No Easy Choices on California's Skyrocketing Energy Prices, Expert Says
By Rick Jurgens, Contra Costa Times, Walnut Creek, Calif. -- June 13
As director of the University of California Energy Institute, Severin Borenstein regularly provides in-depth analysis and timely commentary on the state's crisis-prone electricity system and fluctuating gasoline prices.
He is the lead author of a new report that analyzes in detail the likely
impact of various policy responses to the recent run-up in gasoline prices. In a
recent interview, he took a broader view, outlining grim prospects for
California motorists and tough choices that loom for policy makers.
QUESTION: Could you provide some context for looking at recent increases in
fuel prices?
ANSWER: For many years we've had very cheap gasoline. A few years ago
gasoline hit the cheapest it's ever been ... adjusted for inflation. And the
late '90s were a time when people bought gas guzzlers, and more and more people
drove their cars, and fewer and fewer people were using mass transit. So in
essence we were building a society that was increasingly dependent on oil. At
the same time, less and less of that oil was being produced in the U.S. and,
more importantly, more and more of that oil was being produced in politically
unstable areas. So, as a result, we are now ... highly dependent on the oil
coming out of the Middle East.
If we lost the Middle Eastern supply of oil (which makes up) 25 percent of
world oil supplies, prices would skyrocket.
(While) it's hard to say for sure ... my calculation is (that) would add
roughly 60 cents a gallon on the price.
Q: Many people find it difficult to see why prices have risen so sharply.
A: It shouldn't be. If you own a house in the Bay Area, it's worth a lot more
than when you bought it. When you go to sell it, you don't say, 'Well, I bought
it for $300,000, and I've owned it for two years, and a fair return is about 8
percent a year, so I'll sell it for 16 percent more.' You sell it for what the
market will bear.
That is the basic story in the gasoline market. We have this twin problem in
the refining industry in California. We have a real shortage because demand has
been growing, supply has not been growing as quickly, and we are now at the
point where we cannot produce enough gasoline in California to meet the demand
in California. We have this second problem, of what you might think of as an
artificial shortage. Some companies, seeing that situation, will realize that
"given how tight the market is if I don't produce quite as much quantity,
the price will go even higher." And you can think of that as nasty
behavior, but it's also what any business does.
Q: Can regulators stop oil refiners from putting that extra squeeze on?
A: I don't think we can prosecute our way out of the existence of market
power in the gasoline market. I think what we can do is try to formulate
policies that will make the market more competitive by bringing in more firms.
Now, unfortunately, I think that doesn't extend to actually building new
refineries in the state, because I don't think that there is any place in the
state where a company could get permission to build a brand new refinery.
(Instead) what we're going to have to do is make sure that refineries
outside, in the Gulf Coast, or the Caribbean, or elsewhere, face as few barriers
as possible to bringing refined gasoline that meets our standards into the
state.
Q: How much price relief could that provide to California consumers?
A: For the last eight years, we have averaged about 10 cents a gallon above
the rest of the U.S. And that differential is about what it takes to pay for our
cleaner-burning gasoline. Going forward, we're likely to average 20 to 25 cents
more per gallon than the rest of the country. And the reason is, it's not just
going to (reflect) the extra cost of production, it's going to (reflect) the
extra cost of production plus the extra import costs.
You know, this sounds pretty limited but frankly, the solutions we have are
pretty limited. There is a more serious strategy but it is on the demand side,
not on the supply side. On the demand side
Q: That's consumers.
A: Yes. Essentially, we're talking about a longer-run plan to encourage
people to use gasoline more efficiently, and use less of it. (That includes)
higher taxes on gasoline, which ... I think should be offset by lower income
taxes. This makes sense, because if we have to raise revenue for the state, why
not do it by taxing things that we want to discourage people from doing, like
using gasoline, and not things that we want to encourage people to do, like earn
income. So essentially it would shift the tax burden away from income taxes and
towards gasoline taxes.
The other thing we can do to get more directly at the use of large vehicles
would be a gas guzzler tax. (That could be) a tax either on new SUVs or large
fuel-inefficient cars or actually a registration tax that says if you're driving
a car that's rated by the EPA at below x miles per gallon, then we're going to
add an extra tax on it.
We would have to accompany (tax shifts) with a pretty serious plan to change
... what is now (a) barebones mass transit infrastructure, that is year by year
shrinking, into one that is more intensive so that more people can get from
where they are to where they want to go. We're not going to do this with fixed
rail. Fixed rail is incredibly expensive and takes too long to build. But we
could do it extremely rapidly with more buses.
Q: What you're suggesting sounds like a political suicide note for a
candidate in California.
A: It depends on whether you have a politician who can explain to the
population -- and this isn't just California, it's the whole U.S. -- the
seriousness of the road we're going down, (which is) to rely ever increasingly
on a politically incredibly unstable part of the world where we have fostered,
through supporting repressive regimes, incredible anger at the United States.
Look, we have troops right now killing people and being killed in Iraq, and
the reason we're in Iraq and ... we're not in Rwanda, the reason we're not in
whatever the Congo is now called, or Sudan, is because there is oil in Iraq.
Directly, because we want to assure a supply of oil, and indirectly because by
paying for that oil all these years we made Saddam Hussein rich, and we made it
possible for him and many leaders like him to siphon off that wealth and instead
of doing public good to help his people, (use) it to build an arms cache that he
and the people he supported now threaten the United States with.
A leader would have to explain that we've run out of easy options, that this
idea that we can just continue to consume oil at the rate we are ... without any
political ramifications, those days are over.
Q: Aren't other advanced countries in the same position of energy dependence?
A: Even adjusting for the fact that we are a wealthy country, we consume a
disproportionate amount of the oil because we have built a society where we have
become completely dependent on oil. The Europeans have taken a very different
route.
