Reason Magazine - Topics > Oil

Every Man a Jed Clampett

kmw@reason.com (Katherine Mangu-Ward) — Fri, 25 Jul 2008 15:00:00 EDT

It will not escape the notice of astute readers that heavier-than-air flight requires a fair amount of energy. As a consequence, oil takes up a pretty big chunk of most airlines' operating budgets. So alarms should go off when normally oppositional, hyper-competitive airline companies suddenly join forces, urging all of their frequent flyers to write to their representatives in Congress to Stop Oil Speculation Now!

"Twenty years ago," says a letter [PDF] signed by dozens of airline execs and blasted into thousands of frequent flyer inboxes, "21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts."

Sounds bad, right? "A barrel of oil may trade 20-plus times before it is delivered and used," the airline execs warn. Greedy speculators manipulating oil prices just by pushing paper around? Just who are these speculators, callously driving up oil prices and "hurting our families"? Well, for starters, the airlines themselves.

For years, the stunning success of Southwest Airlines has been a staple feature story on the business pages of major newspapers. In an era of rising prices and busted planes, Southwest seems to float above the fray. Even as the bottom lines of their airborne brethren fall ever lower—other airlines reported a collective $6 billion loss this quarter—Southwest is reporting its 69^thconsecutive profitable quarter. Tickets are still pretty cheap, and there are no new surcharges for checked bags, something the company has been making much of in its ads.

Southwest itself credits its profitability to savvy, forward-looking commodoties hedging to compensate for higher fuel prices. In fact, the company has saved about $3.5 billion with hedging since 1998, a figure equal to 83 percent of its profits over that time. Hedging means that a company locks in a price for oil at a fixed date in the future by signing a contract today promising to buy the oil at that price, no matter what happens to the market in the interim. If prices go up, Southwest speculators get to buy below-market rates. If prices go down, they have to pay more than their competitors for the same oil.

"When oil got to $40 a barrel, we thought, 'Oh, wow! It's too late.' Then it went to $60, and to $80, and then to where we are now," Southwest Treasurer Scott Topping told USA Today this week. Topping is in charge of Southwest's hedging operations. "At each step along the way, the question 'Is this something we should continue to do?' became more and more difficult to answer. But our overall philosophy led us to keep buying hedges. It's a matter of discipline." Southwest has hedged so well that the company paid about $2.35 a gallon for jet fuel this quarter. Those with less speculative skill would have had to cough up $3.95 for the same gallon on the spot market.

Southwest, which also signed the Stop Oil Speculation spam, isn't the only airline to hedge on the price of oil−they all do, just not nearly as successfully. Apparently, when airlines buy oil futures on a bet that the prices will eventually go up, it's good business practice, but when people who don't happen to be the treasurers of airlines do the same thing, it's "rampant speculation" that "upsets the natural relationship between supply and demand."

And then there's that other greedy speculator: You. Anyone with a 401(k) or some kind of retirement benefit coming to them probably has a portfolio containing commodities futures, which are increasingly appealing as the dollar falls and the real estate market continues to reel. Or perhaps you own a bit of Southwest stock, which has a pleasing price these days. Futures contracts exist for all kinds of commodities, and the logic is always the same. It's similar to buying stock, or even buying a house. You're hoping to make a smarter bet than the other guy on which way the prices are going to go. It's how markets work. If there were no "speculators," you'd have no 401(k) and airlines would have to change prices every time Hugo Chavez managed to get ahold of a microphone.

The main concern about speculation, and the reason that the trading of many commodities (like onions, for instance) is regulated, is fear that one company might corner the market. Historically, most efforts to corner markets fail, so the danger of prices skyrocketing after a successful attempt is minimal to begin with. But the fear of futures contracts, or speculation, is even more absurd when the commodity is oil. The energy markets are international and incredibly dynamic. Congress can't really prevent people from speculating on commodities in London or Dubai, no matter how much it would like to, so speculation will carry on, affecting the prices Americans pay for oil, whether or not the bet is placed on our shores. A bill that looks a lot like the airlines' list of demands is currently stalled in the Senate, but it came close to passing earlier this week.

It's possible that no amount of speculation will make much of a dent in the price of oil, at least compared with the ever-growing demand for oil from India and China. In their letter, the airlines claimed that "current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs." But on Wednesday, a task force from the Commodity Futures Trading Commission found that "preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices."

And last month in The New York Post, reason contributor Alan Reynolds pointed out that since oil hit $100 a barrel, the number of speculators betting that the price will drop has increased dramatically. There are nearly as many traders who now think oil prices will fall as there are who think the price will rise. If prices keep going up, these guys are screwed. They're rooting for prices to go down, just like the rest of us, albeit for different reasons.

Frequent flyers are used to receiving all manner of useless promotional emails. "Fly to Siberia via Cincinnati and Rotterdam for only $363 one way!" The only difference is that the Stop Oil Speculation Now! email is worth little more than a stroke of the delete key. Compared to that, a trip to Siberia might actually be fun.

Katherine Mangu-Ward is an associate editor of reason.

The Indicators of Success in Iraq?

mriggs@reason.com (Mike Riggs) — Tue, 01 Jul 2008 11:14:00 EDT

The Associated Press reported today that gas lines in Iraq are as long as two miles, but how could that be the case in a country that is on the cusp of signing oil contracts with potential revenues close to $100 billion? Irony of ironies, the very same "liberation" that freed Iraq's oil market also destabilized the country to the point that it can't even use its own resources:

[S]ectarian strife, rampant corruption, lack of adequate refineries and inefficient government institutions limit the positive impact that increased public revenues could have on average Iraqi citizens like Habib Hadi, who queued up for gas at 4 a.m. Tuesday.
After waiting more than four hours, he said he finally edged close to the gas station and "saw a catastrophe."
"The gas pump was not working because of the lack of electricity," Hadi said.

This bewildering anecdote follows yesterday's news that the no-bid contracts Iraq offered to Exxon Mobil, Shell, Total, BP, and Chevron are "under negotiation" until god knows when; not that it matters one way or another to the Iraqis waiting in gas lines. With no infrastructure to refine crude, they might as well be pumping chocolate pudding.

Only Half a Billion

jsullum@reason.com (Jacob Sullum) — Wed, 25 Jun 2008 18:13:00 EDT

Today the U.S. Supreme Court cut a punitive damage award against Exxon for the 1989 Prince William Sound oil spill from $2.5 billion to $500 million. The original award, which had already been reduced by the appeals court, was $5 billion, 10 times the corresponding compensatory damages. In the majority opinion, Justice David Souter (joined by Roberts, Scalia, Kennedy, and Thomas) concludes that a 1-to-1 ratio of punitive to compensatory damages is an appropriate limit in cases like this one, involving the application of maritime law.

That question is different from the constitutional issue addressed by the Court in other cases dealing with punitive damages. In those cases, the Court has ruled that excessively high punitive damages violate the Due Process Clause, and it has indicated that multiples in the double digits are inherently suspect. In this case, by contrast, the Court sought to further the goals of maritime law by reining in "outlier punitive damages awards," thereby making judgments more consistent. The unpredictability of high punitive awards "is in tension with the function of the awards as punitive," says Souter, "because of the implication of unfairness that an eccentrically high punitive verdict carries." Since "most accounts show that the median ratio of punitive to compensatory awards remains less than 1:1," he says, that's a sensible upper limit.

Picking a ratio is inherently arbitrary, but less so than the highly variable judgments rendered by unconstrained judges and juries. "The real problem," Souter says, "is the stark unpredictability of punitive awards." He cites data indicating wide variability and "anecdotal evidence" suggesting that it is not justified by differences in the underlying facts. Maybe so, Justice John Paul Stevens says in his dissent, but this is a problem for Congress to fix. "While maritime law 'is judge-made law to a great extent,'" he writes, "it is also statutory law to a great extent; indeed, '[m]aritime tort law is now dominated by federal statute.'"

