Arnold Kling  

Gas Prices, Fuel Efficiency, etc.

Affordable Welfare State... Did Gladwell Libel Economists?...

Lots of blather going around the blogosphere about gas prices and fuel efficiency. Most of it violates Oil Econ 101. Perhaps the most reasonable blog take is by Andrew Samwick.

The aspect of SUVs that does annoy me is that I believe that they impose a safety risk on the rest of us for which the owners bear no cost.

...The mullahs don't care whether they get their money from someone driving an SUV 15 miles or a hybrid 45 miles--it's the same gallon of gasoline. So tax that directly and let cost drive behavior.

On the topic of automobile innovation and fuel economy, I would offer only this: in my opinion, the biggest reason that Detroit has such a stranglehold on auto innovation is the regulatory structure that Washington set up, particularly in response to Ralph Nader. Today, I'll bet that it takes more lawyers than engineers to bring out a new car. Deregulate autombiles, and small, innovative companies will have a chance.

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T.R. Elliott writes:

Can you provide justification for the many comments in this post, in particular the strangehold comment, the lawyers comment, and the Ralph Nader comment. Otherwise I suspect all we are looking at is prejudice, not opinion. See Ophuls for a good distinction between prejudice and opinion, with prejudice backed with no facts. I see no facts to back up these prejudices.

John Thacker writes:

Can you provide justification for the many comments in this post, in particular the strangehold comment, the lawyers comment, and the Ralph Nader comment.

Ralph Nader's Unsafe at any Speed led to a massive increase in car regulation, especially but not only safety regulation. Many of these tests are expensive and have complicated rules. A larger company has a big advantage, both because of years of experience navigating the system, the ability to have full-time lawyers and others devoted to dealing with the government, and the ability to spread out the cost of complying with regulation for a model out among many sales.

Regulation increases the fixed cost for developing a new car model. Once you've complied with a particular model, you don't have to repeat most of the compliance costs. But in order to make money, you have to sell quite a lot of cars in order to break even. This definitely favors large companies that sell large numbers of a model over small companies that would, as startups, sell their new model in small numbers. Selling only a handful of cars of a model is extremely unlikely to be economic. The large companies also can influence regulation in ways to benefit them and hurt potential competitors, in what's known as regulatory capture.

This pattern is repeated across many industries-- heavily regulated industries tend to be controlled by a small number of companies, whether due to pure regulatory capture or merely advantages of scale in dealing with regulation. Lightly regulated industries tend to be very competitive.

Honestly, I believe Professor Kling made an assumption that these facts would be obvious to anyone with a familiarity with economics. Sadly, that familiarity is not common enough.

spencer writes:

I have trouble with your anser on oil imports.

If we import 10% of our oil from Saudia Arabia the ammount we need to reduce consumption is enough so that we eliminate 100% of imports.

But you do not provide enough information for the student to give any other answer.

If you assume that all the demand cut show up as a drop in imports the 10% answer is correct.
So your giving the student an F is poor grading unless you had told the student to explain the answer. Your correct answer depends on an assumption not provided in the question. From the information you give the student the answer could be anywhere from 10% to 90%.

spencer writes:

Why do you say auto companies or not innovative?

Compare the auto of today to the auto of 10 or 20 years ago and you will see a steady stream of
innovations that steadily improve the quality and durability of cars.

The reason we do not have many smalll auto companies is the nature of the industry. It is a large, capital intensive industries with very large economies of scale. The industry has been consolidating for decades because of these economic fundamentals that have nothing to do with government.

Take the case of the last new car company-- the Dolerean. It failed for many reasons. But the basic reason was its inability to find a large enough market and/or survive a cyclical swing in auto sales.

Detroit, and the Japanese as well, built SUVs because that is what the market demanded. And with falling real oil prices it was not an irrational decision. Who knows if real oil prices may not be back to $10 in another 5 years. Do you want to bet the survival of your company on the bet that oil will be $100 or $10 in 5 years?
No. So you offer different models and see where the market leads you. GM and Ford, as well as the Japanese have been building hybrids for several years, but the market was very limited. Now, as oil prices change and the market moves you change your production capacities. If oil prices stay high Detroit will expand their capacity to build small cars and reduce their capacity to build SUVs.

