The Resurrection of Peak Oil

For decades there was a widespread belief that peak oil was just around the corner. This belief was based on the work of the world reknown geologist, King Hubbert. Although, there were a large number of skeptics, “Hubbert’s Curve” carried the day in the policy world. That is until horizontal drilling and hydrological fracturing unleashed the potential of shale oil.

While peak oil production can rest in peace, peak oil has returned in the form of a growing view that peak oil demand is just around the corner. A recent article in the Wall Street Journal—November 27—focused on the coming peak in demand. In the 1970s, Saudi oil minister, Sheikh Zaki Yamani made an insightful prediction, “the stone age did not end for lack of stone and the Oil Age will end long before the world runs out of oil.” His prediction was based on economics and a long view of technology. What he did not adequately factor into his analysis was the heavy hand of government.

The Wall Street Journal article draws heavily on the views of European oil companies, Hungary’s MOL Group, BP, and Shell. Shell’s finance chief sees the peak coming in 5-15 years. The views of these companies are not surprising because the EU has been pursuing an aggressive green agenda that has contributed to its economic stagnation and high unemployment and companies in those countries dare not stray too far from government orthodoxy. A more neutral source, the International Energy Agency forecasts that consumption will continue to rise for decades unless governments become even more aggressive in mandating climate change actions, which means technology forcing.

There is little evidence that technology forcing works in the long run because commercialization is achieved at a very high cost. Look no further than the string of failures over the past 8 years in battery technology companies and the subsidies needed for electric vehicles. To illustrate this point, the chief financial officer of BMW recently gave a downbeat outlook for electric cars, according to Bloomberg. He said, “We’ve learned that people aren’t prepared to pay a higher price for an electric vehicle. I don’t see some kind of disruptive element coming from electric cars that would prompt sales to go up quickly in the next five to six years.” The problem is likely worse than that. A 2015 MIT Technology Review article candidly stated the problem with achieving EV goals is that we still don’t understand battery technology.

Economic history suggests that there are limits to how long nations can sacrifice economic growth and better standards of living in pursuit of illusory environmental objectives. Predictions of a climate apocalypse that were supposed to be evident over the last decade have not occurred and the IPCC keeps reducing the effects of doubling CO2. Where it use to give its “best” estimate, it now gives none. Doomsayers may eventually be proven right but right now the climate system is not cooperating and as a result the public is likely to become more skeptical and aware that it has been bamboozled by environmental advocates who have profited from marketing fear.

For the foreseeable future, oil will continue its dominant transportation role because it is abundant, affordable, and has superior energy density. Its competitors maintain their life support through subsidies. Those should be on the hit list of actions to take to stimulate economic growth. The reaction of the stock market since the election is one piece of evidence that consumers and business are fed up with being over governed by the Obama Administration. If the market is allowed to determine oil’s long term future its peak will be like the horizon: it recedes as we approach it.

 

 

 

 

The Bludgeoning Visible Hand

President-elect Trump’s intervention in the Carrier relocation decision and what might not be a not so subtle threat to Boeing should deeply trouble anyone or any business that believes in the benefits of market forces, small government, freedom, and who opposes crony capitalism.

In the absence of more information on both  incidents, there could be justifiable reasons for extending the benefit of the doubt. In the case of Carrier, and its parent United Technology, the decision not to move its plant to Mexico could have been based on an expectation of prompt action on corporate tax reform, a tax holiday, and regulatory relief. In Boeing’s case, $4 billion for a new Air Force1 fleet is certainly reason to publicly call for its cancellation, although it now turns out that the $4billion figure is bogus. However, it also could have been a warning to Boeing, which has an agreement to build aircraft in China. The president-elect’s use of words such as “consequences” and “retribution” make it harder to suspend disbelief however.

If Mr. Trump is that aggressive in attacking any company that even thinks about relocating outside the US, before his inauguration, what is he likely to do when he can bring the full force of the federal government to bear?

