Gasoline Prices: Onward and Upward?

Gasoline prices have been steadily increasing in the past year, going from a national average of $1.87 early in 2016 to $2.51 in July.  The end of the driving season should provide some relief but it won’t be enough to offset upward pressures.

There are 4 factors that drive gasoline prices:  crude oil prices, demand, refinery enhancements, and more recently exports, which have more than doubled since 2010.  Crude oil prices are roughly $6 a barrel higher this year than last, although OPEC was expecting a larger increase from its production cut.  A $6 per barrel increase translates into an increase of 14 cents per gallon.  According to EIA, domestic demand and product exports have been running above the five-year averages.  As long as the economy continues to improve, gasoline demand will remain robust.  Although, refinery production of gasoline has been strong, it has not been sufficient to meet demand, so there have been draws from product inventories.  Reductions in inventories also put upward pressure on gasoline prices because of expectations about the future.

In addition to the increase in the average price of gasoline, the price difference between regular and premium has also been increasing.  According to the Energy Information Administration, as of July 2017 the premium -vs.-regular differential reached $0.53/gallon — more than double the differential in 2012.  Although historically 90% of gasoline sales have been for regular, midrange and premium demand has grown in importance as sales of higher performance and turbo charged vehicles have increased.  EIA also attributes higher fuel economy standards as a driver in increased demand for midrange and premium gasoline.  Demand alone cannot explain why premium prices have increased more rapidly than regular.  The rest of the answer is the cost of production.

The octane level of gasoline before ethanol blending or chemical reforming is less than the 87 octane of regular gasoline.  For the past decade, ethanol, which has an octane level of 115, has been blended with straight run gasoline to achieve the needed octane levels for gasoline sold at the pump.  Now, with growing gasoline demand, ethanol blended with gasoline has reached the legal 10% limit and other sources of octane enhancement are needed.  Refiners have made refinery modifications to increase alkylate production which is the octane booster of choice because it is low in sulfur but high in octane.  Producing alkylate is expensive, resulting in a price per gallon that is 30 cents more than gasoline at the refinery gate.

So, even though gasoline prices have been rising, today’s price has to be considered a bargain when compared to the $4.00 per gallon that motorists were paying in 2011.  No one knows what the price of gasoline will be in the months ahead or next year but the likelihood is that it will continue the steady pace upward if the economy remains strong.  What is important is looking to the future is to keep in place policies that do not restrict domestic production or the efficient operation of refineries.  That will allow market forces instead of political forces to determine the price at the pump.

DARPA’s Threat to Climate Catastrophism

A recent article in Wired–BS Detector—described how DARPA is seeking proposals for “ways to determine what findings from the social and behavioral sciences are …credible.”  The request for proposal states, “There may be new ways to create automated or semi-automated capabilities to rapidly, accurately, and dynamically assign Confidence Levels to specific … results or claims.  …  Help experts and non-experts separate scientific wheat from wrongheaded chaff using “machine reading, natural language processing, automated meta-analyses, statistics-checking algorithms, sentiment analytics, crowdsourcing tools, data sharing and archiving platforms, network analytics, etc.”  Boiling this down to its essence, the article’s author suggests that DARPA is “trying to build a real, live, bullshit detector.”

It might seem that this is a far out notion except for two things.  First DARPA has a solid reputation for innovation and solving the unsolvable.  Its work on communications is now what we call the internet.  Second, Artificial Intelligence  technology is already being in business, especially in investing, where it is achieving above average returns, and in the developmental work on autonomous cars.

Machine learning is a more generalized application of artificial intelligence and may be the means by which DARPA achieves the ability to assign confidence levels to scientific results and claims.  When that day arrives, hopefully not that far in the future, the proponents of an impending climate catastrophe will be in serious trouble.

If there was a working BS Detector  a recent article in the Washington Post titled “We only have a 5 percent chance of avoiding ‘dangerous’ global warming might not have been published.   Written by avowed climate activist Chris Mooney, the article is based on two peer reviewed articles published in Nature Climate Change.  One analysis is based on the hypothesis that additional warming is embedded in the climate system through an energy imbalance from past emissions but has ”not yet arrived.”  The other analysis applies past statistics to the Kaya Identity model to estimate emissions and warming in 2100.  The Kaya Identity is a simple way to project future carbon emissions based on changes in population, GDP per capita, energy intensity, and carbon intensity.  The problems with this article are so obvious that Nature should have rejected publishing it.  The Kaya Identity model can be grossly right for near term periods but is useless for making estimates decades into the future.  No one can accurately estimate carbon intensity or energy efficiency 83 years into the future.  It is foolish to try.  In addition, this article implies an unjustified accuracy in climate sensitivity—the warming from doubling CO2.  The IPCC estimate has changed over time with the lower bound being reduced.  The current estimate varies by a factor of 3.