The markets are working. Two or three years ago the market would not have supported a small car company offering a single line of small fuel efficient cars.

I do not see where your problem is.

simon writes:

Let's permit markets to operate and quit complaining about oil prices. We do not need the government to tell us that oil prices are high (we all can make our own decision)... we do not need government to tell companies where they need to innovate (what do lawyers and law makers know about where the 250mpg carbs are hidden) ... we do not need to tell consumers what types of cars they should purchase (let each consumer make their own choice) ...

I am unsure what problem we have ever effectively addressed by second guessing humanity's collective, market coordinated problem solving engine ... I guess one can say that Nixon took care of the oil shortages in the 70s and that China is doing a great job with its shortages ... NOT

T.R Elliott writes:

I'm familiar with economic theories. I'm also familiar with the shortcomings of many economic theories. Economists somehow think they reside in a temple with secrets so profound that only the initiated can possibly comprehend them. Give me a break.

Prove all the blather you gave me about regulations and the large companies blah blah blah. What you've given me are economic talking points. What are the facts. Prove it. Otherwise it's just hot air.

Robert Schwartz writes:

Innovation? For what? If you want to use less gas buy a smaller car. Most of you, for most of your driving, can do just fine with a Honda Civic. Nice Car, inexpensive, 32/38 mpg. Ditch the 12 mpg Suburban and replace it with a 19 mpg TrailBlazer. If you sell the Hummer and buy a Prius, then you have Hollywood street cred. If you sell the Hummer and buy an Avalon, you are still going to use a lot less gas.

No innovations are necessary.

jaimito writes:

Regulation causing monopolization is the real problem in innovation. I think the vehicle field is so regulated that real innovation will come from outside, in the form of vehicles that are no vehicles in the regulatory sense.

monkyboy writes:

Today's market cap for America's 2 remaining automobile makers:

GM - $19 billion
Ford - $ 18 billion

Market cap for Toyota:

$135 billion

The only stranglehold Detroit has these days is on losing money...

T.R. Elliott writes:

Exactly Moneyboy. I drove a BMW 740 for a while. Got rid of it. Poor quality if you ask me. A litany of problems through the years. We have a Dodge Caravan sitting in the driveway for occasional use. Horrific vibrations and warped gas tanks and oozing fluids from the windows. It was a fine car, but nothing to brag about. My wife and I now drive a Toyota Prius and a Honda Insight. Approximately 50mpg and, to date, no problems.

I think auto makers have plenty of room in which to innovate. They're just lazy and regulations make a good set of excuses.

And does anyone really believe that GM has more lawyers than engineers? I highly doubt it.

Don writes:

T.R. Elliott,

What standard of proof would suffice for this 'hot air'? There's tons of well-though-of journal articles on this topic.

Monkyboy: Both GM and Ford are highly leveraged; while the market value of GM's stock is only about $20 billion, the company's assets are worth a hair under $300 billion.


Bud1 writes:

I haven't heard the "Detroit has a strnglehold" theory for a while now. The explosion of new makes and models in the US market over the past 15 years is evidence to this theory being completely absurd. GM and Ford have consistently lost market share because of ever increasing amounts of competitive models. Some are superior, some are inferior, but each one effectively reduces the "Detroit stranglehold" by some margin based on even minimal sales.

Robert Cote writes:

Anyone who thinks the existence of SUVs is a response to market demand doesn't understand the extent to which regulation created the segment. The introduction of Corporate Average Fuel Efficiency (CAFE) standards killed off the station wagon and gave birth to the SUV which is considered a light truck and subject to different rules.

T.R. Elliott writes:

Robert: Please provide us with the references on this station wagon issue.

Here's the problem and caution I have when reading opinions by economists. I'm a physicist and mathematician by training, and have 20 years experience in high tech. I've studied economics, and it is barely a science. Barely predictive, barely explanatory. Yet we get people such as high school economics teachers with a libertarian bent who "prove" or try to argue convincingly on topics such as regulation when in fact their arguments are not backed by (a) facts and (b) theoretical underpinnings. Economics is unsound from a theoretical perspective. This is not a complaint. It's a complex system. But I get tired of lectures from economists that I need to understand Economics 101 in order to counterargue cases such as regulation or otherwise.

