Commentary From the Mile High City

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Joshua Sharf

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September 15, 2006

Beware Oil

It's a truism that prosperity breeds bad management, and that extended prosperity breeds exceedingly bad management. Example A: Bethlehem Steel (Ticker: PAWS.UP). The legendary CEO of the company used to send people ahead each morning to make sure he wouldn't have to share an elevator. Eventually, the elevators stopped running altogether. Finally, when USX faced bankruptcy, a bunch of mini-mills in the South figured it out and started delivering high-quality, low-cost steel again. A couple of years ago, the leader of the rebellion, Nucor, itself ran into some management problems, opening the door for dozens of others.

It's hard to imagine a set of American companies more victimized by their own success than oil. The automakers learned this less in the late 70s and early 80s, and today's problems are more failures of imaginarion than anything else. But the oil companies, small and large, have a history of making terrible mistakes and then getting rescued by some international crisis or large expanding economy.

Historically, the worst of those mistakes has been over-investing at the peak of the cycle. Anyone from Colorado or Wyoming can tell you about boom-and-bust, and it's a mentality that oil and gas has never seemed to get under control. Right now, they seem to be making the same mistake yet again. I'm not talking about the strike in the Gulf. That kind of exploration has a life cycle of decades. I'm talking about the smaller companies that are now running cash flow deficits because they're looking at the forest and seeing

It's not exploration, which would make sense. It's actual free cash deficits in the face of rising returns, which happen because a company is spending more on its capital investment than its getting from ongoing operations. It's the sign of an expanding supply to meet demand, but it's also risky to plow this money in at the top of the curve time after time. Many of these wells are only profitable at high prices, and when oil prices drop - as they seem to be doing now - a lot of these smaller companies are going to be left with expensive, unprofitable, and idle equipment.

June 5, 2006

Feldstein Proposes Gas Rationing - Roundup

Jaw-droppingly, that's what Martin Feldstein proposes in today's Wall Street Journal.

In a system of tradeable gasoline rights, the government would give each adult a TGR debit card. The gasoline pumps at service stations that now read credit cards and debit cards would be modified to read these new TGR debit cards as well. Buying a gallon of gasoline would require using up one tradeable gasoline right as well as paying money.

The government would decide how many gallons of gasoline should be consumed per year and would give out that total number of TGRs. In 2006, Americans will buy about 110 billion gallons of gasoline. To keep that total unchanged in 2007, the government would distribute 110 billion TGRs. To reduce total gasoline consumption by 5%, it would cut the number of TGRs to 104.5 billion.

The government could distribute TGRs to reflect geographic differences in driving patterns. Additional TGRs would be distributed to each debit account at the end of each month to avoid problems of expiring rights. Businesses that use trucks would also get TGRs.

This was a column that just didn't get printed in time for the April 1st edition, right? Or maybe Feldstein was cleaning out his liquor cabinet and found this draft next to the Purim leftovers.

This is WWII rationing, pure and simple.

More likely, Feldstein has spent so long analyzing government policy on Social Security, Health Care, taxes, fiscal and monetary stimulus, that he's forgotten that we have a perfectly good system for encouraging conservation - it's called, "prices."

One wonders why Feldstein stops with gasoline. Surely a government capable of calculating how much gasoline each neighborhood needs to consume is capable of much, much more.

UPDATE: Feldstein's proposal is generating a fair amount of blogospheric comment: I still think the fundamental question is why on earth anyone thinks any government system of allocating credits ahead of time is going to be a more efficient aggregator of need than the market. Given the national balkanization of fuel mixtures and the refining process, this can only lead to more shortages.

Greg Mankiw: I have said many times that I like the idea of higher gasoline taxes, but Marty's scheme leaves me cold. Do we need to create a new administrative bureaucracy because politicians are afraid to use the word tax? I hope not.

lynne Kriesling: But it is so potentially prone to political manipulation, and over such a large number of possible stakeholder organizations, that I think it would distort decision-making enough to generate bad outcomes and entrench special interests.