Q: We have a governor now who has shown a remarkable ability to sell some
policies that were considered unsellable to the public. Have you gotten any
indication that this message is something that he has heard or would consider?
A: No. What I've gotten is that he is directing attention towards a hydrogen
economy, which is a fine thing to be doing research on but is not a solution for
the next decade. We need to figure out what to do right now, because the
problems we face are really problems that need a solution much sooner.
(And) democratizing the Middle East, despite what President Bush would like
to think, does not solve this problem. It may help in the terrorism issue,
because spreading that wealth from oil more evenly would certainly reduce some
of the antagonism. But the fact is if Iraq were a democracy and had leaders that
were doing the best for Iraq, what they would be doing would be restricting
their supply of oil in order to keep prices up. They wouldn't be selling us all
we wanted at incredibly low prices unless we were threatening them or
threatening not to protect them.
Q: Wouldn't building up mass transit take as long as a conversion to hydrogen
fuel?
A: Oh, no. We could have the transportation infrastructure by a year from
now. We're talking about buying a bunch of buses here. We are not talking about
building fixed rail (or) digging a new BART system.
Q: Wouldn't expanded regulation be a good idea to prevent abuses by gasoline
refiners?
A: It's extremely difficult in gasoline markets to regulate prices without
causing additional problems. In electricity we had a pretty darn good idea of
the price that a competitive firm owning a certain generating facility would
charge. (Electricity) is a very simple production process, and it's a
non-storable good, so basically the (natural) gas comes in, the electricity goes
out, and you know what that costs.
Gasoline is much, much harder. Refining companies face a constant, extremely
complex optimization problem where they're thinking about all of the inputs,
which aren't just oil, but ... ethanol, and other things, (and) all of the
outputs. Gasoline is only half of the output of a refinery. (Also) they're
constantly having to think about what are prices and demand going to be like in
the future, (and) should we be using our inventories or producing.
For a regulator to step in and start second-guessing them requires a
regulator to solve all of those complex questions. I don't think we have any
regulator who has a shot at getting that right. (And) if the regulator gets it
wrong, and sets the price below the market-clearing price, they cause shortages.
People sit in gas lines.
As a consumer, I would much rather pay an extra 10 or 20 cents a gallon, and
know that I can get the gasoline whenever I want it, then start facing ...
rationing.
Q: How did you come to be an advocate for deregulation of the energy
industry?
A: I worked on airline deregulation in 1978 and 1979 at the Civil Aeronautics
Board. That was a case where government regulation had really gone awry and
where there were big benefits to letting the market work and allowing more
competition. And those have paid off hugely for consumers. I know people
complain about the airline industry, but mostly they complain about the
congestion at the airports. That's a sign of the success of airline
deregulation, the failure of government-run airports to keep up with it. But
fares are cheap.
Markets are very powerful and really can be used to benefit consumers -- our
society's built on that -- but on the other hand markets are not perfect, and
there is a role for government. So, for example, when I was at the Civil
Aeronautics Board, I was one of the people who wrote the ... rule, which says
that if an airline bumps you they can't just tell you to get lost, they have to
actually pay you compensation. I think that's appropriate government regulation.
There is an appropriate level to which the government should intervene in all
markets. Sometimes it's not very much at all, but frankly, I want the government
in there requiring that the canned beans I buy at the store be canned in a
sanitary way. I don't want to have to figure out which brand is the sanitary
brand and which brand is going to make me sick.
I have spent my career ... trying to figure out the right level of government
intervention. I'm ... not somebody who thinks that I have to be religious about
deregulation or regulation.
Q: How do you nurture that sort of balanced, nuanced approach to regulation?
A: I haven't figured it out. I keep hoping to hook up with a politician who
can take these ideas and sell them politically more effectively than I can.
Some of these things may not happen for a long time or maybe ever. Some of
these things I think we're going to have no choice about, and not very far down
the road.
Q: Where do you buy gas?
A: I usually buy it in Orinda where I live, and it costs about average there.
I drive by a lot of stations, and I watch them closely, and occasionally if I'm
in Berkeley near one of the cheap stations when I need gasoline I'll buy it
there. But, you know, saving 5 cents a gallon on gasoline, and I'm usually only
buying 10 gallons, is really not worth driving around town.
Q: What kind of car do you drive?
A: Sometimes I drive a Honda Odyssey and sometimes I drive a Honda Accord.
The Odyssey gets about 23 or 24 miles to the gallon, the Accord gets about 27.
I'm obviously not somebody who is buying cars for their sexiness. I view them
as a practical way of getting from point A to point B with the stuff I need to
carry. The price of gasoline has not been a big dimension of it. Whether it's a
$1.40 or $1.80 just doesn't make a big difference to somebody who's driving
8,000 miles a year in a car that gets 24 miles to a gallon. Maybe the extra 40
cents a gallon is costing me $160 a year. Compared to the depreciation on the
car, the maintenance, insurance, all the other factors, it's just not a lot of
money. A car that gets 20 miles to the gallon at $2 a gallon is costing 10 cents
a mile in gasoline. So most of the cost of driving a car is not the cost of
gasoline. That's why people are actually pretty insensitive to the price of
gasoline.
PROFILE
--Name: Severin Borenstein
--Age: 46
--Titles: Director, University of California Energy Institute and professor
of business administration and public policy at UC's Haas School of Business.
--Location: Berkeley
--Career: Previously taught at the University of Michigan, UC Davis and
Stanford. In 1978-79, staff economist with U.S. Civil Aeronautics Board.
--Education: Degrees in economics include doctorate from the Massachusetts
Institute of Technology and bachelor's from UC Berkeley.
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