I see no proof that CAFE killed the station wagon. Maybe it is true. I'd love to see it. If I remember correctly, station wagons went out of FASHION. The herd didn't like it. Funny thing, economics doesn't accept the idea of herd. That's one of the problems.

Now, I read the article that was referenced in this original post (on tech central station, which I'm pretty sure is a bastion of ideological warped thinking if you ask me, the delusional thinking of Gilder types--who by the way, was highly supportive of my company, QUALCOMM, but I still think him a charlatan).

Back to the article: I agree with the point that CAFE standards probably don't make sense. Tax gasoline. Let the market then decide. Taxing consumption is a great idea. But we didn't. And the problem with the SUVs is that regulations were not sound, they did not extend to take those into account. This will always happen. Regulations are like a patch work. And having politicians make them is always risky. So let's improve politics. Having companies make the choice is also sometimes risky. (Would you like some mercury in that fish dinner?) But you know what? The real world is a patch work. Look at your DNA. Patch work. The inivisible hand does not always produce anything that humans would call optimal, from a moral or many other perspectives. Hence the idea that regulations are always bad, or that the market would produce something "simpler" or better, really is a lot of hot air from my perspective.

Chris Bolts writes:

What's funny about your post, T.R., is that you proclaim that economists don't know jack about economics, but if I were to say that physicists don't know jack about how the universe truly works, you'd call me an idiot, and rightfully so. But I won't think the same of you, because obviously you are light-years ahead of me in education.

However, what perplexes me about your argument is that you somehow feel that government can correct the failures of the market, but individuals cannot? Can you explain why you feel that way, seeing that if individuals deal with one another it almost always will lead to an optimal solution, but when government tries to look out for the interests of almost 200 million people it almost always makes the situation worse?

Mr. Econotarian writes:

I also find the CAFE explanation for the loss of station wagons possible. But I don't think it was linked to the rise of SUVs, which were truly market demand-driven. I remember the first time I rode in one, and I was thinking "Wow, this is cool!"

On the other hand, the station wagon to mini-Van change may be CAFE related.

Another regulation is child car seats, which also drive the purchase of ever larger cars by families. A family with three kids can't travel by Volkswagen bug any more.

Anyway, if one really wants the US to not be dependent on Saudi oil, just nuke the Saudi oilfields with dirty, ground-level detonations. The fallout will keep people away for 50 years. Sure, we'll have $200/barrel oil, and perhaps a revived global jihad, but we won't be "dependent on Saudi oil" any more...

Mr. Econotarian writes:

WaPo article on station wagons:

The U.S. government all but killed family station wagons in the 1970s with its politically inspired, non-science-based corporate average fuel economy (CAFE) rule. CAFE required car companies to sell new-vehicle fleets having an arbitrarily pegged miles-per-gallon standard.

...So, U.S. car companies got into a frenzy of vehicle downsizing that eventually led to the near-death of the station wagon and other big family carriers. The problem was that big families didn't die. They continued, along with their need for vehicles that carry lots of people and stuff.

Chrysler in 1984 exploited one of those CAFE loopholes by introducing a truck-based "minivan," which, because it was regarded as a truck, had a lower CAFE standard than a car. Ford Motor Co. and what was then the American Motors Corp.'s Jeep went several steps further, turning trucks into "sport-utility vehicles" -- family rides that had a higher sex appeal than minivans.

T.R. Elliott writes:

Please don't get me wrong. I didn't say that economists don't know jack about economics. It is economists who are in fact saying that economics is a troubled field. E.g. Death of Economics, Economics as Religion, More Heat than Light, Debunking Economics, Butterfly Economics. My point is that people make statements, based upon their particular ideology, e.g. libertarian, then justify those statements through economic language. But they often prove nothing. They are just mouthing talking points and throwing them together to make sentences that people are fooled into thinking is a coherent argument. It might be. Or might not.

Take CAFE standards and station wagons. What is the proof. Someone said it in the Washington Post. Ok, now I know it's true? Because libertarian think tanks and a writer in the Washington Post said so?

Sorry guys. That ain't a proof. Might be true. Might not. Might be propaganda spread by the auto industry. You just don't know.