John Caddell: And Feldstein has a pretty good argument as to why fuel economy standards, while well-intentioned, won't make enough difference to reduce our overall consumption quickly.

Mark Thoma: In addition, while this proposal does provide the correct incentive at the margin, I can envision an endless political fight over the allocation of credits.

Glittering Eye: I have a more basic question. Perhaps I’m being dense but how is this approach better than any other fiat system (it is a fiat system: the government is setting a quota)? Why not just let prices rise? Are they convinced that the demand for oil is infinitely inelastic?

Brad DeLong: I think Marty's right. I think it's a clever idea--and much better than tightening CAFE. Tom Kalil was talking about higher gasoline taxes with the revenue dedicated to paying the first X thousand of individuals' Social Security taxes. But I think Marty's scheme is more transparent, which gives it powerful political-economy advantages.

Arnold Kling: One gets the feeling that his main concern is to fend off fuel economy regulations, which are indeed exercises in moral vanity--they do little to reduce gasoline consumption but they do help to brand auto companies as villains.

May 26, 2006

If Atlas Shrugged Were About Oil... would look like this.

Clear Peak Colorado, a committee that backs Democratic candidates for the state legislature, plans to launch a series of automated phone calls to voters this weekend.

"As you pay record prices for gas this holiday weekend, remember that some of your hard-earned money is paying for partisan politics," the caller says.

The calls claim that Republicans are using oil-and-gas industry money to pay for attacks on Democrats.

"The Republicans have let big oil off the hook for cleaner air and tougher drilling standards. The high gas prices go from your pocket to the Republicans and back to the pump again," the call says.

Talk about the grease calling the oil black. Someone needs to make calls to parents describing how Democrats are using state funds to attack Republicans over schools. Of course, that would take a Republican leadership with the onions to take on the teachers' unions and the lefty non-profits bellying up to the Ref C trough.

Never mind that it's excessive and poorly-designed clean-air regulation, along with bizarre drilling standards that are at least partly responsible for $2.64 gas to begin with. Federal clean-air regulation mandates that several dozen mixes of fuel be sold, balkanizing the refining and transportation process, preventing plants from substituting for each other when they go offline, and creating semi-annual switchover price spikes. Combine that with decades-old offshore drilling restrictions, and you're doing a masterful job of vertically integrating your supply-chain strangulation.

Not that the Post isn't sympathetic:

Already this year, Owens vetoed House Bill 1309, which would have let the state adopt tougher clean-air standards.

"Already!" The legislature has adjourned, and won't be back until there's a new governor, but the Post wants you to think that Owens is ready to run a drilling rig through the middle of the state capitol, and put a refinery in City Park, providing employment displacing the homeless there.

Thereafter follows a list of Trailhead donors who exhale dangerous carbon dioxide greenhouse gases. Including Pete Coors who has had run-ins in the past with state officials over air pollution. Coors, the Post may not remember, actually ran for Senate as a Republican two years ago, at the, ah, suggestion of Owens and Benson. So naturally he's contributing to a Republican party-building 527 because of air pollution.

Bad politics. Bad journalism. Bad economics. The triple threat.

May 23, 2006

Salazar Gets One Right

No, the other Salazar. John Salazar of the 3rd Congressional district. He voted to lift the decades-old ban on offshore drilling in all but a few places. (Naturally DeGette got it wrong, preferring instead to take my money to pay for someone else's heating.)

Gee, now there's a novel idea. Responding to supply-and-demand issues by increasing supply. Maybe it has something to do with the energy poll results from his Congressional website.

Of course, there's this, from the Democratic Congressional Campaign Committee:

Congressman Salazar remains committed to protecting the environment which is why he opposed the “energy bill” devised by the Bush Administration and oil companies that put profits first and threatens natural preserves and Alaskan wildlife. Rather than promoting oil drilling into our precious lands, Congressman Salazar is a leading proponent for renewable energy sources.

