The number of people hitting the road for Memorial Day this year continues to edge up, as gas prices remain stable for the third year in a row. Why don’t travelers have to worry about pain at the pump this year?
The national average retail price for gas leading up to the holiday was $3.67, little changed from last year at this time and lower than the prior two years. Gas prices can be volatile, but the past few years have been in a relatively steady range.
There are a multitude of reasons that gas prices haven’t gone haywire. For one, economic growth has been steady but unspectacular. A deep recession such as the one that began in 2007 will send prices plunging and strong growth means greater demand and higher prices. The best predictor of gas prices is the cost of oil, and though there have been global hotspots over the past few years, there haven’t been many major supply disruptions.
Crude isn’t the only factor in gas prices, of course. Another important input is the refining process. This month more oil moved smoothly through the process in the U.S. than last year, keeping prices lower even as crude prices tick up.
But there’s another long-term trend helping to keep a lid on prices in the U.S. Demand and consumption by cars has been flat or falling. More fuel efficient cars are lowering the amount of energy consumed, according to the U.S. Energy Information Administration. And at the same time, Americans are driving less for a range of reasons, including an older population and lower economic growth and employment.
The hand-wringing over what to do to help Ukraine has had a very positive impact on the U.S. oil and gas industry. Politicians like Sen. Lisa Murkowski (R-AK) are seizing on the crisis to call for a lifting of the ban on U.S. oil exports — the better to counterbalance Russia’s petro-influence. While the Wall Street Journal this morning wrote that western politicians are working on a variety of options to help “loosen Russia’s energy stranglehold on Ukraine” including “larger exports of U.S.-made natural gas.”
Nevermind that the U.S. currently exports no natural gas in the form of LNG because new liquefaction plants won’t be completed until late 2015. The bigger point was made by economist Ed Yardeni in his morning note today: “By invading Crimea, Russian President Vladimir Putin may have succeeded in resolving the debate in the U.S. about whether or not we should export natural gas and crude oil.”
From an efficiency perspective, any ban on exports is a bad thing. While domestic consumers of natural gas benefit from lower domestic prices, those lower prices come at a costs--the hiogher prices domestic producers could receive on the world market. A basic result in the economics of markets is that any restriction on price or quantity will come at a net cost to society. I am not saying that we should remove the export restriction just becaues it benefits domestic producers, but rather, the export restriction causes a loss to domestic producers (and world consumers) that outweighs the benefit to domestic consumers. In other words, the net benefits from natural gas production are lower with the export restriction than without--regardless of who gains and who loses.
If we (in the collective) are happy with accepting a smaller pie because we like the way the pie is divided, then by all means, keep the export restriction. But we need to recognize that it comes at a cost. And by leaving the export restriction in place, we are making a subjective judgement. Personally, I don't like making that judgement for others.
Another in our WWWTF (What in the World Will I ever use This For?) series:
Math Concept: Integration
Having spent multiple hours over the past week helping official oldest daughter of Env-Econ (OODEE) work through calculus problem after calculus problem in preparation for the pending AP exam, I thought it might be helpful to see how she might eventually move past solving math problems to applying the concepts. Right now I'm going to focus on integration, and hopefully later I will come back and talk about differentiation (seems backwards, but integration is fresh in my mind right now). In what follows, I assume a working knowledge of basic integral calculus--otherwise why would you care what you use this for?
As a reminder, a definite integral is defined as:
where f'(x) is the derivative of the function f(x) with respect to the variable x.
Graphically, the integral represents the area under the function y=f'(x) over the closed domain [a,b].
An example might help. Consider the simple linear function f'(x)=6-2X. What is the definite integral of f'(x) over the closed domain [1,3]?
What does this look like graphically?
Notice that for this case of a linear function (a line), the area under the function makes a triangle. A simple way to check your integration is to just find the area of the triangle on the graph.
The area of the triangle is .5(Base x Height) = .5(2 x 4) = 4. This is the same result we got for the intergral. For more complicated functions (non-linear), the area under the function isn't a nice neat geometric shape.
I know what you're thinking: Nice pictures and it's great fun to think about math, but WWWTF? (What in the World Will I ever use This For?). Keep reading for an application to environmental economics.
In Part 1 of our Hotelling's Rule explanation, we laid out the basic economic observation that for a non-renewable, exhaustible resource with completely known stock, no discoveries possible, no alternatives, no recycling, private ownership and constant costs of extraction, the price of the resource will increase at the interest rate over time. Whew, that was a mouthful.
At the end of that post, we observed that real word graphs of prices for some (and this really holds for most) depletable resources seem to look nothing like the ever-increasing Hotelling price path--even over very long periods of time.
As with any good economic model/principle, let's start with a few assumptions to a) motivate the problem, b) set the stage, and c) simplify the explanation to cut off the fat and get to the meat.
Suppose a private owner owns the complete stock of a natural resource.
The complete stock of the resource is fully known and there is no more.
Once some of the stock is withdrawn, the resource withdrawn is used completely with no waste and nothing left over for reuse.
The stock can never regenerate itself.
The cost of withdrawing a unit of the resource is always the same (to make things really simple, we will assume the cost of extraction is $0).
There are no alternatives to the resource.