When President Kennedy publicly chastised the US Steel  in 1961, his brother unleashed the power of the Justice Department against steel companies. And, we know how Richard Nixon engaged in a range of abuses against perceived enemies. Since Mr. Trump has given every indication that he intends to be an interventionist when it comes to US manufacturing abroad, what kind of actions is he willing to take to achieve his objective? Words have meaning and his are troubling.

Mr. Trump promised to “drain the swamp” but actions that make the federal government and executive branch more powerful and promote crony capitalism will have just the opposite effect. Corporations have a fiduciary duty to act in the best interest of their share-holders; not government officials or in this case the president-elect. In recent decades, laws and regulations have been written to benefit the favored and by extension to disadvantage competitors. A smaller and less intrusive government will only come about when crony capitalism and the Bootlegger and Baptist combinations are part of a real swamp draining.

If the business community and the organizations that represent it sit idly by while corporations are threatened and intimidated as Mr. Trump has done, they will encourage more such treatment and that will have wide ranging negative consequences. When the business community was considering whether to oppose President Clinton’s BTU tax early in 1992, a democrat strategist offered this advice: “ if you let them roll you early, they will roll you often”. The business community was unified in opposing the BTU tax and won. If President-elect Trump can roll corporations before he is inaugurated, he will roll them often afterwards. There is a choice to be made and the longer it is delayed, the harder it will be to do the right thing.

The Business Roundtable, Chamber of Commerce, National Association of Manufacturers, and others should take a firm stand against White House intervention in corporate decision making, especially where business investments are concerned. In doing this, they also should stress full support for actions that strengthen the economy and enhance global competitiveness.

The old adage of do the right thing and let the chips fall where they may is sound advice right now.

Charlie Brown, Lucy, and OPEC

The reaction of oil markets, the trade press, and some analysts to last week’s OPEC agreement is reminiscent of the Charlie Brown and Lucy.  Lucy keeps telling Charlie that she won’t pull the football away when he goes to kick it but does repeatedly. And. good old Charlie keeps trusting, when he at a minimum should be skeptical just as the trade press and others should be..

After OPEC agreed to reduce production by 1.2 million barrels per day, prices rose by 10% and the trade press and some analysts wrote that OPEC was reasserting its control and that reports of its demise were premature.   Oil analysts and historian, Daniel Yergin said, “The member countries were faced with a “very deep” abyss of low oil prices, and that won out over politics. …OPEC is back in business … This will rank as one of their historic decisions.”

Well, maybe. History, however, is not reassuring. Since the first oil embargo in 1973, OPEC has mainly been a price taker; not a price maker. Agreements to cap or reduce production have failed because OPEC lacks an enforcement mechanism and members have a strong incentive to cheat. That is likely to be the case with this agreement. Saudi Arabia and Iran came to an agreement, which had eluded them in the past, that allows Iran to increase production by 909,000 barrels a day as it tries to rebuild its economy after the end of Western Sanctions. Why should Iran stop at 90,000 barrels once its oil infrastructure is rebuilt? Why should Venezuela, an economic basket case, or Iraq honor the agreement’s limits? Russia, which produces about 10.32 million barrels a day has agreed to cut production 300,000 barrels. But, Russia’s economy and adventurism needs more hard currency, so if prices rise it too will have an incentive to cheat.

If prices rise above $50 a barrel, OPEC members will see their revenue increase, which is their goal, but that increase will create an incentive to try for more. Hence, more cheating.

As prices go up, more US production, especially shale, will come back on line and that will have the effect of offsetting OPEC production cuts. In 1973, OPEC produced 54% of the world’s production. Today, it is down to 42% and only Saudi Arabia and Iraq are among the top five global producers, according to Statista. If most OPEC members, especially Saudi Arabia honor this agreement, US oil producers will owe them a big thank you.

