Too Big to Fail?

The commercial aircraft manufacturing industry is dominated by Boeing and Airbus.  Until recently, not much thought may have been given to potential unintended consequences of this dominance .  That perhaps is changing.  Airbus bet on plane—A-380 that no one wants to fly and Boeing bet on one—737 Max—that no one wants to fly.

Perhaps the current situation is just a temporary bump in the road. But in a rapidly changing world, it could also be that Boeing and Airbus suffer from holding too much of the market captive, from too cozy relationships with government, and from the unintended consequences of being too big.

The following chart shows the significant concentration in the current aircraft manufacturing industry.

This data can be slightly misleading since it includes all sizes of commercial aircraft.  When it comes to large commercial planes—seating capacity of 140 or more, Boeing and Airbus control over 90% of the market.  Both firms have worked hard to achieve their current dominance which is aided by their activities in the pollical market place.  The latter pays off handsomely. Boeing, for example, receives about 40% of Export-Import Bank funding. 

In addition, economics makes it difficult for competitors to gain inroads. Beyond, the high cost of developing a new plane, airlines have incurred large sunk costs for maintenance facilities, training, and parts.  Changing from one manufacturer to another is very expensive which make airlines reluctant to do so.

The cost of bringing an aircraft to market and the time required to develop one represent a significant market barrier.  Given the challenge of predicting the market and consumer tastes, investors have little incentive to commit billions to develop a new aircraft. There are a few exceptions.  One of which is projected shifts in passenger demand.  The International Air Transport Association estimates that over the next few decades, half of new passengers will live in Asia.  This represents a potential opening for the Chinese and perhaps the Russians to gain a substantial foothold in emerging markets.  In addition, regional jet manufacturers Bombardier and Embraer are moving into the large commercial aircraft market. While both are likely to occupy only a small share of the global market in the short run, if their new aircraft prove to be as cost efficient as promised and Boeing and Airbus continue to stumble, they can become strong competitors in the large commercial jet segment.

Boeing’s problems are not limited to the 737 Max, it is also experiencing problems in the manufacture of the Dreamliner.  It could be that the Airbus-Boeing duopoly along with substantial barriers to entry may have led to complacency, hubris and carelessness in manufacturing quality.  If that is the case, changes in the market place and a loss of confidence by the flying public may significantly weaken Boeing’s market share.

What’s Surprising About the Rise in Gasoline Prices?

Last year around this time the average retail price of gasoline was about $3 per gallon.  It then began a steady decline and reached about $2.40 in December and slightly lower in January.  Since then, it has been steadily rising, reaching $2.74 this month. Some have speculated that $3 per gallon will be reached in the near future, perhaps around Memorial Day.  We should be grateful that the price is not higher.

Since December the average price of crude oil has risen almost $20 per barrel, from $45 to $64. That alone would translate into a 45 cent per gallon increase, which covers the price increases since the start of the year.  Crude oil prices are the major driver for prices at the pump but not the only ones. In addition to the effects of supply and demand imbalances, the price of ethanol comes into play as does the regulatory requirement to produce summer gasoline to counter smog formation and spring refinery maintenance.  

For anyone who doesn’t remember the formula for summer or reformulated gasoline (RFG) was written into the Clean Air Act Amendments of 1990.  The legislative specifications covering oxygenates, benzene levels, olefins, sulfur, and evaporation were included to mask the ethanol mandate. Since producing RFG is more expensive, it normally results in an increase of about 10 cents a gallon during the summer months.  All other things being equal, the price of gasoline prices should be higher.

Although Russia and Saudi Arabia appear to be adhering to the OPEC agreed production cut back, adherence by other members is always problematical.  Production has been exceeding the stated 30 million barrel per day quota because as crude prices rise, members have an incentive to cheat. And even though production by some members has declined recently, those reductions won’t last long except for Venezuela.  Most OPEC members like to get while the getting is good.

US shale production is up 25% from this time last year and will continue to increase as prices do.  The loss of Venezuela heavy crude imposes additional costs on refiners.  The next best source is Canada but the lack of pipeline capacity and efficient distribution alternatives limits supplies to US refiners. Constraints of Canadian distribution will be removed in the coming years as a result of increased pipeline investments. 

While OPEC and Russia would like to see crude oil prices around $80 a barrel, the downward pressure from a slowing global economy, cheating, increased domestic production and increased crude from Canada will likely keep that price target from being achieved absent some unknown and unpredictable event.

Resort to Principles of Economics

According to the Wall Street Journal, neither the Federal Communications Commission (FCC) nor the Federal Trade Commission (FTC) have been capable of reigning in the increasing annoyance of robocalls, scammers, etc. The only thing that the Telephone Consumer Protection Act seems to have accomplished is proving the ineptness of the bureaucracy in enforcing it.