I tend to agree that legislation is a more appropriate response to the problems raised by arbitrary, unpredictable punitive awards, and many state legislatures already have imposed limits on punitive damages in the form of ratios or monetary caps. I'd prefer to see states and the federal government abolish punitive damages altogether, keeping civil lawsuits focused on compensation and imposing punishment for especially egregious conduct under criminal law. (Many of the people who said Exxon should pay billions in punitive damages conflated these two goals, arguing that victims of the Exxon Valdez spill were never adequately compensated, which is a separate issue.) But if we must have a parallel system of punishment, it's better to have one with statutory standards like those that govern criminal penalties.

I discussed the Exxon Valdez case in a column last fall.

The Return of Stagflation?

schapman@tribune.com (Steve Chapman) — Thu, 12 Jun 2008 07:00:00 EDT

If you're at a party and the subject of the economy comes up, it's easy to sound like you know what you're talking about: Just drop the phrase "the return of stagflation"—a phenomenon not seen, and not missed, since the 1970s and early 1980s. With unemployment and gas prices climbing, you're not likely to get an argument.

Even Ben Bernanke is paying heed to that concern. This week, the Fed chairman pledged that "we will not countenance building inflationary expectations."

That wasn't universally reassuring. His comment added to worries that, having let inflation emerge, the Fed will now take steps that are a) too late to head it off but b) just in time to squeeze any remaining life out of the economy. So we'll be left with the dismal worst of both worlds.

Given negligible recent growth, the economy can already be described as stagnant. But as with a ham-and-cheese sandwich, one ingredient is not enough. To get stagflation, you also need inflation. And contrary to popular impression, that has yet to show itself.

For months now, Bernanke and Co. have been trying to stimulate lending by cutting interest rates. In normal times, that can be inflationary. But these are not normal times.

Because of the mortgage crisis, banks are inclined to cut back on loans, which means a shrinkage of the money supply. To counter that contractionary effect and try to avert a recession, the Fed had to use expansionary tools. If it's got the balance right, the result will be that inflation won't rise or fall but stay the same.

Critics insist that the Fed has surrendered on inflation, pumping money out in a desperate attempt to prevent a full-fledged downturn. Exhibit A in the charge is the weakness of the dollar. Bernanke's detractors say he's let the greenback sink, which in turn has pushed up the price of oil and doomed us to the sort of inflation we haven't seen in a long time.

But the theory and the evidence find themselves at odds. The dollar has actually been stable over the last three months, both against the Euro and against other currencies. Three months ago, however, the price of oil was below $100, and lately, it's been above $130. A dollar that's not declining can't explain why oil prices are rising.

If the dollar were steadily losing value, another commodity should also be soaring in price—namely gold, the traditional haven for the inflation-wary. In fact, gold, which came within sight of $1,000 per ounce back in March, has been trading well below $900.

Nor has inflation spread across the rest of the economy. The core rate, which excludes food and energy, has been eerily consistent for a long time. In April, the annual core inflation rate was 2.3 percent higher than a year before. In April 2007, it was up 2.4 percent. In April 2006, 2.3 percent. A year before that, 2.2 percent. Whatever the Fed was doing right before, it seems to be doing still.

It may seem absurd to omit two hugely important categories like food and energy. The reason for leaving them out is that they are notoriously unpredictable and can suddenly climb or plunge for reasons having nothing to do with how much money is in circulation.

You can get high energy or food prices even when inflation is in check. But you can't get high prices everywhere else unless the Fed is pumping too much money into the economy for an extended period of time.

Rising costs at the pump and the grocery are a major problem. But the problem is not inflation. It's that worldwide demand for some key commodities has risen faster than supply. Unlike inflation, which tends to feed on itself, supply and demand changes tend to be self-correcting.

That's why it makes sense for Bernanke not to get too wrought up about $4 gas. The Fed's job is not to maintain price stability in any specific good or service, which no central bank can hope to do. It's to maintain general price stability—preferably while keeping the economy growing at a healthy pace.

So far, the Fed has managed to keep inflation in check, and it's done so without strangling the economy. These may not be the days of wine and roses, but the 1970s never had it so good.

Steve Chapman blogs daily at newsblogs.chicagotribune.com/steve_chapman

Oil Prices and Economic Reality

schapman@tribune.com (Steve Chapman) — Thu, 29 May 2008 07:00:00 EDT

Right now, energy consumers can only envy the Greek King Sisyphus. He was condemned by the gods to spend his life pushing a boulder up a hill, only to see it roll back down again. Motorists and other fuel users seem condemned to push uphill forever, with never a downward respite.

In the past year, world crude oil prices have risen like a bottle rocket. In the last year, they have doubled. Since February, they have gone from less than $90 a barrel to $135 a barrel—a level that was almost unimaginable at one time, like three months ago.

And some experts say that someday, we'll look back fondly to the days of $4-a-gallon gasoline. Famed oilman Boone Pickens is betting oil prices will reach $150 a barrel. Goldman Sachs analyst Arjun Murti, one of the few to anticipate the recent price surge, says they could reach $200. That would mean pump prices of $6 a gallon.

All this is the result, we are told, of a devilish convergence of forces: tight supplies, geopolitical uncertainty and booming demand in countries like China and India. Since none of these is likely to change, the upward trajectory of prices won't either.

At the risk of ending up on Pollyanna's Christmas card list, allow me to differ. Oil prices are unpredictable, particularly in the immediate future, and it's easy to think of events that could force them higher—like, say, a war between the United States and Iran. But in the long run, there is every reason to think that the steep, rocky ascent we have been on will give way to a welcome downhill path.

I'm not alone in my optimism. Michael Lynch, head of an energy consulting firm in Massachusetts, told the Associated Press the current price of gasoline "is the peak or very close to it." Analysts at the investment bank Lehman Brothers say we are just as likely to see oil at $80 a barrel as at $200.

It's easy to take a trend line as eternal fate. The oil market may look particularly inflexible, given the finite nature of fossil fuel deposits and the insatiable needs of growing economies. But two important things in the oil market can change. One is demand. The other is supply.

Demand here is already in full retreat. People are abandoning SUVs for hybrids, taking mass transit and even venturing out on foot. "The average American motorist is driving substantially fewer miles for the first time in 26 years," reported USA Today recently. "Miles driven in February declined 1.9 percent from February 2006 before rebounding slightly for a 0.3 percent year-over-year gain in March." And that was before gas got to $4 per gallon.

Americans are not the only influence on oil demand, but they're the biggest one. We consume a quarter of the world's annual supply—three times more than China and eight times more than India. So if our consumption starts falling and keeps falling, the petroleum sector will quickly feel the effects.

The common assumption is that oil use in China and India will soar no matter what. But even on the other side of the planet, demand is inversely related to price. Pump prices have risen in China, and if American motorists are cutting back on travel, you can bet that Chinese drivers are doing the same.

The supply of oil is also related to the amount it sells for. It's not getting easier to find new reserves, but at $130 a barrel, a lot of companies are going to be looking really, really hard. They will also be reevaluating fields that couldn't be profitably tapped at $60 a barrel. The federal Energy Information Administration projects that U.S. production will rise 24 percent in the next decade.

The same factors should boost output abroad. OPEC members will face far more temptation to cheat on their production limits. "This year will be a year in which supply will be put into the market by stealth by OPEC countries and countries we call black-hole countries" such as China, Lehman Brothers energy economist Edward Morse told The New York Times.

Back in the 1970s, everyone thought the world was running out of petroleum. But spurred by huge price increases, production rose even as demand was falling. Before long, the world was awash in cheap oil.

Don't be surprised if it happens again.

COPYRIGHT 2008 CREATORS SYNDICATE, INC.

