A Battle of Wits with an Unarmed Man
Driving in to work this morning, I caught part of a discussion on The Diane Rehm Show between David Kreutzer, Senior Policy Analyst in Energy Economics and Climate Change at The Heritage Foundation and Peter Gosselin, national economics reporter for the Los Angeles Times about the recent spike in oil prices.
Kreutzer asserted that drilling in the Arctic National Wildlife refuge and offshore would yield somewhere in the neighborhood of 4 million barrels a day and, by itself, lead to a 25 percent reduction in the price of gasoline at the pump. Gosselin said that the price impact would be negligible because it would be such a small amount of overall production. Rehm chimed in saying that it would be “literally, a drop in the bucket” and got Gosselin to agree to that assessment.
Kreutzer countered that, no, the way the supply curve works is that a relatively small change in either supply or demand can have a drastic impact on prices once reserve capacity is used up because of elasticity. Gosselin responded that it didn’t sound right to him.
Why are these people debating as equals on a national radio program?
Both are biased observers, to be sure, but that’s the nature of these shows. But Kreutzer is a PhD economist (George Mason, 1984) whereas Gosselin somehow got an MBA (Columbia) despite not understanding that prices respond to changes in supply and demand in a curvilinear rather than an arithmetic fashion.
Couldn’t Rehm’s producers find someone who could debate economics from a leftist perspective but actually understood economics? Wasn’t Brad DeLong available? Or Duncan Black? Or, you know, pretty much any economist employed by a university?
As fate would have it oil economist James Hamilton’s most recent research paper is on a closely related subject. Here’s a snippet from the summary:
I don’t believe that, at least in the short term, the price elasticity of oil is quite what Dr. Kreutzer seems to believe it is. But you don’t have to take my word for it you can take JH’s.
Doesn’t seem like either one of them is qualified to comment. The DOE estimates of ANWR production is almost _40_ million gallons per day, not 4, but production wouldn’t be fully online until 2025, which means it’s completely irrelevant for the current market.
As a reference point, total US motor vehicle fuel use is about 400 million gallons per day.
Heh. Say rather, that NPR managed to locate someone with a leftist’s perspective of economics.
Kreutzer’s argument is what I’ve been saying for a year now; any new competition on the field has a tendency to affect price well beyond their weight, as the rest of the market reacts trying to keep as much market control to themselves as possible. ANWR coming online will cause OPEC to drop prices rather substantially to counter.
Why is everyone so hot to drill in ANWR? If the price sensitivity is so high right now, you could crash the price of oil just as easily with a 4% increase in fleet average fuel efficiency (ANWR’s 750 kbarrels/day divided by current consumption of 20698 kbarrels/day) and, as a bonus, you could do it right now instead of in 20 years.
Jeffrey: He might have said “40” but I thought I heard 4. I’m agnostic on ANWR but do think it makes sense to drill as much of our own oil as we can.
Dave: Good info. Kreutzer used the increase in overseas demand to bolster his argument in response to a caller. The per barrel price has doubled in the last year despite a relatively small increase in demand.
Thanks for the coverage. One point of clarification: The 4 million bb/d would be from ANWR and additional off shore fields. This is my pretty wild guess based on other estimates of 1 million bb/d from ANWR and that estimates show several times as much oil off shore as in ANWR.
First off, the time limit on ANWR was TEN years, not 20.And it’;s ten years later. Do you suppose that oil woulda come in handy, by now?
Secondly, there isn’t another 4% to be had, unless you’ve got us all riding mopeds.
You must be joking, Bithead. You don’t think we can increase fleet fuel mileage by barely 4%? Our current overall fuel economy is 26.7 miles per gallon. Increasing that to only 27.8 miles per gallon would have the same effect has pumping at maximum production from ANWR. Current average fuel economy in the EU is 43MPG and in Japan it’s 46MPG, so 28MPG should be trivial to attain.
Note that a reduction of 4% in vehicle miles traveled has the same effect. Americans in March 2008 drove 4.3% less than in March 2007, which also is 1 ANWR worth of efficiency. I didn’t notice oil price declining, did you?
The US made rapid increases in the fuel economy of its cars from the mid 70s to the mid 80s, going from over 15L/100km to a bit under 10, and has since remained more or less flat. Europe and Japan’s fleets average around 7L/100km and they’re driving cars, not mopeds. That is over 20% to be had. Surely we can squeeze 5%. Some of this involves car choices and higher prices could encourage people to make more fuel efficient choices as they did in the late 70s. Giant SUVs that never leave a paved road and rarely carry more than one person look much less attractive at $4/gal than at $1/gal.
