Category: Transportation

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Transportation

A Desire Named Streetcar

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Albuquerque’s City Council on Monday will take up Mayor Martin Chávez’s proposal to spend $224 million state and local tax dollars to build what the mayor calls a “modern streetcar.” The plan is to run trains along Central Avenue from the river to Nob Hill and out to the airport. It will only cost an estimated $28 million a mile— in the unlikely case that overruns don’t occur.

Unfortunately, $224 million is just the upfront cost of building the streetcar that Mayor Chávez desires. Once the project is complete, taxpayer will be on the hook for millions of dollars in annual operating costs. According to the Transit Department, the city’s entire bus system operates for a mere $35 million annually. Imagine what kind of bus system we could have with $224 million as opposed to what we’ll have if buses are forced to compete with streetcars for resources.

Fiscal conservatives intuitively understand that $224 million used for a train could also be used in many other ways. Transit supporters especially must be aware that the high cost of this train could ultimately threaten the rest of our transit system. High construction costs and cost overruns often force transit agencies to cut back on bus service and/or raise fares, thus depressing overall transit ridership.

Los Angeles, for example, lost 25 percent of its transit riders when it built a rail transit system between 1985 and 1995. Low income and minority advocates in both Los Angeles and the San Francisco Bay Area have sued transit agencies or transit planners for building expensive rail service to wealthy suburbs while they let bus service to low-income neighborhoods stagnate or decline. If our goal is to provide transit for those who need it, we should invest in a world class bus system, not rail.

Other issues should also give taxpayers and our elected officials pause. One is the fact that even in the corridor served by the streetcar, mobility will not improve much. Differences between bus speed and streetcar speeds will be negligible. Having attended one of the public meetings and heard the pitch from Transit Director Greg Payne and others, it is clear that the point of this project is to “redevelop” the Central Avenue corridor at the expense of taxpayers throughout the rest of the city and state.

Another concern about this streetcar proposal is some of the underlying assumptions being made by its supporters. Backers of the project often point to Portland, Ore., as the shining example of how modern streetcars can work. But Albuquerque has little in common with Portland. With 2,483 people per square mile, according to the Census Bureau, Albuquerque is only 60 percent as dense as Portland which has 4,143 people per square mile. Albuquerque’s metropolitan area also has only 40 percent as many people as Portland (797,000 vs. 2 million).

Portland has set up an entire regional government called Metro that is vested with enormous powers to restrict growth to transit-friendly areas. Still, despite this and a great deal of investment, Portland’s mass transit system actually carried a higher percentage of the region’s daily trips in 1982, prior to building its rail system (2.6 percent), than it does now (2.3 percent).

Supporters of the streetcar plan have also made favorable comparisons between their project and the “Big I” reconstruction. In fact, Payne has repeatedly asserted that having spent $230 million on the “Big I,” it is only right to spend $224 million on a streetcar. This is a poor comparison. The “Big I” is an integral component of our region’s economy and it transports thousands of people and tons of cargo daily. Imagine how bad traffic would be without the “Big I.” There is simply no comparison in terms of importance to the region between the “Big I” and the proposed streetcar.

The mayor’s “modern streetcar” system is simply too expensive and not necessary. Rather than keeping the transit tax in place and making it permanent (with future tax hikes likely), we would all be better off if taxes were reduced for a change and Albuquerque focused on continuing to improve its bus system.

Paul Gessing is the president of the Rio Grande Foundation, a non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility (www.riograndefoundation.org).

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Economy Oil & Gas Transportation

Don’t Take Pols’ Hooey on Gas Prices

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Have you noticed that politicians are constantly talking about gasoline prices?

As the 2006 election approaches, claims and counterclaims about the cause of high gasoline prices are becoming more intense. But the din of political opportunism has trumped sound economic analysis. Politicians are taking advantage of the complexity of oil markets, rather than trying to educate us.

For example, House Minority Leader Nancy Pelosi recently visited Albuquerque on behalf of Patricia Madrid’s bid to unseat Rep. Heather Wilson. Wilson was accused of being “beholden to big-oil,” with the implication that she and her Republican colleagues are somehow responsible for high gasoline prices. Nor has Wilson shown a keen awareness of energy economic realities with her “sound bite” approach, as is exemplified by her misguided and unrealistic effort to see “price gouging” where none exists.

What the public really needs – but has not been getting from at least this particular race, and indeed from few political contests – is a “fact-based” approach based on economic realities.

