Will raising the minimum bid in federal oil and gas lease auctions boost auction revenue?

The short answer to the title question is probably not.

In the Department of the Interior’s rulemaking docket concerning the financial terms governing oil and gas leasing on federal lands, a handful of comments endorsed the idea of raising the minimum bid in lease auctions as a way to increase federal revenues. But, as explained below, under current law raising the minimum bid could increase or decrease total government revenue generated.

Raising the minimum bid can have the effect of increasing the winning bid on some properties, so generating a higher bonus payment from the successful bidder. Presumably this is the direct effect that proponents of the idea have in mind. At the same time, a higher minimum bid means that some properties will not attract bids in the auction and instead be offered for non-competitive leasing after the auction. Parties securing non-competitive leases do not pay a bonus, so these properties yield lower federal revenues. Under existing regulations, royalty rates and other terms are mostly identical whether the lease is sold at auction or the property is leased non-competitively. Depending on whether the increased revenues from higher bonus bids is greater than the lost revenues from more properties becoming leased non-competitively, total revenue will either rise or fall.

In any case, relatively few properties likely would be affected by an increased minimum bid. Good prospects already sell at auction for higher than the current minimum bid or any likely raised minimum bid—often much, much higher—so bonus payments on those properties would be unchanged. Marginal properties already do not sell in auction at the existing minimum bid and become offered non-competitively. Revenue from those properties would also be unchanged. Only in the narrow range between “good” and “marginal” as described will the higher minimum have an effect, sometimes increasing revenue and other times decreasing it.

The narrowness of the opportunity to increase federal revenues by raising the minimum bid can be emphasized by noting that revenues only increase for cases in which the minimum bid is increased to a point higher than the second highest willingness to pay among bidders but lower than the highest willingness to pay. In cases in which the existing minimum bid is below the highest willingness to pay but the increased minimum bid is higher than that value, revenue will fall. In other cases revenue is unaffected by the change in minimum bid.

We can pin down the various effects on revenue analytically.

Call the existing minimum bid “MB” and the proposed higher minimum bid “MB+”. Assume each potential bidder comes to the auction with a maximum willingness to pay in mind for each property. Call the bidder with the highest maximum willingness to pay bidder A and the bidder with the second highest willingness to pay bidder B. Assume non-strategic bidding (i.e., bidders A and B are willing to bid up to their maximum willingness to pay in any auction in which that maximum is greater than the minimum bid). Leases are offered in an ascending price auction.

Therefore, so long as bidder A values the lease at a value greater than or equal to the minimum bid, bidder A wins the auction at a bid fractionally higher than bidder B’s maximum willingness to pay or at the minimum bid level, whichever is higher. If bidder A wins the auction, then bidder A pays the winning bid (termed the “bonus payment”). If bidder A’s value is below the minimum bid level, the lease is not sold at auction and becomes available for non-competitive leasing and no bonus payment is made.

We can describe the possibilities in the following way (simplifying by using A to stand for the maximum willingness to pay of bidder A, and similarly for bidder B).

  1. If B < A < MB < MB+, then the lease is not sold by auction and becomes available for non-competitive leasing both under the existing minimum bid and under the higher minimum. Revenue is unaffected.
  2. If MB < MB+ < B < A, then the lease is sold at auction at fractionally above B, both with the existing minimum and with the higher minimum. Again, revenue is unaffected.
  3. If MB < B < A < MB+, then the lease would have sold at auction at fractionally above B under the existing minimum bid, but would be leased non-competitively at the higher minimum bid. These properties will yield less revenue.
  4. If MB < B < MB+ < A, then the lease would be sold to bidder A at just above B under the existing minimum bid, but will be sold to bidder A at the higher MB+ under the raised minimum bid. These properties yield higher revenue.
  5. If B < MB < A < MB+, then the lease would have sold to bidder A at MB but now will be leased noncompetitively. These properties will yield less revenue.
  6. If B < MB < MB+ < A, then the lease would be sold to bidder A at MB under the lower minimum and at MB+ under the higher minimum. These properties yield higher revenue.