I'm Not Going to Pay a Lot for That Gasoline

jsullum@reason.com (Jacob Sullum) — Thu, 20 Mar 2008 13:21:00 EDT

Suppose you pull into a gas station and notice that the price for a gallon of regular unleaded seems awfully high—more than $4, compared to the $3.30 or so you're used to paying. If you're in a hurry, you might decide to pay the premium. If you have a couple minutes to spare, you might go to the station down the street where prices are lower. In Indiana, you would have a third option: Buy the gas and call the attorney general:

Three Hendricks County gas stations agreed to refund customers after Attorney General Steve Carter's inquiries about excessive pricing last week.
A Speedway and two Marathon gas stations on U.S. 36 set prices at $4.09 a gallon for regular unleaded gasoline for a period of time last Friday, sparking complaints to the attorney general's office. The stations agreed to provide customers with refunds of the difference between the market price at the time and the higher price—70 cents a gallon.
"These prices stuck out like a sore thumb and were clearly excessive in the marketplace," Carter said. "Our inquiry into the matter has resulted in an outcome favorable to customers."

"The system has worked," Carter added. "The attorney general's office is regularly monitoring gasoline pricing and the market pricing to ensure a quick investigation and review of excessive pricing reports. The stations involved have cooperated with our inquiry and recognize the need to provide customer refunds."

How does Indiana's gasoline czar know a station is guilty of "excessive pricing"? When its competitors are charging less. Possibly Indiana motorists, even without a crack staff of taxpayer-funded investigators, are also capable of gathering this information. They could, say, consult those gas station signs with the prices displayed in big numbers. If that takes too much effort, here's a website where they can do gas price comparisons without even leaving home.

I don't quite understand where Carter gets the legal authority to dictate gasoline prices. His website explains the circumstances in which consumers should file an "incident report":

In 2002, the Indiana legislature adopted a law making it illegal to engage in excessive pricing during a state of emergency. The law is designed to prevent retailers from profiting at the expense of consumers should any emergency, like the September 11 tragedy, ever occur again. This law is triggered when the governor declares a state of emergency; the law can only be used while the state of emergency is in place and where there are insufficient cost factors to justify the increase. There is no specific percentage of price increase that is prohibited by the law. The law prohibits any price increase that "grossly exceeds" the price at which the gasoline was available before the emergency was declared.

Is Indiana under a perpetual state of emergency?

[Thanks to Nicolas Martin for the tip.]

Oil Prices: Must They Go Up Because Charlie Gibson Says So?

bdoherty@reason.com (Brian Doherty) — Wed, 09 Jan 2008 19:18:00 EST

Charlie Gibson stated at Saturday's GOP candidate debate that "intellectual honesty" required admitting oil prices can only go up. Cato's Jerry Taylor thinks the evidence suggests that those with most to gain or lose from accurately predicting oil price fluctuations seem to think the opposite:

Oil prices might indeed be on a rocket ship upwards for as far as the eye can see, but market actors don’t think so. At the New York Mercantile Exchange, oil for delivery from next month through December 2016 is showing a downward price trend. In short, the people with the most money on the line - who will live and die (economically speaking) by these assessments - aren’t buying Gibson’s assertion about the future.
More evidence can be found the behavior of oil inventory holders. At present, oil inventories are being released to the market –hardly what one would expect if inventory holders thought that oil prices will continue their long march upward.

Ron Bailey from our May 2006 issue on the "peak oil crisis."

Peak Oil Again?

rbailey@reason.com (Ronald Bailey) — Tue, 06 Nov 2007 14:29:00 EST

Crude oil prices hover between $90 and $100 per barrel and U.S. gasoline prices are again north of $3 per gallon. Since 2002, the price of a barrel of oil has risen more than four-fold. Are we running out of oil? A new report by the German think tank Energy Watch Group (EWG) says so. The EWG report argues that the world reached the peak of oil production last year and supplies will fall from about 81 million per day now to just 39 million by 2030. "The world is at the beginning of a structural change of its economic system. This change will be triggered by declining fossil fuel supplies and will influence almost all aspects of our daily life," declared EWG founder Joerg Schindler. This fast onset of oil supply shortfalls, warns the EWG report, could trigger the "meltdown of society."

At the heart of the EWG analysis is its drastic downward revision of estimated world oil reserves. The Oil & Gas Journal estimates that world oil reserves are 1.3 trillion barrels and BP offers an estimate of 1.2 trillion barrels. By including unconventional sources of oil, Cambridge Energy Research Associates (CERA) triples reserves to 3.7 trillion. The EWG derives its figures by joining other peak oil proponents skeptical of Middle Eastern reserve claims. Like other oil peakists, they believe that Middle Eastern governments are lying about how much oil they have in the ground and, as a result, slash over 300 billion barrels from their total, calculating world reserves at only 854 billion barrels.

First, a bit of perspective. Daniel Yergin, chairman of CERA, noted that this is the fifth time the world is said to be running out of oil. "Each time—whether it was the 'gasoline famine' at the end of World War I or the 'permanent shortage' of the 1970s—technology and the opening of new frontier areas has banished the specter of decline," asserted Yergin. "There's no reason to think technology is finished this time."

Higher prices do generally mean that supplies are becoming relatively scarcer. So what is causing today's scarcity? Most people have forgotten that by the mid-1990s, the price of oil dropped to around $10 per barrel. Why? Because the world was awash in oil relative to demand. The oil crisis of the 1970s provoked so much field development that there was a 25 percent excess capacity. Low prices also meant that there was very little incentive to invest in projects to increase supply. For example, when oil prices collapsed in the 1980s, the number of exploratory drilling rigs in the United States fell from 4500 to under 1000.

At the beginning of the 21^st century, economic growth in India and China surged after they finally managed to shrug off the shackles of socialist planning. Strong world economic growth soaked up the excess production capacity, which has now fallen to around 2.5 million barrels per day. Generally a cushion of 5 million barrels per day is necessary to keep prices low. Most of the excess capacity is in Saudi Arabia. The world currently consumes about 86 million barrels per day.

Fearing that the U.S. economy was about to slow down, the Organization of Petroleum Exporting Countries (OPEC) cut exports by 500,000 barrels per day in early 2007. Now afraid that higher oil prices will provoke a world economic recession and reduce the demand for their product, OPEC has opened the spigots by 500,000 barrels in November.

The rise of resource nationalism is also bedeviling oil supplies. Some 77 percent of world reserves are owned by governments—and they are trying to extract as much revenue as possible from them. The result, according to an October 31st report by the investment firm Goldman Sachs, is that greedy governments are killing incentives to bring new supplies to market.

"West Africa, Russia, the UK, Canada, and various Latin American countries have pursued very aggressive tax regimes on oil production profits, with Venezuela even shifting to the extreme of the nationalization of its assets," notes Goldman Sachs analsysts. "These policies substantially increase the costs of production and the price of oil required to incentivize investment. Over the past few weeks, Canada, Nigeria, and Kazakhstan have all suggested higher government royalties on production." For example, the Washington Post reported that above certain thresholds, Russian taxes siphon off $19.15 of a $20 a barrel price increase.

In addition, the International Energy Agency (IEA), the energy watchdog which was established by the developed countries during the 1970s oil crisis, finds that government oil companies are failing to invest enough to keep oil supplies flowing. Claude Mandil, head of the IEA warned last year that his agency's World Energy Outlook 2006 report "identifies under-investment in new energy supply as a real risk." In other words, the world could experience an even worse oil supply crunch because of the economic incompetence of governments in places like Venezuela, Iran, Mexico, and Nigeria.

Interestingly, despite a four-fold increase in the price of oil, world economic growth has been pretty robust. For example, the U.S. economy grew at 3.9 percent rate last quarter and inflation and unemployment remain low. Why? In September 2007 paper entitled, "Who's Afraid of a Big Bad Oil Shock," Yale University economist William Nordhaus speculates that the reaction of consumers and businesses to steep oil price increases is muted because they regard them as temporary. In addition, the cost of energy is less important to the budgets of businesses and consumers.

In 1980, when oil reached $101.70 per barrel in real terms, spending on gasoline was 4.5 percent of GDP, 7.2 percent of consumer expenditures, and 6.2 percent of personal disposable income, according to a March 2005 report by Goldman Sachs. If oil prices reach $105 per barrel, the report noted that gasoline spending would reach 3.6 percent of forecasted GDP, 5.3 percent of consumer expenditures, and 5.0 percent of personal disposable income. Prices would have to rise to $135 per barrel to equal 1970s levels. In addition, it takes only half as much energy to produce a dollar of GDP today than it did in 1980.

