:: Some thoughts... ::

:: Thursday, October 03, 2002 ::

On Environmentalists

The average person’s interest in environmental issues extends probably no farther then what they read in the newspaper or if the local air and water is reasonably clean. The Environmentalist is different. The Environmentalist places great stock in reports of corporate malfeasance, government destruction of the environment, habitat erosion, shrinking forests, even the in absence of facts or contrary evidence. It is an article of faith that things are getting worse and humans are the primary culprit. What is unsaid about the radical environmentalist movement is that humans are the source of the world’s problems. The implicit suggestion embodied in statements regarding global warming, “overpopulation”, deforestation, etc. is that without humans on this earth, life would be perfect. First, one truth is evident, humans and any other species change nature by their very existence. Humans just happen to be better at it than other species. Honestly, I don’t think that environmentalists really understand this tenet behind their position. For the most part they haven’t thought that far ahead to understand what exactly they are supporting. Environmentalism is a rather reflexive thing. Forests are disappearing, it’s man’s fault, more specifically, in the US, it’s the “evil” corporations and Republicans who are at fault. If only the government would step in and do what is right. First, let us look at the facts. Forests are NOT disappearing, in fact global forest cover has increased from 30.4% to 30.6% of total land mass. Oh, never mind the facts though, the earth has too many people, and we soon be unable to feed them, says the Environmentalists. There are to arguments embodied in this statement, one, that there is “too many people” and secondly, that we will be unable to feed them. First, that is entirely a normative statement. It expresses a desire for the way things should be as opposed to how they are. It is a value judgment not a fact. The second statement tries to explain the reasoning behind the value statement of there being “too many” people. Unfortunately for the Environmentalist and fortunately for humanity, it is false. Thomas Malthus, originated this argument in 1798, he posited that population growth was exponential and food production arithmetic. The short summary of his argument is we shall soon run out of food. Well, 200 years and change after Malthus made this argument we are still waiting to run out of food. The population of the United States has gone from maybe 4 million people to over 281 million people, yet we consume more food than ever before. The Environmentalist still dogged in his determination to show that he is right will insist that the US is taking more than its “fair” share. Absent any argument what “fair” means. Let us ignore that at the moment, and take the case of India as an example. Paul Ehrlich one of the leading modern day Malthusians infamously said in 1967 that we should divert food aid from India because obviously our resources were stetched to thin and would be better applied elsewhere. Good thing, no one told the Indians. In the 35 years since Mr. Ehrlich made that statement, the Indian population has roughly doubled from 500 million people to 1 billion people. Average per capita calorie consumption has increased 33%. I don’t have the exact figure in front of me at the moment but needless to say Indians thanks to the “Green Revolution” have proved quite adept at feeding themselves. My point in bringing up these examples is that the Environmentalist believes in certain principles and simply ignores the facts.
This brings me to my latest story which happens to fit quite nicely with the above. I was in class the other day. The class doubles as an Environmental studies and Economics class. The professor, while I believe an economist by training is a rabid environmentalist. I have always wondered how the myths and doctrines of the Environmental movement spread and maintain themselves. This little example serves to explain why. First, remember some of the precepts of the Environmentalist movement. Humans are bad, the world is getting worse, and of course any Republican is bad for the environment, especially “Big Oil” George W. Bush. The story begins with an update on a “fish kill” on the Klamath river in Northern California or Southern Oregon. My professor launched into a story about how there was 10,000-15,000 Salmon dead on the river. I perked up from my usual distant thoughts in class (it’s a boring class and generally full of dumb Environmental studies comments because they don’t understand economics). Then came the litany of charges. First, if you remember this refers to the same farmers who generated great public protest when the Department of the Interior under ex-President Clinton turned off the taps to their water and enforced this with the barrel of a gun. Look it up on the internet if you care to. The farmers won that fight on the back of huge public protest. They were able to continue their existence. The environmentalists at that time claimed that the low flow of water was killing the endangered “sucker” fish and baby Salmon. There was and is no scientific basis to this complaint. In fact, the sucker fish and the Salmon did just fine without the lower water. Back to the story at hand. My professor launched into the story of the fish kill and how it was the farmers fault for living on a “natural” flood plain. The implicit criticism was that the farmers had just arrived there and despoiled nature. Fact: The farmers moved there over 90 years ago. These family farms have passed through several generations. My professor then began to talk about birds and how it was a great place for birding (bird watching to the uninitiated). How this had any relevance I am not sure. Then he made it clear that after great protest, the Secretary of the Interior Gail Norton (a Republican) had turned back on the taps only after the end of the planting season. Implying that this was a cynical move on the Republican’s part intended placate their foes at no cost to themselves. In the process there was a large number of carcasses of these dead salmon. This is a typical environmentalist story. There was a presentation of a figure without context or reference. This is important because 10,000 fish out of 15,000 would be a big deal, 10,000 out of a million is rather insignificant. I don’t have the information to argue about the actual number of dead, so let us assume 10,000 is correct. Secondly, a story about how nice the nature of the area is which is completely irrelevant to why the fish are dead. Also, absent in context is whether 10,000 is an unusual number. If there have been 10,000 fish dead for the last 20 years then there is nothing at issue here. In addition, the salmon swimming up the river are going to die. They are already in a weakened state. The fact that there is 10,000 dead Salmon is normal, it’s a matter of when and where it occurs. This was all the arguments that are easily understandable without more facts. Well, it turns out after a little digging that the river is flowing at around 750 cfm (cubic feet per minute). It has been at a lower flow rate at this time 4 times in the last 10 years without this problem of a “fish kill.” This counters the Environmentalist’s argument that the low rate of water flow is the issue here, it just doesn’t square with the facts. Something else is contributing to this, but it is not the farmers using the water. Oh. Secondly the fish are dying above where the water is diverted for farming. This means that the fish are not dying downstream of the diversion where the flow is lower than upstream. This further takes away from the main assertion by the environmentalists that lack of water flow by the farmers is killing the fish. Oh. Thirdly, it is not the interior secretary but the farmers themselves who let the burst of water go. Oh. Sadly this pattern of distortion, and outright lying is ubiquitous in the Environmentalist movement. The way which my professor presented the “facts” squared almost exactly with the Environmentalist’s movement accepted “truths.” The lady next who sat next to me that day in class gritted her teeth and nodded her head at the preaching coming from my professor. She left class that day, not an informed critical thinking student, but an evangelist further convinced of the rightness of her cause. Her beliefs reaffirmed by lies and distortion. I say this in sadness because the beauty of this world is awesome and we are rich enough to be able to help it along. Human beings are a part of this beauty of nature, and we must balance competing demands for resources. Environmentalists do not help this cause by creating “phantom menaces” and telling outright lies. It is time to inject honesty and realism into the debate.