BTW scooters get between 2.3 and 1.1L/100km. That would be in the neighborhood of an 80% drop.
You guys are assuming that people both desire, and have the money to replace their current vehicles to help the government meet an arbitrary MPG goal.
Most of the ‘rapid increase’ Grewgills speaks of were made at the cost of… how many lives, was it? Oh, yes.
So are you willing to give up your life so we can save a little fuel? You’re so generous…
I believe in increasing efficiencies but OPEC could limit production to counter those gains and keep prices high. New domestic supplies would increase competition and keep OPEC a little more honest.
Increasing domestic production also instills fear into OPEC. They want no competition and will lower prices in order to discourage it. In our present case they have lost control of the market because of the speculative interests driving prices short term. Once those players fall away OPEC will manipulate oil to the point of discouraging investment in new supplies and alternatives by lowering prices. The cartel can warp and does warp the classical supply and demand models for it’s own benefit.
Drilling and developing our own resources will lessen OPEC’s power and that can’t be a bad thing. We should have worked to break OPEC years ago and should still see it as an ultimate goal.
It’s bad enough they couldn’t get another economist to debate but why a reporter from the LA Times? Should members of the press be advocating through public debate?
Bithead, what those studies have never adequately explained is why our motor vehicle death and injury rate is higher than any other OECD nation, much higher in most cases, even though our fuel economy is the worst.
I think not, Steve. Opec has a history of lowering prices just enough to keep the oil fields of non-opec nations just out of economic reach, by comparison. If past be prologue, bringing any added oil online will cause OPEC to drop prices.
I should think that obvious; Miles traveled, in response to the sheer size of the country, among other things.
Incorrect. The USA has by far the highest deaths per person-mile traveled.
Jeff, you’re neglecting the other factor brought on by miles traveled… speed. Which is even more reason why smaller cars cause more deaths.
And in any event, I fail to see how your point negates the link between auto downsizing and increased death rates.
Let’s say for arguments sake that I were to concede this point. Would you be willing to concede that we need to make a serious, perhaps all-out effort to develop new technologies that will take us beyond fossil fuels?
If you are going to cut and paste it is best to provide the link.
from the study referenced in the article you borrowed from,
also in that same study,
and
What the studies have found is that high variability of weights among vehicles is what is most dangerous. When driving a lighter car amongst heavier vehicles you are at greater personal risk. Conversely, when you are driving a heavier car amongst lighter cars you put others at greater risk.
Which again could have something to do with the age of the people driving.
Any significant
BTW Europe also has fast drivers so that does not account for the differences between here and there.
Anjin,
The question would then become what constitutes a “serious, perhaps all-out effort”? I’m not sure if I could support throwing money at every grant application or research request that might come in. I could support tax breaks for new technology and even offering prizes for successful ventures.
We must also recognize certain steps (such as ultra fuel efficient cars) could cost lives. Political opposition to nuclear and coal would have to be overcome. The same could be said for wind power off Cape Cod or certain solar projects.
I think we could both agree the posturing by our politicians is doing nothing to better our position. The more common sense approach is for the left to give up some of it’s opposition to drilling and nuclear while the right accepts the funding of some alternative energy projects.
Throw out some ideas for discussion my liberal friend.
I’m not sure where Kuetzler comes up with this, given that the latest DOE report shows that it would take until 2025 for ANWR to reach full capacity of .6-1.6 million barrels per day (assuming production begins in 2013). Let’s assume it takes offshore drilling the same amount of time, so it’s not until 2025 that we see 4 million barrels per day.
Assuming that oil production remains constant at approx 85 million barrels per day, this represents a total increase in daily oil production of about 4.7%. Bear in mind that not all of that oil is going to be used for gasoline.
Even assuming that demand remains constant (which it is not), I find it hard to believe that a less than 5% increase in supply leads to a 25% price drop, especially considering that most refineries are already working at peak capacity, meaning that more refinery capacity will have to be built to accomodate the increase in gasoline production, which would only raise costs of gasoline.
Now, given that demand is likely to be much higher in 2025 than it is today, unless some serious conservation comes into play in the developing world, ANWR becomes even less of an effect.
Improved efficiency and more work on gasoline alternatives appears to be the better economic investment.