Instead of the "meldown of society," a likely and painful scenario is that greedy and incompetent government oil producers will continue to under-invest, causing a shortfall in supplies that will drive up prices and provoke a global economic slowdown. Expensive oil also encourages consumers and businesses to invest in energy efficiency that will combine with the slowdown to cut demand. Reduced demand will drive down oil prices as steeply as they rose. Some day peak oil production will be reached, but most oil reserve estimates suggest that there are good reasons to doubt that that day is now at hand.

Ronald Bailey is Reason's science correspondent. His most recent book, Liberation Biology: The Scientific and Moral Case for the Biotech Revolution, is available from Prometheus Books.

$23,000-a-Barrel Oil

jsullum@reason.com (Jacob Sullum) — Wed, 31 Oct 2007 06:55:00 EDT

When does oil cost $13,000 a barrel? When you spill it in Prince William Sound. That's how much Exxon paid after one of its tankers ran aground on Bligh Reef near the southern coast of Alaska in 1989, spilling 258,000 barrels of oil.

The company spent more than $3.4 billion on clean-up costs, fines, and compensation payments. Yet in 1994 a federal jury in Anchorage said Exxon should cough up another $5 billion in punitive damages, a number that an appeals court eventually cut in half.

Now the U.S. Supreme Court has agreed to decide whether that punitive damage award, by far the largest ever upheld by an appeals court, is consistent with maritime law. In addition to raising that question, the gargantuan judgment casts doubt on the very concept of punitive damages.

The case was a class action brought on behalf of some 33,000 fishermen and other individuals who argued that they had not been adequately compensated by Exxon's voluntary payments after the accident. The jury put their compensatory damages at $287 million, an award that came to about $20 million after the earlier payments were subtracted. The $5 billion punitive award was 250 times as high.

The legal wrangling that followed the trial focused on whether that eye-popping award was so disproportionate that it violated the constitutional right to due process. The litigation took 13 years, mainly because the Supreme Court was simultaneously issuing rulings that said the Due Process Clause places limits on punitive damages but did not clarify what those limits are.

The U.S. Court of Appeals for the 9th Circuit said Exxon's employment of Joseph Hazelwood, the tanker captain who precipitated the accident by leaving the bridge during a crucial maneuver, was "reckless," since management knew he was "a relapsed alcoholic." Yet the court also emphasized that the damage caused by the crash was not intentional and that Exxon acted quickly to mitigate and repair it.

Finding that the "reprehensibility" of Exxon's conduct was neither low nor high, the 9th Circuit figured a middling ratio of punitive to actual damages was appropriate. Based on a 5-to-1 ratio and a damage estimate of $500 million (almost twice the compensatory award), it calculated that $2.5 billion was an appropriate number.

The Supreme Court has said ratios in the single digits are "more likely to comport with due process." But it also has said that "when compensatory damages are substantial" even a 1-to-1 ratio "can reach the outermost limit of the due process guarantee." Combine this ambiguity with the various possible interpretations of what should count as actual damages, and a court can rationalize just about any number.

Perhaps not surprisingly, the Supreme Court has chosen not to wade once again into this due process thicket. Instead it will consider whether federal maritime law, a form of common law dealing with ships at sea, allows punitive damages in a case like this one and, if so, whether it imposes limits on them.

These questions illustrate the fundamental problem with punitive damages: They're not really damages at all; they're punishments. Like criminal penalties, they're supposed to serve the goals of deterrence and retribution. Exxon argues, pretty plausibly, that the $3.4 billion it already has paid is "more than enough to deter and punish anyone for anything."

Given the impact that the Prince William Sound disaster had on Exxon's reputation as well as its finances, oil companies have a strong incentive to avoid anything like it in the future. As for retribution, it's a tough concept to understand when it's applied not to culpable individuals such as Joseph Hazelwood but to corporations owned by shareholders who are innocent of any wrongdoing.

In any event, Exxon was already punished, paying the U.S. government a criminal fine prescribed by statute. It should not be punished again for the same conduct under rules that allow fines to be pulled out of thin air.

Russia Conquers the North Pole

bdoherty@reason.com (Brian Doherty) — Fri, 03 Aug 2007 14:42:00 EDT

Could this be the basis for a new Cold War? (Thanks, I'll be here all week, remember to tip your waitress....)

From the International Herald Tribune:

A Russian expedition traveled Thursday in a pair of submersibles more than four kilometers under the ice cap and deposited a Russian flag on the seabed at the North Pole, making a symbolic claim to vast fields of oil and natural gas believed to be beneath the sea north of the Arctic Circle.
........
Inside the first of the minisubmarines to reach the sea floor were two members of Russia's lower house of Parliament, one of whom, Artur Chilingarov, had led the expedition to seek evidence reinforcing Russia's claim over the largely uncharted domain.
That claim, which has no current legal standing, rests on a Russian assertion that the seabed under the pole, called the Lomonosov Ridge, is an extension of Russia's continental shelf, and thus is Russian territory.
Russia submitted its claim in 2001 to an international commission, which has thus far ruled that the available data is not sufficient to support it. But Russia has pressed on.

..............
The day's events underscored both Russia's restored sense of confidence and the international competition for access, influence and extraction rights in the far north, which has intensified as oil and gas prices have surged and as trends in global warming have encouraged speculation that the region could become more navigable and accessible.
Five countries - Canada, Denmark, Norway Russia and the United States - have territory in the Arctic Circle and under international convention have rights to economic zones within 320 kilometers, or 200 miles, of their borders.

Cathy Young wondered last month here at reason why Bush isn't tougher on Russian autocrat Vladimir Putin.

UPDATE: And our own Jesse Walker last week blogged this exact same story! Life is long, memory sometimes too short, and I was away from my computer that day.....

Rolling Over Ethanol

bdoherty@reason.com (Brian Doherty) — Thu, 02 Aug 2007 17:33:00 EDT

Following late in the footsteps of some observations about ethanol made in November 2003, May 2006, and June 2007 by reason's own Ron Bailey, Jeff Goodell at Rolling Stone pisses in Archer Daniels Midland's ethanol bowl (though I'm not saying that Ron necessarily agrees with every element of Goodell's indictment). As Goodell sums it up:

Ethanol doesn't burn cleaner than gasoline, nor is it cheaper. Our current ethanol production represents only 3.5 percent of our gasoline consumption -- yet it consumes twenty percent of the entire U.S. corn crop, causing the price of corn to double in the last two years and raising the threat of hunger in the Third World. And the increasing acreage devoted to corn for ethanol means less land for other staple crops, giving farmers in South America an incentive to carve fields out of tropical forests that help to cool the planet and stave off global warming.
So why bother? Because the whole point of corn ethanol is not to solve America's energy crisis, but to generate one of the great political boondoggles of our time. Corn is already the most subsidized crop in America, raking in a total of $51 billion in federal handouts between 1995 and 2005 -- twice as much as wheat subsidies and four times as much as soybeans. Ethanol itself is propped up by hefty subsidies, including a fifty-one-cent-per-gallon tax allowance for refiners. And a study by the International Institute for Sustainable Development found that ethanol subsidies amount to as much as $1.38 per gallon -- about half of ethanol's wholesale market price.

Another Reason to Welcome High Gas Prices

jsullum@reason.com (Jacob Sullum) — Thu, 05 Jul 2007 08:27:00 EDT

In a recent working paper, Washington University economist Charles Courtemanche finds a negative association between gasoline prices and obesity, supporting his hypothesis that paying more at the pump encourages people to walk instead of drive, which leads to weight loss. Courtemanche projects that a $1 increase in the price of gas would reduce the prevalence of obesity in the U.S. by 13 percent, which he says would prevent 15,000 obesity-related deaths and save $16 billion per year. He also estimates that "13% of the rise in obesity in the U.S. between 1979 and 2004 can be attributed to declining real gas prices during the period." He therefore sees a "silver lining" in recent gas price increases, which have "the potential to significantly improve public health," and suggests that gas taxes should be set with an eye toward a slimmer America.