As far as wanting the government to make decisions, I think that's a bad idea. But the issue is INFORMED CHOICE. Many times people do not have (a) INFORMATION and (b) CHOICE. In addition, there is something called the common good. Liberatarians are too dense too understand it (at least those on the anarchistic end of the spectrum). But we as a society can choose to have a common good, and let's face it, there never has been and never will be a libertarian society.

That said, I'm all for libertarian goals. I call myself a libertarian with a social net. But I think an argument can be made that the US is in a much worse position because instead of taxing gas years ago we are now instead stuck with an inefficient transportation system and instead have to send $$$ to the Saudis and other oil producers. As energy costs increase, the trade imbalances will get worse.

Keep in mind. Truly efficient and free markets often lead to unnecessary pain, suffering, and death. It's true. No economist can tell you otherwise. That's why governments exist. Because sometimes freemarkets lead down blind alleys. Particularly since markets are often very short-term in their thinking. The futures market is a good example. The futures market tells us nothing. Give me evidence that the futures market is an accurate predictor of the future. The futures market, a year ago, told me that oil would be $28 a barrel now (or so). I didn't believe. I thought oil would be over $60 by this time. I was right. The futures market was wrong.

And that, my friend, you can take to the bank.

Don writes:

T.R. Elliott,

I have a wonderful quote extolling the virtues and obvious superiority of a Soviet-style planned economy on the wall of my office. The quote is Einstein. I keep it there as a daily reminder that very smart people often say very stupid things when they're out of their field of expertise.

Perhaps you'd like a copy.

jaimito writes:
The futures market, a year ago, told me that oil would be $28 a barrel now (or so). I didn't believe. I thought oil would be over $60 by this time. I was right. The futures market was wrong.

And that, my friend, you can take to the bank.

I canĀ“t take to the bank past predictions. Will you please predict the price of a barrel of oil in a year? That, my friend, may be of some interest.

T.R. Elliott writes:

Strawman. I never proposed Soviet style economics. That's one of the difficulties I have with the obsessively libertarian Ayn Rand acolytes. They see the world in black and white. Soviet style planned economies are pathetic. I'm all for a regulated free and fair market.

As far as oil, my gut tells me that we're near a top. I think it has found a new home in the $50-$70 range. Enough to destroy some demand. I do not think oil is a bubble, as I do the real estate market. Everything seems to indicate that producers are going all out. There is additional heavy sour capacity, but no ability to process it. Therefore I don't see the price collapsing.

My main point in these diatribes of mine is that economists are no better able to tell us what is going on or what is going to happen. They just pretend that they do. It's nothing against economists. It's a very complex chaotic system. Books like Butterfly Economics point out that governments really cannot control the economy, even though they try through monetary policy as an example. But one comes away from a book such as Butterfly Economics and other looks at the field of economics understanding that much of what economists say cannot be proved, and doesn't hold up when compared with real world data. And that there are times when in fact the government should intervene.

How inefficient are CAFE standards? Well, even I said I think taxes would be a better approach. But CAFE would have worked fine. Even the Economist says as such here:[link]

CAFE could have easily been extended to accomodate larger vehicles. But the auto manufacturers would not have allowed it. This implies that regulations are often irrational. But the market is also sometimes irrational. Sound analysis should be performed to determine when the market should decide, or when regulations are more appropriate. Not all regulations are bad.

jaimito writes:

Elliot, Oil demand seems to be supplied and there are no shortages. Therefore, the new home in the 50 - 70 $ range seems too high. I think inflation will erode oil real price and also US foreign debt. Further growth and prosperity are around the corner. The NASDAQ will be 4000 next year.

T.R. Elliott writes:

jaimito: First, let's only speak in 2005 dollars. Oil is now $65 give or take in 2005 dollars. If inflation increase, oil will go higher. But I'm speaking in 2005 dollars. Second, have you actually looked at production versus consumption? Have you looked at the increase in consumption, year on? The ODEC report? The Yergin report? If you look at fundamentals, oil looks to be very tight. We're supplied, but barely. And there doesn't seem to be much new capacity coming online when you consider depletion. Therefore I think we have entered a new price range for oil long-term.

