Arnold Schwarzenegger, Governor of California, set to veto renewable energy bill.

Earlier in the week, it was reported that there was a serious battle going on in Sacramento over the 33% mandate for energy creation. In this mandate, it states that Californian energy companies must create 33% of energy used by 2020. However, after looking at the bill in more detail, Governor Arnold Schwarzenegger said that he would veto the bill passed by the Californian legislature.

Governor Schwarzenegger believes that the bill is unfair to utility companies because it limits their ability to import wind, solar, and geothermal energy from out-of-state sources. This was written into the bill to ensure more Californians got hired, but it posed issues related to the inability of utility companies to meet the 2010 quota of 20%.

“The poorly drafted, overly complex bills passed by the legislature are protectionist schemes that will kill the solar industry in California and drive prices up like the failed energy deregulation of the late 1990s,” Governor Schwarzenegger’s spokesman Matt David said in a statement.

Instead of pursuing an option with the legislative branch, Governor Schwarzenegger will issue an executive order to mandate that 33% of energy be from renewable sources by 2020. Unlike the legislation’s version, the executive order would allow utility companies the opportunity to import some of their energy from solar and wind fields in other states.

This veto has Democrats and environmentalists up in arms. They want to have more of the power generated in-state because it would ensure more renewable projects were built rather than just imported and prevent more expensive power-lines from being constructed. In their book, this provided for a long term success for California.

One company, San Diego Gas and Electric Co., has stated that it won’t be able to reach the 2010 quota of 20% energy by renewable sources. Currently, they are at 6%. According to SDG&E, if they were allowed to import more energy and build more power-lines, they would be able to meet the quota.

Gas prices are dropping except for California.

For California, though, they have seen an increase in the cost for gas, the report coming a day after the holiday weekend. The price for gas rose 6.2 cents to rest at $3.099 a gallon. California is used to high gas prices, but when the economy is rough, no one wants to spend forty dollars to fill their car.

The primary cause for the increase in gas price is due to the fact that Californian gas has to be much cleaner. In regards to the cleanliness, it is cleaner than any other state’s gas. Because of this, though, there are not nearly as many refineries that pump out this extra clean gas which causes a decrease in supply.

Furthermore, two refineries in Northern California are closed for maintenance, so the refineries that are there are forced to work even harder to try and get their output up. Analysts are suggesting that, because there are fewer refineries working, and the ones that are working are trimming some production to keep profits high, that gas prices in California might go up as high as $3.25.

There are people obviously concerned and frustrated about this. Complaints about the tremendously high fuel taxes (highest in the Union) make Californians even more distasteful about the prices. Finally, because it costs anywhere from 5-15 cents more a gallon to refine this extra clean gasoline, the prices fall on the consumer.

Because the state is down to only 13 refineries creating this extra clean gasoline, there is going to be a major issue of supply not meeting demand. If that happens, prices are expected to rise even more.

There are so many ways to achieve renewable energy. California is trying to develop their own plethora or renewable energy.

The utility companies want there to be flexibility in the bills because of numerous cases. First off, they want the option to import renewable energy from out of state so that they can meet the 33% bill. Furthermore, they want the opportunity to extend the 2020 deadline if they’re going to miss it. Their argument is that the markets can’t plan that far in the future and it is unfair to the utility companies to demand there be this reached deadline.

The fight is coming in from all parts. The environmentalists are worried that if the lawmakers allow this flexibility, it will prevent real change from occurring environmentally speaking and no good will come from it. Consumers are concerned that the cost of California residents’ energy bills will skyrocket. Furthermore, they’re trying to prevent these utility companies from getting the energy from elsewhere because they want to create jobs in California.

People are concerned that if the utility companies are allowed to import their energy, what will happen is that there will be no economic growth in California, only green growth, and the goal is for there to be a mix of both.

There’s also the issue of funding it. It could require as much as $115 billion to reach the 33% goal by 2020. This makes it increasingly difficult for utility companies to reach it, especially since its being suggested that they won’t even reach the 20% by 2010 as tehy were supposed to do. Instead, it may take as long as 2013 or 2014.

There are also discussions of using hydroelectric plants, but environmentalists are firmly against some aspects of it. They are looking into creating run-of-the-river plants where they divert water into the turbines to create electricity, but don’t block the entire river with a huge dam. This would please environmentalists as well as provide for more energy.

Governor Arnold Schwarzenegger has expressed a great interest in trying to turn California into a firm green energy producing state. With the economy shaky there, it would be incredibly beneficial for the state to have this flow of renewable energy. Most importantly, the environment would get a break from the constant release of emissions.

California’s low-carbon fuel standard has oil companies anxious

Here are the bits that raised my eyebrows:

The petroleum industry and some economists say the new standard adopted by the state Air Resources Board on Thursday will cost motorists billions, because blending gasoline will become considerably more complicated.

But state officials and environmentalists say the “low-carbon fuel standard” will actually save Californians money by reducing oil consumption and ushering in a competitive new era of biofuels and electric vehicles.

A big problem, she [Dorothy Rothrock] said, is that the air board’s standards will limit the use of corn-based ethanol in gasoline – leaving refiners with a major hurdle.

Yet the Air Resources Board, in approving the low carbon standard Thursday, dismissed forecasts of higher costs. The board’s staff contends that when the standard is fully operational, in 2020, Californians will save about $11 billion a year.

“It’s the reduction in the use of petroleum,” said board spokesman Dimitri Stanich.