Using data from the Behavioral Risk Factor Surveillance System, Courtemanche finds that gas prices are correlated with self-reported exercise levels. Oddly, though, his measure is all forms of exercise, rather than the walking he posits as the cause of greater calorie expenditure. He suggests that "as people become accustomed to additional walking, physical activity becomes more pleasant for them, and they may increase other types of exercise." It seems at least as plausible that they would cut back on other forms of exercise, reasoning that they are already getting a workout by walking so much. It is also worth noting that Courtemanche's projection of health care savings seems to hinge on the assumption that excess weight per se is responsible for the diseases associated with obesity. Even assuming he's right, the savings amount to just 15 percent of the additional spending on gasoline that he estimates would result from a $1 increase in gas prices.

Maybe higher gas prices do affect how much people weigh. But using that connection as a rationale for raising gas taxes means overriding the preferences of people who would rather drive than walk, even if it means they weigh a bit more than they otherwise would. The same argument could be used to justify high taxes on labor-saving devices such as dishwashers, remote controls, and gas-powered lawnmowers, not to mention TV sets, video games, books, and other products associated with a sedentary lifestyle. Courtemanche takes it for granted that fining people for avoiding exercise, which is what taxing gasoline to encourage walking instead of driving effectively does, is an unobjectionable policy, provided it works. This approach, all too common in treatments of sloth, gluttony, and other "public health" issues, transforms what should be a debate about the value of liberty and the proper function of government into a technocratic discussion about which forms of social engineering are most efficient.

Price Gouging as Public Policy

rbailey@reason.com (Ronald Bailey) — Fri, 15 Jun 2007 12:30:00 EDT

Having failed so far at immigration reform, the Senate turned its hand to energy reform this week. The debate is ongoing, so we won't know what harm, if any, the Senate might end up doing to domestic energy markets until next week. Naturally, Democratic senators are just outraged about how Big Oil is picking the pockets of American commuters by means of high gas pump prices. Congress looks ready to pass and President Bush to sign new corporate average fuel economy (CAFE) standards of 35 miles to the gallon for cars by 2020, up from 27.5 miles per gallon today. It must be a confounding puzzle to our lawmakers that while plenty of high mileage automobiles are available to drivers today, not everybody wants to buy them.

In addition, the Senate wants to require production of 36 billion gallons of ethanol a year by 2022. Using current technologies, that requirement is equivalent to turning the country's entire corn crop into car fuel. And even if producing that quantity of cellulosic ethanol becomes feasible that could mean plowing up 100 million acres of land for fuel each year-an area about the size of California.

Both the Senate and the House have approved legislation that outlaws "unconscionable" gasoline price gouging during presidentially declared energy emergencies. The Federal Trade Commission (FTC) is empowered to investigate complaints of gasoline price gouging. Remember when gasoline prices soared after Hurricane Katrina knocked out 10 percent of U.S. refining capacity? That would have qualified as an emergency under this new legislation. The FTC conducted a post-Katrina investigation into alleged price gouging and found that "the sizes of the post-hurricane price increases were approximately what would be predicted by the standard supply and demand paradigm that presumes a market is performing competitively." In other words, no price gouging.

Ignoring the other Senatorial meddling in energy markets such as imposing appliance, bus idling, lighting and insulation standards, let's focus instead on one aspect of political hypocrisy. Every spring when gas prices begin to rise, analysts consistently offer as part of the explanation the fact that no new oil refineries have been built in the U.S. since the 1970s. Refinery capacity has increased as refiners have added to their existing plants. Part of the problem has been that few people want an oil refinery next door, the notorious not-in-my-backyard (NIMBY) phenomenon. For example, one recent survey reported that nine of ten Americans want more energy self-sufficiency, yet 84 percent are against the building of an oil refinery in their hometown. It took seven years for Arizona Clean Fuels to get a permit to build the first new refinery since 1976. It is supposed to begin operating in 2011.

Complicated environmental permitting laws offer NIMBY opponents lots of opportunities to block refinery construction. So back in 2006, the House of Representatives passed the Refinery Permit Process Schedule Act that aimed to cut refinery construction approval time to just one year. It passed on largely a party line vote in a Republican-majority House with such Democratic luminaries as Nancy Pelosi (Calif.), Steny Hoyer, (Md.) Bart Stupak (Mich.), John Dingell (Mich.), Henry Waxman, (Calif.) and Rahm Emmanuel (Ill.) voting against it. The entire Massachusetts delegation opposed the legislation. A similar bill was killed by a party-line vote plus Sen. Lincoln Chafee (R-R.I.) in the Senate's Environment and Public Works Committee in the months after Hurricane Katrina.

So, when gasoline prices began their annual spring rise this year, analysts trotted out the same old explanations about tight refinery capacity being partly responsible. What did Congress do this time? Did members of Congress try to figure out how they might help expand refinery capacity? No. They passed price gouging legislation. Instead of increasing supplies to keep prices down; they just decided to make it illegal to raise prices. And guess who voted for it in the House? That's right, the same Democrats who opposed streamlining the process for approving new refineries (except Pelosi, who by custom as Speaker does not vote). In addition, the entire Massachusetts delegation supported the price gouging legislation.

But you really have to look to the Senate to find the most flagrant examples of grandstanding on gasoline prices. In the current version of the Senate's energy bill, the only mention of oil refineries involves temporarily exempting small ones from renewable fuel standards. On the other hand, the bill does promote biorefineries (which is playing havoc with food and feed markets). So instead of trying to figure out how to boost gasoline supplies, the Senate evidently wants to subsidize corn farmers and ADM.

Clearly, it won't do for Congress to share any of the blame for tight refining capacity, so it must be somebody else's fault. And, who else can it be? Senate Majority Leader, Harry Reid (D-Nev.) identified the culprits in a speech at the Center for American Progress earlier this week "There is nothing wrong with companies making money," declared Reid. "But there is everything wrong with manipulating energy supplies to keep prices artificially high. There's everything wrong with neglecting to reinvest a fair portion of those record profits in refinery capacity to increase supply." Never mind that environmental regulations and NIMBYism have stymied such investments. And never mind that the FTC has never found that the oil companies or refiners are "manipulating energy supplies."

Reid was joined by Sen. Ron Wyden (D-Ore.) in piling onto those malefactors of great wealth, the oil companies. Wyden's plan? He wants Congress to take tax breaks away from oil companies that do not invest as much as he thinks they should in new refinery capacity and upgrades. Look, for the record, I'm against "tax breaks" for any corporation, including those that manufacture bioethanol, hybrid automobiles, solar panels, or gasoline. Let's just get rid of corporate income taxes altogether, and then the Senators and Representatives won't be able to corruptly bestow legislative largesse on favored industry supporters. That said, it is not at all clear that Wyden's threat to take away oil company profits so that they will have less to invest in refineries makes much sense. And, for what it's worth, the American Petroleum Institute claims that refiners have spent $50 billion over the past decade meeting higher pollution and clean fuel standards.

If the Democratic majority in the Senate was truly sincere about weaning us from foreign oil and making us drive alcohol-fueled hybrid cars, live in more insulated buildings, and use more energy efficient appliances and lighting, they have the power to enact a simple and easy way to do it. They can "gouge" us themselves. That is, Congress can set a high price for carbon emissions on fossil fuels—either through taxes or through a cap-and-trade market—boosting the price of gasoline and electricity so much that Americans would be forced to buy all those wonderful energy efficient products that the Senators think we should want. Why, if Congress gouged us enough, demand for gasoline would fall so much we wouldn't need any new refineries; we could probably even shut some down.

Disclosure: I still own those 50 shares of ExxonMobil.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

Discuss this article online.