The Gravy TrainMight Be Ending

Climate advocates and environmental organizations like the Union of Uninformed (Concerned) Scientists are in a high state of dudgeon over the election of Donald Trump. Before appointments are made or any policy decisions are announced, they are claiming that his Administration will be run by climate denialists. It doesn’t matter to them or the media that cites their railing that the word “denial” pejorative. The real sources of anxiety for many perhaps most is the prospect of their funding stream being turned off.

Ever since Vice President Gore increased climate funding to demonstrate that using fossil fuels would create a climate catastrophe, federal funding for so called climate research has increased, with the emphasis on confirming the climate catastrophe described in Earth in the Balance.

It was clear during the Clinton Gore Administration that if researchers wanted funding, their work had to support the Vice President’s beliefs. That remains true today where research funding under the Obama Administration has increased to about $2.7 annually. In addition to that has to be added $8 billon in “clean energy technologies” and $5 billion in subsidies. Since Jesse Ausubel of Rockefeller University has established that the US has been decarbonizing for over a century, spending on fossil duel alternatives is mainly waste, especially the subsidies.

Rationalizing climate related spending could save taxpayers upwards of $16 billion dollar annually. All that the Trump Administration has to do is set objective criteria for reviewing and continuing existing programs.

One place to start is spending on larger and more complex climate models. Given the range of scientific uncertainties that are even acknowledged by climate advocates—climate sensitivity, natural variability, cloud formation, solar affects, aerosols, and oceans for example—it should be obvious that model performance can’t improve until our state of knowledge improves. Federal research should focus on improving our understanding of the climate system by addressing major areas of uncertainty.

One of the pillars of climate orthodoxy is the assertion that CO2 is a pollutant. It is not; it is a nutrient as has been clearly documented by the CO2 Coalition. A better understanding the CO2 and the physics related to it would undermine EPA’s Endangerment Finding and regulations based on it. That would not only eliminate wasteful spending and economically damaging regulations but also would represent an important step in restoring scientific integrity. The corruption of science by the Obama Administration and agency climate advocates can be reversed by appointing as Science Advisor to the President an individual whose integrity is beyond reproach, a person who will take steps to make sure that the best available science is used in the policy process.

None of these actions have anything to do with “denial”. Climate change is real and humans are a contributing force, although there is no compelling evidence that we are the driving force. Instead of wasting resources on trying to prove the contrary, the federal government could invest in developing the capacity to deal with whatever future climates evolve.

We know that sea level is rising. As MIT professor Carl Wunsch has made clear. Sea level has been rising since the end of the last ice age and will continue until the next one. Helping states deal with that reality is a legitimate government function. Agricultural research on drought resistant crops is also a legitimate role.

Government decisions on climate should like Lewis and Clark’s expedition of the west should only extend as far as our state of knowledge, which should always be expanding. Prophesies of doom have been the mainstay of charlatans for centuries. We need to stop feeding them and start ignoring them

Political Forecasting Failure: a Broader Lesson in Humility

This year’s election demonstrated very clearly that forecasting is fraught with dangers because it is dependent on assumptions, the quality of data, and the structure of models used. And, the lessons from the failure of most pollsters/forecasters to come close to the actual election results should lead modelers and users of model outputs, independent of the field of study, to show a bit more humility. That is especially true about climate and other environmental models.

For almost three decades, climate models have over predicted the affect of greenhouse gases on global temperatures and weather events. That should surprise no one because the climate system is complex, chaotic, and still not well understood. It should be obvious that if the system being modeled is complex, not well understood and requires a very large number of equations, the models built to represent it cannot be accurate, especially when the forecasters use point estimates instead of ranges that reflect uncertainty. That has been the case with climate models and the forecasts that come from them,in spite of the billions of dollars spent on model development and the super computers to run them.

In spite of a very poor records of predictions, those who make predictions based on these complex models are considered experts who must be listened to. In fact, the cult of climate experts who peddle visions of doom are no better that fortune tellers and seers of the Middle Ages who became well knows by their prophecies of the future. Assertions of expertise is no substitute for being right more than half the time.