We could argue about whether the new standard is a good idea, but that’s not the purpose of this essay. What should be beyond dispute is that it will cost consumers more money. It may in fact reduce oil consumption and usher “in a competitive new era of biofuels and electric vehicles.” But it will do so not by mandating new technology that is magically more cost-effective than the status quo, but instead by making fuel more expensive.

Where are gasoline blenders supposed to get these low carbon fuels, given that corn ethanol has been declared taboo with the new standards? Why, it’s the old reliable ethanol from switchgrass:

Refiners and entrepreneurs will have plenty of time – and economic incentive – to make inexpensive biofuels, hydrogen-based fuels, even ethanol from such “cellulosic” materials as switchgrass.

Plenty of time? They have until 2020 before the rules are fully phased in. And economic incentive? How does that work, given that the new rules are supposed to save consumers money? Where does the incentive come from, if not higher prices for the new, ‘low carbon’ biofuels?

Of course I knew that we have been trying to commercialize cellulosic ethanol for decades, but Robert Bryce recently pointed out that this was in fact known technology as far back as 1921:

Consider this claim: “From our cellulose waste products on the farm such as straw, corn-stalks, corn cobs and all similar sorts of material we throw away, we can get, by present known methods, enough alcohol to run our automotive equipment in the United States.”

That sounds like something you’ve heard recently, right? Well, fasten your seatbelt because that claim was made way back in 1921. That’s when American inventor Thomas Midgley proclaimed the wonders of cellulosic ethanol to the Society of Automotive Engineers in Indianapolis. And while Midgley was excited about the prospect of cellulosic ethanol, he admitted that there was a significant hurdle to his concept: producing the fuel would cost about $2 per gallon. That’s about $20 per gallon in current money.

So, what we have failed to achieve in the past 90 years will be easily achieved in the next 10? Keep in mind that we knew how to convert switchgrass into ethanol not long after the Wright Brothers made their first flight. Since that time, airline travel has become a major commercial enterprise, and we have even managed to put a man on the moon. Cellulosic ethanol still toils away in the lab or at very small scale demonstration plants. The reasons are fundamental, and even if commercialization occurs, it will only be very marginally commercial for those fundamental reasons. And we all know what happens to marginally commercial ventures in the cyclical energy business: Volatility wipes them out.

Having said that, there are some possible bright spots in the new standard. Corn ethanol producers will have a strong incentive to reduce fossil fuel inputs to improve their greenhouse gas score. Sugarcane ethanol production in the U.S. will now have more attractive economics (it gets a better score than corn ethanol with the new standard). But the reason for both is that these fuels will now command a premium, as gasoline blenders search for something to replace corn ethanol. Costs will absolutely, positively go up. Not that there is anything wrong with that, as I think higher costs will lead to some of the intended benefits. But let’s not lie to people about the costs.

Corn Ethanol Worse than Oil? California Rules Yes

In what would certainly be a huge blow to the US’ formidable corn-ethanol industry, the California Air Resources Board is readying a report that says ethanol is worse than oil in terms of greenhouse gas emissions. According to the Daily Climate, the California regulators are prepared to go as far as to declare that biofuels cannot help the state fight climate change–could this be the beginning of the end for ethanol?

So, what does this mean? The article above has a different interpretation than my own:

What’s especially interesting about all this, however, is that such a groundbreaking finding will probably have a major impact at the national level as well: Obama is leaning towards establishing a national emissions standard, so California’s report is bound to form something of a precedent. Which spells bad news for the corn industry.

My own interpretation comes from a previous CARB ruling that had zero impact on what the EPA ultimately decided to do. This one is from 2005:

Senator Feinstein Renews Call for Federal Oxygenate Waiver for California

The California Air Resource Board (CARB) researched this issue at length and found that ethanol-blended gasoline does not help California meet the goals of the Clean Air Act as it relates to reducing ozone formation, particularly during the summertime, and, in fact, ethanol actually increases the emission of pollutants that cause ozone during the summer months.

In September 2004, CARB sponsored a study by the Coordinating Research Council (CRC). The CRC issued a report entitled Fuel Permeation From Automotive Systems. The study was designed to determine the magnitude of the permeation differences between three fuels, containing MTBE, ethanol, or no oxygenate, in the selected test fleet. The study found that emissions increased on all 10 vehicle fuel systems studied when ethanol replaced the MTBE. In fact, the ethanol blended gasoline caused emissions to increase by 65% when compared with MTBE blended gasoline, and by 45% when compared with non-oxygenated gasoline.

In a November 2004 report, CARB staff issued a preliminary analysis of increased emissions due to ethanol blended gasoline. The staff reported that “on-road vehicles hydrocarbon emissions increase[d] by 40-50 tons/day, statewide, [in] 2004.” CARB staff is currently working on a final analysis of the impact of ethanol blended gasoline on emissions.

So what happened? The EPA said “too bad.”

EPA Upholds Reformulated Gas Requirement in California, New York, and Connecticut

On June 2, 2005, EPA denied requests made by the states of California, Connecticut and New York for a waiver of the oxygen content requirement of the RFG program. The Clean Air Act includes specific guidelines for when EPA may grant a waiver from the Congressional mandate that RFG contain oxygen. States must provide to EPA clear evidence that the oxygen content requirement will prevent or interfere with their ability to meet the National Ambient Air Quality Standards (NAAQS). EPA determined that the petitions submitted by California, Connecticut and New York fail to meet the waiver requirements outlined in the Clean Air Act.