:: Nathan 10:43 AM [+] ::
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The Economics of Gasoline

Time for some myth debunking… In my region, the San Francisco Bay Area, gasoline is continuously derided as expensive (It is!!!) compared to everywhere else. The first refrain to come out of the person’s mouth and it hardly matters who is speaking, is that it is “Big Oil.” The oil companies are colluding to rob us poor (relative in the Bay Area) people of our hard earned money. First, let us establish the record on this, the Democratic Attorney General investigated and found no evidence of collusion between the oil majors. Absent that, what could possibly explain the relatively high gasoline prices in the Bay Area. First and foremost we must establish that the government charges a flat tax of approximately $0.36 a gallon. That accounts currently for 25% of the price of “Regular” gasoline. (87 Octane @1.44 a gallon). In comparison, the current sales tax throughout most of the SF Bay is 8.25%. Whether the tax is set correctly or not, is another discussion for another day that involves a lot of uncertainty. To touch briefly on it, it would involve a discussion about the externalities of using gasoline (ie. pollution costs).
To summarize so far, we can account for roughly $0.36 of the price of a gallon of gasoline. That is pretty uniform and everyone in California pays that tax. In addition, the whole United States pays $0.18 of that tax (it’s a Federal tax). The tax in itself does much to explain the absolute levels of gasoline costs but does little to explain the relative differences between Los Angeles and the SF Bay Area or between California and say Arizona. One part of the equation is transit costs. This would seem to work in the favor of the Bay Area because of the refineries in the Martinez, and the North Bay area. The mystery remains and deepens because ceteris paribus (all other things constant) it would seem that the lower transport costs would mean lower prices for the SF Bay Area, but they are higher, in some cases a lot higher. Why is this so?

