalty taxes on the minerals taken from federal land.

While environmental activists call for the end of the Mining Law and stricter regulations on mineral exploration and development, a PERC Policy Series by David Gerard offers a more comprehensive summary of the problem, as well as an alternative solution:

Reform advocates often imply that since the Mining Law contains no environmental protection measures, mining is unregulated. Of course, this is not the case. Mining activities on federal land are subject to federal, state and local regulations for air and water quality, solid waste, public safety and fire control. The Forest Service and BLM have their own regulations. Although regulations such as the National Environmental Policy Act, the Clean Air Act, and the Clean Water Act are not mining-specific, mining firms must comply with them.

Hughes and Woody claim that the mining industry’s track record on environmental protection, “hardly inspires confidence,” but as Gerard points out, the majority of environmental degradation is a byproduct of abandoned sites, which were mined before environmental regulations went into effect.

While environmentalists speak as though polluters should be liable for the harm they cause others, a number of deficiencies in federal laws violate this principle. These deficiencies are not found in the Mining Law but, rather, in environmental laws such as Superfund and the Clean Water Act. In particular, the requirement that mining companies take on responsibility for others’ damages is hindering cleanup, not helping it. Superfund and the Clean Water Act are keeping both mining companies and state governments, which have an increasing role in environmental-protection matters, from active reclamation of abandoned sites.

The Mining Law as it now stands is not without merit. The holding fee was enacted in 1992 under the Clinton Administration, which cut the number of claims reported to BLM from one million each year down to an estimated 340,000. Additionally, the holding fee allows claimants to hold marginal sites in anticipation of changing market conditions. “Market forces rather than a statutory time constraint may determine if and when production begins,” writes Gerard.

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Fined for Failing to Do the Impossible

Back in 2007, Congress created a biofuels mandate under which oil companies are required to use a minimum amount of cellulosic ethanol each year.  The mandate was supposed to encourage the development of a domestic cellulosic ethanol industry.  This has not happened.  Several years after the mandate was imposed, there is still no commercial cellulosic ethanol production.  This gets the oil companies off the hook, right?  Nope.  As the New York Times reports, companies are still paying fines, totaling nearly $7 million, for failing to meet a blending quota for a substance that does not exist.  Were that not bad enough, this year the cellulosic ethanol quota will increase, as will the fines for failing to meet it.

Who would defend mandating the use of a substance that, for all practical purposes, does not exist?  Not the renewable fuel industry.  As the NYT reports, they acknowledge that commercial production of cellulosic ethanol remains years away.

“From a taxpayer/consumer standpoint, it doesn’t seem to make a lot of sense that we would require blenders to pay fines or fees or whatever for stuff that literally isn’t available,” said Dennis V. McGinn, a retired vice admiral who serves on the American Council on Renewable Energy.

The EPA, on the other hand, defends the mandate:

Cathy Milbourn, an E.P.A. spokeswoman, said that her agency still believed that the 8.65-million-gallon quota for cellulosic ethanol for 2012 was “reasonably attainable.” By setting a quota, she added, “we avoid a situation where real cellulosic biofuel production exceeds the mandated volume,” which would weaken demand.

AEI’s Ken Green has trouble making sense of the EPA’s rationalization:

So what’s most important about biofuel quotas is that they prevent us from over-producing a product that we can’t produce so we don’t weaken demand for the product that the government mandates we use.

As Green notes, Congress might as well have mandated oil companies blend gasoline with rainbows and unicorn sweat.

Originally posted at The Volokh Conspiracy.

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Urbanization for Population and the Planet

National Geographic recently launched its “Seven Billion Special Series“–a year-long series on global population. I hesitantly read the first article expecting more of the same old gloom and doom but “The City Solution”  offers a refreshing take on why economists and environmentalists can embrace cities.

With Earth’s population headed toward nine or ten billion, dense citites are looking more like a cure–the best hope for lifting people out of poverty without wrecking the planet, writes Robert Kunzig.

Harvard economist Edward Glaeser supports this point of view in his new book, Triumph of the City where he writes, “There’s no such thing as a poor urbanized country; there’s no such thing as a rich rural country.” Poor people flock to cities, according to Glaeser, because there is more money and cities produce more because “the absence of space between people” makes it cheaper to move goods, people, and ideas. Moreover, city dwellers tread lightly:

Their roads, sewers, and power lines are shorter. Their apartments take less energy to heat and cool…and they drive less.

The fear of urbanization has not been good for cities, countries, or for the planet. The author suggests that it is a mistake to see urbanization as evil rather than as an inevitable part of development. People (and planners) should no longer look at cities as tumors “but as concentrations of human energy…to be tapped.”

