Market Power

ReasonTV on the Ethanol Boondoggle

Two points made in the video that I've made before: 

1.  Who wins from ethanol subsidies?  Farmers, agri-giants like ADM, and politicians.  Who loses?  The rest of us.

2.  If ethanol were such a great thing, we wouldn't need subsidies.  Subsidies are a way to tell us that the product isn't all that great of an idea.  Where have I heard that before?

Cross Price Elasticity of Demand

Via Bill Polley:

If there is any good news about $4 per gallon gasoline, it is that ridership on Amtrak is booming.

Here's the story.  People respond to incentives, especially given time.

 

Warren Meyer on Oil vs. Wind

Here.  The concluding sentences

Incredibly, despite all this effort and technology and investment required to generate electricity from fossil fuels, wind generators still need subsidies to compete economically with them.  In a very real sense, the fact that fossil fuels can come to us even at today's prices is a modern day business and technological miracle.

Of course, in the press, the wind guys begging at the government trough are heroes, and the oil companies are villains. 

Addendum:  whups.  I forgot the link and I didn't indent the first paragraph taken from Warren.  My bad.  Both problems have been fixed.

More on the Ethanol Boondoggle - the Missouri Edition

Via Knowledge Problem come this from the Show-Me Institute of Missouri:

A report from a Missouri-based research organization debunks the claim that Missourians are saving money through a state law requiring that retail gasoline contain a minimum of 10% ethanol. The report is in reaction to an assertion by the Missouri Corn Merchandising Association (MCMA), alleging that Missourians will save more than US$ 285 million through the E-10 mandate in 2008, and nearly US$ 2 billion over the following decade.

The MCMA arrived at these numbers by taking the price difference between pure-grade gasoline and E-10 blended fuel, and multiplying it by Missouri’s projected annual consumption.

However, the report by the Show Me Institute reveals two fundamental flaws with this calculation. One is that it fails to take into account the fact that E-10 blended fuel is cheaper because ethanol producers receive tax credits and other subsidies.

“Government officials cannot simply take tax dollars from the public, give those tax dollars to ethanol blenders, and then have ethanol supporters tell the public that ethanol is saving them money with cheaper fuel as though the subsidy never existed,” write the report’s authors, Justin P. Hauke and David Stokes.

The MCMA also does not take into account that E-10 blended fuel is about 2.5% less efficient than pure-grade gasoline, meaning that Missourians will be filling their tanks more often.

When both of these factors are taken into account, the ethanol blending mandates are shown to be costing Missourians about US$ 118 million per year.

“Although Missourians may pay nominally less for gasoline at the pump after the E-10 mandate, these savings will not reflect the actual cost Missourians would pay in complying with new ethanol fuel standards,” write the authors. “Ethanol subsidies are not free money — they are simply a wealth transfer from one taxpayer to another.”

Add to that the increase in food prices driven by ethanol mandates and subsidies, and the cost goes even higher.

I've said it before and I'll say it again:  if ethanol, particularly corn-based ethanol, is such a good use of resources, why does it need to be subsidized?

Biofuels and Food Prices

Via Marginal Revolution comes this:

Biofuels have forced global food prices up by 75% - far more than previously estimated - according to a confidential World Bank report obtained by the Guardian.

The damning unpublished assessment is based on the most detailed analysis of the crisis so far, carried out by an internationally-respected economist at global financial body.

The figure emphatically contradicts the US government's claims that plant-derived fuels contribute less than 3% to food-price rises. It will add to pressure on governments in Washington and across Europe, which have turned to plant-derived fuels to reduce emissions of greenhouse gases and reduce their dependence on imported oil.

Tyler Cowen thinks this estimate is too high.

I think that this line of research will be one of the more interesting lines over the next few years as we come to learn what a boondoggle biofuel subsidies are.  If biofuels are such a great use of resources, why must government subsidize the heck out of them? 

The Elasticity of Supply of Oil

For some time now, Greg Mankiw has had a series of posts about the responsiveness of consumers to the rising price of oil.  I'd like to add something from the other side of the market:

In less than a year, Stohler and his wife, Lorene, 82, have become millionaires from the production of one well on their land near Dunn Center, a mile or so from the sod home where Oscar grew up. A second well has begun producing on their property and another is being drilled — all aimed at the Bakken shale formation, a rich deposit that the U.S. Geological Survey calls the largest continuous oil accumulation it has ever assessed.