I posit three main things, market segmentation, government environmental regulations (good and bad ones) and opportunity cost. To a lesser degree, income, competition and branding are also factors.

Market Segmentation: The market for gasoline in the United States as a whole is segmented. This should not be so. Gasoline is an easily transportable commodity that does not have a degradation limit, meaning it won’t rot like fresh fruit or go stale like bread. In other words time isn’t really an issue in the transport of gasoline. Then why is the market segmented? Two words, environmental and other regulations have stymied the formation of a nationwide gasoline market. In the Midwest, it is the 15% ethanol requirement to satisfy Illinois corn farmers. In California it is the California Air Resources Board’s insistence on “reformulated” gasoline. This means that refiners aren’t able to focus on just one kind of gasoline but must create batches of different formulations. It also means that if there was a surplus in Nevada it could not be shipped to California and be sold. California in particular is particularly vulnerable in this case as there are only six refineries to serve it. In one were to go down due to a fire, or for maintenance for an extended period, supply would be greatly restricted and the price of gasoline would shoot up. The United States in other words, is not a unified market. Refiners can’t make up for shortfalls in one region or the other by shifting stocks of gasoline because the market is artificially segmented. This serves to drive up the price of gasoline because it restricts supply to a given market. It also drives up the cost of entry into a given market because a refiner who makes gas formulated for only the Midwest might find it difficult technically and financially to make gas for California. In other words, segmentation creates barriers to entry to the separate gasoline markets. Segmentation serves to reduce economies of scale, restrict competition and drive up prices. A uniform standard for the entire US would eliminate this problem, by allowing increased competition and an efficient allocation of gasoline to where it is needed most.
Governmental Regulations: From above, it becomes plainly obvious that government regulations restrict interstate commerce and create segmentation in the gasoline market. Market segmentation wouldn’t exist without government regulation. In California specifically we have something called “reformulated” gasoline. It is the only kind of gasoline that can be sold in California. Never mind that studies have shown that it decreases miles per gallon, and causes increased wear on fuel hoses, especially in older automobiles. In other words, it was meant to decrease pollution but actually ends up most likely as a wash in that department while making cars less efficient, and thereby increasing the demand for gasoline. How does reformulated gasoline increase demand? Ceteris Paribus, in the short run a person will drive the same number of miles (ie. commuting to work) and therefore that person will have to consume greater amounts of gasoline for a given distance, this drives up aggregate demand for gasoline. Furthermore as refinery capacity is limited, this stretches the capacity of refineries as they are forced to increase production in the short run to satisfy demand. In the long run, the pattern of behavior may change as a person may decided to take public transportation or find a job that’s closer to compensate for increased gasoline costs. I would speculate for most people that their demand for gasoline is fairly insensitive (inelastic for you economists) to price changes even in the long run. I can’t prove that assertion but seeing as it is a relatively small portion of consumer’s income (especially in the SF Bay Area), one would assume that it matters relative to its proportion of the consumer’s budget. Given that it is a small portion, it would make sense that consumers are relatively insensitive to price changes. In the short run, this has been documented to be so. It makes sense intuitively also. Reformulated gasoline has been part of patchwork of regulations that have served to increase demand for gasoline or restrict supply, thereby raising the price of gasoline. ( For non-economists, unfamiliar with demand and supply curves. Think carefully, as the number of people wanting a given good goes up, and if there is say only one of whatever good it is, the price will go up. That is why popular sports players charge higher prices for their autographs compared to unknown players)
Other regulations also play a part. California due to onerous environmental restrictions and NIMBY (Not in my backyard) makes it largely impossible to add refinery capacity or a new refinery. The regulations while possibly useful make it prohibitively expensive to increase the supply of gasoline for the California market. As the population expands, this problem will only get worse. Another environmental regulation has to do with gasoline holding tanks at service stations. California as part of a crackdown on pollution mandated that service station owners upgrade their tanks (at a high cost) or be shutdown. As a result, many small operators went out of business because they lacked the resources to upgrade. (I have heard one estimate that this regulation will cause 25% of California’s existing service stations to go out of business)
The new holding tanks will not be paid for by the government but by you, as the owners pass their cost on to the gasoline consumers in the form of higher prices. In addition as the independent operators (who incidentally usually have lower prices) go out of business competition is restricted. These regulations while hopefully well intentioned serve to limit supply and decrease competition thereby increasing the general price for gasoline. This helps to explain greatly why California as a whole has higher gasoline prices, but does little to explain why the Bay Area is relatively more expensive than the rest of California. Which bring us to the last main reason, opportunity cost.

