Environmental Illusion and a Public Swindle

According to environmentalists and the Renewable Fuels Association, the ethanol mandate in the Clean Air Act as modified by the Energy Policy Acts of 2005 and 2007 has resulted in cleaner air and a reduction in greenhouse gas emissions.  In reality, the mandate has produced no real environmental benefits while enriching corn farmers, large retailers, and ethanol manufacturers and imposing unnecessary and unreasonable costs on fuel producers and auto manufacturers.  It has also had a negative effect on food prices.

Just recently, the largest refinery on the east coast—Philadelphia Energy Solutions– filed for bankruptcy protection because of the prohibitive costs of obtaining EPA compliance credits—RINs.  According to a Wall street Journal editorial, Philadelphia Energy Solutions has spent $832 million on purchasing credits since 2012.  This is 1.5 times its average annual capital expenditures and twice its payroll costs.

EPA will claim that imposing the compliance burden at the refinery level ensures a high degree of compliance because of the relatively small number of refineries in the US–137.  The problem is that there is a big difference between independent refineries and those that are integrated or large convenience store chains.  The latter have blending capabilities that provide an economic advantage who are also blenders. Independent refineries must buy RIN credits; the others generate  RIN credits through blending that can be banked or sold.  Think about it.  An independent refiner incurs a cost; large retailers like Circle K and Sheetz create an asset through blending that can be sold.

It is only common sense to provide a level playing field for the point of obligation.  Moving this point from the refinery gate to the point of blending might complicate EPA’s compliance tracking but it would not discriminate among refiners.

A much better solution would be to simply abolish the renewable fuel standard since it accomplishes nothing.  The ethanol—oxygenate mandate—is a creation of the Clean Air Act Amendments of 1990 that was designed to secure votes for passage from farm state members.  It was not needed, and Congress knew this at the time, to meet tailpipe emission standards to reduce ozone causing chemicals.  And, it has been shown by analysis after analysis that it does nothing to positively impact global warming or reduce imports.

The renewable fuel standard is simply another example of the Bootlegger and Baptist collusion.  Farmers, commodity traders, and ethanol manufacturers benefit by having money transferred from consumers by embracing environmental benefits that don’t exist and politicians who support the standard are considered good stewards of the environment.  It’s just a sophisticated swindle.

Legal Flim Flam

The City of New York is suing five major oil companies claiming that they have knowingly produced and marketed oil and gas that is causing catastrophic climate damage.  The City’s Counsel is using a non-existing case as part of a PR campaign.  The brief is an example of the lawyer’s rule:  when the law is against you, argue the facts; when the facts are against you, argue the law; and when both are against you, pound the table and yell—a PR stunt.

The heart of the City’s argument is ascribing certainty of knowledge where no certainty exists, impugning the integrity of those who don’t embrace the climate orthodoxy and claiming intentional deception.

The idea that companies and their scientists knew in the 1970s that CO2 from fossil fuel combustion would cause catastrophic climate change is pure nonsense. In the 1970s, there was concern about global cooling as was documented by the first Secretary of Energy, the late James Schlesinger.  Concern about global warming that followed the cooling concern was led by the leaders of the Club of Rome which predicted the end of mankind within decades.  The flawed predictions, based on a complex computer model, were widely criticized and discredited but like all zealots many of the Club’s members moved from Limits to Growth to an impending climate catastrophe without missing a beat. Their predictions of climate catastrophe and James Hansen’s were based primarily on models which continue to overstate warming and climate events as was demonstrated by Professor John Christy in Congressional testimony in 2106.

The limits of models should not surprise anyone since our understanding of many climate processes that are included in models is far from certain and as has been documented by the IPCC—clouds, solar irradiance, oceans, and aerosols, and climate sensitivity.     A major problem with predictions are the complications caused by  the climate system being chaotic.  The father of chaos theory, Ed Lorenz, in 1991 stated, “We note the consequent difficulty in attributing particular real climate change to causes that are not purely internal.”  He also said, chaos theory “will tell us that there is a limit to how far ahead we can predict, but it may not tell us what this limit is.  Perhaps the best advice that chaos theory can give us is not to jump at conclusions; unexpected occurrences may constitute perfectly normal behavior.”

 The City also claims that these companies acting through the American Petroleum Institute (API) and Global Climate Coalition(GCC) engaged in a concerted deception of the public as to the damaging effects of climate change from burning fossil fuels.  That charge is absolutely false.  Neither API nor the GCC ever denied the reality of climate change—called global warming back then–, the fact that CO2 contributed to warming, or that human activities affected climate.  What both organizations did say was that the extent of uncertainty about the impact of human activities did not justify the mandatory emission reductions endorsed by Vice President Gore and the IPCC or the economic damage that they would cause.

