“Farmer Johnson, plant more corn”

Michael Giberson

If you haven’t had your fill of ethanol-and-the-high-price-of-food-everywhere stories, today the Washington Post takes a look from the point of view of an Iowa farmer.

Johnson is a one-person summary of how high corn prices are washing through the world of agriculture and climate change. Normally, he plants half of his 900 acres with corn and half with soybeans. He alternates crops on each field because it is better for the soil.

But last year he planted 500 acres of corn and 400 of soybeans, and this year he will do the same. “The market was screaming, ‘Farmer Johnson, plant more corn, plant more corn,’ ” Johnson says.

Well, the market may be screaming for more corn, but much of it is due to the hard, swift kick in the bushel-basket delivered by Congress:

In 2005, the Republican-led Congress and President Bush backed a bill that required widespread ethanol use in motor fuels. Just four months ago, the Democratic-led Congress passed and Bush signed energy legislation that boosted the mandate for minimum corn-based ethanol use to 15 billion gallons, about 10 percent of motor fuel, by 2015. It was one of the most popular parts of the bill, appealing to farm-state lawmakers and to those worried about energy security and eager to substitute a home-grown energy source for a portion of U.S. petroleum imports. To help things along, motor-fuel blenders receive a 51 cent subsidy for every gallon of corn-based ethanol used through the end of 2010; this year, production could reach 8 billion gallons.

The article is part four in a series on high food costs around the world.

Piling on the criticism of a summer gas tax holiday

Lynne Kiesling

By now you all have probably heard that Hillary Clinton and John McCain are proposing gasoline tax holidays this summer to take some budget pressure off of voters who drive a lot (c’mon, let’s be honest about the true audience of these proposals). Barack Obama does not support such a proposal.

Criticizing this proposal is truly like shooting fish in a barrel, and others have done it more thoroughly and eloquently than I can (thanks to the WSJ’s Environmental Capital for the link).

So will the populist impetus take the day on this issue, or will there be room for reasoned economic analysis to convince voters that this is a stupid policy? Depends on who they are and how much they drive, probably.

Thrills! Chills! High Oil Prices! A Roller-Coaster Ride of Excitement!

Michael Giberson

Wow, this article on international oil supply and demand from the New York Times is fascinating, and not in a good way. Did they fire the editors? It is like a bad action movie – fast-paced, a few colorful characters, far too many plot twists, and if you stop to think you spoil the effect. It just doesn’t add up.

Here is one thread of an idea, followed through the article:

But as prices flirt with $120 a barrel, many energy specialists are becoming worried … Higher prices have done little to attract new production or to suppress global demand, and the resulting mismatch has sent oil prices spiraling upward.

Have you ever actually seen a price spiral upwards? Not me. Nor downwards either. Later in the article:

“It’s a crunch,” said J. Robinson West, chairman of PFC Energy, an energy consulting firm in Washington. “The world is not running out of oil, but rather it’s running out of oil production capacity.”

I think the reporter didn’t understand what “running out of oil production capacity” meant to the story.

Still later:

In fact, high prices have sparked a global dash for oil. … In some cases, the hunt has been successful. … To make up the shortfall, the world is increasingly turning to fuels made from unconventional sources, like biofuels or heavy oil.

The world is running out of oil production capacity because there is a global dash for oil. This dash is the oil supply response, and it is probably not too soon to conclude the world oil production will be higher this year than last, even as we are short on oil production capacity.

Oil production capacity is expandable, of course, as more tools can be built, more geologists trained, more wells drilled, more reservoirs analyzed, and so on. But just like a new oil discovery doesn’t show up in your gas tank the next day, it takes time.

(HT to The General)

“There’s no such thing as a free carbon cap”

Lynne Kiesling

I’m taking a little time this morning to catch up on the reading I’ve missed over the past month, while I’ve been focused elsewhere. One worthwhile observation, with which I agree, comes from Virginia Postrel’s note about carbon policy positions of Presidential candidates, among other things:

It’s infuriating how all three presidential candidates prattle on about the need to fight global warming while also complaining about the high price of gasoline. … The last thing you’d want to do is reduce gas taxes during the summer, as John McCain has proposed. That would just encourage people to burn more gas on extra vacation trips–as any straight talker would admit.

No gouging or other manipulation found in study of Washington state gasoline prices

Michael Giberson

Leffler-Washington-gas price study 2008 cover.pngAccording to a year-long study of gasoline prices in the state of Washington, variations in prices across the state “are due to the cost of obtaining and transporting fuel to stations and local competition – not illegal price manipulation.”

The state’s Attorney General commissioned the study, which was conducted by University of Washington economist Keith Leffler.

“West Coast refineries are running at capacity,” [Washington Attorney General Rob] McKenna said. “We’re importing higher-priced refined gasoline to meet consumer demand, which raises average prices at the pump. Any glitches in the supply system can cause significant price spikes. Meanwhile, crude oil costs nearly four times as much as it did five years ago.”

In general, the report observed that retail gasoline prices were higher because the cost of crude oil was higher, regional variations in wholesale prices were closely related to variations in the cost of supplying fuels to terminals (though exceptions are noted), and competition within city areas is the most important factor behind remaining differences in regional retail prices.

Current average retail Washington prices were reported to be the sixth highest in the nation, in part because, as the report explains, Washington state gasoline taxes are highest in the nation.

Perhaps unlike Vermont*, gasoline consumption per person is going down in the Pacific Northwest. The Seattle Post-Intelligencer reported:

Washington, Oregon and Idaho residents are guzzling less gas per person, according to a report released Thursday by Sightline Institute, a Seattle-based think tank.