Whether forecasting economic growth, elections, or future climates, forecasts are no better than the understanding of the underlying phenomena, the data that reflect those phenomena, and the models that process that data. The uncertainties in our understanding of the climate system as documented by the IPCC should disqualify climate models from being used to drive policy.

Professor John Christy in congressional testimony presented a comparison of a large number of models with actual temperature increases over the past few decades. While that is a short time frame for climate, all of the models over predicted actual temperatures. That fact is evidence of a bias about how the climate system is thought to work and a lack of humility about the inability to model a complex and chaotic system. Instead of expressing humility, climate advocates double down by making their models more complex and providing rationalizations for their inaccurate forecasts. Unfortunately, the political system hasn’t discounted the forecasts, it has embraced them, wasting money on solutions to a contrived problem.

A new Congress and new Administration has the opportunity to change course and demand a higher level of objectivity and real scientific proof.

 

 

Mass Delusion in Marrakesh

In 1841, Charles Mackay wrote Extraordinary Popular Delusion and the Madness of Crowds. Ever since then, the world has kept proving that Mackay was right when he wrote, “ In reading the history of nations … we find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit…” Over 10,000 people have descended into the city of Marrakesh to attend COP 22, celebrate the entry into force of the Paris Agreement on climate change and to plan its implementation. This annual ritual is a manifestation of the madness of crowds.

Ever since the Rio Treaty in 199X, annual Conferences of the Parties have been held to plan actions to avoid a climate apocalypse, which is just over the horizon. But, like the horizon, it recedes as it is approached. Prophets of doom have been predicting dramatic climate events for about three decades and for almost that length of time have been explaining why they haven’t yet occurred but soon will.

Under the Paris Agreement, nations are to submit plans for achieving their pledges to reduce greenhouse gas emissions and then regular reports on progress made. COP-22 has the responsibility for hammering out the details of reporting, transparency, compliance, capacity building in developing nations, and financing actions. On the surface, this does not appear to be an overwhelming task but in reality it will prove difficult to achieve. Every past COP has ended with delegates floundering to achieve its goals and then scrambling to make failure appear as success.

Many developed nations, if not most, will look for ways to create loopholes so that their reports can show significant progress and to make any shortcomings something that is outside their control. Developing countries will tie their commitments to significant funding from the developed world. There is already a pledge of $100 billion annually by 2020. A review of the last report stated that an “estimated … $62bn was provided in 2014. However, there is some tension about the methodology chosen to produce this report, which might flare up in Marrakech”. At a time when developed nations are struggling with weak economies, excessive debt, and unfulfilled citizen expectations, financing will continue to be the Achilles Heel for this agreement as it was in the past.

The delegates, who are enjoying the good life in Marrakesh, are harboring a vision of how the world works that no longer exists. Our presidential election is not the only sign that the paradigm of the past has changed. It is evident around the globe. Populist unrest is changing the political dynamics and that cannot but influence how nations address the illusion of dangerous climate change. In addition to the problems that the COP-22 delegates had at its beginning, they now have to face the reality that the Obama climate agenda will be brought to an end on January 20, 2017. The climate change table has been reset.

 

The Tesla Hustle

Tesla Motors, with great fanfare, announced this week that its third quarter profit was $21.9 million. This is the first time in three years that its quarterly earnings were positive. Has Tesla turned the corner or was the third quarter an artifact?

Tesla sales benefit from a generous taxpayer subsidy–$7500 per vehicle—and its ability to sell credits granted because its cars have no emissions. Those credits were worth $139 million, $100 million more than the same quarter last year.   Selling nothing for a profit and relying on government subsidies is not a business model for long term success.