The City’s brief would lead a reader to believe that the oil industry refused to take any action on CO2 emissions.  That also is absolutely false.  In Kyoto and subsequently, the GCC and API told VP Gore and White House staff that it would work with the Administration on adopting and promoting voluntary programs, that it would support additional R&D on new energy technologies, and it would work with the Administration to promote the adoption of energy technologies by developing countries.  That offer was rejected because neither the oil industry nor any GCC member was willing to adopt the mandatory actions that were part of the Kyoto Agreement.

One of the most offensive parts of the City’s brief is its slander of the late Fred Seitz who can’t defend his good name.  The City has accepted uncritically the calumny of Naomi Oreskes who among other things slanders Seitz for overseeing research sponsored by Reynolds tobacco.  Oreskes might not be aware but the City’s Counsel should know that a company has a legal duty to have the knowledge of an expert.  Turning to someone who was a past president of the National Academy of Sciences and Rockefeller University would demonstrate that it took this obligation seriously.

The weakest part of the City’s case is ignoring the tremendous economic benefits and progress that fossil fuels have made possible around the world.  It is only necessary to look at the plight of under developed countries where over 1 billion people lack access to commercial energy.  Does the City and its Mayor really want Americans to live that way?

If the Mayor was engaged in more than a public relations campaign, he would ban cars and trucks from New York.  He knows, however, that if he tried to ban cars and trucks from the city he would be recalled and run out of town on today’s equivalent of a rail.

New York has real problems and their neglect is made worse by the Mayor’s folly and the waste of funds on  frivolous litigation.



Delusional Divestment

New York Mayor De Blasio has become the latest activist to join the divestment crowd that is attempting to discredit oil companies.  People like the divestment crowd do a lot of foolish things but selling their stock in protest is more than just foolish, it is an act of economic ignorance.

New York has, according to reports, $5 billion in oil company stocks.  Presumably these are part of the city’s retirement plan for employees.  While $5 billion is a lot of money, it is not a significant amount in terms of the value of oil companies or the amount traded daily in their stocks.  If the Mayor thinks that his stunt will somehow hurt the finances of major oil companies, he knows even less about market forces than a New York taxi driver. New York City’s retirement fund is currently under performing and is underfunded.

Selling stocks in protest as New York plans to do and as some universities have done will hurt them more than the companies whose stock is sold.  For every seller there is a buyer, so the company whose stock is sold only sees a change in ownership.  The seller may sell at a loss as well as incur other costs to complete the sale–transaction costs and the cost of less diversification.  What happens to the proceeds of the sale?  Since the motivation for selling is political and not economic, the seller is likely to purchase replacement stocks that also reflects political considerations.  The chances are that they may not perform as well and may have a higher risk.  If that results in a lower return over time, the beneficiaries of the fund—retirees or scholarship/financial aid recipients are the losers.  In the case of New York, the Mayor is imposing a cost on pension fund participants so that he can participate in a campaign that will not achieve its objectives.  New York City’s shift in focus from meeting or exceeding its return objective to political objectives will only lead to even worse performance.

As a campaigning strategy, divestment is fatally flawed.  As Harvard economics professor Rob Stavins observed, “Divestment doesn’t affect the ability of fossil fuel companies to raise capital: For each institution that divests, there are other investors that take its place. As long as the world still continues to rely on fossil fuels, and consumes them at current rates, the companies that supply them will have a ready market for their products.”  The world is not going to turn away from oil and gas anytime soon because there is no commercially viable substitute for a high density, abundant energy source that is reasonably priced.

Prof Daniel Fischel, professor emeritus of the University of Chicago, in a paper on the subject of divestment–divestmentfacts—wrote,” There is no basis to believe that divestment can affect the stock prices or business decisions of targeted firms. Moreover, there is broad agreement among financial professionals and academics that simple investment rules like divestment from fossil fuel companies cannot generate superior returns. Finally, divestment seems unlikely to affect the public debate or provide an effective tool even for those who strongly feel the need to address climate change.”

Instead of diverting investments from superior to inferior ones and engaging in frivolous campaigns, the mayor should solve the underfunding problem but not on the backs of workers and focus on improving the performance of the city’s retirement fund.







Octane and Gasoline

After my post The Hidden Tax on Gasoline, I was asked to provide more information on octane.  Here is my attempt at a Dick and Jane.

Gasoline and engines are a system.  As engines change so must gasoline.  Today’s engines reflect engineering designed for them to meet strict CAFÉ standards, tail pipe emissions standards and to incorporate technology advances. In general, this has led to higher compression engines which provide better performance, greater efficiency, and more horse power but as a result many of these engines require a higher octane gasoline.

Octane measures a gasoline’s knock resistance or the ability to avoid premature ignition. Most cars still run on regular gasoline–85 %–while cars in the class of BMW and Mercedes and many turbocharged engines require premium or 91-93 octane.  Race cars burn fuel with 100 octane or higher.