Opportunity Cost: First let’s look at the definition of opportunity cost. It is basically the cost of a given action in terms of what else you could have done. For example, the opportunity cost of going to the movies on Friday with that special someone, is instead of going to a bar with your buddies. We make these choices in every day life, all the time. The value we receive from doing something is greater than the alternative, but the cost of taking the choice of greater benefit is the benefit you would have received from doing the alternative. It sounds complicated but in reality is really simple. Just think of the choice you made last Friday night on where to go out or where to eat. Gasoline station owners or prospective owners face the same choice. They must decide whether the cost of opening and operating the gasoline station and the benefit derived from doing so is going to work out favorably compared to say, operation a hotel. Remember in building a gasoline station, one needs land, environmental permits, and equipment as the basics. The underlying value of the land is higher in the SF Bay Area compared to say Sacramento or LA. The alternative use of the land could be to sell it and build an apartment complex. In other words, the land under the station has value, and in the case of the Bay Area that value is greater than in other regions. This has two effects. First, because of greater value of the land (ie. it’s opportunity cost) the owners demand a subsequently higher return. This higher return is gained through higher gasoline prices. Secondly, the price of land means that there are relatively high (expensive) barriers to entry. This reduces competition which increases prices. To take an extreme example, if there is only one gas station in Los Altos Hills, it would serve as a monopoly provider of gasoline for everyone in that market who does not want to drive to a gas station outside of Los Altos Hills. Being that it is a monopoly, it can raise prices higher than would otherwise be the case. It is also relatively unlikely that this monopoly provider of gasoline will face competition because the land in Los Altos Hills has an extremely high opportunity cost (ie. other use, nice expensive houses). This happens to a lesser degree all over the Bay Area. That is why gas prices in the mid-peninsula are higher than San Jose. It is relatively cheaper to open a new gas station in San Jose, as a consequence there are more of them. Lastly, the other opportunity cost is for the consumers. Given that on average Bay Area residents spend proportionately smaller portions of their income on gasoline compared to the rest of the country, it makes little sense for them to seek out lower prices. In other words it isn’t worth it for them time wise to travel an extra mile to seek out cheaper gas. The benefit (ie. time saved and time is money) of convenience is greater than the “extra” cost of the gasoline.

This is by no means a complete explanation as there are other factors, but in general it serves as basic discussion for the average reader to understand why gas is so high.

:: Nathan 11:48 AM [+] ::
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