If the previous ruling was that California didn’t have good enough evidence to warrant the waiver (and last time they had lab data in hand), I don’t see any way that they are going to get any slack this time. My prediction is that this won’t have any impact on the ethanol mandates. It might slow down a rush to increase the percentage of ethanol allowed in gasoline (ethanol proponents want to see this ramped up to 15%, and that might be a tougher sell now). There is also more recent precedent than California in 2005; the EPA recently turned down a request by Texas Governor Rick Perry for partial relief from the mandate.

As expected, the Renewable Fuel Association took exception to CARB’s findings, presenting a 117-page document that disputes the ruling. I have not had time to browse through the document, and present it here merely for information.

At least they will now have more time to devote to their other campaigns, such as 1). Stopping oil companies from donating money to universities; and 2). Berating oil companies for not giving enough to universities. (They make more sense if you view them as a satirical site along the lines of The Onion. The only problem is that Oil Watchdog is trying to be serious). I think it is particularly curious that the press uncritically accept and quote those associated with Oil Watchdog as consumer advocates trying to do the right thing by consumers, when a cursory investigation would show what they are (hypocritically) up to.

First, here are a few of the links to previous discussions of the issue:

Hot Gas Lawsuit in Utah

More on Hot Gas Lawsuit

Hot Gas Issue Heating Up

Hot Gas is a Bunch of Hot Air

In a nutshell, the issue is that gas expands when the temperature is warm, and so a gallon of ‘hot’ gas has less energy than a gallon of cooler gas. This means you aren’t getting the same amount of energy from your gasoline that is hot, therefore “you are being ripped off.”

This is the kind of issue that an organization like Oil Watchdog was built for. They can hype up the controversy, get outraged people to send them donations (after all, who is going to protect the little guy from Big Oil if not them?), and try to get some litigation going to benefit people like the professional litigator who is behind the site. His own website says that he “has focused on suing insurance companies that overcharge or mistreat consumers, in violation of state laws; cell phone companies for billing mistakes and poor service; and HMOs and health care companies for providing shoddy health care and refusing to pay people’s claims.” Just imagine the potential windfall if he can get a class action going by convincing enough people that deep-pocketed Big Oil is overcharging and mistreating them. That would certainly earn him more money than 99.99% of the “greedy” people in the oil industry.

Oil Watchdog – a spin-off of the Foundation for Taxpayer and Consumer Rights (see this story for the dirt on why they do what they do and evidence of who is behind the site) – has fought to force installation of temperature compensating equipment so that the gallon is corrected for temperature. That means when the gas is warm, you get a little more than a gallon, but when the gas is cold you get less. So what’s wrong with that? Basically, as I discussed at the links above, it belies a real misunderstanding of just what the outcome would be.

Imagine for a moment that you redefine a gallon so that the new volume is now equivalent to 1.5 of the old gallons. Do you think the price for a gallon of gasoline would stay the same? Of course it wouldn’t. You would pay 1.5 times as much for it. This is what Oil Watchdog and others pushing for this legislation could never absorb: It wasn’t going to work as they claimed, because as soon as the size of the gallon changes (which is what temperature compensation does), the price will change. You would probably find more variation in energy content just based on how the gasoline is blended. (Imagine how outraged they will be when they finally figure out that ethanol is contributing to gasoline with lower energy density, or that energy density varies between summer and winter.)

Oil Watchdog has really been on top of this issue, issuing press release after press release to make sure everyone knew how badly consumers were getting ripped off. Yet despite all that effort, the California Energy Commission has ruled against them:

Commission says fixing ‘hot fuel’ would drive up fuel prices

This is of course what I have been saying since this issue first cropped up. From the article:

The California Energy Commission says forcing retailers to install temperature-compensation devices on fuel pumps would drive up the price.

Officials with the Owner-Operator Independent Drivers Association challenge that claim, saying a one-time investment by fuel companies is part of doing business and would save consumers money in the long run.

During a business meeting Wednesday, March 11, the California Energy Commission recommended against forcing retailers to implement automatic temperature compensation, or ATC, at the pump.

Retail fuel is currently sold as a 231-cubic-inch gallon and does not take temperature into account. Elementary physics shows that all liquids expand and contract with temperature changes.

State and federal law does not require fuel retailers to compensate for temperature, but consumer groups and some lawmakers are trying to change that.

Directed by state law AB868, the California Energy Commission studied fuel temperature and evaluated the cost of implementing ATC at retail pumps.

“If retail station owners and operators continue (are) to grow and remain profitable, then retail station owners will most likely raise their fuel prices to compensate for selling fewer ‘gallons,’” commissioners wrote in the report. “If this is the case, then expected benefits for retail motorists will be essentially zero.”

Oil Watchdog of course wasn’t going to take that lying down, so they have issued a series of press releases charging conflicts of interest and anything else they think will stick (and draw attention away from all of their donors’ money they wasted on this). Here was their latest press release on the issue:

Documents Show Political Appointees Interfered With Cal. Energy Commission Study Of Hot Fuel Ripoff To Protect Oil Companies

Personally, I think that’s too subtle, but what do I know? I am not an ace journalist like the staff at Oil Watchdog.

As I have documented previously, Oil Watchdog started censoring comments following their stories because people were consistently demolishing their claims. Some of the comments are very good, though. So below I have copied one of those comments that Oil Watchdog conveniently put out of sight by default (and you will see why they started doing that). This is a typical sort of blistering rebuttal they often receive following some of their hysterical “essays”, which finally resulted in them frequently labeling those who disagree with them as “Shills for Big Oil.” What else were they going to do, debate the technical merits?