Baby Carrots and Twigs

kmw@reason.com (Katherine Mangu-Ward) — Tue, 15 May 2007 12:20:00 EDT

Last week, Sen. Barack Obama (D-Ill.) said something that sounded dangerously like blaming the victim, at least to the soi-disant victims in Motor City: "Here in Detroit, three giants of American industry are hemorrhaging jobs and profits as foreign competitors answer the rising global demand for fuel-efficient cars."

Everyone at the Detroit Economic Club speech was probably already grumpy, what with the recent news of Toyota surpassing GM as the world's biggest seller of cars, and gas (maybe) creeping up toward $4 a gallon. Obama's implication that their current distress was their own fault was met with "stunned silence."

In this depressing 18-months-‘til-election-day, interest-group-courting phase of the campaign, this kind of sass from a candidate is always welcome. And what sounded like a smidge of pro-market sass from a Democrat? Even better.

But what at first seemed to be a sharp thwack from a stick turned out to be mostly prelude for carrots. To soften the blow of stricter requirements fuel efficiency, Obama promised that the federal government would take on some of the "legacy" health care costs weighting down the Big Three. He offered to cover up to $7 billion in costs through 2017 if auto makers invest half of the windfall on new technology to improve fuel efficiency in the cars they manufacture.

What started out sounding like an interesting, tough economic outlook from a Midwestern Democrat turned out to be a bailout for a wheezing industry, paired with an expansion of a set out burdensome regulations.

Chrysler responded by pointing out that the goodies Obama was proffering were baby carrots at best. Cleverly slicing the numbers, a spokesman pointed out that car makers would get $29 per car in benefit support, compared with a current burden of $1,500 per car (Think about that for a minute, by the way. $1,500 of the cost of your car goes to pensions and health care for autoworkers.) As the spokesman told Newsweek: "Twenty-nine dollars is really not a lot of help."

No matter how much of a dent it makes, it's a cash grant to companies to keep them from complaining about stricter regulation of their industry. As Ronald Bailey pointed out last week, "Put nicely, this is a subsidy; put more accurately, it's a taxpayer bailout of failed management."

Oddly, Obama's proposal looks likely to pass long before his presidency could begin. Current requirements for fuel efficiency are cumbersomely mandated in terms of average efficiently for the overall production of each car manufacturer. (Economists consistently find the system wildly inefficient.) Obama proposed expanding fuel economy standards by 4 percent each year, to reach an average fuel efficiency of 35 miles per gallon by 2020. (At the moment, the mandatory fleet-wide average for cars is 27.5 miles per gallon, and 22.2 mpg for SUVs, pickup trucks, and vans.)

But a Senate committee is expected to consider a proposal today to raise mandatory fuel efficiency standards on cars and trucks to levels virtually identical to the Obama proposal.

Despite all the hullabaloo, Obama's proposal is practically conciliatory compared to those of his competitors. Christopher Dodd (D-Conn.) and New Mexico governor Bill Richardson are both pushing for 50 mpg, and John Edwards wants 5 miles per gallon more than Obama, four years sooner.

These varying proposals highlight one of the major problems with fleet-wide mileage standards: they're basically numbers pulled out of a hat. They are, as the reaction to Obama's speech so clearly demonstrated, not necessarily crafted with much industry input and they don't necessarily represent anything other than the set of numbers that sound most plausible given the conditions under which they are proposed. 50 mpg by 2017? 40 mpg by 2016? 35 mpg by 2020? Who knows?

Further evidence that the numbers are chosen semi-randomly from a big red, white, and blue Uncle Sam top hat: The tempest in a teacup over Obama's claim in the Detroit speech that, "while our fuel standards haven't moved from 27.5 miles per gallon in two decades, both China and Japan have surpassed us, with Japanese cars now getting an average of 45 miles to the gallon." The 45 mpg figure is contested, as many bloggers have obsessively discussed. The thrust of the blog squabbling is that policymakers (or at the very least, speechwriters) seem to be googling fuel efficiency figures or pulling them from Pew reports on climate change (a non-authoritative source for auto industry data) to form the basis of their claims about the relative backwardness of the United States.

"For years," said Obama, "while foreign competitors were investing in more fuel-efficient technology for their vehicles, American auto makers were spending their time investing in bigger, faster cars." This is, of course, true. One reason this is true—besides the fact that American like bigger, faster cars—is that fuel efficiency standards have been set by the federal government since 1975. Unsurprisingly, the standards have been slow to change in that time, since changes require bureaucratic action on a politically charged topic with heavy lobbying from industry. Basically, the standards haven't changes in a dogs' years, and so neither has the American fleet. Once they make it up over the fleet standard, manufacturers have little incentive to go above and beyond for the whole fleet. Rising demand for hybrids and other fuel efficient cars is being belatedly met, but fleets continue to feature giant gas guzzlers as well, keeping the average right at the mandatory levels.

Republicans—and Sen. Hillary Clinton (D-N.Y.)—have so far resisted the temptation to play the price is right, though Clinton's campaign says she'll be announcing her magic number in the coming weeks.

"Our goal is not to destroy the industry, but to help bring it into the 21st century," Obama said. "So, if the auto industry is prepared to step up to its responsibilities, we should be prepared to help."

But it's not clear that more help is what the auto industry needs. As the chairman of GM North America, Bob Lutz, recently noted, trying to reduce energy consumption by limiting the characteristics of cars that can be manufactured in the United States is like trying to stop obesity by mandating that all clothes be made only in size small.

Sen. John McCain (R-Ariz.) seems to get this, more or less. When asked what how many miles per gallon he thinks auto makers should be forced to get, he said: "I'm not prepared to name a certain number. I'm hopeful that the marketplace itself and the sale of hybrid cars—the [Toyota] Prius, electric cars—would address this issue in an effective fashion."

Katherine Mangu-Ward ia an associate editor for reason.

Discuss this article online.

What We Believe About Energy

bdoherty@reason.com (Brian Doherty) — Tue, 17 Apr 2007 14:12:00 EDT

From the Manhattan Institute, some "energy myths" that most Americans they polled believe. Some samples, from their press release:

MYTH: Most of our energy comes from oil.
Nearly two thirds of respondents believed this to be the case.
FACT: In reality, 60 percent of our energy comes from non-oil sources.
Growing electricity use accounts for over 85 percent of growth in our energy demand since 1980; this deserves greater focus from policy-makers and media.
MYTH: Saudi Arabia provides more oil to the United States than does any other foreign country. When asked for the largest source of foreign oil, 55 percent guessed Saudi Arabia.
FACT: Canada provides the USA with more foreign oil than any other country.
An erroneous belief in our dependence on Middle Eastern oil leads to an illegitimate fear of having energy used as an economic weapon against us.
.....
MYTH: Our cities are becoming more polluted and our forests are shrinking.
Nearly 84 percent believe cities are increasingly polluted; 67 percent believe logging and development are shrinking our forests.
FACT: Trends suggest that the air in our cities is becoming cleaner and we are
experiencing annual net gains for forest area. Inaccurate assumptions about our environment encourage onerous regulation and limit urban development.

Full report on the poll.

Fill 'Er Up, Terror Free

kmw@reason.com (Katherine Mangu-Ward) — Tue, 06 Feb 2007 05:02:00 EST

Last week saw the unofficial opening of the nation's first Terror-Free Oil filling station, which sells only gas that originates from countries that do not support terrorism and oil companies that do not operate in the Middle East. The existence of the station was billed as a new way for U.S. customers to make a statement about energy policy and corporate behavior with their dollars.

I was chewing on the idea on Thursday afternoon, when I stopped to fill up the tank of my busted 1998 Camry on my way to the Whole Foods in Cambridge, MA. As usual, I drove past the Citgo station to fill up at the Exxon station across the street in my own tiny version of protest about the country of origin of my fuel.

These days, any purchase is fair game for an ideological battle. Since I'm headed to buy cruelty-free chicken weighted down with an entire food philosophy, why not put some thought into the implications of my gas purchase? I usually give Citgo a pass because most of the company's profits wind up on the hands of the Venezuelan government, headed by the socialist, Castro-loving, anti-globalization, and virulently anti-American Hugo Chavez.