There are a lot of people talking about energy now. Many of the talking heads, and many of them economists, talk about the stone age not ending for lack of stones. These people are idiots. Believe me. Study energy. Study the flow of energy through the economy. Look at how many energy transitions have taken place in human history. I can count them. Wood, Biological Oil (e.g. Whale), Coal, Fossil Oil, Fossil Gas, Uranium). Plus solar and assorted solar derivatives like wind and currents and hydro. There is nothing left to transition to. Demand must be constrained. Capital investment will be required. The price must be higher. It will be in my mind. I can't prove it, but the reasoning, based upon geophysical arguments is much better than the waving of the hands that economists will give you.

aaron writes:


The purpose of the futures market isn't to predict the price (though that's one goal participants try to achieve). The purpose is to manage the risk of changes in price.

No one asked you to argue soviet style economics. That comment was simply pointing out that smart people can often say stupid things. Like that the futures market doesn't work because it doesn't predict the exact price of oil in future.

I'm inclined to agree with your assesment, but your prejudices don't do you any service. You make the same type of prejudiced assumptions that you try to argue of others. You overly discount the value of the information before you and at the same time expand purported ideas beyond their intent. Kling never said that all regulation was bad, he just suggested that there may be too much regulation and that the regulatory structure is poorly designed. Reducing regulation may lead to more flexible companies that can better compete with foreign competition.

Much of what you site actually supports what Arnold wrote. Think it though.

Living in detroit, I know a lot more engineers than lawyers. I'll take Arnold's bet.

aaron writes:

More energy can be supplied, but not in the short term.

Demand will be constrained by price if supply is does not increase. Constraining demand artificially would lower the price of oil and reduce incentive to invest in increased production and alternative sources. The price of oil will determine how much capital is invested.

If you want to decrease demand for gassoline, there are three things you need to get the majority of drivers to do in your community:
1. Obey the speed limit on surface streets.
2. Accelerate faster (use about 2/3s of available power).
3. Communicate. Use your horn and signals (to keep people on the ball).

In conditions of varying speed between 20 and 50mph, ICC systems used along with manually controlled cars see about 20% reductions in fuel cosumption. I would speculate that much greater reductions can be realized on surface steets. The key is to avoid braking and coming to complete stops. Decreasing the variance of speed on roads will increase efficiency by preventing traffic from forming and more effectively dispersing it. Starting from a complete stop can use 6 times as much fuel as a rolling stop.

T.R. Elliott writes:

Aaron: Yeah, yeah, I know, I come off as a prejudicial jerk.

But...Go over to James Hamilton's econbrowser. He's been pointing to the futures market to argue future energy prices, doing exactly what I said probably doesn't make sense. So over there we have a respected econmomist arguing by drawing upon the futures market. And I made the same point over there that you just made. The futures market is a risk mitigation scheme. It doesn't tell me about the future price of oil. But Hamilton starts waxing about capitalism and the collective view of the marketplace and blah blah blah which is partially true but really is just the stuff of the Ayn Rand novels that I--tongue in cheek--poke fun at. It sounds good, but when the pedal hits the metal, it really isn't worth much at all.

So we have respective economists arguing about energy by looking at the 2010 price of oil as projected by the futures market. And we've got economists tellings us about regulations, which I agree are an important issue, but unfortunately the whole dialogue about regulations and the likes is literaly impossible these days because of the ideologically libertarian "the only good regulation is a dead regulation" comments that often issue from economists who have a libertarian bent.

So then, I agree, I make the mistake of acting the fool in the other direction.

rmark writes:

CAFE standards pushed station wagons onto truck frames to avoid lower fleet mileage. And in my humble opinon, SUV's are a sorry replacement. Those old station wagons wide and low, with up to 3 folding bench seats, that allowed plywood to be hauled if the tailgate was down. Add a roof rack, and you could haul your deer home in the cool breeze.

rmark writes:

World War 2 rationing base amounts - 3 gal/week, 2880 miles/yr, 35 mph national speed limit (trivia only, not a prediction)

Chris Bolts writes:

By the by, T.R., here's an excellent article with an excellent graph that demonstrates the effect of CAFE on consumer behavior and their demand for gas.

Click on the link "this graph" to get a good picture of fuel efficiency and market demand for gas.

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