It is a bit long, but a highly entertaining example of what happens when an organization completely devoid of any technical people on their staff pumps out the misinformation they do. As the poster below points out, there seems to be no due diligence at all, but the reason for that becomes clear when one understands their actual objectives.

———————-

Oil Watchdog presents the hot fuel issue as one hoisted on the public by Big Oil. Without defining Big Oil, we have to assume she [Judy Dugan] means large refiners and integrateds, as opposed to retailers. Let’s examine the facts in this case, instead of the anecdotes.

The claim is that an annual $400,000,000 in excess revenue is generated dishonestly in California. As Oil Watchdog is clearly biased in this case (they are after all paid to criticize the oil industry), we can safely assume that this figure is probably at the very highest end of the impact spectrum. But let’s take it anyway, and break the figure down and see, to a reasonable approximation, just who is getting what from hot fuel. By the way, I’ll state here that the more accurately fuel can be dispensed, the better for consumers. But the real issue is, not what is the best technical solution, but whether consumers would benefit from ATC. Oil Watchdog sweeps the latter point under the rug and presents ATC purely as a morality play.

The simple analysis goes as follows:

$400,000,000: Oil Watchdog’s claimed ripoff. This is in the form of revenue to the retailers.

10% profit margin: we are here mixing refiners and integrateds, so it’s not a bad approximation. But we’ll reach the same conclusion below with any reasonable range of profitability assumptions.

$40,000,000: hot fuel profit to the industry.

Who is getting this? We know it only applies to the retail level (as Dugan has reported herself) since refiners sell their fuels corrected for temperature.

Here are the market shares of California refiners, as reported by the state of California:

Company CA Market Share, Gasoline
BP 19%
Chevron 19%
Valero 13%
ConocoPhillips 12%
Tesoro 11%
Shell 10%
ExxonMobil 6%
Big West 2%
Kern 1%
New West 1%
Petro-Diamond 1%
Tower Energy 1%
IPC 1%
Others 3%

In terms of industry concentration, this market does not look particularly concentrated when compared to other critical industries, such as automobiles, computers, or tires. So the case for conspiracy is weak on the basis of market share alone. At the level of the state of California, the Herfindahl Index for refining would be about 1300, well below the 1800 that might start getting attention at the Department of Justice. In fact, the DOJ considers industries in the range of 1000 to 1800 as being only “moderately concentrated.”

We now want to take the $40,000,000 hot fuel profit derived above, and allocate it to the state’s refiners. But first, as Dugan knows and has reported, we know that Big Oil has largely exited the retail sales business. In fact, she has quoted the widely published fact that about 97% of retail sales go to retailers, and not to Big Oil. So we need to allocate 3% of the $40,000,000, or $1,200,000, to Big Oil refiners by market share. When we do that we get the table below (here showing Big Oil shares).

Company Share of Hot Fuel Profit
BP $228,000
Chevron $228,000
ConocoPhillips $144,000
Shell $120,000
ExxonMobil $72,000
Combined Retailers $38,800,000

Clearly, the benefit to Big Oil, by Dugan’s own figures, of hot fuel in California would not even cover the cost of a lawyer for each company. In short, Big Oil could really care less about hot fuel in terms of impact to the bottom line. ExxonMobil’s hot fuel take in California represented about 0.00018% of its total profit. It probably spends many times that on landscaping or office water coolers.

And just as clearly, we see that the retailers should have a vested interest in the outcome. But when you consider that there are about 12,000 gas stations in California, you find that

$38,800,000/12,000 = about $3200 annual hot fuel profit per gas station.

In other words, the average California station doesn’t appear to be getting a huge jolt from this either. I think we can safely assume that this is not a profit grab by Big Oil, or even the retailers: the retailer opposition is probably based more on avoidance of ATC costs and maintenance.

But the really interesting point to be made here is that on the one hand Oil Watchdog charges this group of retailers with fraud, but on the other hand claims that the retailers will now absorb the cost of the equipment and maintenance, to the benefit of consumers. What if Oil Watchdog is wrong, and the consumers end up behind in the long run? This strong possibility is essentially ignored. For reference, the average consumer, if he drives 15,000 miles per year and gets 20 mpg, is paying a little under $19 per year on hot fuel (based on the $400,000,000 divided by gallons sold in California, or 2.6 cents per gallon). What if the retailers pass along an average of 4 cents per gallon? Why not? Aren’t they conspiring to rip us off now anyway? After all, each retailer will know that his competitors are facing the same new expense. The whole episode would probably be a futile exercise in money laundering in which no one benefits. This is one of the reasons why the American Trucking Associations, the nation’s spokesman for the trucking industry, opposes ATC. Any charge that the ATA has a vested interest in higher fuel prices is not credible.

If the potential buyer of Judy Dugan’s $5000 used car finds a defect in the engine (perhaps a microscopic hole in a piston) that might cost him 8 extra gallons of gas per year (near our $19 hot fuel cost), and Dugan learns it will cost $500 to replace the piston, will it be a good thing for the buyer if she does that and charges him $5500? Dugan is, after all, selling a car which she knows has a hidden foot on the gas pedal. Or would she just negotiate a new price and let the market make the correction? Isn’t that in fact what retailers are doing? As the market shares above show, and as recent steeply falling gasoline prices have proven, the industry is competitive. Unless they conspire, it would seem that no one retailer could make incremental profit off hot fuel as long as a competitor somewhere was willing to cut into that profit to gain market share. The market will equilibrate to a rate of return acceptable to competing retailers. Introduce a retail cost perturbation into the system, as in ATC, and prices will tend to adjust to maintain that equilibrium margin, unless one believes that the retailers will now stop ripping us off and simply accept lower incomes.