Most financial analysts are highly skeptical of Tesla’s long-term viability. In the fourth quarter of 2015, it was reported that Tesla lost about $18,000 for each Model S sold. That loss is now reported to be $4000 per Model S its high priced vehicle. Whatever the correct number, you don’t make money selling at a loss. None the less, some investors using rose colored glasses keep driving up its share price. Currently its market capitalization is bigger than the combined value of Mazda, Fiat, Ferrari, and Porsche. And, its price/earning ratio is a whopping minus 57 to 1. That is the kind of P/E ratio that led to the tech bubble burst in the early 2000s.

When a sell off in the market occurs, and they always do, companies with stratospheric PEs take a big hit in their share price and their capitalization. Investors who continue to drive up Tesla’s price allow profit taking by those who bought low. It could be that smart investors, like those who made money in the home mortgage melt down, are seeing a case of the “greater fool theory” at work and just hope that no one takes the punch bowl away anytime soon.

Tesla is an attractive vehicle with plenty of pick up. It’s a head turner. But, in the real world it has to compete over time against established manufacturers who actually turn a profit. The best way to test the viability of EVs, and Tesla in particular, is for the government to remove subsidies and other inducements and let manufacturers of EVs compete in the market place. The key to viability, however, is not less maintenance, which EVs have, it is battery cost, range and a reputation for quality.

Lithium-ion batteries represent the current state of technology. Although breakthroughs have been predicted, they have not taken place. One reason according to MIT’s Technology Review is “One difficult thing about developing better batteries is that the technology is still poorly understood”. Battery cost is still about double the target of the US Battery Consortium, range is limited, and lithium-ion batteries are a fire risk. Until those problems are solved, EVs will have a niche market for the wealthy and the ultra green drivers. Former GM and Chrysler executive and icon Bob Lutz told CNBC’s Squawk Box in February that “companies such as General Motors will not be making any money on their “Tesla killer.” They are making these vehicles to appease Washington. … The majors are going to accept the losses on the electric vehicles as a necessary cost of doing business in order to sell the big gasoline stuff that people really want.”

 Elon Musk has proved himself to be a crony capitalist extraordinaire and he is raking in a lot of investor and government dollars but if Washington removes its subsidy gift, Tesla is likely to go the way of the Tucker and De Lorean, out of business.

 

The Overlooked Burden on Economic Growth

A number of economists, such as Harvard professor and former Treasury Secretary Larry Summers, are urging a major increase in infrastructure spending to get the economy out of the 1% growth ditch. But the overlooked drag on the economy is not lack of government spending, but the expansion of the regulatory state.

Since 1980 the code of federal regulations has grown from 100,000 pages to almost 180,000, according to the Mercatus Center. A number of organizations have estimated that those regulations carry a cost of about $1.9 trillion annually.

A 2013 study—Federal Regulation and Economic Growth by John Seater, North Carolina State University and John Dawson, Appalachian State University concluded that federal regulation has “statistically and economically significant effects on aggregate output and factors that produce it.” They conclude, “Federal regulations have reduced real output growth by about two percentage points on average over the period 1949-2005.” According to their calculations, that reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as of the end of 2011. That is, “GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if regulation had remained at its 1949 level.” Critics can point out that 1949 is the wrong base year and in recent decades national issues, like the environment, have created new regulatory needs. Although this is obviously true, there is no doubt that the effect of regulation has been negative and larger than needs to be. The literature is rich with work on the growth of federal regulations and their negative impact on the economy.

The regulatory burden just keeps growing. Large companies have to allocate increased resources to compliance and lobbying that could otherwise be invested in improving their business. Small companies don’t have that option. Regulations are a tax that is a deterrent to their job creation and growth. An OECD study on small business stated that “regulatory burdens remain a major obstacle” because these firms are not well equipped to deal with them. An article in Entrepreneur.com by Scott Shane of Case Western Reserve University found that regulation had gone from being small business’s fourth major problem in 2008 to being its primary one in 2013. This burden is not trivial because small businesses account for over 50% of all domestic sales and since 1970 66% of all net new jobs. (SBA data).