Until the mid 1980s, refiners used Tetraethyl lead to prevent knocking.  Lead was phased out for health reasons.  Refiners turned to ethanol or ethers to boost octane.  Ethanol has an octane rating of 115 but has a number of problems which is why it is limited to a 10% blend for most vehicles. Ethers—MTBE—were banned about a decade ago.

As more refineries began dealing with more light—lower sulfur crudes—from imports and shale oils and stricter fuel specifications, they had to find additional sources of octane because gasoline from light crudes have a lower octane rating.

Gasoline is a complex chemical mixture and various refining processes are used to rearrange hydrocarbon molecules to produce higher octane. These include catalytic reforming, isomerization, and dehydrogenation. Probably most refiners use catalytic reforming to produce reformate which is a high octane blending component.  All of these processes add to the cost of producing gasoline.

A Hidden Gasoline Tax

According to EIA, the price spread between regular gasoline and premium, which has been increasing since 2000, accelerated over the past few years.  It is now roughly 50 cents per gallon, more than double the spread in 2009.  Part of the reason is an increase in demand and part of the reason is the cost to produce higher octane gasoline.

Premium gasoline as a percentage of the gasoline pool has increased from about 7% to almost 12%.  While some increase in the use of premium can be attributed to motorists choosing a higher grade because of low gasoline prices, the major driver is the changes in engines that have been necessary to meet the fuel economy increases imposed by the Obama Administration.

CAFÉ regulations finalized in 2012 raised fuel economy for model years 2017-21 from 27.5 miles per gallon (mpg) to 40-41 mpg.  Subsequently, the Obama EPA raised the standards to 54 mpg for model years 2022-25.  The motivation for setting such stringent standards had little to do with improving air quality and everything to do with a goal of reducing CO2 emissions.  To meet the tougher CAFE standards, automakers have had to implement a number of technological solutions, all of which have added at least $4000 to the average price of cars and more to the cost of trucks.  In addition, to weight reduction, better aerodynamics, and engine and transmission efficiency, manufacturers have turned to producing turbocharged engines, which for many engines require the use of premium gasoline to avoid incomplete combustion.

At the same time, the changing slate of crude oils and environmental regulations have increased the cost of producing higher octane gasoline, 91-93 octane for premium versus 87-89 for regular.  Between 2000 and 2012, refiners could rely primarily on blending ethanol, which has an octane rating of 115, to boost the octane rating of gasoline. Increasing volumes of light crude oils from imports and shale oil contain higher levels of parafifins which lead to lower gasoline octane levels and the hydro treating needed to meet the 2017 gasoline specifications also results in a loss of octane.  As a result, refiners have had to turn to more expensive octane boosting processes.

Changes in CAFÉ standards and fuel specifications, ostensibly for environmental reasons, have raised the cost of light duty vehicles and the fuel that they must use without making a real contribution to air quality or climate change mitigation.  They were driven by ideology and the increases in cost are simply a hidden tax on the use of gasoline and diesel, one that is highly regressive.


The Missing Links

Critics of corporate tax reform reveal an economic myopia that either reflects an abundance of ignorance or a willingness to engage in deception.  The primary criticism of the corporate tax reform contained in the just enacted legislation is that the lower tax rate, the territorial tax approach to foreign earnings, and the incentive to repatriate about $2 trillion will benefit corporations, their executives and shareholders but not workers.  That charge shows at best a lack of understanding of how an economy operates.

When corporations get an infusion of revenue from lower taxes, they don’t reward the entitled few and lock the rest of it away.  Increased revenue is used to invest, to reward workers, and reward shareholders through share buybacks and dividend increases.

If companies invest in either new equipment, new projects, or new technology, they send money to other companies and that benefits the workers who make the equipment or carry out the new projects.  The companies on the receiving end of those investments go through the same process of investing, hiring, or rewarding shareholders.  All those actions benefit the economy.

As companies expand from new investment, they hire more workers who then spend and invest.  The benefits to economic growth are positive.  Most analyses of the just passed tax legislation estimate that the economy will grow by an additional 2%-3%.  Economic analysis also shows that labor benefits from lower tax rates.  Glen Hubbard, former chair of the Council of Economic Advisers and Dean of the Columbia School of Business has made that point clearly and cited a recent Berkley and Boston University study that showed wages increasing 8%.  This is consistent with other analyses showing the impact of taxes on wages.

If companies engage in share buybacks, they make shareholders wealthier and pension funds containing their stock richer.  The recipients of buyback money will either reinvest it in another company, spend their increased wealth, or do both.  In either case, the money gets into the economy.  Richer pension funds enable workers to have larger pensions which they will choose to spend and/or invest.

The bottom line is that increased corporate revenue from lower taxes leads to more employment and stronger economic growth.  Arguments to the contrary show an economic myopia.  Looking at only one link in a chain tells you nothing about the length and strength of the chain.