Krugman: A Pig in a Jacket

Paul Krugman takes a look at the administration's sudden support of energy conservation. He starts by recalling Dick Cheney's rejection of energy conservation during the California energy crisis and notes the recent about face by energy secretary Samuel Bodman on this issue:

A Pig in a Jacket, by Paul Krugman, NY Times: ...[T]his week Samuel Bodman, the energy secretary ... declared that "the main thing that U.S. citizens can do is conserve." Is the Bush administration going green? No, not really.

Then why the sudden switch to encourage conservation?

The background to Mr. Bodman's remarks is growing public anger over ... the price of gasoline, but the worst is yet to come: just wait until people see their winter heating bills, especially for natural gas ... the political danger to the administration is obvious: polls suggest that many people blame... administration for failing to control price gouging.

Krugman notes that during the California crisis, hardly anyone would believe prices were manipulated, though later it was confirmed that they were, whereas this time it is widely believed that prices are being manipulated when there is no evidence of that happening:

Now, much of the public believes that corporate evildoers with close ties to the administration are conspiring to drive prices up. But this time they aren't, at least so far.

Paul Krugman defending energy companies? Wow!

Just in case you think I've gone soft on the energy industry, let me say that claims that we're having a crisis because environmentalists wouldn't let oil companies do their job are equally bogus... the current crisis is nobody's fault, except Mother Nature's.

Krugman notes that until recently, energy companies weren't interested in building refineries because there was no expected profit in doing so, not because of environmental regulations. With respect to the current crisis, when the supply of a product like energy falls, we need to find a way to reduce demand from its previous levels. Krugman calls this "demand destruction" and notes it is needed to bring demand in line with the reduced supply. But how is this accomplished?

In the absence of an effective conservation policy, prices will do all the persuading: the cost of fuel will rise until people drive less and turn down their thermostats. The problem, of course, is that high prices will impose serious hardship on many families.

And that hardship could mean political trouble, hence the sudden shift to push conservation. But, says Krugman,

[A]s you might expect, the administration's conservation push lacks conviction.... the administration's attempt to promote "Energy Hog," a cartoon pig in a leather jacket, as a conservation mascot verges on the pathetic. So it's going to be a long, cold winter...

The short-run is looking chilly and expensive. What about the longer run?

The long-term case for energy conservation doesn't have much to do with the current shortages. Instead, it's about national security, broadly defined - reduced dependence on Middle East oil supplies, reduced emission of greenhouse gases.

National security? Those are magic words. Will that get the job done?

No such luck: when it comes to substantive actions, as opposed to public relations, it's still the same old, same old. Mr. Bush has ... said nothing about raising mileage requirements and efficiency standards for appliances. And as for a higher gasoline tax, which would be politically possible only with broad bipartisan backing - don't be silly. Conservation's day will come. But it hasn't happened yet.

Comments

[ilsm]

The price elasticity of gasoline has never been addressed openly in national debate, except possibly by Gore and Kerry in the idea of placing a tax per gallon to depress demand, in the long term that would cause conservation and alternative approaches to satisfy the things that energy soothes.

The Bush loyalists killed that debate in the same manner the Swifties went after Kerry's war record.

In the 80's the oil cartel observed that the industrial world would go alternative energy if they kept up the gouging.

There was a steady decline in real oil prices from mid 80's through late 90's. This caused an end to oil shale and other alternatives.

No one at that time, when supply pricing was to assure demand, realized that the industrial world would fall for it so far and no one wanted to invest in refineries which would be needed if the demand swung.

It swung in 2000. But no one thought refineries.

The Saudi recently quoted in Business Week is correct. The main issue now is refining capacity. The Saudis can in a few years expand crude output by 30% but there is no refining capacity. The answer for several years is; go back to the 70/80's approach to conservation.

Of course, that makes refinery investment a risky idea.

The other day Bush puppetted the Saudi about more refineries.

I say more investment in alternatives. Less money to keep aircraft carriers and troops in the Gulf.

[anne]

What a gem you are, for these commentaries are wonderful even for people who have access to NYTimes Select.

[brad s]

ilsm -- 13 mbd from saudi? interesting. how do you respond to the simmons argument? the nyt mag article quoted a pretty senior saudi oil executive saying something like 12-13 over time but unlike more. that seems consistent with your argument ... care to share any additional details?

[anne]

"Krugman notes that until recently, energy companies weren't interested in building refineries because there was no expected profit in doing so, not because of environmental regulations."