Although Congress has passed legislation to deal with regulatory burdens—Paperwork Reduction Act, Congressional Review Act, and the Data Quality Act for example—their effectiveness has not been sufficient to reverse the trend to an over governed society. The growth of the regulatory state needs to be halted.

The next Administration and Congress have an opportunity to translate reform rhetoric into effective action. Here is a list of actions that could help to reign in excessive regulation.

  • Congress should set an annual regulatory budget with a percentage of the savings from reductions in obsolete and ineffective regulations added to the following year’s budget.
  • Require that new regulations include a sunset provision that can only be avoided by a rule making process to extend them.
  • Wayne Crews of the Competitive Enterprise Institute has recommended a Regulation Reduction Commission that would prepare a “packages of rules for an up or down vote.” This would be modeled after the Base Realignment Commission. Such a commission could use a triage process starting with rules promulgated before some agreed upon date and considered major.
  • Currently major rules, those costing more than $100 million annually. are submitted to Congress for a 60-day review under the Congressional Review Act, allowing Congress to pass a resolution of disapproval. Instead of a resolution of disapproval, Congress should be required to take affirmative action certifying that regulations meet the underlying legislative requirements and are cost-effective.
  • The OMB Office of Information and Regulatory Affairs (OIRA) has review authority over all proposed regulations from Executive Branch agencies. Its performance has been uneven because it is part of the Executive Branch and reflects the philosophy of the current Administration. There should be bi-annual performance reviews conducted by the Government Accountability Office to assess OIRA’s effectiveness in carrying out its legislative mandate.

The Paperwork Reduction Act (PPA), passed in 1980 and amended by the Data Quality Act of 2000, is the vehicle that guide the regulatory review process. The purpose of the PPA was to reduce the burden of information/data requirements imposed by Executive Branch agencies, to improve the quality of information coming from federal agencies and improve the efficiency of government programs, including regulations.

While the next Congress and Administration consider cooperation on regulatory reform, Congress could make a major contribution by tasking the Government Accountability Office or Congressional Budget Office with conducting a review of PPA to determine its effectiveness and changes needed to improve data/information management and to increase transparency and objectivity of analyses and research conducted in support of rule making. The system of checks and balances that is supposed to make government function effectively is not working in the regulatory process and it needs to reign in unelected regulators.

 

 

 

 

 

 

 

Declare Victory and Stop Helping Us

After the 1973 oil embargo, the government got involved in a big way in responding to energy scarcity and the price increases that go with it. Relying on market forces was not an option because the public demanded that government do something. It did with mandates on fuel efficiency standards—CAFÉ—as well as standards for HVAC systems, appliances, and housing. It also provided consumers, states, and industries with information on energy saving opportunities—Green Lights for example.

New businesses sprung up to assist consumers and businesses make cost-effective decisions on energy trade offs. There also were increased investments in energy technologies, many in response to environmental standards. The overall effect was that consumers became more educated and conservation became part of our society’s value system. The evidence that confirms that is the reduction in energy intensity. According to the American Council for an Energy Efficient Economy (ACEEE) between 1980 and 2014, GDP grew almost 150% while the energy required to produce that growth only increased 26%.

An August ACEEE report stated, “…a diverse group of scientists, analysts, and policymakers began to develop strategies to reduce energy waste and use less energy to deliver the same or better services to consumers and businesses. What they produced was an array of energy-efficient technologies, policies, and innovations that consumers take for granted—“an unqualified success story, both economically and environmentally, although one often unseen by the public.” The increase in energy efficiency runs the gamut from home appliances, HVAC systems, industrial use, commercial buildings, highway vehicles, to energy transmission and distribution system.

With energy efficiency embedded in our economy and investments in energy technologies being made to meet future needs, the time has come for the government to declare victory and let the market continue to achieve progress. That would enable the federal government to do something as strange as a dog walking on its hind legs, cancel energy standard setting programs and eliminate their costs from its budget.