One gets the sense that Oil Watchdog does not understand the concept of cost-benefit analysis, and instead subscribes to the simple belief that anything bad for the oil industry must be good for consumers. The representation of hot fuel as a willful fraud perpetrated by Big Oil, when Oil Watchdog has acknowledged that refiners deliver temperature corrected fuel to retailers, is negligent and cynical…. or just plain dishonest. There is an underlying perception that this issue is one of self-interest for Oil Watchdog, a feather in their cap so to speak, or perhaps justification for existence in a world where the recent steep drop in prices prove that oil companies cannot set those prices, thus muting many of Oil Watchdog’s past charges. The rug being pulled from under its feet, Oil Watchdog needs a new pretext for its sources of funding.

Now, Oil Watchdog may in fact be correct on this issue. There is a lot of uncertainty in the data and therefore conclusions on hot fuel cost estimates, and future market responses to ATC installation cannot be predicted with certainty. But they make no credible case, and reasonable calculations based on their own numbers raise legitimate doubts as to who really benefits. Unfortunately, instead of pursuing an impartial quantitative analysis, they turn ATC into a witch hunt and go after the usual suspects. Their motivation appears above all else to be giving the oil industry a black eye; consumer benefit is assumed, and not investigated. The possibility that they could be wrong, and therefore that they could be hurting consumers, takes a back seat. There does not appear to be any due diligence on Oil Watchdog’s part to demonstrate that their position on ATC would result in a net benefit to consumers.

The way I came up with this graph was by modeling the solar cell power curve based on Google’s Solar Panel Project, which they update daily for solar electricity produced. You can presume at this point some hypothetical number of panels to produce 36 GW at peak power. The reason for 36 GW is that I found a presentation that showed actual load behavior in California on a summer day in 2003, and peak power demand was 36 GW.

It became clear to me why some people are approaching this from different directions, and why neither answer is actually correct. One approach looks at peak demand, and installs enough solar panels to meet that. But as you can see, peak demand doesn’t correspond to peak output. The second approach looks at the demand for the entire day, and then attempts to produce that in 4 or 5 hours. That isn’t correct either. You need to produce the required daily output in the total area under the solar power curve. But, you need to be able to store it. And due to storage losses, you actually need to produce quite a bit more than you expect to be consumed in any particular day.

That, I believe, is the correct way to solve the problem. In all of the approaches I have seen as I have studied the problem, I haven’t seen this specific approach. Thoughts? Just eye-balling it, it looks to me – presuming you have a workable storage solution – that you would require about double the power of the peak demand number in order to produce the required energy each day. In other words, if that solar power curve topped out at 70 GW or so, that would be enough energy produced in a day to meet that demand curve.

I don’t have time to work on this any more right now, but I will come back to it. My chapter is due on August 1, and I am still tidying it up. But I think the next approach is to either integrate the area under the solar output curve, or approximate it as a square wave – and then develop the relationship to daily demand.

What Went Wrong

I can point to numerous things that went wrong with the “Yes” campaign. While I really was pretty ambivalent about the initiative, I was not ambivalent about the tactics that the “Yes” campaign utilized. Several months ago I commented to a person that was associated with the Yes campaign that it almost seemed like they were running a parody of a political campaign. They displayed a stunning level of naivety over energy issues and energy policy.

The L.A. times characterized this initiative as “deceptively marketed”, which was also the title I chose for my first Venture Beat article on the initiative. The California papers almost unanimously opposed the proposition. So, the Big Oil hate-mongering from the Yes camp rang a bit hollow when all the newspapers were editorializing against it. Were they all in the camp of Big Oil? Were Vinod Khosla’s hometown papers, all of which endorsed a no position, in the camp of Big Oil?

I found it very difficult to read Vinod Khosla’s essays in favor of Prop 87. I felt like most of it was very condescending drivel, more appropriate for a grade school audience. He would have been taken a lot more seriously had he stuck with the facts, and avoided all of the emotional pleas to punish oil companies. Clearly, he hates the oil companies. We got it. But as he continued to write, I was just waiting for him to claim that refinery boilers are fueled with homeless children.

There were also a number of times that the Yes campaign demonstrated that they didn’t even know what was in the initiative. An example of this was reported last week at the No on 87 website:

KGO-AM’s Ronn Owens hosted a spirited debate over Proposition 87 (the $4 Billion Oil Tax Initiative) in San Francisco today.

I went up against Beth Willon, who represented the Yes on 87 campaign.

At one point Willon tried to make the argument that Prop. 87 “will only last 10 years.”

I responded by pulling out the actual initiative text and reading Section 26029.4 which states “the authority may be terminated at any time by the Legislature no sooner than January 1, 2027 or after the assets of the authority have been fully expended, whichever is later.”

Beth’s only response was that I was reading “very deep” in the initiative text. Somehow I think the “deep” parts count too.

It would be funny if it weren’t such a serious subject. The proponents also frequently characterized this as an excess profits tax, when it was actually a severance tax. The difference is that even when oil companies are in a down cycle and profits are much lower (or nonexistent), they get to keep paying the severance tax.