So if Salazar is for drilling elsewhere, but opposes it close to home, what does that say about him? Moreover, if that's what the DCCC chooses to emphasize, what does that say about their energy "policy?"

(Hat Tip:, now comforably Blogrolled.)

April 30, 2006

MSM Still Passing Gas

MSNBC's First Read continued its obsession with gas prices to the exclusion of, well, all other economic news this past week. A rough word-count of economic reporting on First Read's blog shows that of 3500 words devoted to economics, 3250 were about gas prices. This does not include a Monday posting ostensibly about the Dahab bombing that spent the second paragraph talking about oil prices.

Ironically, First Read is aware of the problem, even if they don't know that they know. On Friday:

Asked in the April 21-24 NBC/Wall Street Journal poll who is most responsible for high gas prices, 37% of those polled say the oil companies are most responsible. Oil-producing nations rank second at 22%, while only 15% lay the most blame at President Bush's feet and 4% say Congress bears the most responsibility.

While on both Tuesday and Wesnesday:

...unstable relations with Iran and political instability in Nigeria seem to be the primary drivers of the price of oil.

Gee. I wonder where people are getting this idea that ExxonMobil is wearing the oil-soaked black hat here?

MSBNC "First Read" Issues Correction

Last week, we noted how MSNBC's First Read blog had reprinted the New York Daily News's misquote of a CNN poll about how oil prices were affecting families. In the poll, 23% said that gas prices were having a "severe effect," 46% said they were having a "moderate effect." The Daily News and First Read both reported 69% under the "severe effect" label.

On Friday, in response to my email, First Read issued the following correction:

On Tuesday, we quoted a New York Daily News article, which cited a CNN poll showing that 69% indicate gas prices are causing them severe hardship. However, the actual poll finds that 69% say these prices are causing them "hardship", not "severe hardship."

To their credit, the correction was given about the same prominence as the original report - at the end of their long, daily commiseration about gas prices.

It's not a perfect correction; they probably should have noted the difference between "severe" and "moderate," for instance. But Ms. Wilner replied promptly and without attempting to make excuses.

April 25, 2006

What Is It With NBC's First Read and Polls?

For a few days, it looked as though maybe MSNBC's First Read - written in part by NBC's political director Elizabeth Wilner - was being more careful with their poll numbers. Then, from today:

The New York Daily News says the same CNN poll showing Bush's approval at 32% also notes that 69% "said gas prices were causing them severe financial hardship."

Well, they quoted the Daily News accurately enough:

Sixty-nine percent of Americans in the CNN poll said gas prices were causing them severe financial hardship.

Take a look, though, at the actual poll. Forty-Six percent say gas prices have caused "moderate hardship," while only 23% say "severe hardship."

In effect, both the Daily News and Ms. Wilner triple the number of people reporting "severe hardship". At least it wasn't their own poll they got wrong this time.

Meanwhile, First Read, now posting throughout the day, fails to mention today's buoyant consumer confidence numbers, which would tend to contradict the claim the gas prices are forcing people to take second jobs.

So why the discrepancy? Probably because gas prices are the one price that everyone knows, because it's posted on every street corner in America. As you drive by the sign, you're literally coming closer to having to pay that price. Gas prices are a lower percentage of total household expense than ever, but gas consumption is something that usually takes some major change to affect. So any change in price gouges into that always-thin margin between the red and the black.

I realize that First Read is primarily political, not economics, but they're clearly letting their political biases get in the way of their economic fact-checking.

A Little Trent's A Lott

Trent Lott was just on Sean Hannity explaining why every time he opens his mouth he gets further away from succeeding Bill Frist and closer and closer to being the ranking minority member on whatever committee assignment he gets.

Look, I know gas prices are high. I pay for gas, too. But to try to argue that there's collusion at the highest levels because when you drive down the street, the prices are all near each other must be to come from a state that can see oil wealth but didn't have enough sense to lure it across state lines. Oil and gasoline are commodities, meaning that they compete on price, that there's no basic difference between the competitors.