CAFÉ: The Triumph of Dogma

Congressman Scott Peters wrote an impassioned defense of CAFÉ in the Washington Post’s Power Post. His article reveals an argument built on dogma and assumption. He is dismissive of any criticism of CAFÉ and accuses republicans of wanting to “ gut fuel efficiency standards. In defending CAFÉ as “one of the most successful energy conservation programs”, he embraces conservation without limitation or understanding of how CAFÉ works.

CAFÉ was a creation of the post oil embargo panic. Its goal then was reducing oil imports by reducing gasoline consumption. The initial goal could be defended, as there was a concern that unchecked imports would transfer too much wealth and power to the Persian Gulf. Also, at that time, there was the widely held belief that the world was running out of oil, the end of oil was predicted to be at the end of the 20th century. While the goal could be defended, the mechanism, CAFÉ, can’t. It shows Congress’ lust for power and lack of faith in market forces. A gasoline tax would have been far more effective and much easier to implement. Analyses have concluded that a gasoline tax would be 6 to 14 times more effective.

Since the 1970s, CAFÉ has morphed from fuel conservation, which it did not achieve because as the cost of driving declined drivers increased miles driven, into a means for emissions reductions, specifically CO2. EPA has a long record for setting fuel and tailpipe standards as a mechanism for improving air quality, so CAFÉ was not needed to do that. While a case can be made that the standard setting process has been based on worst-case assumptions, which it has, there is no question that air quality has achieved tremendous improvements. Using CAFÉ to achieve CO2 objectives is nothing less that a case of orthodoxy driving regulation.

CAFÉ is a two-sided coin. One side reflects the air quality improvements, including reductions in CO2 emissions. The other and darker side represents the consequences of government fuel efficiency mandates. Until the most recent standards, manufacturers had to build lighter and smaller cars to meet fleet mileage requirements. Over the decades since the 1970s there has been accumulating evidence that lighter, smaller vehicles have led to greater highway fatalities.

Since most buyers prefer larger vehicles, smaller ones had to be sold at a loss. Cross subsidization allowed for those lower prices by making larger vehicles more expensive. Cross subsidization is compelling evidence that CAFÉ is in conflict with consumer preferences.

The current CAFÉ standards have eliminated that flaw by using vehicle class standards—vehicle foot-print—for calculating applicable standards. The current approach according to a paper from the Energy Institute at the University of California at Berkeley—New CAFÉ Standards: The Good, the Bad, and the Ugly, January 2016—is counter-productive “… the footprint-based targets may actually incentivize manufacturers to increase the average footprint of their fleet. This may make sense from a political point-of-view because domestic manufacturers produce large numbers of SUVs and pickups, but it doesn’t make sense from the perspective of reducing GHGs.” This explains why manufacturers were willing to accept more aggressive standards. They can sell more larger vehicles which are more profitable while appearing to be good corporate citizens.

As Milton Friedman observed, there is no such thing as a free lunch. Analyses of the new standards have concluded that they increased manufacturing cost initially by $1000 and by $3000 by the time they are fully implemented. This is because manufacturers have to substitute lighter material for metal and develop new drive train technologies. While advocates hail new technologies as a benefit of CAFÉ, they are assuming that those technologies would not have come about from meeting consumer preferences and competition among manufacturers. There cannot be any dispute that technology forcing leads to higher costs than competition.

 

The CAFÉ program is now dogma and a costly tool to reduce greenhouse gas emissions. It will do nothing to impact climate change but has allowed manufacturers to game the system and increase profitability. This is just another example of the Bootlegger and Baptist theory! It also is strong evidence why there is a need for strong regulatory reform that includes “look back” provisions and a strong role for effective agency oversight by Congress. No major rule such as CAFÉ should go into effect until approved by Congress.