Because we can’t rely on politicians when trying to comprehend why prices at the pump are so high, let’s dig beneath the rhetoric to be better informed about gasoline prices: Prices are determined in a market by demand and supply. In the past few years, demand for petroleum products has been increasing, primarily because of increasing prosperity in China, India and a few other countries. Increasing demand, everything else being equal, increases the price of petroleum products. Also, risk of supply disruptions due to instability in some of the major oil producing regions has added a speculative component to demand, further driving up price.

Another factor driving prices higher is that the world’s oil supply has not increased as quickly as demand has grown. War and threats of more war have kept supply from increasing in the Middle East. Hurricanes, particularly Katrina, have reduced supply.

Most recently, pipeline problems experienced by British Petroleum reduced the amount of oil coming from Alaska by nearly 300,000 barrels – a loss of about 6 percent of U.S. daily output. In addition to the issues above, which can loosely be called “market-oriented supply problems,” other problems have been the direct result of government interference. Foremost among these is the reluctance on the part of Congress to allow more drilling for domestic sources of oil.

Politicians have also refused to allow increases in refining capacity for several decades and have also smeared oil companies as villains by threatening them with “price gouging” laws despite the lack of any evidence of such practices.

The fact is that oil exploration and drilling is inherently risky, and it takes millions of dollars and years of investment before the first barrel is pumped out of the ground. These political threats obviously add another element of risk that reduces supply. The threat of “windfall profits” taxes has also added a political risk to the risks faced by oil companies.

Although it may play well in the polls, bad-mouthing the oil industry and threatening it with higher taxes only raises its risk, which hampers research and development efforts and thereby reduces future supply. Did you know that cumulative oil industry research-and-development expenditures over the last few years have exceeded profits? Why would we want to discourage those efforts by piling on more risk?

So there you have it; there is no mystery to gasoline prices. The fundamentals of petroleum markets have caused the increase in gasoline prices, specifically increased demand without increased supply. Politicians like to talk like they can legislate away the scarcity of oil, but instead they make things worse.

Because of the increase in price, we have heard much misleading political rhetoric about evil big-oil profits. Yet the oil industry has profits that are generally in line with other industries. Those profits may be a little above average now – 8.5 percent of revenue versus 7.7 percent for all industries – but since the oil industry waxes and wanes with market conditions, it often sees profits that are below average. Big government actually takes more from big oil in taxes than the industry makes in profit.

If there is anything that is evil in the political din over gasoline prices, it is the politicians. Do not trust them to enlighten you.

Messenheimer is an economist with the Rio Grande Foundation, a free-market oriented think tank based in New Mexico.

Categories
Economy Oil & Gas Transportation

Hysteria Over High Gas Prices is Pumped Up

The hysteria surrounding the spike in gasoline prices has risen to the level of the late 1970s and early 1980s “oil-crisis” madness. Most of the media is actively participating in the doomsday chorus, and the House of Representatives recently voted 389-34 to make gasoline “price gouging” a federal felony. It is time for some serious economic analysis.

First, let us examine gasoline prices expressed in today’s dollars from 1971 to 2005. During the first three years of the 1970s the price has been about $1.50 a gallon, then, because of the OPEC disruption and the Iran-Iraq war, it soared to unprecedented high levels, hitting a peak of $2.70 a gallon in 1981, and then receded gradually, returning to its early 1970s price of $1.50 in the mid 1980s. Until 2003, gas prices fluctuated around $1.50 a gallon. In 2003 gasoline prices began a climbing trend, reaching an annual average of $2.31 in 2005.

Surprisingly, today our economy is robust despite the spike in oil prices. There are two reasons for this: First, at a price of $1.50 a gallon, due to personal income growth and increased automobile efficiency, the percentage of average household income spent on gasoline fell from 4.5 percent in 1971 to 3.1 percent in 2001.

Second, President Bush’s tax cut in May of 2003, supported by accommodating monetary policy, gave the economy a huge boost that easily swamped the impact of rising gasoline prices. Politicians who advocate restoring taxes to their pre-May 2003 level should think again.

The present spike in gasoline prices— surprise, surprise— occurred because supply and demand for a change have not been going hand-in-hand. Demand for oil has intensified since the economies of China and India have at long last taken off. But the growth in oil supply slowed down considerably in the wake of Katrina and Rita, the instability in the Middle East and in response to the new ethanol legislation fiasco. That policy forced oil companies to shoulder the distorting 54-cent a gallon tariff to protect ethanol producers.