Motorists used on average nearly a gallon less each week in 2007 (7.8 gallons) than they did in 1999 (8.7 gallons), the lowest per-capita level since 1966.

Despite growth in population, overall gas consumption has been relatively flat in the region in the last nine years, the report said.

“The biggest single impetus is higher prices,” said Clark Williams-Derry, research director of Sightline. “When prices rise, people start to make different kinds of choices. … We’re traveling a little less. We’re making shorter trips and fewer trips.”

*Or maybe Vermont, too, is using less gasoline, despite the note yesterday saying that vehicle miles traveled in the state is up since 2000 even with higher prices. The Kansas City Star reports that gasoline consumption is falling nationwide:

Kansas City Star_gas_by_region_042208.jpg

A longer view of the retail gasoline experience in Vermont

Michael Giberson

Free Press columnist Ed Shamy offers “a stroll through The Burlington Free Press archives about gasoline prices,” beginning January 16, 1974, continuing to today:

Jan. 16, 1974: Gasoline in short supply in Vermont. Entire communities without a single open filling station. And gasoline is obscenely expensive, an average of 48.7 cents per gallon for regular.

Jan. 19, 1974: AAA poll of 113 Vermont service stations shows most are open 7 a.m. to 7 p.m., most closed Sundays, all limiting sales to $3, and charging an average of 49.6 cents per gallon.

April 2, 1974. Some Vermont vendors are selling gasoline for as high as 53 cents per gallon for regular. Rampant speculation that oil companies may be gouging consumers.

Oct. 1980: “People will drive five miles to get 2 cents off on a gallon,” says the manager of a Berlin gas station during a price war.

May 1981: Three gas station owners in Londonderry predict a painfully slow summer tourist season because gas has reached an eye-popping $1.399 per gallon. Rampant speculation that oil companies may be gouging consumers.

May 1989: President of the Vermont Chamber of Commerce says, “When it breaks that $1.50 a gallon figure, that’s when it starts to affect people.”

August 1999: Burlington man: “Terrible! It was $1.19 the other day. Today it was $1.21. They’ve got you where they want you, and they are going to keep you there until they bleed you to death.” Rampant speculation that oil companies may be gouging consumers.

September 2005: “I didn’t know until yesterday that my pumps wouldn’t go over $2.99,” says a gas station owner in Elmore.

November 2007, with gasoline prices averaging $3.02 per gallon in Vermont: “Everybody keeps wanting to see what’s that point of impact where people start to cut back. We keep setting the benchmark, and people continue to travel,” a AAA spokesman says.

Today: $3.50 per gallon and rising with no end in sight.

Shamy adds a footnote: “In 2000, each Vermonter traveled 11,167 miles in a motor vehicle, according to the U.S. Transportation Department. By 2005, there were more of us and still each of us traveled more — 12,379 miles.”

More on ethanol policy and food prices

Michael Giberson

In an op-ed in the Washington Post, Lester Brown and Jonathan Lewis seem overly generous in their interpretation of the motivations for the now-obvious-failure of ethanol policy in the United States:

Food-to-fuel mandates were created for the right reasons. The hope of using American-grown crops to fuel our cars seemed like a win-win-win scenario: Our farmers would enjoy the benefit of crop-price stability. Our national security would be enhanced by having a new domestic energy source. Our environment would be protected by a cleaner fuel. But the likelihood of these outcomes was never seriously tested, and new evidence has shown that the justifications for these mandates were inaccurate.

I must have missed the analysis indicating that ethanol was intended to create crop price stability. I thought the hope was always that the policy would push food prices up. Isn’t that how increases in demand work?

Also, the national security argument for ethanol always struck me as false. We import most of our oil from Canada and Mexico, and with oil a fungible product in an international market, it is hard to see just how some other nation might wield oil-withholding as an offensive threat.

Possibly the move to increased ethanol could have lead to environmental improvements, but biofuel mandates are a bad way to implement policy even if it were true that they produced benefits. As a practical matter, the environmental arguments for ethanol have always been mostly a smokescreen. Ethanol policies were never popular in Iowa because of their potential for improving air quality in Los Angeles or New York City. “Food-to-fuel mandates” always smelled like political pork to me, so I guess I’ve never had a generous opinion of the motives of its political supporters.

(In fact, there is some danger that all ethanol technologies will be unfairly tainted by an association with current failed policies mostly intended to drive up corn prices. Supporters of non-corn-based alternatives for making ethanol may want to distance themselves from the pork-barrel politicking of the agribusiness lobby.)

Of course, Brown and Lewis are promoting a change in policy, for which the support of politicians is needed. I suppose, purely as a rhetorical device, it is useful to not describe the targets of your appeal as a bunch of …. Well, it is probably useful not to finish that sentence.

The Brown and Lewis editorial does bother me in parts. Does most of the energy used to make ethanol actually come from coal? I would have guessed oil for fuel and natural gas for fertilizer. Also, like many people (myself included), Brown and Lewis are eager to blame world-wide high food prices on ethanol policy, but most of the analysis I’ve seen in the newspapers is thin. The argument makes a lot of sense, but there are other obvious factors (high fuel costs, increasing world demand for meat consumption, increasing world demand for food generally), so it would be nice to see a careful sorting out of the contributing factors.

The conclusion, however, is good:

[I]t is impossible to avoid the conclusion that food-to-fuel mandates have failed. Congress took a big chance on biofuels that, unfortunately, has not worked out. Now, in the spirit of progress, let us learn the appropriate lessons from this setback, and let us act quickly to mitigate the damage and set upon a new course that holds greater promise for meeting the challenges ahead.

(HT to Tim Haab at Environmental Economics)