But I think the thing that really persuaded people to vote “no” was the uncertainty of the impact on gas prices. I was with the vast majority of economists in my belief that this proposition would drive up gas prices. But the overall amount was uncertain. The initiative would have impacted the supply/demand balance in California, with uncertain results.

I am certain I could have come up with a better proposition to promote alternative energy. I believe the voters would have supported a nickel a gallon gas tax increase with the proceeds going to fund alternative energy. That way, the price increase would have been known. In fact, since higher gas prices correlate with lower demand, a nickel gas tax increase might not have caused gas prices to increase by a nickel. And I don’t think the oil companies would have come out so strongly in opposition. And when you run a campaign that essentially paints the opposition as being responsible for all of society’s ills, you better make sure your nose is clean. In this case, Mr. Khosla’s engaged in quite a bit of hypocrisy, and that was used effectively against him.

I don’t doubt some new version of Prop 87 will be resurrected in the future. If any of you proponents are going to try this again, feel free to send me an early draft of the initiative and I would be glad to critique it for you. But get someone else to run your campaign the next time around.

Note: I am going to be out of town for the next few days with no access to the Internet, but I did want to offer up my thoughts on the election as soon as the results were clear.

My first essay, Prop 87: Deceptively Marketed, addressed 3 specific claims coming from the proponents, and then I offered up my predictions. In the second essay, I went directly after a number of irresponsible claims that Vinod Khosla made in his second essay. Mr. Khosla is essentially betting people’s lives by making the claims he is making. If, ten years down the road, it becomes clear that he can’t deliver, we will have lost ten precious years in which we could have embarked upon a massive effort to deal with Peak Oil. But as long as there are Vinod Khoslas out there, naively making promises that everything will be OK, that massive effort will be delayed. Our energy policy is far too important, so I believe Mr. Khosla’s promises should be vigorously challenged.

Below is the text of my rebuttal to Vinod Khosla’s claims, which can be found in essays that he wrote for VentureBeat and The Huffington Post. Please note that I am not arguing for a “No” vote, nor am I making a blanket defense of the oil industry. I am responding to Mr. Khosla’s claims.

————————————-

Apparently some Proposition 87 proponents have never heard the adage “People in glass houses shouldn’t throw stones.” They complain about slimy tactics, while engaging in plenty of slimy tactics and hypocrisy themselves. In this essay, I will address Mr. Khosla’s second essay and show that his glass house is vulnerable to my pile of stones. This is also why I become concerned when people with expertise in one field try to influence policy in another. My dentist is a great guy, and very good at what he does, but I wouldn’t let him remove my appendix. And while he should certainly be involved in the discourse, he shouldn’t receive undue influence on energy policy just because he is a good dentist.

I explained in my previous essay who I am, and that I am not campaigning against Proposition 87. My interest is in raising the level of political discourse with respect to energy policy. My criticisms are aimed at the “Yes on 87” campaign, because much misinformation is being directed at my own industry. I find it very ironic that those who are flying around the country to decry the “evil oil industry” are doing so using jet fuel supplied by the oil industry. They enjoy many conveniences as a result of oil and gas production, but have deluded themselves into believing their lifestyle could be maintained if we all switched to alternative energy.

I don’t live in California and have never seen an ad from either side, but I have seen a number of “Yes” essays in the mold of Mr. Khosla’s latest missive. So let’s dissect his latest entry for some examples of hypocrisy, misinformation, and faulty logic. Mr. Khosla’s comments are in quotes.

Given the current oil situation the ONLY way oil prices will go down is if we have alternatives to oil.

Since it doesn’t benefit any big business interests, conservation, probably the most valuable “alternative” out there, is mostly overlooked in this debate.

Mr. Khosla: Given the massive profits they make on oil they wouldn’t want a cheaper alternative in the marketplace.

I covered profit margins in my previous essay, and noted the hypocrisy coming from an industry that sees double the profit margins of the oil industry. But “they wouldn’t want a cheaper alternative” is misinformation. The entry barrier for ethanol production and biodiesel is quite low. If ethanol is ultimately a cheaper option, oil companies will start making ethanol. Right now, most do not see that it is clearly viable in the long-term without subsidies. In fact Mr. Khosla was recently quoted in Red Herring: “Contrary to what you might believe, I think it’s extremely unlikely that in 20 years we will be using any ethanol in cars.” I think the oil industry shares this view, which is why they aren’t rushing out to build ethanol plants.

However, oil companies have made big investments into solar, wind , and biofuels. In fact, Iogen, a company running a large scale cellulosic ethanol trial, is receiving major funding from Shell. Of course this puts oil companies in a “damned either way” position. If they invest in alternatives, critics say it is a token effort, or just for public relations. If they don’t, then they are standing in the way of progress.

It is also unfair if they use their political clout to wrangle billions of dollars of subsidies from American taxpayers.

Given that the ethanol industry receives billions in direct subsidies and you are trying to secure even more with Prop 87, I am going to call this a bit of hypocrisy. The ethanol industry is the recipient of $0.51 gallon in direct ethanol subsidies. However, the subsidy is per gallon of ethanol produced, as opposed to actual net energy produced. If the ethanol energy return is 1.3/1, then it takes 3.3 gallons produced to net the energy equivalent of 1 gallon of gasoline. The website Zfacts, strongly supportive of alternative energy, concludes that when all the subsidies are added in, displacing a single gallon of gasoline costs $7.24 in ethanol. Furthermore, the ethanol industry depends on fossil fuels to drive their trucks and tractors, so any oil “subsidy” is also an indirect ethanol subsidy.