These six cases exhaust the possibilities. We can conclude that revenue will increase if added revenues from cases 4 and 6 are greater than the reduction in revenues from cases 3 and 5.

That is to say, revenue will increase in cases in which MB+ is greater than B but less than A, but revenue will decrease in cases in which MB is less than A but MB+ is greater than A. Or, restating the “narrowness” conclusion from above, revenues increase only in cases in which the minimum is raised to a level that is higher than B but below A—in all other cases revenues are unchanged or reduced.

We can estimate the net revenue effects of a higher minimum bid.

Or rather, if we had detailed auction data from recent lease auctions, then we would be in the position to estimate the net revenue consequences of a higher minimum bid. With sufficient information from auctions values for A and B could be estimated for various properties and the effects of higher minimum bids could then be simulated.

NOTES

Related earlier posts

Information on the rulemaking process

How should the BLM reflect social costs when leasing federal lands for oil and gas development?

In April the U.S. Department of the Interior issued an advanced notice of proposed rulemaking (ANPR) seeking comments on a handful of economic issues surrounding the leasing of federal lands for oil and gas development. Most of the questions raised in the ANPR concern aspects of the “government take” – the royalty rates, minimum bids, annual rental rates, bonding requirements, and non-compliance penalties – arising from the leasing program.

One of the questions asked raises a broader point: “Should the [U.S. Bureau of Land Management (BLM)] consider other factors in determining what royalty level might provide a fair return, such as life cycle costs, externalities, or the social costs associated with the extraction and use of the oil and gas resources? If the BLM should consider such factors, please explain how it should do so.”

In a public interest comment recently filed in the ANPR docket, Shawn Regan of the Property and Environment Research Center and I suggest an answer to this question on social costs. Quoting from our comment:

Federal lands offered for oil and gas leasing often contain a wide range of non-energy characteristics. If the BLM could accurately determine the full social cost of developing energy resources for each property, in principle the value could be employed as a property-specific minimum acceptable bid in the lease auction. Such a change would ensure that properties are developed only when the value of the energy resources produced is expected to be greater than the value of the environmental benefits sacrificed.

Two problems arise. First, under current federal law BLM is constrained to employ a single minimum acceptable bid nationwide. Second, and more importantly, federal lands are potentially valued for a wide variety of use and non-use values, some of which values complement each other and some of which conflict. No method reliably integrates the variety of diverse, predominantly subjective, and sometimes conflicting values into a single, uncontroversial auction reserve price.

We suggest that these subjective and conflicting values could be incorporated into federal land practices by direct participation of recreation, environmental, and conservation groups in oil and gas auctions. Should these groups desire that a property be held out of development, they simply need to outbid oil and gas developers in the lease auction.

In this system, the highest bid from a conservation group serves as a reserve price. An oil and gas developer would have to bid higher than the highest conservation group bid to obtain the lease. Should a conservation group bid the highest, it obtains the rights to either develop oil and gas resources or hold the property out of development. The greater the conservation values at stake, the greater would be the likely bids from conservation groups. The process would at least in part mimic a system in which the BLM could measure the social costs of oil and gas development and employ that measurement as a minimum bid price in the lease sale.

We do not claim our suggestion would work perfectly, only that it provides an approach to bringing social costs into the leasing system and no administrative system would do a better job. Our proposal is not fully developed in the comment filed, but we do address a few obvious questions.

Feedback appreciated, so take a look and let us know what you think.

So far only one other “academic-y” comment filed in the docket. Jayni Foley Hein of the NYU School of Law submitted a detailed report, “Harmonizing Preservation and Production: How Modernizing the Department of Interior’s Fiscal Terms for Oil, Gas, and Coal Leases Can Ensure a Fair Return to the American Public.” (Have not had a chance to read it yet.)

By the way, the deadline for comments in response to the ANPR has been extended to June 19, so if you have a view on social costs or the government take associated with oil and gas leasing on federal lands, feel free to let the Department know how you feel.

