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Part III: Energy markets1
US Primary Energy Consumption2
Real prices3
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1919 1929 1939 1949 1959 1969 1979 1989 1999 2009
Annual Motor Gasoline Retail PriceDollars per gallon
Nominal Price
Forecast
EIA Short-Term Energy Outlook, January 2011
Real Price (Jan 2011 $)
Demand for Fuels
Source: DOE, Annual Energy Outlook 2007
4
Constraints5
Refinery Locations
Large: Over 75,000 B/DSmall: Under 75,000 B/D
Source: EIA and NPRA
6
Refined Product Movements7
1970 (2,072,350, 412 sq. mil)
1990 (3,452,625, 754 sq. mi.)
8
Houston
1970 (273,288, 58 sq. mi.) 1992 (741,368, 170 sq. mi.)
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Las Vegas
Confessions of an environmental criminal10
Car Life Cycles
11
World Auto Use
12
Competing Policies
Antitrust
Preventing “destructive competition”
National security
Environmental protection
13
Antitrust
Standard Oil cases (1892-1911)
Madison Oil case (1937-38) “The advantage of the antitrust laws is that they are sufficiently
vague” – Thurman Arnold
“Mother Hubbard” case (1940s) “shared monopoly” / 300+ companies
Regular FTC, GAO, Congressional, etc. investigations
14
Destructive Competition
NRA & “hot oil”
Minimum pricing laws
Small refiner bias
Restrictions on competition (NJ full service rule)
15
National Security
Energy “independence” through government fuel mandates Synfuels Ethanol & biofuels
Tariffs
Import Restrictions (MOIP 1959-early 1970s) “Mexican Merry-Go-Round”
Price & Allocation controls (1970s)
16
Environmental Protection
The internal combustion engine is the “most serious and dangerous source of air pollution in the Nation today” (1974)
Tightened standards
Fuel composition regulation
Ethanol mandates
I&M programs
17
Emissions Standards
0
2
4
6
8
10
1965 1975 1985 1995 2005
VO
C (g
ram
s/m
ile)
Model Year
Large SUV
Small/Medium SUV
Car
Tier 1 Tier 2NLEPre-Tier 0 Tier 0Pre-
18
Boutique Fuels
19
Ethanol20
“It’s like trying to solve a traffic problem by mandating hovercraft. Except we don’t have hovercraft.” Robert Rapier, The Oil
Drum
Why things are hard to change
Slow capital turnover
Slow fleet turnover
Low population density makes mass transit impracticable
Logistics revolution means more trucks / shipments
The “Amazon Effect” means more retail deliveries
Greater wealth means more VMT
21
Applying the public choice lens
Rational ignorance: Energy policy is hard to understand, voters hear about “energy
independence”, evil energy companies, and miracle cures not market fragmentation, shifts in capital spending, or the costs of the small refiner bias.
Voting rules matter: Seniority + interest overweights power of representatives of
domestic energy interests in Congress and legislatures
Iowa caucuses and ethanol
22
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Dispersed costs, concentrated benefits: Fuel composition mandates, ethanol mandates
Subsidies24
25
Interest group organizing costs matter: Small refiner bias, I&M programs, corn ethanol, renewables
industry
Regulators are people too: ADM contributions of $7.9m from 1989-2006 (#85) + soft
money
Cato estimates each $1 of ADM ethanol earnings costs taxpayers $30
2005 McCain votes against energy bill b/c of ethanol mandate; 2006 declares ethanol “a vital energy source”
Hayek’s Knowledge Problem 26
Energy use decisions made by individuals in response to price signals vs. mandates
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