Among the issues most commonly discussed are individuality, the rights of the individual, the limits of legitimate government, morality, history, economics, government policy, science, business, education, health care, energy, and man-made global warming evaluations. My posts are aimed at intelligent and rational individuals, whose comments are very welcome.

"No matter how vast your knowledge or how modest, it is your own mind that has to acquire it." Ayn Rand

"Observe that the 'haves' are those who have freedom, and that it is freedom that the 'have-nots' have not." Ayn Rand

"The virtue involved in helping those one loves is not 'selflessness' or 'sacrifice', but integrity." Ayn Rand

27 December 2014

The Obama Opposition to Pipeline Construction Lowers Our Future Standard of Living

Obama has delayed and opposed the Keystone XL Pipeline section proposed to bring Canadian "oil" from Alberta to Nebraska, where it will be picked up by existing pipelines.  Obama claims that having more oil available in North America is hardly important, since oil is a world market commodity whose price is set in the world market.  He claims that the Keystone XL Pipeline is “not even a nominal benefit for U.S. consumers.”

The Keystone XL pipeline will allow large amounts of Canadian "oil" (really largely bitumen) to reach our many Gulf Coast oil refineries which are expert in refining hard-to-refine oils such as the almost vanishing supply of Venezuela.  The despotic regime there has almost totally destroyed the Venezuelan oil fields and extraction industry.  One of the good results of the Keystone XL Pipeline is to replenish the supply of crude oil for these refineries.  Another is that the pipeline will also pick up oil from the Bakken oil shale formation in North Dakota and Montana.  This in turn might fuel the investment in new oil refineries in Nebraska or nearby states.  It might then give rise to further industrial manufacture of petroleum products in that area of the country.

The Obama administration and those of states with Democrat governors and legislatures are generally negative with respect to the building of other pipelines as well.  For instance, proposed pipelines to serve the gigantic Marcellus Shale Oil and Gas Formation of Pennsylvania, Ohio, West Virginia, Kentucky, and No-Fracking New York have been delayed by government actions.  The result has been that natural gas prices have locally become particularly depressed because the natural gas produced cannot be taken to more lucrative markets in other areas of the US.  This is not optimal market behavior.

While it is true that the price of oil is mostly set by world markets, it is not true that the effects of where oil is found, how it is delivered to refineries, where the refineries are located, and how the refined hydrocarbon products are moved from the refinery to market are insignificant to American consumers or manufacturers.  There are deleterious consequences when government prevents the private sector from optimizing the efficient delivery of petroleum products to American consumers.

Let us consider the product whose price affects all Americans and with which most of us have a considerable experience -- regular gasoline.  If the entire infrastructure I described in the previous paragraph had no effect on the cost of regular gasoline, then after we subtract the sum of the federal and state gasoline taxes from the average cost of a gallon of regular gasoline in each state, the remaining cost would be the same.  Yes, the cost has a component with is related to the cost of the oil, but even that cost has costs of delivery to the refinery built into it.  The cost of operating the refinery is another variable.  Then the cost of transporting the refined product to the market in each state in the US is still another variable.  There are still more retail costs.

So, let us examine how much variation in the cost of the pre-tax regular gasoline there is.  I am using the average state prices from AAA of the early morning hours of 25 December 2014.  The state taxes are those of April 2014 generally.  I have used the rolling month by month tax for Indiana for the month of December 2014.  Upon subtracting the state and federal tax from the current average sale price of gasoline in each state, one finds that the lowest price on delivery for gasoline is in the state of Missouri.  Kansas and Ohio are almost as inexpensive.  Oklahoma produces much oil, has refineries, and has many pipelines, so it is not a surprise that it is the next least expensive.  Kentucky is next, then Alabama, then Texas, Minnesota, Michigan, Iowa, and then Indiana and Illinois.  Texas with its rich supply of oil, its many refineries, and its ports is closely tied to the world markets.  One might expect that it would be the lowest cost state, but the world market activity there may actually pull up the cost to Texas consumers.  Yet, if so, the upward effect of the world market is small since Texas gasoline at the pump is actually only slightly more expensive than in Missouri.  Much bigger effects are found for Hawaii and Alaska, both of which have consumers far from refineries and no pipelines to deliver refined products.

Each extra cent added to the cost of regular gasoline causes $1.4 billion more in the economy to be spent on gasoline and diverted from other uses.  The 2013 US GDP was $16,768.1 billion, so $1.4 billion/$16.768.1 billion = 0.0000835 or 0.00835%.  Each extra dollar in gasoline cost is then equal to a cost to the economy of 0.835% of GDP.  We can now measure the cost of gasoline in each state relative to the cheapest state of Missouri as a fraction of the GDP, if that state were representative of the entire GDP.  In other words, the cost of gasoline effectively shifts the nature of the economy of that state in a manner equivalent to its being a part of an economy with such a change in the growth rate of the GDP each year.  The number in the last column of the table below is the effective percentage by which each state's GDP is lowered relative to that of the lowest cost state of Missouri.

Hawaii and Alaska have such high costs for gasoline delivery that those states have an effective lowering of their GDPs of 1.048% and 1.014%, respectively.  Not surprisingly, Vermont, being a low population density and somewhat remote state, not to mention a very green state, has very expensive gasoline causing a 0.524% reduction in its GDP.  New York is next worst with a 0.441% reduction of GDP.  Some of New York's diminished GDP is due to its opposition to fracking to take advantage of the Marcellus Shale or Utica Shale formation in western New York.  Some is likely due to a reticence to build adequate pipelines or to host oil refineries.  Some is due to the dominance of New York City, which is easily supplied with petroleum products by sea, but still has high costs such as for fuel storage and gas stations due to a very high population density and for an exceedingly high cost government.

Now given the new Obama normal of a real GDP growth rate of about 2% a year and a population increase of about 0.9% a year, we have a dismal real per capita GDP rate of growth of about 1.1% a year.  A generation is traditionally taken to be about 22 years, but with American women waiting much longer to have children, an American generation is now about 31 years.  If a state has among the best-served oil and gasoline product infrastructure and market systems, let us say it is better than the present national average in its effective GDP growth rate by about 0.15%.  Those served more poorly, such as New York State and New England, have growth rates depressed by about 0.15%.

What is the difference for the real per capita standard of living improvement over a generation of 31 years?  The better oil and gasoline market system states have a growth rate of about 1.25% per year, while those with the less well-functioning market systems grow at a rate of about 0.95%, ignoring other factors affecting growth rates.  The better served gasoline markets experience an increased standard of living of 47.0% over a generation, while the more poorly served states would have an increased standard of living of 34.1%.  This difference is not insignificant for people who have children, for people who live 2 to 3 generations long, or simply for people of a benevolent nature.

This is just the effect of gasoline prices as well and does not consider the many other products of oil.  Other products from oil include lubricants, diesel fuel, heating oil, aviation fuel, greases, asphalts, paraffin, and cutting oils.  Resins made from products refined from oil are used to make plastics, paint, sealants, adhesives, and composite materials.  The lowered prices of these products have already had an impact on reviving manufacturing in the USA.

What is more, the same viewpoint that opposes the use of oil, the building of pipelines, the building of refineries, and other facilities and infrastructure that make the petroleum products markets highly efficient, causes many inefficiencies in other industries and commercial endeavors which also lower our standard of living, especially over generations of time.

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