Help me vote tomorrow

[Anonymous]

I voted Saturday just as NSR listed.

Flinger, thanks for the insightful commentary.

[Anonymous]

The argument that gas prices will go up in California rests on three assumptions (1) that oil production will decrease in CA as a result of prop 87, (2) that decrease will cause the prices refiners pay for gasoline to increase, (3) and that increase will passed on to consumers.

(1) I heard zero credible arguments for the production will decrease. Oil production is falling in CA in-spite of rising oil and gasoline prices. If you empirically derived the supply curve for CA oil from the production and price data over the last 10 years, you have a downward sloping supply curve. Suppliers are apparently producing more when the price is lower. Clearly, the lower prices were not causing supplier to produce more but claims that supply curve shifts due to price or cost are empirically false. The supply curve is vertical against any reasonable range of price. Additionally, I would challenge anyone who thinks the price will increase to name one project that will receive reduced investment due to prop 87. I’ve made this challenge on other sites and so far no takers.

(2) While all oil is not the same, this argument assumes there is a substitution cost for using non-CA oil. Again, zero evidence presented any where. I’ve seen this assertion over and over again but nobody can back it up. CA produces less than 1% of the world’s oil but we use more than 1% of of the world’s oil so our refineries must already be using foreign oil.

(3) CA has consistently higher gasoline prices than the rest of the nation. Aside from deflating the theory that in-state production lowers gasoline prices, this fact shows that refiners have market power since there is no cost reason why CA gas should cost more. As such, refiners are pricing more reductions in marginal revenue than increases in marginal cost.

At the end of the day, anybody with mean prediction and a confidence interval for this illusory gas price increase due to prop 87 is blowing smoke. This increase could literally be $0.000000001 / gallon.

In fact, fuel costs go down with prop 87 because alternative energy research funded by prop 87 brings new cheaper technology.

[OwnerOfCalifornia]

Jay,

I never suggested that oil production will decrease. Production of existing fields will continue to be constrained by geology and infrastructure. The global price of WTI, or any local CA crudes, has no affect on production at this point.

Your challenge is specious reasoning. I cannot list any projects that will receive reduced investment as a result of prop 87, but you cannot list any projects that won’t receive reduced funding. I am not on the BOD of any major oil companies so I have no idea how they will allocate their production budgets. Furthermore, we don’t know the results yet from prop 87 so oil companies don’t know either.

As to points #2 and #3, I don’t think you read the essay I posted, so I’ll quote from Robert Rapier on The Oil Drum:

Each year, oil companies decide where they will allocate capital based on expected returns for various projects. After the initiative passes, it will be less profitable to extract oil in California. The expected returns for some capital projects in California will decrease. California will get just a bit smaller capital allocation from corporate budgets, which over time will squeeze supplies. Not only will the returns from California be lower, but initiatives such as this are viewed as hostile toward the industry, providing another disincentive for investing capital in California. As investment slows and gasoline capacity fails to keep up with demand, higher prices will result.
Some proponents have declared this scenario unrealistic, because oil and gas prices are set on the global market. For example, in a recent report, ABC news reporter Mark Matthews asked the following question: “But will 87 raise the price of gas?” He then answered the question with “The price of oil is set on a world market, not state by state.” What many people don’t seem to understand is that there isn’t a single price for oil. Oil prices vary greatly in different locations based on a number of factors, as Ana rightly pointed out in her previous essay. Prop 87 will improve the economics for importing oil into California, simply because it will increase the operating costs for California oil producers. So, even though West Texas Intermediate, for example, is set on the world market, the price for crudes produced in California will reflect California’s specific circumstances. And those specific circumstances are set to change with passage of this proposition.

I suggest that the report you showed indicates that while we are not wholly dependent on CA crudes, we still get a large enough chunk (37% in 2005) to affect gasoline prices here. Additionally there is a cost basis for higher gasoline taxes here in CA since we pay some of the highest taxes in the nation when considering the complete gasoline taxation picture. When taxes on 37% of our crude input goes up, that can only make matters worse. For reasons of infrastructure, we cannot simply whisk cheaper crudes from all over the world to compensate and expect to receive it for the spot price of WTI. There is time, infrastructure, tanker royalties, pipeline royalties, etc. that dictate the reasons why we acquire 37% of our crude from in-state. I suppose we could eventaully readjust our fuel portfolio but…that’s will cost money :).

Finally, as this assertion:
In fact, fuel costs go down with prop 87 because alternative energy research funded by prop 87 brings new cheaper technology.

This statement is too vague. There is no guarantee that prop 87 will bring any new technology. Some research efforts succeed, some fail. When one looks at progress in the energy industry, you can see that research has been going on for decades in all sorts of niche sources. Yet we still use ever-increasing amounts of oil in the world. There are no alternatives currently in place, or none of the drawing board, that will make us less dependent on oil. Only conservation will.

[bubba99]

Prop 87 has many really interesting arguments about what will happen after nominal taxes are added for an “oil extract fee”. Most have missed a fundamental issue with crude here in California vs Texas, or UAE. And that is the oil is here. It is cheaper, and it does not need to be transported 1000 or ten thousand miles to get here for refining. Diane Fienstein asked for a GAO investigation in 2005 as to why CA crude was so much less expensive than WestTexas benchmark. To date, no answer but the oil companies have lost a lot of litigation on the issue. (If the oil companies can keep the cost artifically low, they pay less under current royalty agreements. link http://www.mms.gov/ooc/PDFs/cahis.pdf

Our current cost of fuel is not based on price of manufacture, but nominal utility of the product – what the market will bear. Nominal taxes will not effect the marginal utility of gasoline or even close. Their only comments about the higher cost California mixture is that “it is more expensive to produce” even with lower cost California crude. The oil companies do not discuss production costs, only world prices of crude – not impacted by the lower cost California crude even at 106%% of its lower cost. They will not stop producing “California” crude, because it is too profitable.

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