Related Knowledge Problem posts include:

The primary reason for quadrennial gasoline price-gouging charges against Marathon in Kentucky

On May 12, 2015 Kentucky Attorney General Jack Conway filed a lawsuit against Marathon Petroleum Company alleging Marathon has engaged in anti-competitive practices that cause higher gasoline prices for Kentucky consumers. In making the announcement Conway said he has tried over and over to get the Federal Trade Commission or U.S. Department of Justice interested in the case, but they have declined to join efforts.

This isn’t the first time a Kentucky Attorney General has gone after Marathon over gasoline prices in the state. On May 13, 2011, AG Conway charged Marathon violated Kentucky’s price-gouging law after floods struck Western Kentucky. On May 10, 2007, then-AG Greg Stumbo filed suit against Marathon alleging price gouging after Hurricanes Katrina and Rita struck the Gulf Coast in late 2005.

Notice a pattern? Every four years during the second week in May Kentucky Attorneys General take on Marathon over gasoline prices.

What else happens every four years in May in Kentucky? Primary elections for state offices. In 2007 Stumbo was a candidate for Lt. Governor in the Democratic Primary held on May 22nd. In 2011 Conway was a candidate for re-election as AG in the Democratic Primary held on May 17th. This year Conway was a candidate for the Governor’s office in the Democratic Primary held on May 19th.

Nobody in Kentucky pays attention to state elections until after the Kentucky Derby, and that gives candidates only two weeks or so before the primary to make a splash. What better way to show voters you are on their side than an opportunistic attack on an oil company?

I conclude that the primary reason for quadrennial gasoline price-gouging charges against Marathon in Kentucky is the state’s Democratic Primary.

NOTES

Newsweek Cloaks Industry-Funded Environmentalist’s Hit Piece

First, some background

On April 11, 2015, an editorial piece by Randy Simmons and Megan Hansen on the cost of wind energy was published by Newsweek. A DailyKos blogger posted the next day disputing various claims in the piece and observing Newsweek had not disclosed Simmons’s apparent oil industry connections. The day after that the wind energy industry’s lobbying group in Washington, D.C., the American Wind Energy Association, published its reply, more pointed on the topic of Simmons connection, and Media Matters for America chimed in too.

A week later Newsweek added an editorial note to the Simmons and Hansen piece stating Simmons had been the “Charles G. Koch Professor of Political Economy” at Utah State University and was also a fellow at the Property and Environment Research Center. In addition, Newsweek posted a reply op-ed by James Marston, a founding director of the Texas office of the Environmental Defense Fund.

So here we go

Marston pulls no punches in his counterattack on the Simmons and Hansen policy piece in Newsweek: “[Randy] Simmons’ op-ed on the ‘true cost of wind power’ is the same tired slant we have heard from fossil fuel interests time and time again, which should come as no surprise when you learn who’s really behind the piece.”

Get that sinister phrase, “who’s really behind the piece”? Marston apparently believes you can judge a opinion by the company the author keeps. If the author has ever taken money or worked for a project somehow connected to a company, foundation, or industry lobbyist then surely everything the author ever does is tainted, at least in Marston’s view. It is an insulting approach to debate, implying a lack of respect both for people you disagree with and for anyone who might read either the original op-ed or Marston’s reply. It is doubly insulting in the case of an academic like Randy Simmons, who has published several books and peer-reviewed academic articles.

Simmons has presented his best summary of his understanding of the issues. If Marston had respect for his readers, he would do the same. Marston should present his own best substantive arguments, not make tenuous emotional appeals and logically irrelevant ad hominem attacks.

Of course Marston does present some substance in the article that Newsweek rushed into print as a kind of rebuttal to Simmons, but there is a real question as to whether the article is his own work. It certainly looks heavily dependent on the AWEA blog piece written a week earlier by a wind energy industry lobbyist.

Let’s look

On April 13, American Wind Energy Association lobbyist Michael Goggin wrote: “[Simmons] paints a very misleading picture of federal energy incentives by ignoring that study after study has found that subsidies for conventional energy sources have been far larger than those for renewables. The nuclear industry’s own tally shows that all renewable resources accounted for less than 10 percent of federal energy incentives provided over the period 1950-2010, with fossil resources receiving more than 70 percent.”