The media assigns too much credibility to peer review.  The peer review process has been misused in all fields of science and its shortcomings well documented.  In part, peer review fails because reviewers are not blinded, are too busy to invest enough time to do a thorough review, and most important the essential steps of data validation and replication are not performed.

If DARPA’s initiative is successful climate catastrophism will be exposed for what it really is, advocacy.  Fact Checker gives Pinocchios; maybe the BS Detector will assign piles of dung.

 

 

 

 

 

 

A Triumph of Hope Over Experience

The White House has laid out an aggressive schedule for passing tax reform legislation sometime this fall.  That schedule means that tax reform will have to be tied to the budget and passed under reconciliation.  After the health care debacle, enthusiasm and certitude need to be tempered by a large dose of reality and a good understanding of what would be deemed acceptable by the Senate Parliamentarian.

The House’s Better Way tax reform plan is based on solid principles but it also involves a number of elements, such as border adjustment, that represent significant departures from the current tax code.  That is going to make the sell in the Senate very difficult.

The White House supports eliminating or curbing numerous tax breaks to offset some of the lost revenue from cutting tax rates but those “tax breaks” are not identified and surely will cause some Senators to balk. The White House plan includes cutting the corporate tax rate from 35 percent to 15 percent, simplifying the taxes individuals and families pay, eliminating the estate tax and jettisoning the alternative-minimum tax.  Senator Hatch has dismissed that objective as unrealistic.

After the embarrassment of not being able to pass a republican only health care bill, there should be some reluctance to attempt the same approach with tax reform.  But, bringing democrats on board also represents a major challenge.  Democrats have issued a letter that identifies three basic demands: any tax legislation should be drafted under the regular bipartisan committee process; the legislation should deliver relief to middle-class families without tax cuts for the rich; and any tax changes should include at least as much revenue as is collected today.  Although this is the democrats opening gambit, it is not clear whether the two parties can come together on a reasonable set of changes.

It is a virtual certainty that both parties are applying game theory or something analogous to it.  The democrats don’t want to give the republicans any victories so that they can make a stronger case in next year’s elections.  At the same time, they cannot be seen as total obstructionists on taxes which has a high priority with the public.

The republicans would prefer to pass tax legislation without compromising but after the health care vote cannot count on 50 sure votes on comprehensive legislation along the lines of the House’s Better Way.  Further, comprehensive tax reform involves a time consuming process of tradeoffs, which the republicans cannot not afford.  They need to pass something this year to bolster their re-election prospects in 2018.  The tax reform act of 1986 took two years from start to finish.  The republicans cannot take that much time after failing to pass any major legislation that appeals to the public.

Given all of the political constraints that exist and the number of legislative days remaining, there is no realistic basis for believing that anything as comprehensive as the Better Way will get passed.  Corporate tax reform is essential to help US companies compete in a world where the average OECD tax rate is 22.5%.  Lowering corporate rates will probably be paid for by eliminating some business deductions.  The business community will probably go along—sullen but not mutinous—as long as the result is a level playing field and avoidance of dual taxation on foreign earnings.

On the individual side. Lower rates and simplification should generate strong support, especially if the top rate remains the same or close to it.  Mortgage deductions, state tax deductions, the inheritance tax, and the capital gains tax could be candidates for revision as long as changes do not penalize the  middle class are seen as benefitting them more than the top 10%.

One change that Congress should consider and which would be very popular with the average tax payer is for the IRS to prepare draft returns for review and approval by tax payers.  The service already collects the information needed to do so.  According to an article The Atlantic10 Second Tax Return –“ Eight OECD countries, including Finland and Norway, fully prepare returns for the majority of its taxpayers. In Estonia, it famously takes the average person five minutes to file taxes”.   That one reform measure would save taxpayers time and money spent in completing their annual tax returns and go a long way in restoring confidence in Congress.

The electorate is rightfully unhappy with the performance of our Federal Government.  Unless the Trump Administration and Congress start doing the peoples’ work both could pay a heavy price at the polls.  Modest tax reform now followed by a major simplification initiative would help to restore faith in our system of government.  The current tax code has grown from 26,000 pages at the time of the last comprehensive reform to over 74,000 pages today.  It needs major streamlining and simplification.