Landowners in western North Dakota have a much better chance of striking it rich from oil than they do playing the lottery, say the Stohlers. Some of their neighbors in the town of about 120, from bar tenders to Tupperware salespeople, have become "overnight millionaires" from oil royalty payments.

"It's the easiest money we've ever made," said Lorene Stohler, who worked for decades as a sales clerk at a small department store.

Will the Price of Oil Fall Below $100?

John Chilton:

If I weren't such a chicken, I'd go with #3. I've said before on this blog that oil won't stay above $100/barrel for long. I don't have a fancy model, just an intuition that there's plenty of oil out there in costly to extract places where extraction costs -- although well above Saudi levels -- are also below $100/barrel. It's a matter if doing the engineering. And then there's the factor energy saving technologies, and development of alternative energy sources.

If the new extraction will involve large up-front expenditures, then I can definitely see this.  Once the investment has been made, then the cost is sunk and as long as the marginal cost of extracting the oil from these new "wells" is less than $100, then oil will sell for less than $100 a barrel.

Of course there's probably oil out there that, without government restrictions, would be extracted, lowering world oil prices towards the $100 level.

Two on Gas Prices, One on Speculation

Michael Giberson on why the demand and supply of speculative assets is driving the futures price of oil.

John Whitehead on the price of gasoline in the US relative to elsewhere.

Mark Perry on the price of gasoline in the US relative to the level of per-capita disposable income.

What do the Politicians Think Motivates Producers in the Oil Market?

Here's King commenting on Congressman Tim Walz, a Mankato democrat (and, apparently, someone who seems to think that oil prices are not subject to the laws of demand and supply).

This does not prevent, unfortunately, government from acting as if they did. Sometimes arrogance is a disguise for ignorance, and as a good example this week consider Tim Walz' antipathy to markets, as Andy Aplikowski documents.  He quotes a Rochester Post-Bulletin article in which Walz denies the market.

This idea — this red herring — that all of a sudden you’re going to drill and everything is going to be better, as if the market fundamentals are at work here — that’s not happening... These are the same people that are (getting) $40 billion in profit.

"As if" Walz believes profits do NOT motivate drilling. What do you think they do it for, to drop the rocks they drill in the ocean to watch the ripples? There is, in the Walz mentality, a suspicion that people who earned a profit got this from someone, that it's undeserved. For many years we've understood profits as the return to risk born by the residual claimant, the entrepreneur.  But instead we get people who believe corporations are reprobates less worthy of our trust than a government that has a monopoly on force.

Read the whole thing.

Heavy Rains, Higher Ethanol Prices, and Putting Our Energy Eggs in One Basket

Tim Haab at Environmental Economics writes:

record levels on Friday, prompting concerns about the outlook for this year's harvest....

"Heavy rains have flooded corn crops in Indiana, Ohio, Nebraska and other states, giving farmers their wettest spring since 1993 and severely delaying planting. Forecasts show the bad weather moving toward the western corn belt states of Minnesota and Wisconsin over the next several days."

The AP article went on to explain that, "U.S. farmers were expected to plant 86 million acres of corn this year, but wet weather in Midwestern states has left 4 million acres unplanted. If the remaining fields aren't planted by June 10, farmers will either leave them empty and take insurance payments or switch the acres over to soybeans, which have a later growing cycle.

"That would likely lift corn prices further, forcing consumers to pay higher grocery bills for meat and pork, as livestock producers would be forced to pass on higher animal feed costs and thin their herd size.

When we are mandated to use ethanol-blended gasoline (i.e. corn ethanol, since ethanol imports are taxed), that can only mean higher gas prices in the future (all else equal).  When the price of an input (corn) exogenously increases, that pushes the price of the final product (corn-based ethanol) up.  If a. we didn't mandate the use of ethanol and b. we didn't restrict the use of other types of ethanol (e.g. sugar-based ethanol, as used in Brazil), then we wouldn't be so dependent on local growing conditions. 

This is one of the unintended consequences of creating policies to reduce our "dependence" on foreign oil:  we make the gasoline market more susceptible to local shocks, and therefore more volatile.  Putting our eggs in one basket, as it were.

PS:  we are under a flash-flood watch here in southern Mn because of forecasted heavy rains and because the ground is saturated from recent heavy rains.