Once again, it needs to be said that the oil companies don't set gas prices.

Lott also played the robber-oil-baron class-warfare card. Has he actually bothered to do the arithmetic? Does he really think that if every oil company CEO worked for $1 a year it would save me more than that dollar over the whole year?

Here are two suggestions that Senator Lott might want to try out. First: let the oil companies actually make a profit so they have something to reinvest in exploration and drilling and all those alternative energy sources they'll need to stay in business when the well runs dry. (Corollary: let them actually invest it in those things.)

Second: you, too, can share in the wealth by buying oil company stock. These stocks pay dividends. The Dow Jones US Oil & Gas Index is up something like 35% over the last year. Over the last 3 years, it's up about 100%. If you want to shield yourself against the high price of gas, maybe think about buying oil stocks, and sharing in the wealth.

No, I didn't do that, I'm afraid. But then, I'm not whining about greedy profiteering, colluding oil CEOs, either.

March 15, 2006

More Gas Prices

I was on the other side of town for a meeting today, and noticed something that should put to rest the idea that big oil companies set gas prices. (Senator Schumer, please pay close attention.)

There were two gas stations, both selling Conoco, right next to each other on a major north-south street. One was on the northwest corner, and the other on the southwest corner of the intersection. There was no obvious commuting advantage to one over the other: the side street wasn't terribly busy, and they were both on the same side of the major street.

One was selling gas for 10 cents cheaper than the other. That's a huge difference, especially for the same brand.

There was no obvious difference between the two - both had pay-at-the-pump, both had carwashes - except that the cheaper one also had a small mini-mart, too. Is it possible that the mini-mart made up enough margin that the first one could undercut the second on price to that extent, and so bring in the extra gas business? (Remember, if there isn't some imbalance, either station could always match the other's price.)

In any case, Conoco obviously wasn't setting the prices here.

March 3, 2006

Addicted to Natural Gas

It turns out that China, by capping gas prices in an attempt to shift from coal & oil, has driven consumption up to the point where they're pricing themselves out of the natural gas market.

Despite a significant improvement in Tongchuan's air quality, local leaders are planning a new plant and it is going to be powered by coal. They blame sharply rising gas prices. "We have plenty of coal, why don't we use it?" says Zhao Guanlong, the deputy director of the city's development and planning commission.

China has backed out of at least one multibillion-dollar deal to buy gas from overseas oil companies and other deals are in jeopardy. Plans to build more than a dozen terminals to receive gas shipments in liquid form are on hold. Chinese officials are discouraging new gas-related investments because they fear the terminals won't be fully utilized.

This indicates the folly of "energy policy."

Of course, it's going to make LNG more appealing to us, and put more pressure on oil prices, which is why this is good news:

As the Bureau of Land Management faces increasing pressure to speed up gas-drilling permits on federal land across the West, it has begun extending deadlines in Colorado because companies can't start drilling fast enough.

BLM officials in Colorado recently changed their rules to stop the clock for drilling companies that can't find rigs to drill gas fields they've leased from the government. Previously, companies that couldn't start drilling before their lease expired lost their lease. M/blockquote>

Since it's smaller companies that are having a hard time finding drilling equipment, this serves as a help to smaller business; and it also suggests that it's time to look into companies that make (not necessarily operate) NG drilling equipment. Note that a large part of the cost of LNG is transportation, so this undercuts that cost.

One other point. The WSJ notes that China has the world's second-largest energy use. But it only just became the world's fourth-largest economy. So it's apparently incredibly inefficient when it comes to energy use, and incredibly dirty when it comes to pollution. Its exclusion from Kyoto is another reason to ignore that treaty.

February 28, 2006

Even More Economic Illiteracy

This is going to have to become a category on its own.

The WSJ is reporting that a number of state legislatures are mulling over the notion that the answer to low supply further depress supply:

With consumers in many parts of the country facing sharp increases in their electricity bills, officials in some states are considering rate caps or other measures that would beat back deregulation.