Eight days later, Newsweek published the following under Marston’s name: “Study after study has shown that subsidies for conventional energy sources, such as coal and oil, historically have been much larger than those for renewables, but Simmons ignores this information. The Nuclear Energy Institute’s own tally indicates all renewable resources made up less than 10 percent of federal energy incentives between 1950 and 2010.”

Phrasing kind of similar, isn’t it. And both of the two sentences in the two pieces include links to the exact same pair of internet locations. Sure, some differences here, Goggin wrote “study after study has found that subsidies for conventional energy source …” while Marston wrote “study after study has shown that subsidies for conventional energy sources ….” In the second sentences quoted both pieces embed a link using exactly the same word as anchor: “tally.”

Again, from Goggin on the 13th of April: “Last month, independent expert DBL Investors analyzed the data and found that states with the most use of renewable energy have lower electricity prices, while also observing that states with pro-renewable policies have seen lower electricity price increases than other states.”

Eight days later from Marston: “Moreover, last month, independent DBL Investors found states with the greatest use of renewable energy experience lower electricity prices, and states with pro-renewable policies have seen lower electricity price increases than those without.”

Once again similar phrases, once again both use a one-word internet link, once again it is same word (‘found’) in both the industry lobbyist’s blog post and the environmentalist’s Newsweek article, and the link in both cases goes to the same internet-accessible report.

A little later a paragraph on electric transmission repeats the same two main points using similar language, link to the same two internet sources, and use the same words to link to these same resources. Oh wait, not quite identical: where the industry lobbyist Goggin used the words “more than pay for themselves” to anchor a link, the environmentalist Marston used the words “more than paying for themselves.”

One more example. Goggin, the lobbyist, wrote: “The claim that wind energy is having an undue impact on other energy sources has been thoroughly rejected by a number of experts, including former Federal Energy Regulatory Commissioner John Norris.”

Eight days later in Newsweek, under Marston’s name, appears this sentence: “This claim that wind energy is having an undue impact on other energy sources has been thoroughly debunked by a number of experts, including former Federal Energy Regulatory Commissioner John Norris.”

In Goggin’s version of the sentence the words “thoroughly rejected” link to an AWEA report and in Marston’s version the words “thoroughly debunked” link to the same AWEA report. In both sentences the name “John Norris” anchors links to the same blog post on the AWEA website.

Marston’s version does include a few links not in the week-earlier blog post of the wind energy industry group, and some of the weaker, earlier points made by Goggin are omitted from Marston version. The Marston version is heavily rearranged. But it is clear that significant parts of the Marston version are a not so expert gloss on the blog post put out by the wind energy industry.

One thing you can say for Marston, he believes in recycling.

Marston and EDF

Marston has been working environmental issues in Texas for several decades, so clearly he is both committed to the cause and has a thick skin. His reputation is not at stake here, because he has done so much more. But he and the Environmental Defense Fund of Texas ought to be embarrassed to have this piece published in Newsweek with their names attached.

What of Newsweek?

Issues of plagiarism and industry ties are raised here. Newsweek took a lot of flack online for initially publishing the Simmons piece without mentioning apparent connections to fossil fuel interests, and became convinced to append a comment. Is Newsweek interested in Marston’s connections to the wind energy industry (or DailyKos or Media Matters, etc.)?

Marston’s employer has partnered up with wind turbine manufacturers like General Electric and wind-farm owning electric utilities like Duke Energy and NextEra Energy on various projects. GE Corporation has a representative on the AWEA’s board of directors, and so does NextEra Energy. [Edited, see below. -MG]

Newsweek ought to disclose both the, uh, affinities (if we do not call it plagiarism) between the Marston opinion piece and the wind energy industry lobbyist’s blog post, and the multiple financial ties between the wind energy industry, it’s lobbyists in Washington, DC, and Marston’s employer.

By the way…

I’m not a disinterested observer here. In his Newsweek piece Simmons favorably cited work I did that was funded by the Institute for Energy Research. Goggin attacked my work on the AWEA blog (“Fossil-funded think tank strikes out on cost of wind“). For that reason, I am placing this material here and inviting you to think for yourself.