In the short term Congress could alleviate the market pressures by rescinding the ethanol tariff, abolishing— or at least relaxing— the “boutique” regulations that hinder gasoline mobility across the United States, and doing something about the NIMBY (not in my backyard) activists who are responsible for the freeze in the number of oil refineries.

Politicians who incite against the oil companies are working for re-election, not for American consumers. In particular they have launched a witch hunt for price gougers.

Economic theory is very straightforward on this issue: Price gouging is possible only if producers collude. For example, a lonely wheat farmer in Minnesota cannot raise the price of wheat over the prevailing price in the marketplace. But, if all wheat farmers colluded they could conceivably become a cartel of gougers. Hypothetically, since the oil and gas industry is somewhat concentrated, oil and gas companies could conspire and raise the price to a monopolistic level.

However, this is very unlikely: First, charges of price fixing may send oil executives to jail. Second, if oil executives were willing to take the legal risk involved in price fixing, they would collude when the price is $1.50, not $3 -a-gallon, when everybody wants to stick it to them. It is safe to assume that oil executives’ brains do not shrink when gasoline prices rise.

Some oil industry bashers advocate slapping the oil companies with profit taxes. Economic theory is also straightforward on this issue: Initially such a tax will not affect the level of production because it will not modify the conditions for profit maximization. In the long run, however, oil companies will have less profit available to reinvest in new drilling and better technologies. The impact on future oil and oil-substitute production will be devastating. So, what to do in the long run?

The long run begins in Alaska. The first step to accelerate the supply growth of oil should be taken by drilling in the Arctic National Wildlife Refuge. The environmentalists continue to argue that drilling in ANWR and shipping oil via pipe across Alaska will devastate caribou and other wildlife. Fact is that the caribou herd in the Prudhoe Bay oil field has grown more than sevenfold since the Prudhoe Bay project started in the mid-1970s.

Last, but not least, there is a danger in the free world’s relying on the turbulent Middle East for its huge exports of crude oil. Advancing alternative energy resources through selective subsidies or regulations is a bad idea— it leads to economic inefficiencies and political pressure groups that invest time and money in lobbying for even higher subsidies for their specific product.

To reduce our reliance on oil from the Middle East we must eliminate the anxiety stemming from oil-price instability. For this end, Congress should initiate setting a floor for the price of oil at a relatively high level, maybe something in a range of $40-$55 per barrel. This could be implemented by imposing a flexible duty on imported crude oil. This is a bad idea whose time, unfortunately, has come.

Micha Gisser is professor emeritus of economics, University of New Mexico, and a senior fellow, Rio Grande Foundation.