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The Keystone Pipeline Precedent

Others have commented on President Obama’s decision to punt on the Keystone XL pipeline project.  Ordering additional review pushes the decision past the next election and enables the Administration to evade responsibility should the project ultimately fail.  As those who study environmental law know, delays of this sort are often enough to derail major projects for good — and that’s certainly the outcome some environmentalists anticipate.

The CFR’s Michael Levi suggests environmentalists are being short-sighted, as “the tactics and arguments that have won the day are ultimately as likely to retard clean energy development as they are to thwart dirty fuels.”

oil pipelines are hardly the only pieces of energy infrastructure that will require government approval in coming years. This is particularly true if the United States wants to build a new clean-energy economy.

The country has already seen strong opposition to offshore wind energy in Massachusetts, including from environmental activists and local landowners, on the grounds that it will ruin spectacular ocean views. Solar plants will need to be built in sunny deserts, but local opponents continue to insist that the landscape blight would be intolerable. New long distance transmission lines will have to cross multiple states in order to bring that power to the places that need it most. Once again, though, a patchwork of local concerns and inconsistent state regulation is already making the task exceedingly difficult. . . .

Energy experts often note that it would be impossible to recreate today’s energy infrastructure, given the intensity of opposition to pretty much any new development. The environmentalists’ victory against Keystone XL will only reinforce that judgment. But realizing their broader vision — a low-carbon economy that enhances the nation’s security and helps avoid dangerous climate change — will require defeating the same sort of local opposition that they have just embraced.

The experience of Cape Wind confirms this conundrum, as I have noted for some time.

Originally posted at The Volokh Conspiracy.

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Another Setback for Cape Wind

In 2002, federal reguators predicted it would take between 18-months and three-years for the proposed Cape Wind energy project in Nantucket Sound to receive federal approval.  Nearly ten years later, the project is still awaiting full federal clearance, and has yet to begin construction.  Full operation remains at least two years away.

On Friday, the Cape Wind project suffered yet another setback when the U.S. Court of Appeals for the D. C. Circuit vacated and remanded the Federal Aviation Administration’s determinations that the project would pose no hazard to air traffic.  A unanimous three-judge panel concluded that the FAA had failed adequately explain the basis for its decision.  Even though formal FAA approval is not required for the windfarm, the Interior Department has made its approval of the plan conditional upon FAA clearance and full compliance with any FAA-recommended mitigation measures.  So until the FAA can provide an explanation for its “no hazard” determination the D.C. Circuit will accept, construction will be on hold.

Friday’s decision is not merely a setback for Cape Wind.  It worsens the climate for offshore wind energy development more generally.  The longer and more uncertain the regulatory process for such projects, the harder it will be to encourage private firms to invest — and the more difficult it will be to expand wind power offshore.

The Cape Wind experience also shows that it does not take much to gum up the regulatory gears for new projects of this sort.  Opposition to Cape Wind has been driven by a few dozen families willing to invest their time and money to influence the regulatory process — and it’s worked.  It does not matter whether a proposed project is popular with local residents, as a relatively small group of naysayers can exploit existing regulatory requirements to slow things down in the hope of eventually killing the project altogether.  If other offshore wind projects are to succeed where Cape Wind has (thus far) failed, they must prepare for similar opposition, and encourage regulatory reforms that will streamline wind project development and approval.

Originally posted at The Volokh Conspiracy.

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An Oil Plateau

We are running out of oil, so the story goes. A finite resource with limited supply and massive consumption — at some point the last drop will be used up, right? Wrong. The theory of peak oil is based on the assumption that global oil demand will continue to increase and as a result supply will eventually dwindle to nothing.  Both assumptions are myopic.

It is true that demand for oil has followed an increasing trend as developed and emerging countries increase use for production and personal vehicles. But at the same time efficiency has increased enabling us to get more power from less fuel.

On the supply side, proved oil reserves continue to grow. Yes, though a finite resource, the quantity that is economically viable to remove is increasing. Proved reserves are the known oil pools that are practical to access with current technology and price. As technology advances, so does the amount of oil that is economical to remove. While consumption in the decade between 1998 and 2008 was near 322 billion barrels, the available reserves grew by 480 billion barrels.

If supply does not keep up with demand, indeed, the price at the pump will rise. As it does, alternative energies become more appealing. They become more cost competitive and will be even more so with technological advances. The future will bring a transformation from the current-day oil economy to increased use of alternative energy sources. Daniel Yergin calls this the oil plateau in his recent persuasive article.

We did not depart the Stone Age by running out of stones. Nor will we run out of oil. It is markets that will determine the end of oil use. The last pools will be too expensive, relative to the alternatives, to extract. It is markets that will harness the next energy source that will lead us into the next era.

Originally posted at Environmental Trends.