Many ethanol advocates claim that the $0.51/gallon subsidy actually benefits the oil industry. Without going into a detailed analysis of why this claim is wrong (it essentially allows ethanol producers to charge $0.51/gal more than market conditions would warrant), ask yourself why it is the ethanol/farm lobby who is fighting to keep this subsidy, and oil interests who are speaking out against it. Note that the executive vice president of the American Coalition for Ethanol vigorously defends the subsidy. Is this a case of oil company benevolence?

And they often make us pay for their R&D.

As compared to making your competitor pay for your R&D? I will admit, it is a brilliant move to force your competitor to fund your own research, but the above statement really takes hypocrisy to a whole new level.

The world uses about 12 billion gallons of ethanol today. If that was removed form the market, oil prices would spike up. If we produce more, oil prices will decline as supply increases.

This one is just faulty logic. Ethanol production in the past few years has exploded. Did oil prices decline?

A few token projects to “sound green” are thrown in but almost no money goes into finding real alternatives to oil.

As I stated earlier: “Damned either way.”

Even the small technology oriented Silicon Valley company can spend 20% of its revenue on R&D.

I have an idea then. Since Silicon Valley is so innovative, and we know that companies there are quite profitable, why don’t we tax them to fund this measure? That seems like a real win-win solution. The people who most strongly support this proposition will be the ones who will both pay for it, and “benefit” from it.

The oilies are scare mongering with their massive dollars.

We actually prefer our pejoratives to be capitalized. But this is an example of the need to raise the political discourse. Also – and feel free to correct me if I am wrong – the proponents are spending tens of millions of dollars to push this measure, and they are doing it with tactics that have been more along the lines of hate mongering.

President Clinton has said ethanol is 33% cheaper. I know it is cheaper to produce, even with the subsidies oil currently manages to get.

Ignoring the repeated hypocrisy over the subsidies, let’s talk about economics. Now, I may not be well-versed in Silicon Valley economics, but here’s what I think. If I have a product that I can make for cheaper than the competitor, why would I need mandates, subsidies, and an extortion tax on my competitors in order to compete? I don’t really think I would need this, if indeed the claim is true. So, that leaves me to believe that either the claim isn’t true, or ethanol companies are worse than oil companies at “ripping people off.”

Let’s consider the following graph from the official Nebraska government website:

This is a comparison of the average annual rack price of ethanol versus mid-grade gasoline for the past 25 years. Ethanol, with lower energy content, has been more expensive than gasoline in each of the past 25 years. So there is a track record over a long period of time that suggests that not only do ethanol prices rise and fall in response to gasoline prices (putting a damper on the argument that ethanol is going to drive down gasoline prices) but the price differential is actually greater since most people don’t buy the more expensive mid-grade.

Now, if Mr. Khosla is correct, and it is in fact cheaper to produce ethanol than gasoline, it suggests that 1). Ethanol profit margins are far higher than gasoline profit margins; 2). Ethanol producers are “ripping us all off”; and 3). Ethanol producers should have no problem funding their own growth.

I hope that Mr. Khosla can see that his glass house is quite vulnerable. I call on him to raise the level of discourse on our energy policy – regardless of the outcome of the vote.

California’s Proposition 87 promises to reduce oil consumption in California, at no expense to the consumer. I am quite sympathetic to the goal of reducing petroleum dependence. This is a goal to which we should all aspire. But I have my doubts that the promises being made by the Proposition 87 campaign can be kept. I also dispute many of the claims made by the Prop 87 proponents. Finally, I have a problem with the way the oil industry is being portrayed in order to win support for this measure.

While I do not intend for this to be a point by point rebuttal of Ana Unruh Cohen’s recent essay in support of Prop 87, I do intend for it to debunk a number of claims from the Yes on 87 campaign. As I turn a critical eye toward the claims of the pro-87 contingent, I invite Ana to do the same to the anti-87 contingent if she wishes to write a follow-up to this essay. It is not actually my intent to argue that you should vote one way or the other, even though it may sound like I am staking out a solid No on 87 position. My intent in this essay is to look into my crystal ball to see what Prop 87 will really do, and to set the record straight with respect to the oil industry. My prediction is that Prop 87 will receive at least 60% of the vote, but that 10 years from now California will still be just as dependent on oil as is the rest of the country.

Where I’m Coming From

I struggled with whether to put this section at the beginning or the end. Ultimately, I decided to open up with it, because I want you to know up front where I am coming from. You may consider this section a personal rant, designed to explain why I get upset with some of the rhetoric that is directed at my industry. I understand that this rhetoric plays well in Peoria, and everywhere else for that matter, but as an oil company employee I feel that this is unfair to a great many people.

Many people think of oil companies and see the face of Lee Raymond, ExxonMobil’s recently retired CEO. I see the faces of the many men and women who work very hard to make sure the transportation industry can get the fuel they need to deliver food around the globe. I see the faces of many people who juggled operations to make sure that the airplanes recently used to fight fires in Montana and Washington had the aviation fuel they needed to do their jobs.

I admit that my views are shaped from working inside the oil industry. But that doesn’t mean that my views are wrong. When people write that oil companies are evil incarnate, they aren’t just talking about Lee Raymond. In fact, they are talking mostly about people like Tim Crank. Let me tell you about Tim. Three years ago, Tim was working on a pump at a refinery in Ponca City, Oklahoma. A release occurred while he was working, which resulted in an explosion and fire. Tim died from injuries received as a result of the fire, leaving behind a wife and two young children. This tragic incident will always be imprinted in my mind, because I witnessed it. I know how his family struggled to cope with his death. Furthermore, I know that just about everyone in this industry can tell a similar tragic story.