Alex,
If the oil companies deem it a worthwhile economic investment and they are investing their own money why should the government step in the way? Those who risk the money should make the decision about what’s the best investment.
Kuetzler’s point about the inelastic demand and how minor changes in supply can have a large impact should be explored and understood. Of course we have all seen what a gulf storm or refinery fire can do to prices and they are short lived and minor in nature.
Think too of the message increased exploration would send to OPEC and especially the Saudis. Their immediate reaction would be to discourage competition by reducing price.
There is no good economic reason for not tapping ANWR today and reaping the benefits tomorrow. The debate about the environmental impact was only won through the side show of need and time to get the oil in the system.
If demand is much higher in 2025 then we should be drilling right now.
Your argument is silly Steve because the Saudis do not have the ability to reduce prices with the wave of some magical wand. Their field is in decline, and production is running at maximum. The only people who could conceivably increase supply are the Russians, who have a lot of unexplored reserves, and the Chinese, who have not yet seriously explored their own mineral resources outside of coal.
I continue to disagree with you that a small increase in supply would have a radical effect on price. We already had a 4.3% annual decline in consumption in March of this year, and it had no noticeable impact on the price of oil. If a 4.3% decrease in demand does not impact oil prices, why would a 4% increase in supply have any appreciable effect?
Jeffrey, the argument is not silly. The Saudis effectively control OPEC through the ability to extract oil for less money than anyone else. This power over OPEC can be leveraged into overall production increases within the cartel. The Saudis have waved that magic wand to force prices up in the past so I think they can do more than you believe.
We will have to agree to disagree on the effects of more supply and less demand. Eventually it will have an effect and more so if the climate of long term price reductions force a fleeing of the speculative money. There are economists on both sides of this issue.
We have seen a decrease of demand over the last couple of months but the market will not react to quickly and ramp up production or stop bidding up contracts for future deliveries. It will take some time but the steps need to be in the right direction now.
Why don’t we just start driving less? I would bet that the average person could cut back on driving by 15-20% with no lifestyle hit.
Wouldn’t it be a lifestyle hit by definition?
Probably 70-75% of my driving is the daily commute to work and there’s no alternative that wouldn’t both suck up another two hours a day and be much less pleasant. I suppose I could make even more effort than I do now to consolidate errands but that would probably amount to no more than 2-5% of my driving. Even there, though, you’re talking about giving up substantial flexibility.
Steve, the Saudis are quite obviously lying at this point – they can sell us a considerable quantity of additional crude, but only the high-sulfur garbage. They’re now pumping the good stuff as quickly as they can (ref the number of rigs in operation – much higher than in years past; with no real rise in output).
But obviously, it DOES. The reason for that wording? The lawsuit. Or hadn’t that idea occurred to you… they don’t want to get sued.
Steve;
Could? No. WILL.
James:
Correct. UYet, they know all of this. And of course the economic consequences of this are not unknown to them either, being rather the target.
Consider Obama’s comments the other day:
Do you begin to understand both the level of micro management these people are pushing, and the goal of that micromanagement?
Do you begin to understand the damage they will do?
Perhaps a peek at recent history, as regards Phrudoe Bay and it’s effects on price.
And yes, that operation produced rather more than was predicted, but then again, that’s part of the point; This stuff usually gets under-estimated, becaise of among other things, technology improvements during the life of the field.
But not nearly as much of a freeway system, in total.
No. Again the studies referenced in the article actually point to less danger in low weight to low weight collisions.
The vehicle weight to accident ratio was also confounded by the linear relationship between vehicle weight and age. Younger people are getting in more serious accidents and younger people are driving lighter cars. You look at this evidence and say that it is obvious that the lighter cars are at fault. That is far from obvious. Did you even skim the actual study referenced in the article you uncritically borrowed from?
The freeway systems there move at similar rates of speed and the ratio of freeway to surface street driving there is not all that different in my experience.
Fine.
You’re going to eliminate all trucks from the highway, now? If not, you still have a problem. You know… the real world?
So, why weren’t they dying at the same rate when cars actually had a frame, then?
But does not constitute nearly the same percentage of miles it does here. That cannot be without effect. Again, real world.
Bit you seem to be quite concerned about the risk to life involved with lighter cars. What about the risk to life from pollution?
And those numbers would be what, exactly?
Let’s ask the EPA:
Now; this is still a problem?
Again, real world.
