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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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Q&A with Matthew Turner on Road Congestion and Transportation Policy

It’s been another busy summer at PERC, with our summer fellowships bringing together an all-star cast of scholars to Montana to research topics relating to free market environmentalism. This week we continue our Q&A series with economist Matthew Turner, a leading expert on road congestion and transportation policy.

Matthew Turner is a 2012 PERC Julian Simon Fellow and professor of economics at the University of Toronto. His research focuses on the economics of land use and transportation. We thank Matthew for taking time to answer our questions. For more PERC Q&As, visit the series archive.

Q:  At your latest PERC workshop you presented new research, co-authored with Victor Couture and Gilles Duranton, entitled “Speed.” What aspect of speed are you looking at and why is it important?

A:  Bakeries in the Soviet Union used to hand out bread for free to the first in line while those at the back wait for the next batch. This was wasteful. It meant time was spent waiting that could otherwise be used for something else, and it gave bread to people with the most time on their hands rather than to the hungriest or the hardest working. We allocate highway space in much the same way. The commuter who arrives on the road at 7:00am gets to travel, but the one who arrives at 7:30am needs to waits in a traffic jam until road capacity becomes available. Just as for the old Soviet bakery, this leads to a lot of time wasted in traffic jams and assigns scarce rush-hour capacity to people willing to wait in traffic, who might not be the people who value rush hour travel most highly.

In our research we are try to understand the determinants of  driving speed in order to estimate the value of time lost to waiting in traffic. Since road travel, one way or another, accounts for about 18% of gdp, the value of this waste is a big number. We also want to develop a basis for making guesses about what a good road pricing system would look like.

Q You claim there are sizable welfare gains to be had from more sensible transportation policies? What sorts of policies are we talking about? Taxes on driving?

A:  Our research suggests that the failure to price access to roads leads Americans to waste tens of billions of dollars worth of time each year sitting in traffic. Yet roads are congested only part of the time and even our biggest and busiest cities have unused road capacity off peak. If we impose tolls on congested roads at congested times, we give people an incentive to shift their travel to an uncongested time when we have surplus road capacity. This saves people from waiting in traffic and will likely increase the capacity of our road network.

QAre there areas where congestion pricing has worked? Could it be implemented on a wide scale in the United States?

A:  Stockholm, London, and Singapore, and a handful of U.S. roads and bridges have congestion pricing programs. In these places we see big increases in travel speed in response to pretty small charges for peak hour road use. With that said, the devil is in the details. So far, these programs are expensive to administer and it is easy to imagine ways that they could create problems. Rather than aiming for wide scale application to the United States we ought to encourage pilot programs in congested cities like New York, Miami, Seattle, Boston and Portland. As we gain experience administering congestion pricing programs we can apply them more widely.

Q In earlier research you find that widening and building more roads actually creates more traffic. What is “The Fundamental Law of Road Congestion” and what are its implications for transportation policy?

A:  In this project we examine the relationship between the stock of highways and arterial roads in large U.S. cities and the total amount of road travel in these cities. More precisely, it examines the relationship between a city’s total lane kilometers of highway and arterial road and total miles driven within the city in a year. We find that a one percent increase in road lane kilometers causes almost exactly a one percent increase in driving. We also find that changes to the stock of buses in a city’s public transit network do not affect driving.

This means that we should not expect either road or transit expansions to alleviate traffic congestion in the long run. The only policy that we know to be effective at reducing traffic congestion is congestion pricing.

QWhen might investments in public transportation or road building be worthwhile?

A:  Even though road and transit expansions probably won’t reduce congestion on our roads and highways, they will allow more people to move around. We want to evaluate transportation infrastructure on the basis of the value of these extra trips. If a new subway line allows an extra 50,000 people to work downtown, we need to decide if the extra economic activity downtown justifies the cost of the train. The same is true of road expansions. We don’t have good answers to this question yet. Generally, it looks like expansions of highway and subway capacity are so expensive that it is going to be difficult to pass this test, especially in the countryside where rural state senators like to send federal highway funding. On the other hand, making investments that squeeze more capacity out of existing roads and tracks in big cities is going to be easier to justify.

For more from Matthew Turner on transportation policy, read his article in the Fall 2010 edition of PERC Reports.

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The Adaptability of Property Rights

by Andy Hanssen, PERC Lone Mountain Fellow

What Naomi Lamoreaux has termed “The Mystery of Property Rights” has two aspects. On the one hand, secure and stable property rights are essential to economic development and growth. On the other hand, a set of property rules that cannot evolve in the face of technological and social change may be unable to adapt in ways that facilitate progress.