For those who like to picture what these assumptions mean, think of yourself as being the sole owner of a giant bowl of all of the existing M&M's in the world (and the recipe for M&M's and all other candy has been lost so no more M&M's or other candy exist or will ever be made)*.
Given the 6 assumptions, how would you manage your stock of M&M's? And what affect would that have on the price of M&M's. Read on...
The Bet is Yale University historian Paul Sabin's (no relation to Nick) telling of the story and political culture surrounding Paul Ehrlich and Julian Simon's 1980-1990 $1,000 bet over the Hotelling rule. OK, it wasn't really over the Hotelling rule, but it was about Hotelling-like predictions of changes in depletable resource prices. In particular, the bet focused on the change in prices of five metals (Copper, tin, chromium, nickel and tungsten--I think they made that last one up) over a 10 year period. Whack-job dooms-day ecologist Paul Ehrlich--OK, that's unfair to Ehrlich, he is a butterfly biologist, not an ecologist (is that biased?)--famously predicted throughout the late 1960's and 1970's the coming cataclysmic collapse of the Earth's environmental/ecological systems due to natural limits and exponential population growth.
In short, Ehrlich believed that humans are but one part of the broad ecosystem, and subject to all of the natural laws and limits that come with being part of that system--including species collapse due to exceeding the system's natural carrying capacity. Ehrlich was the loudest voice of the early zero-economic growth movement (and a contemporary of the Club of Rome and Limits to Growth). One observable indicator of Ehrlich's and his colleagues' dire predictions would be the Hotelling-like rise in depletable resource prices over time. As resources become more scarce (reach their natural limits), prices would have to rise. This is a somewhat ironic prediction from Ehrlich given the lack of price rationing in the Limits to Growth-type models of world collapse, but I digress.
Julian Simon, a mild-manned Chicago-trained University of Illinois professor of marketing (who eventually ended up in the University of Maryland School of Business), disagreed with Ehrlich's basic premise that population growth necessarily strained the natural limits of the ecosystem and instead argued that scarcity creates increasing opportunity costs and opportunities for investment, exploration, discovery, innovation and development of subsitute forms of capital. In short, Simon the economist argued that the simple form of Hotelling (prices rise in response to increasing scarcity) was correct, but the extension needs to be accounted for--increasing prices create incentives for the generation/investment/invention of alternative resources. Simon believes that increased in population actually increased general well being, increased the stock of human capital and would ultimately result in the creation of substitute pools of resources (whether natural or man-made). Simon believed that man-made capital would remain substitutable for depleted natural capital and resource prices would fall.
In the end, Simon won the bet and Ehrlich paid off without much fanfare. But in Sabin's view, the bet highlighted a growing set of divides: The academic divide between ecoologists and economists on matters of the environment, the philosophical divide between growthers and zero-growthers, and the political divide between the left and the right over matters of economic management. Sabin does an intriguing job of couching the bet within the heated political environment of the 1970's and 80's tracing the environmental movement through the national political scene from the environmental conservatism of Nixon, to the limited growth/strict conservation advocacy of Carter (not much mention of Ford), to the deregulated free-marketism of Reagan. In the end Sabin draws lessons from both Ehrlich and Simon to make a strong and lucid case for a middle ground between the coercive population reduction arguments of Ehrlich and the free-market environmentalism of Simon.
On a personal note, I found the book particularly useful at providing a different perspective on my own training in environmental economics. Beginning my graduate training in 1991, the year after the bet ended, the foundations of market-based environmental interventions had already been accepted by most economists and much of the mainstream public (to varying degrees of course). "The Bet" provides an interesting, easy-to-read introduction to the muddy politics and social setting that served as a backdrop for the development and relevance of the field of environmental economics. The political and public context provided by "The Bet" has helped to provide me with a much better understanding of how I ended up thinking like I do about environmental issues.
A Colorado measure to impose sales and excise taxes of 25 percent on newly legalized recreational marijuana and earmark the first $40 million in revenue for public schools was approved by voters on Tuesday, Governor John Hickenlooper said.
The move showed a willingness on the part of Colorado voters to tax marijuana for the public benefit even as they roundly defeated a broader tax measure that would have increased state income taxes to raise $1 billion for schools.
Taxing goods with demand that is relatively insenstive to price changes--we call that inelastic demand--as we might expect the demand for marijuana among marijuana users will raise revenue and create a disincentive to smoke marijuana for some (although that disincentive might be small). Taxing income will raise revenue and create a disincentive to work (although that disincentive might be small as well).
"This blog aims to look at more of the microeconomic ideas that can be used toward environmental ends. Bringing to bear a large quantity of external sources and articles, this blog presents a clear vision of what economic environmentalism can be."
Don't believe what they're saying
And allow me a quick moment to gush: ... The env-econ.net blog was more or less a lifeline in that period of my life, as it was one of the few ways I stayed plugged into the env. econ scene. -- Anonymous
... the Environmental Economics blog ... is now the default homepage on my browser (but then again, I guess I am a wonk -- a word I learned on the E.E. blog). That is a very nice service to the profession. -- Anonymous
"... I try and read the blog everyday and have pointed it out to other faculty who have their students read it for class. It is truly one of the best things in the blogosphere." -- Anonymous