Nice try, though.
Are you speaking about light trucks or semis? If you are speaking about semis they constitute a miniscule fraction of traffic accidents. If you are talking about light trucks, they are also subject to CAFE standards.
More drivers and more SUVs also correlate with the increased rate.
Also, smaller cars/trucks are also generally more maneuverable and have shorter breaking distances and so are able to avoid more accidents which is not accounted for. We cannot know how many accidents are entirely avoided because of this.
Really? Care to back that up?
The ratio of freeways to surface streets appeared nearly the same to me. All major hubs are connected by freeways and the population density is considerably higher on average.
BTW you seem focused on lighter weight vehicles as the means to increase fuel efficiency. This is a way, the only way.
Oops.
Should read
This is a way, not the only way.
But the fatality rate on a per accident basis, as compared to more solidly built vehicles, is staggeringly high.
More drivers, perhaps. Not more SUV’s. Indeed, the fatality rate (Once rollovers from tire failures are factored out) goes down when SUV’s enter the picture.
Oh, yes, we can.. it’s zero, because it’s not true. Smaller vehicles may well have less mass to stop, but then again, they’re usually equipped with lesser braking power, and therefore end up stopping in about the same distance. (In my case, I’ve had my vans, and now my Rainier fitted with increased braking power, to overcome even that.)
Look at a map of old Europe… It doesn’t take Magellin to see that you’re not talking nearly the miles between ciies, though, does it? Therefore, less long haul freeway miles.
(Aside… why are we holding up Europe as the shining example again? WHat is it about that socialist paradise that causes this constant comparison? (Or, have I answered my own question?)
Driving anything other than another semi or a large bus, when in an accident with a semi you lose. Should we then all drive semis or large buses for safety’s sake?
A few within brand comparisons of size and breaking distance in m at 100 km/hr
Cadillac Escalade…………72.6
Cadillac Seville……………38.6
Subaru Outback………….43.6
Subaru Imprezza…………41.9
Volvo V70…………………48.2
Volvo V40…………………41.7
There are some exceptions when the larger car is a performance auto and the smaller is an economy vehicle, but in the large majority of cases when the larger and smaller car are both performance or both economy vehicles the breaking distance on the smaller car is shorter. You know more mass to stop, cheaper cars = cheaper components, real world and all.
I notice also that you do not dispute that smaller cars are generally more maneuverable, yet you do discount this as a potential for accident avoidance. Do you think that more maneuverable cars are not better able to avoid collisions?
But that is not when/where most accidents happen here or there. People here and there are driving on crowded freeways going to and from work. People here and there do not often go on road trips of more than 4-6 hours (Paris to Milan is about 8hrs, Paris to Amsterdam is about 5 hours).
Because on average they have smaller/more fuel efficient cars than here so can serve as an example of the danger or lack thereof of smaller/more fuel efficient cars.
Thing is you’re comparing apples and green beans.
But you don’t DIE, usually, in the process, if there’s a frame under you. Tell me; in which vehicle do you suppose a passenger would fair better in a rear end collision witha semi? A Prius, or an Escalade?
Simply untrue. When is the last time you actually cracked an automotive review magazine?
Yes, I do dispute it. Most small cars I’ve driven,(And I’ve driven rather a lot, given a former job) couldn’t handle their way out of paper bag. It’s one more reason I simply won’t buy one. Cheaply made, and light, not performance, is the object of such cars. Underpowered to the point of not being able to get out of their own way, tipsy, and usually able to over-run the rubber they’re fitted with…(No accident avoidence to speak of) (Shudder) no thanks. I choose LIFE.
Yesterday, when I pulled the numbers above from the website of one. Keep the comparisons within a reasonable price range (ie the larger car does not cost 1/2 again to more than twice as much) and my statement holds.
No. I am showing an example of a society with smaller, more fuel efficient cars and lower automotive death rate per mile(km) driven. According to your thesis this should not be unless you believe those European socialists are better drivers than good solid capitalist Americans since the common driving patterns are not all that dissimilar.
I’ve driven plenty of both as well on SoCal freeways and the smaller cars were generally more maneuverable and more fun to drive. I would take a Outback Sport or WRX over an Escalade any day of the week. The former is far more maneuverable and fun to drive (and far shorter breaking distance), will off-road every bit as well, and doesn’t require a second mortgage to pay for the gas.
No, that’s my point. There are way too many variables involved in the comparison to make such a case.