Categories
Transportation

Another Fine Mess in the Making: New Mexico’s Proposed Commuter Rail System

So New Mexico needs a passenger rail system, or so some would argue. The Albuquerque Journal has devoted a series of articles, mostly favorable in slant, to this proposal. Certainly rush hour traffic is dense between Belen, Albuquerque, and Bernalillo, and it makes sense, in the abstract, to believe that commuter trains would ease some of this congestion.
Those who share the Rio Grande Foundation’s concerns about economic liberty and the overreach of state government, however, will have serious doubts about the legitimacy of such projects. They will be alert to the strong likelihood that such a project would lose huge sums of money and fail to accomplish its objectives.
Higher taxes are guaranteed:
First of all, the ground truth of commuter rail systems in the United States is that all of them—every single one—requires a subsidy from taxpayers. This necessarily involves a transfer of money from all taxpayers to those who happen to benefit from the cheap transportation system.
Traffic “experts” will point out the benefits to those who continue to drive cars at rush hour, but those benefits usually evaporate as roads continue to fill up, owing to economic expansion and population growth.
The rail proposal is reasonable only in the abstract; in New Mexico the situation is such that a commuter rails system is sure to be a money loser on a massive scale.
Although several studies of the proposed system have been made, it appears that no one has a firm grip upon the following magnitudes:
Initial cost of construction and equipment
Annual operating costs
Number of passengers (for a range of fares)
Revenues from fares
Required subsidy from the state
Number 1, initial cost, is uncertain. Numbers like $250 million and $300 million have been conjectured, but as we will see later such off-the-cuff figures are likely to be much too low.
Number 2, annual operating costs, appears to be a complete unknown.
Numbers 3 and 4, the projected demand for rail services, are very uncertain and have usually been the downfall of failed systems across the country. The basic problem is that New Mexico is just not situated properly for commuter rail to make sense.
Number 5, the required subsidy, is just revenue minus the costs of construction and operation. This tabulation is a simplified version of what’s needed, but it is at least a framework within which we can consider whether such a system would be beneficial or a vast albatross for the tax payers.
Does rail transit ever work?
Let’s look at the more instructive examples, some of which have been cited as “proof” that passenger rail would work out in New Mexico.
Fort Worth and Dallas
This example has been cited by proponents of an Albuquerque-area system. Rail service between these cities is one of the more successful situations because of the demand for services. The population of the two cities is substantially greater than that of all of New Mexico, and many times the population of all the cities along the route of New Mexico’s planned system. Furthermore, there are plenty of buses and parking lots to serve rail riders whose destination is not exactly at the rail terminals.
Bay Area Rapid Transit
This system looked like a natural, given the crowded roads and dense population of the San Francisco Bay area, but it has never paid for itself.
Fredericksburg, Virginia to Washington, DC.
This line has every advantage but still loses money and has done little to alleviate traffic congestion. An already existing passenger rail line reduced initial costs. Commuters into Washington’s Union Station can easily transfer onto the Metro, which takes them anywhere in the city. Moreover, auto congestion is so hideous between Fredericksburg and Washington—far worse than anything seen here—that commuters are anxious to escape it. Nevertheless, the existence of this line has made no detectable difference in road congestion.
The key point in all these examples is that New Mexico is different, in ways that will prevent ridership from ever reaching levels to make rail economically viable. And only in the most favorable cases does passenger rail come even close to paying for itself.
Another factor in the relative success of existing rail systems is that they were built decades ago, when construction was cheaper and before urban sprawl had taken over. Once a city has grown into the spread-out fashion of Albuquerque, it is too late to change. As one letter to the Albuquerque Journal put it, “You can’t have sprawl and public transit. It’s one or the other.”
Passengers do not move merely from one rail station to another. They must travel from their homes to the station, and then from the terminal to their work places. This means that the great majority of them must drive from home to a parking lot near the station, and then take a bus, or whatever, from the terminal to their ultimate destination. This has two implications:
1. The state has to build parking lots and furnish connecting buses. Both of these would increase operating costs very substantially.
2. More important, many commuters will find that this three-part commute is just too expensive and time consuming to bother with; they will prefer a shorter and less expensive drive in their own cars. Imagine someone who lives in Belen and works in northeast Albuquerque; the rail-bus journey would take twice as long as driving, even assuming there was connecting bus service taking him anywhere near his job.
It is this second factor that will doom the proposed system to failure. The small New Mexico towns at the end points of the route simply do not contain enough people who will find the system useful enough to pay for it.
Does anyone benefit?
At this point some readers may object to our repeated assertions that the proposed system would not pay for itself and would require a large subsidy from the state. Of course it will lose money, they might say, but this loss will be more than outweighed by the benefits of reduced congestion on highways.
This is a foggy argument at best. Even supposing that ridership is enough to reduce traffic appreciably, this relief would last for only a short time. Less highway congestion is an incentive for still more urban sprawl, as people choose to house themselves farther from their jobs, thanks to eased driving conditions. Before long, the highways would be back to their old status.
Once again, we have no clear estimates of what decongestion might be worth. Moreover, we would also need to figure in the depressing effects of the higher taxes needed to construct and run the system.
Facts please:
Could we at least see some attempt to cost out the proposed rail system before it is too late to cancel it? Proponents of the rail system scoff at the several studies that have already been done, saying that we need concrete plans, not more studies. But none of these studies has satisfactorily addressed the issues raised here, and unless some clear headed analysis is produced, the system may be assumed to be a clear money loser for as long as it exists.
Of course, the mere existence of a “study” with favorable conclusions does not guarantee the soundness of a rail system. Cost and revenue projections are inevitably paid for by proponents of rail systems. Thus, we would expect them to be biased.
Indeed, such bias appears to be the general case. The Independence Institute, located in Denver, cites a survey of major urban passenger rail systems. Of 16 regions that ultimately built rail systems, 15 were based on studies that grossly underestimated construction costs. Of the ten projections of ridership for major projects, all ten overestimated ridership, and by margins of 50 percent and more. Even projections of improved safety were overly optimistic.
Again, we return to the principles that guide the Rio Grande Foundation. New Mexico’s economy is weak mainly because of high taxes and intrustive government. So when someone proposes a huge new government project based on platitudes rather than clear analysis — watch out.