In this context, consider the United States. The United States is an economically successful country with well-respected enforcement of property rights – so much so that it serves as a destination for capital fleeing less stable regimes. Yet the United States also has a record of making abrupt alterations to property rights (creating losers as well as winners) in the face of new technologies and/or the availability of new resources.

When a parcel of land is taken via eminent domain for a “public use,” its owners are entitled to “just compensation.” These two requirements (public use and just compensation) are written into the U.S. federal constitution and the constitutions of most states, and ostensibly check the ability of governments to take private property. In fact, each requirement has proven sufficiently malleable so as to allow a broad range of takings. Although debates over the proper definition of public use have generated controversy, unhappiness with how just compensation is determined has also sparked much concern. That unhappiness became particularly pronounced in the 19th century when a practice known as the benefit offset was employed (see Fleck and Hanssen 2010).

The idea behind the benefit offset is simple: If an owner has land taken for a public use via eminent domain and the value of the remaining land rises as a result, the taker can “offset” required compensation by that rise in value. For example, assume a farmer loses 10 of his 100 acres to a railroad, the pre-railroad price of farmland is $100 per acre, and the price rises to $105 per acre when the railroad lays its line. The farmer is due compensation equal to $1000 (10 x $100) for taken land, less $450 (90 x $5) for the increase in the value of the remaining land, summing to a net payment of $550.

The benefit offset was one of several “expediting doctrines” used to promote public infrastructure projects – highways and canals – in the early 19th century. The “expediting” was justified by the alleged importance of the projects to the general public.

The benefit offset was also used to subsidize railroad building. Why subsidize railroads, and if doing so, why use the benefit offset?

Various explanations for a subsidy are possible, but holdup problems were likely to have been of concern. Infrastructure projects entail large sunk investments, with returns generated over a period of years. Nonetheless, the benefit offset seems a roundabout form of dealing with a holdup problem. One possible explanation is that the benefit offset enhances the incentive to choose the most valuable route (in terms of willingness of shippers to pay).

Rail rates (as with rates for canals or highways) were regulated, which may have prevented companies from capturing the full value of a line through pricing (this would be a form of holdup). As a result, a rail company will choose the cost-minimizing route, which may not be the value-maximizing route as landowners are concerned. The benefit offset may have helped overcome this problem.

As Lone Mountain Fellows at PERC this summer, Robert Fleck and I are taking a closer look at this issue. By examining how the benefit offset was used and when it changed in different states, we highlight factors that underline the adaptability of property rules—but which don’t threaten the security promised by the property regime.

 Andy Hanssen is a 2012 PERC Lone Mountain Fellow and an associate professor of economics at Clemson University. He is the co-author, along with Robert Fleck, of the 2007 PERC Policy SeriesDo Profits Promote Pollution? The Myth of the Environmental Race to the Bottom.”

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Support Subsidies, Pay Less for Subsidized Service

Gary Leff reports on a new Amtrak program whereby those who join the National Association of Railroad Passengers, a D.C.-based “advocacy organization” that supports greater Amtrak subsidies, get special discounts on Amtrak tickets. Leff comments:

Whatever you think of government funding for train travel in the United States, is it problematic that a government corporation will give people discounts if they pay to join an organization that will lobby the government for more subsidies?

Put another way, Americans who pay to support more subsidies get charged less to travel on subsidized trains than those who oppose the subsidies.

Cross-posted at the Volokh Conspiracy.

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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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The Fundamental Law of Road Congestion

Photo: Minesweeper on en.wikipedia

Matthew Turner, a visiting 2011 PERC Julian Simon Fellow, was interviewed on All Things Considered this weekend about road congestion:

For decades, urban areas across the country have been adding lanes and building roads to fight congestion, but a recent study by University of Toronto researchers finds that widening and building more roads actually creates more traffic.

“What we found was that in cities where there was more roads, there was more driving,” economist Matthew Turner, a co-author of the study, tells weekends on All Things Considered host Guy Raz. “In particular, if you had 1 percent more roads, you had 1 percent more driving in those cities.”

Turner’s study also looked at public transportation, and the results were similar: More buses and trains create more riders, but generally don’t make a dent in traffic problems.

“As you increased a city’s stock of light rail or bus cars, there’s no impact on the amount of driving,” Turner says.

The one-to-one relationship between roads and vehicle miles driven is what Turner and his co-author Gilles Duranton refer to as “the fundamental law of road congestion” [PDF]. And since increases in road capacity and expansions to public transit do not reduce miles drive, the authors claim congestion pricing is the only effective tool to curb traffic problems.

This is certainly not what Los Angeles residents wanted to hear as they prepare for this weekend’s “Carmageddon” — a $1 billion widening project that will close Interstate 405 for more than 50 hours and is expected to create traffic jams more than 30 miles long.