The idea is not original. In fact, I'm not even the first person on my block to have the thought. My Boston neighborhood and Citgo have had a surprisingly fraught relationship over the years. A huge illuminated Citgo sign near Fenway Park has long been a Boston landmark, but after Chavez called President Bush "the devil" last September, my city councilor called for the sign to be taken down and replaced with an American flag:

"I'm a Boston guy-born in 1967, the year the Sox won the Pennant. And it used to mean something different to me. But, symbols are powerful things, and right now when I see that Citgo symbol, the only thing it symbolizes for me, is a dictator that means to hurt our economy and hurt our way of life."

And that wasn't the first time the Boston Citgo sign had come under fire as a symbol of energy policy. In 1979, Governor Edward J. King used it to demonstrate his commitment to energy conservation-by turning it off. And then there's the surest sign that a Citgo boycott is the way to go: Commondreams.org, a site whose editorial positions I rarely agree with, is sponsoring a BUY-cott of Citgo to "help fuel a democratic revolution in Venezuela."

Why Exxon? For the most part, Exxon has held firm on the evils of Kyoto and the dubious evidence that proposed interventions will work in response to dubious levels of global warming and earned the enmity of practically every socially-conscious buyer in America. Lately, they're showing signs of having gone soft on the issue. But I like to think that my gas money balances out other, ongoing boycotts of Exxon stations. Anyway, some of my best friends are Alleged Exxon Mobil Whores.

Mostly, though, I like to support companies that are under attack for making "highest profits in the history of the world" Quoth Sen. Hillary Clinton at a recent DNC meeting: "I want to take those profits, and I want to put them into a strategic energy fund." Ridiculous government subsidies and tax breaks aside, Exxon profits shouldn't be the federal government's business and demagoguing about excess profit makes my blood run cold.

I'm far from alone in my (admittedly lackadaisical) efforts to buy ideologically-appropriate gas. If I'd cruised past the Exxon and continued until I reached Omaha, the site of the new Terror-Free oil station, it's good to know that I would have had even more options with which to express my opinions on geopolitics by paying at the pump, not just in a voting booth.

"What we wanted to do we tried to figure the way to stop terrorist financing," says James Baeur, who was part of the early stages of the Terror-Free Oil Initiative. "From what we understand the majority of the financing that goes to terrorism is oil revenues. There are other sources, but nothing compares to oil revenues. Like most of America, we were under the impression that most of the oil we use comes from the Middle East, but our research showed that this was not the case."

Spokesman Joe Kaufman said the project began as outreach: "We were contacting a lot of gas companies, the executives. We couldn't get on the phone with anybody important." The goal was to convince oil executives that they were "hurting America by purchasing crude oil from the Middle East," and, more important, to convince companies who were already using non-Middle East oil to advertise that fact.

After making no headway, the idea of a Terror-Free gas station was born. But finding a supplier wasn't easy.

"The situation is pretty bleak," says Kaufmann. Even the supplier they finally settled on, Sinclair Oil, can't guarantee that they are 100 percent terror-free. Most of the oil they buy is from the United States or Canada, but some is purchased on the New York Mercantile Exchange, which creates bundles of oil from various countries of origin. Kaufman says Sinclair was the best available option.

The group has done almost no publicity for the station. "As soon as the signs went up," Kaufman said, "we started getting calls." At first, they were exited to be featured on every TV station in Omaha, but when someone sent them a clip of a segment from a network in Russia, said Kaufman, they realized they were onto something big.

None of the oil executives who snubbed the Terror-Free Oil initiative's calls have made contact with the group yet. But they have gotten "dozens of calls from investors looking to open more stations." Until those stations open for business, though, I'll have to content myself with skipping Citgo and hitting the Exxon.

Katherine Mangu-Ward is associate editor of reason.

The Costs of CLEAN Energy

bdoherty@reason.com (Brian Doherty) — Mon, 22 Jan 2007 10:11:00 EST

Jerry Taylor and Peter Van Doren at Cato think hard about a key part of the Democrats' "100 Hours" Agenda, H.R. 6, the "Creating Long-Term Energy Alternatives for the Nation Act," or "CLEAN Energy Act." They have a cheer for "a proposed $14 billion cut over ten years in the subsidies going to the petroleum industry," are skeptical about the "conservation resource fee," are for "the elimination of preferential tax treatment afforded intangible domestic drilling expenses" and give examples of even more Congress could have done in targeting various accelerated depreciations that impact the oil industry's tax bill.

The ultimate joker in the CLEAN Energy deck, though, is that:

The Democrats' somewhat dodgy anti-subsidy crusade, however, collapses into ashes with the proposed "Strategic Energy Efficiency and Renewables Reserve" tacked on to the bill. In short, all fiscal gains to the Treasury associated with the above will be handed back out again to corporations like GE, British Petroleum, and you-name-the-industrial-conglomerate engaged in energy efficiency and renewable energy businesses. But the same arguments against handouts to "Big Oil" can be as easily marshaled against handouts to Big or Little Fill-In-the-Blank. And with energy prices this high, there are ample incentives for investors to spend money on oil and gas production, renewable energy, energy conservation, or other energy exotica.

Whole article here.

Political Peak Oil

rbailey@reason.com (Ronald Bailey) — Fri, 05 Jan 2007 06:46:00 EST

Petroleum geologists are pretty sure that there is more than enough oil in the world to meet projected demand for at least the next 25 years. In other words, as I reported in my article “Peak Oil Panic” last year, geologically speaking “peak oil” is at least a generation away.

But the days when you could punch a hole in the ground and up would bubble some crude have now passed. It will take increasing technical savvy and a lot of money to keep oil production up with demand. Fortunately, the International Energy Agency believes that projected demand for oil and gas can be met if producers invest $4.3 trillion and $3.9 trillion (in 2005 dollars) respectively over the next 25 years. The question is that level of investment happening?

That’s were I get worried. The problem arises because 77 percent of the world’s known oil reserves are in the hands of state-owned oil companies. Such “companies” do not respond with alacrity to market signals and so are under-investing in new production technologies and even in maintaining the production facilities that they currently have. I have earlier pointed out that an “oil crisis,” that is, a steep rapid run up in the price of oil may occur at any time due to government incompetence or maliciousness.

Iran: A new study published in the Proceedings of the National Academy of Sciences caught my attention when it projected that Iran’s exports of oil could dry up by 2015. Why? Because, according Johns Hopkins University geographer Roger Stern, “Iran's petroleum sector is unlikelyto attract investment sufficient to maintain oil exports. Maintainingexports would require foreign investment to increase when itappears to be declining.” Basically, Iran’s oil exploration and production facilities are rusting away as the Iranian government spends the current oil windfall to maintain itself in power. The country cannot generate enough investment capital nor develop the expertise it needs to boost oil production without foreign private investment.

Today, Iran produces about 3.7 million barrels a day, about 300,000 barrels below its Organization of Petroleum Exporting Countries (OPEC) quota. Stern somewhat oddly concludes that this oil production death spiral may be behind Iran’s claim that it needs to develop nuclear power. However, as Stern himself points out this claim “strains credulity.” Iran flares off enough natural gas now for it produce four times the electricity that the nuclear plant it is constructing would generate, and much more cheaply too. Stern concludes, “Energy subsidies, hostility to foreigninvestment, and inefficiencies of its state-planned economyunderlie Iran's problem, which has no relation to ‘peak oil.’”

Mexico: Production in Mexico’s largest oil field peaked in 2004 and is slated to decline at about 14 percent per year. Mexico has discovered many other deep water oil fields that could offset the declining production in older fields, but does not have the funding or the expertise to develop them. All Mexican oil and gas resources were nationalized in 1938 and foreign ownership is prohibited by the Mexican constitution.

Last March, the CEO of Petroleos Mexicanos (Pemex) Luis Ramirez Corzo stated that the company needs to invest $20 billion annually for the next 20 years to maintain production. However, Pemex has invested only about half that over the past 5 years. Amazingly, as private oil companies around the world raked in record profits last year, Pemex lost $3.75 billion. Why? The chief reason is that the Mexican government loots the company to finance itself. Only a state-owned oil company can lose money when oil prices have been this high.