Some state officials are stepping forward to propose rate caps and other measures meant to hold down increases in electricity bills. But the proposed fixes could put utilities in a cost squeeze. Similar proposals backfired five years ago during California's electricity crisis, bankrupting the state's biggest utility. Critics also say the measures do nothing to fix the underlying problem of surging wholesale power costs.

We want more efficient plants. The public would almost certainly settle for more nuclear plants. Heaven forbid the energy companies be able to charge enough to cover the cost of new investment. No, no, much better to let the system crumble, and then, twenty years from now, ask what happened.

February 20, 2006

More Economic Illiteracy

When will we learn that there really is no free lunch? Some Colorado legislators, eager to throw yet more money at the teachers' unions, want to raise taxes on the booming oil and gas industry in the state. And for some reason, they don't think it will actually cost anything:

The proposal would increase by 1 percent the taxes oil and gas producers pay and would divert some federal mineral lease funding largely for school-building and renovations.

"It is our intention in this measure to make sure that we address the immediate health and safety needs in the poorest districts first," said Mary Wickersham, a leading supporter of the proposal and who works for the Donald Kay Foundation.

Because oil and gas prices are set by national and international markets, Wickersham said, the severance tax hike would not increase what Colorado consumers pay for gasoline or natural gas.

Well, if you spread the added cost over the entire worldwide oil & natural gas markets, I suppose that's true as far as it goes. But of course, it's only true as far as any cost doesn't really show up in the price, since prices are set by markets, not by sellers. It also makes Colorado marginally less competitive, since the competition isn't only straight drilling now, but also tar sands and shale oil. Which eventually will mean an equivalent number of jobs lost. Oh, we won't notice it now, only when we need the work.

Then again, what do you expect from someone who thinks that calling a wild pitch a ball means that the umpire is skewing the game?

February 12, 2006

Oil Reserves & Politics

Last night, one of the guests on John Andrews's show was Jay Lehr of the Heartland Institute, talking about our national "oil addiction." He made the perfectly good point that as the price-per-barrel rises, recoverable reserves rise as well. While the days of $20 per barrel are long-gone, at $50 per barrel, nobody's running out of anything for a while, and the US and Canada suddenly have the largest reserves in the world. So in a war or some other world crisis, we should be able to get our hands on enough oil to run the military without foreign help. (In the absence of a war, the US is still hooked into the international system, where transportation of oil is relatively cheap, and prices are set at world, rather than local, markets.)

That said, it's worth remembering that recoverable reserves are also subject to political as well as economic restraints. Much of the world's exploration and recovery is now being done by government firms, which tend to be less flexible, more protective of prerogatives, and less efficient. This can't help but decrease the recoverable reserves, if only by slowing exploitation, especially of the harder-to-reach reserves, which require more infrastructure.

In fact, it's also worth pointing out that even the surface oil takes a little while to get to, while rigs are built. Large-scale shale and tar sand recovery will take a while to get up and running, and until then, we will remain vulnerable to international oil shocks.


Power, Faith, and Fantasy

Six Days of War

An Army of Davids

Learning to Read Midrash

Size Matters

Deals From Hell

A War Like No Other


A Civil War

Supreme Command

The (Mis)Behavior of Markets

The Wisdom of Crowds

Inventing Money

When Genius Failed

Blink: The Power of Thinking Without Thinking

Back in Action : An American Soldier's Story of Courage, Faith and Fortitude

How Would You Move Mt. Fuji?

Good to Great

Built to Last

Financial Fine Print

The Day the Universe Changed


The Multiple Identities of the Middle-East

The Case for Democracy

A Better War: The Unexamined Victories and Final Tragedy of America's Last Years in Vietnam

The Italians

Zakhor: Jewish History and Jewish Memory

Beyond the Verse: Talmudic Readings and Lectures

Reading Levinas/Reading Talmud