[About two weeks ago I emailed seeking comments from Marston and EDF of Texas, Goggin at AWEA, Newsweek, and the Washington Post‘s Eric Wemple who had blogged about the controversy over the Simmons piece. Other than a quick reply from Wemple acknowledging my email, I have seen no reaction.

My title “Newsweek Cloaks Industry-Funded Environmentalist’s Hit Piece” is patterned after the Media Matters headline “Newsweek Cloaks Koch-Funded Professor’s Dirty Energy Agenda.”

NOTE ON EDIT: I had initially claimed that Marston’s employer, EDF, was represented on the AWEA board. As Michael Goggin commented below, the EDF on the AWEA board is the France-based international energy company not the Environmental Defense Fund.]

FERC’s Clark looks to states for help with regional markets

EnergyWire reports, “FERC’s Clark looks to states for help fixing dysfunctional markets.”

It is, I guess, a reasonable impulse. Given the way regulatory authority over the electric power industry is currently divided between the feds and the states, there are limits on what the one can do without the other. We saw in the fate of FERC Order 745, on demand response, evidence of the conflict: the court found that FERC’s rule encroached on states’ exclusive jurisdiction. States have also seen their efforts constrained (as, for example, the failure of New Jersey’s effort to subsidize investment in generating capacity).

FERC Commissioner Tony Clark is no stranger to state regulatory perspectives, having served nearly a dozen years on the utility commission in North Dakota, finishing as chair, and a year as president of the National Association of Regulatory Utility Commissioners (NARUC). Still, looking to state regulators, each elected or appointed within the political environment of local state capitals, to adjudge matters of costs and benefits on a regional basis seems to me a case of looking for love in all the wrong places.

RELATED NEWS: The Newest FERC Commissioner, Collette Honorable, was sworn in on January 5, 2015. Like Clark, Honorable was formerly chair of a state utility regulatory commission (Arkansas) and former president of NARUC.

James Fallows on surveillance’s effect on the commercial Internet

I’m pleased that someone picked up on my offhand mention of the likelihood that deep and broad NSA surveillance will have a negative effect on the value of the Internet as a commercial platform for value creation and posted the link on reddit. Thanks!

Since I didn’t intend to provide any in-depth analysis on that point, and some of the reddit commenters are taking me to task for not doing so, I encourage reading James Fallows of The Atlantic on this point: Why NSA Surveillance Will Be More Damaging Than You Think. For example:

The problem for the companies, it’s worth emphasizing, is not that they were so unduly eager to cooperate with U.S. government surveillance. Many seem to have done what they could to resist. The problem is what the U.S. government — first under Bush and Cheney, now under Obama and Biden — asked them to do. As long as they operate in U.S. territory and under U.S. laws, companies like Google or Facebook had no choice but to comply. But people around the world who have a choice about where to store their data, may understandably choose to avoid leaving it with companies subject to the way America now defines its security interests. …

What governments do eventually becomes known. Eventual disclosure is likely when a program involves even a handful of people. (Latest case in point: Seal Team Six.) It is certain when an effort stretches over many years, entails contracts worth billions of dollars, and requires the efforts of tens of thousands of people — any one of whom, as we’ve seen from Snowden, may at any point decide to tell what he knows.

In launching such an effort, a government must assume as a given that what it is doing will become known, and then calculate whether it will still seem “worthwhile” when it does. Based on what we’ve seen so far, Prism would have failed that test.

 

History of economic thought course video: John Stuart Mill

Lynne Kiesling

You may know John Stuart Mill the utilitarian philosopher, the JS Mill of On Liberty and of Utilitarianism. You may know him as the philosopher who can’t hold his shandy in the Monty Python philosopher’s song.

What you may not know is how important an economist Mill was. He made some original contributions that bridged from the classical economics of Smith and Ricardo (and others) to the subsequent marginal revolution of Jevons, Menger, and Walras.

You can read some of them yourself in Mill’s Principles of Political Economy (1848), available at the Library of Economics & Liberty.