I have a problem with this comment, a big problem. The world is large and there have been all sorts of places for refineries.... Not only have American companies not built refineries, they have done little exploring. A 20 billion dollar subsidy for exploration was included in the energy bill just passed. No; there is something we are missing about the oil industry in America.

[anne]

http://www.nytimes.com/2005/02/18/business/worldbusiness/18refinery.html?ex=1120708800&en=e5a8de6981eb6d16&ei=5070&emc=eta1

February 18, 2005

A Former Gas Station Attendant's Big Bet on a Refinery Has Paid Off
By KEITH BRADSHER

JAMNAGAR, India - The vast refinery and petrochemical complex here is the size of Manhattan south of Central Park. It could have been a costly white elephant.

Instead, the quirky project, which includes the world's largest mango plantation, has become one of the most profitable bets in the global refining industry. The success of the complex shows the changing economics of refining, a business once regarded as an unglamorous backwater by oil executives more interested in finding the next big oil field.

Completed by Reliance Industries of Mumbai in 1999 at a cost of $6 billion, the operation's $7 billion a year in sales equals 4 percent of the entire revenue of India's corporations. It is one of the few refineries in the world that can take very thick high-sulfur highly acidic grades of crude oil and process them into extremely pure, low-polluting gasoline and diesel fuel.

The New York region, with its demanding environmental standards, has become the biggest single destination for shipments from here, said Captain Sunil Pradham, who manages a four-mile-long jetty that stretches into deep water where tankers pick up cargos, four at a time.

Crude oil tankers with deeper drafts unload their cargos even farther offshore, pumping the oil through an undersea pipeline to the refinery.

Rapidly rising energy demand from China and India in the last several years has benefited the refinery in two ways. Saudi Arabia and other oil exporters have stretched their output by producing more thick grades of crude oil with lots of sulfur and other contaminants; they were already pumping better grades of crude at close to full capacity before the surge in Asian demand.

So much low-quality crude has flooded the market that it now sells at a discount of up to several dollars a barrel compared with better grades. That has meant savings for refineries like the one here that can handle poor-quality crude.

At the same time, Asia has run short of refinery capacity, as oil companies failed to foresee the soaring car sales that have driven up the region's demand. That has allowed refineries to charge higher markups for gasoline and other refined products.

Gross pretax profit margins run $10 to $14 a barrel, said P. K. Kapil, the president of the complex here. That is remarkably high by the standards of the refining industry, where margins have often been $1 or $2 a barrel and sometimes disappeared altogether in the 1990's.

The complex here is the creation of Reliance's founder, Dhirubhai Ambani, who died in 2002. As a young man working as a gas station attendant in Yemen in the 1950's, Mr. Ambani dreamed of someday owning his own oil empire, from drilling to refining to marketing....

[anne]

http://www.nytimes.com/2005/05/18/business/18valero.html?ei=5070&en=f1cd6f0774bc520a&ex=1120276800&emc=eta1&pagewanted=all

May 18, 2005

A Fast-Growing Independent Strikes Gold in Oil Refining
By JAD MOUAWAD

SAN ANTONIO - It is impossible not to notice the eight-foot bear in William E. Greehey's office.

The story of how the stuffed grizzly ended up here says as much about Mr. Greehey's hunting trip in British Columbia in 1982 as it does about his attitude as chief executive of Valero Energy: aggressive, risk-prone and endowed with self-confidence -- or, his critics say, an oversize ego.

Those are the same traits that helped him turn Valero from an obscure gas pipeline business into the nation's top independent oil refiner. Valero, based in San Antonio, is leading a pack of refiners that are staking their future on the notion that tight refining capacity, growing demand for gasoline and high profit margins will last.

On the other side of the argument are the major oil companies, which have been selling their refineries in the belief that profits and margins may soon reach a peak in a notably volatile and cyclical business. The debate is being played out as retail gasoline prices are near the highest level in recent years.

''Anybody who has been in this business for a long time knows it has been lousy and they haven't made as much money as in exploration,'' said Malcolm M. Turner, president of Turner, Mason & Company, an industry consultant in Dallas. ''But Greehey has been a bull for five years on refining, and now he's turned into a raging bull.'' ...

[anne]

Why were there no subsidies for building refinery capacity in welcoming countries and for exploration in past years? The market surely was not the answer, and I am not interested in talk now about rasing taxes on gasoline, for this is justly politically intolerable at such a time.

[anne]

I am not impressed by economists, even those I most admire, who should have understood what energy means for the country and who ignored the extent to which energy companies have not been forward looking.