Russia: Last year, Russia’s oil production actually exceeded Saudi Arabia’s which is constrained by OPEC production quotas. Ominously the administration of Russian president Vladimir Putin seems bent on renationalizing his country’s oil and gas industry. Between 1999 and 2004, private sector Russian oil production grew 47 percent. In those years, private oil companies made over $41 billion in the net profits and reinvested more than $36 billion in exploration, drilling, and modern technology. At the same time, state-owned companies increased production by 14 percent. Production the largest state-owned company, Rosneft, was basically flat.

As part of the drive to renationalize Russia’s energy industries, the Putin administration ginned up some tax evasion charges against the highly successful private Russian oil giant Yukos and then basically seized it. Now the Putin administration is using ham-fisted bureaucratic maneuvers to seize the assets of foreign owned oil and gas companies. For example, last month, Russia forced a deal in which the state-owned oil and gas company Gazprom paid well below the market price for a majority share of the giant $20 billion Sakhalin-2 oil and gas project which had been built by Shell Oil. In addition, Russia is increasingly using its energy resources as a foreign policy weapon.

However, those days are numbered. Due to under-investment, Russian gas production is already beginning to decline. As a recent report from the Congressional Research Service noted, “Russia’s ability to maintain and expand its capacity to produce and to export energy faces difficulties. Russia’s oil and gas fields are aging. Modern western energy technology has not been fully implemented.” And just where will Russia get the latest technologies for maintaining and boosting production if its government continues to seize private assets? An attorney for jailed Yukos executive Mikhail Khodorkovsky, Robert Amsterdam told the Washington Times, "By putting energy companies in the hands of rival bureaucratic factions in the Kremlin, profit is suppressed, investment is suppressed.”

Venezuela: The U.S. Government Accountability Office (GAO) issued a report in June 2006 that found the Venezuelan oil production dropped from 3.1 million barrels per day to 2.6 million barrels per day since 2001. Again the administration of the leftwing populist Hugo Chavez is starving his country’s oil industry of needed investments to pay for an array of social programs. The GAO report noted, “Venezuela needs willing foreign oil company partners to maintain the country’s current level of oil production.” Venezuela is also making itself unfriendly to outside investors. In 2006, Petroleos de Venezuela SA (PDVSA) seized oil fields run by ENI of Italy and Total of France. Five others were "voluntarily" handed over including ones run by ExxonMobil and Statoil of Norway. In March 2006, Karen Harbart, assistant secretary for policy and international affairs in the U.S. Department of Energy testified before a congressional hearing that Venezuelan “production levels are down [and] current production is increasingly coming from private sector sponsored fields, as state company investment and expertise declines. Private foreign companies have all but frozen new investment due to the uncertainty of the situation.”

Besides the ones mentioned above, the list of corrupt oil producing countries is nearly endless--Nigeria, Chad, Sudan, Angola, Libya--and that’s just in Africa. If an “oil crisis” fails to materialize, it will be because nimble private oil companies will have succeeded in boosting production capacity in enough places around the world that temporarily losing one or two major producers to incompetence or malice won’t matter much. But the sad fact is that the world’s energy security would be a lot greater if more of the world’s oil and gas resources were in the hands of private companies.

Disclosure: Yes, yes, yes. I still own 50 shares of ExxonMobil. And yes, ExxonMobil has been a contributor to the Reason Foundation. So go ahead and take everything I’ve written above with a grain of salt—it doesn’t matter because the reporting is still as true and as accurate as I can make it.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

Is America Over A Barrel?

rbailey@reason.com (Ronald Bailey) — Tue, 08 Aug 2006 09:09:00 EDT

BP's unexpected shutdown of its oil production facilities in Alaska's Prudhoe Bay cuts U.S. domestic production by 400,000 barrels per day. That amounts to about 8 percent of domestic production and about 2.6 percent of daily consumption. The oil fields on the North Slope of Alaska produce a total of about 900,000 barrels of oil per day. Skittish world oil markets reacted by running up the price of oil by $2 to almost $78 per barrel (which is still a far cry from the $100 price achieved after the 1979 Iranian revolution).

The BP shutdown comes at a particularly nervous time for oil traders. Iraqi production has never returned to pre-war levels and is threatened by a potential civil war. According to some reports, Nigerian production has been reduced by almost 700,000 barrels per day by attacks from separatist groups in the Niger delta. Iran threatens to withhold its daily exports of 2.5 million barrels of oil if the United Nations imposes sanctions on it in an effort to halt its nuclear program. The state-owned oil companies in Russia, Venezuela and Mexico are under-investing in their production facilities. Meanwhile, global demand for oil continues to grow, if at a somewhat slacker pace than a year ago. Interestingly, Saudi Arabia announced yesterday that it would boost its production to make up for the shortfall from Prudhoe Bay.

Since there is essentially no excess global oil production capacity, prices rise rapidly in response to any disruption or possible disruption. For example, oil prices rose last week when tropical storm Chris looked like it might spin up into hurricane and shut down oil production in the Gulf of Mexico. As late as 2002, the world enjoyed a production cushion of 6 million barrels per day. Today, excess capacity has fallen to less than 1 million barrels per day. What happened? In the 1990s oil sold for around $10 per barrel, so cash-strapped oil companies effectively ceased to develop current fields or explore for new fields. They are now playing catch-up to try to meet burgeoning demand.

U.S. domestic oil production peaked in the 1970s and wealthier and more environmentally conscious Americans increasingly adopted a not-in-my-backyard attitude toward various plans to boost domestic production. Consequently, the Arctic National Wildlife Refuge (ANWR), sections of the Gulf of Mexico and both the East and West Coasts have been closed for about three decades to oil exploration and production. Estimates of oil reserves in ANWR vary, but a 2004 report by the Energy Information Administration (EIA) offered a mean estimate of 10.4 billion barrels and predicted the field could eventually produce around 1 million barrels per day. Oil production from the North Slope of Alaska peaked at 2 million barrels per day in 1988 and will continue to decline unless ANWR is opened to production.

Last week, the Senate voted to allow the Interior Department to lift a 25-year moratorium on oil and gas drilling on 8.3 million acres in the eastern Gulf of Mexico. This area is about 100 miles from the nearest land and 125 to 310 miles from Florida's beaches. Ironically, while American oil companies are forbidden to drill close to Florida, Cuba has given China's state-owned oil company permission to explore for oil within 50 miles of Florida's coast on Cuba's side of the Florida Strait. In 2005, the U.S. Geological Survey estimated the North Cuba Basin may contain 4.6 billion barrels of oil.

Again, estimates vary, but one EIA report projects that deepwater Gulf oil production could rise from 1 million to 2.2 million barrels per day by 2016. The House of Representatives is considering legislation that would open up oil and gas drilling in areas more than 100 miles from U.S. shores and permit individual states to authorize drilling within 50 miles of their shores. The good environmental news is that the amount of oil spilled in the United States has steeply declined over the past three decades.

Opening up currently closed domestic reserves is not a silver bullet for high oil prices. However, any boost of production here combined with increased production in other areas of the world could eventually ease prices. One econometric model by the consulting group DRI-WEFA suggests that excess production capacity exceeding 5 percent of world demand would result in oil prices falling to around $35 per barrel. The latest report from the International Energy Agency foresees oil prices falling to $35 per barrel by 2010 and rising to around $40 by 2030. The IEA projects that even if future oil production is constrained by underinvestment the price in 2030 should be around $52 per barrel. Higher oil prices naturally inspire thoughts that the world may have finally reached the peak of oil production. However, most analysts do not think so.

To conclude: Oil markets and prices will settle down as soon as: peace comes to Iraq; Iran's ayatollahs halt uranium enrichment; the demands of Nigerian separatists are satisfied; and Venezuela's Hugo Chavez and Russia's Vladimir Putin boost investment in production. In other words, it may be a while.