Since 2015, the FCC has levied over $200 million in fines for violations of the Do Not Call Registry. That would be a deterrent if collected but to date the FCC has collected less than $7000 or .00004%. The FTC has obtained court judgments of $1.5 billion since 2004 in civil penalties for robocalls or violations of the Do Not Call Registry. It has done better than the FCC in collections but only because the FCC success rate is so pathetic. The FTC has recovered an unimpressive 8% or $121 million.

The FCC claims that it lacks enforcement authority and has to rely on the Justice Department. The FTC told the Journal that it was proud of its “strong enforcement.” No wonder that the number of robocalls has soared. Robocalls to mobile phones reached 50 billion last year according to the Pew Center.

Carriers are supposed to be working on verification systems that will help consumers decide if calls are legitimate. Of course, those systems won’t prevent the annoying ringing of calls that seem to always come at the worst of times. Consumers can purchase equipment or apps that will block unwanted calls but devices for landlines can cost over $100 and while some mobile systems are free, subscription apps cost at least several dollars a month. While apps provide some level of protection they’re not fool proof. There have been estimates that no service flags more than two-thirds of calls because many robocalls spoof their identities.

A professor at the University of Texas, Roger Meiners, suggests that economic principles might provide a better answer. Namely, if you want less of something, in this case robocalls, etc., raise its cost by imposing a tax on calls. Meiners has proposed the Penny for Sanity Tax. A I cent tax on 50 billion calls would raise $500 million annually. He makes the point that since the tax applies to all calls, it would avoid litigation over discrimination and would be very difficult to avoid.
According to the Pew Center, the average adult cell phone owner makes and receives around 5 voice calls a day. If we assume that average holds for land lines as well, assuming 3 calls made per day would cost 3 cents or less that $1 per month. At 5 cents, the monthly cost would be slightly less than $5. While $60 a year is steep relative to other options, it probably is more effective. Many would gladly pay a reasonable price to avoid the annoyance. Congress ought to be able to find a creative way to make that tax deductible or authorize consumer rebates to significantly reduce the burden on all of us. Congress has an incentive to do so because it is voters who are receiving these calls.

Making the Theory Work

Charles Kettering, a former head of General Motors Research once observed, ( in theory)“There is no difference between theory and practice. ( in practice) There is one difference. Practice won’t let you forget anything or leave anything out. In theory, problems are easily solved because you can leave something out.”

While he made that statement at least 72 years ago, climate advocates have latched onto the part about problems being easily solved by leaving something out. What they leave out is observational data that conflicts with their preferred assumptions.

Those who rely on the climate orthodoxy to promote their agenda are wedded to the results of complex computer models that have been constructed to demonstrate that the increase in CO2 emissions inevitably leads to dangerous warming. What they leave out is the fact that their model projections overstate warming. This is shown in the following graph produced by Professor John Christy.

The explanation for this difference is that the models assume a greater climate sensitivity than is demonstrated by the climate itself. According to the National Academy of Sciences, climate sensitivity is “the equilibrium global mean surface temperature change that occurs in response to a doubling of atmospheric carbon dioxide (CO2) concentration. Climate sensitivity is a function of numerous feedbacks among clouds, water vapor, and many other components of the earth’s climate system. It is presently one of the largest sources of uncertainty in projections of long-term global climate change.” The NAS went on to say that some uncertainties could be reduced or removed if there were better temperature records and better estimates of past radiative forcing. That falls into the category of wishful thinking because the records and estimates cannot be rehabilitated. There are too many variables involved with past temperature records to significantly improve their accuracy.

Analysis by Professor J. Ray Bares, University College Dublin, concludes that models underestimate the amount of heat radiated into space from the tropics. This conclusion is consistent by Dick Lindzen’s research demonstrating an “iris” effect in the tropics. In addition, Pat Michaels’ work on climate sensitivity shows that studies since 2011 estimate a lower sensitivity than the IPCC or the models that are used to project warming.

So, why do advocates of the climate orthodoxy cling to predictions of catastrophic warming when more recent research confirms a lower climate sensitivity as does the climate itself? There are several plausible explanations. One is that many are very risk adverse and believe in the Precautionary Principle which in Dick Lindzen’s words, “Everything is uncertain, thus anything may cause anything, and thus we should do something about it.” This is taking an abundance of caution to the extreme.

Another explanation is that some environmentalists have strong objections to economic progress and the way in which it is achieved. They want to control the means of production and how the economy evolves. Of course, they also happen to be high up on the economic ladder, so they can be cavalier in wanting to deny the benefits of economic growth to others.

In the end, if extreme energy policies are the mechanism for responding to climate change, resources will be wasted and the impact on warming and its climate effects will be imperceptible.