While some may see this personal story as a cynical or insincere ploy to generate sympathy, the reason I told this story is to let you know why I get angry when my entire industry is characterized in venomous terms. The vast majority of oil companies are made up of people like Tim Crank, just trying to do their jobs, and tragically sometimes losing their lives in the process. People outside the oil industry often view us with disdain, because they think of Big Oil and see Lee Raymond. I get defensive because I see Tim Crank, out there working to make sure the public gets their fix of cheap gas. That’s why I won’t sit idly by while people speak of my industry with contempt. The Prop 87 campaign has been guilty of this, and this is why they have my undivided attention.

Fact or Fiction?

One of my biggest pet peeves has to be fiction that masquerades as fact. Following are some examples from the “Key Facts” page at the Yes on 87 site.

Yes on 87 “Fact”: Oil companies that oppose Prop 87 posted record-setting profits in the last five consecutive quarters — $78.3B in 2005 and $20.5B in the first quarter alone of this year.

Reality: Oil companies have in fact done very well lately. The oil industry is cyclical, and the current 10% earnings on sales is much better than the historical 5-7% earnings on sales. Of course these numbers pale in comparison to companies like Microsoft, who are earning 26.5% on sales. Microsoft recently had profits of $2.89 billion on revenues of $10.9 billion. Oil companies would love to see those kinds of margins. The overall numbers are larger for many oil companies, simply because the companies are much, much larger even than Microsoft. But record-setting profits are pretty meaningless unless placed in context.

Yes on 87 “Fact”: CA is the third largest oil-producing state, but the only one where the oil companies don’t pay oil drilling fees like they do in other states.

Reality: This claim is false. There are a number of states in which no drilling fees are paid. Furthermore, according to this article:

Except for California, most oil producing states rely on a severance tax for the majority of oil revenues. Yet contrary to popular belief, California does not place an abnormally light tax burden on crude oil producers. Considering both tax and royalty revenues, state government revenues from oil production in California amounted to 13.4 percent of the value of nonfederal production in the state, well above comparable rates for Oklahoma, Texas, and Wyoming.

Yes on 87 “Fact”: Oil companies are gouging California consumers at the pumps with the highest prices in the nation.

Reality: As you will learn in this essay, the reason Californians pay some of the highest gas prices in the nation is that they have some of the highest gasoline taxes in the nation. Besides that, I dispute that anyone is being gouged. First, provide a definition of “gouging”, and then I will get back with you on that one. I suspect we would find that pretty much anyone who sells into a rising market would be guilty of the same kind of gouging. Most people in California who have sold a home at a nice profit would certainly be guilty of gouging.

Yes on 87 “Fact”: Oil companies are blocking our access to cleaner, cheaper fuels.

Reality: This is a ludicrous claim. Oil companies have made big investments into solar, wind , and biofuels. In fact, the only company running a large scale cellulosic ethanol trial, Iogen, is receiving major funding from Shell.

Yes on 87 “Fact”: Prop 87 makes it illegal for oil companies to raise gas prices to pass the cost along to consumers.

Reality: Prices are affected by supply and demand, not by propositions that declare it is illegal to raise gas prices. Hawaii recently tried an experiment in price controls, despite warnings that consumers would be harmed. When the warnings came true, Hawaii abandoned this experiment.

Yes on 87 “Fact”: Requires strict accountability; nonpartisan, expert oversight and no new bureaucracy.

Reality: Where I see no accountability at all is if this measure fails to achieve the desired results. In my opinion, it will raise gasoline prices for California consumers, while penalizing shareholders of oil companies. Where is the accountability to those groups for their lost dollars should this measure fail?

Yes on 87 “Fact”: California deserves its fair share and the oil companies can afford to pay it. But the opposition is lining up, contributing millions of dollars to spin, scare and deceive voters.

Reality: Following this essay, you can decide whether California is getting a “fair share”. You will also see that some Prop 87 proponents are guilty of spin and deception.

Truth in Advertising

I am confident that Prop 87 will raise gas prices in California. That’s fine with me, because this should increase conservation. However, the Prop 87 proponents are promising Californians that there will be no increase in gas prices. Californians are being promised a free lunch; that in fact this new $4 billion tax will be borne entirely by oil companies.

I don’t see it that way. 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.

In fact, it seems that the only people who think gas prices won’t be impacted are the Prop 87 proponents. According to California Politics Today:

Proposition 87 may prohibit an “oil tax pass-through,” but everyone but its sponsors agrees it will raise gas prices at the pump.

Protecting consumers from price increases at the pump based on the levying of this tax is the implicit promise of Proposition 87’s proponents and the form in which they are promising California voters the always-popular something for nothing, not to mention, as will be heard in the interviews below, promising to repeal the basic economic law of supply and demand, which, in this context, amounts to the same thing.

Making “it illegal to pass the cost to us” is not the same as guaranteeing that passing Proposition 87 won’t, on its own, cause gasoline prices to rise.

As can be heard in the four interviews below with a range of experts and advocates in the fields of energy and economics, adding to the cost of oil produced in California cannot help but cause an increase in the price to consumers in California of gasoline.

So, in the interest of truth in advertising: Prop 87 will widen the gap between gas prices in California and the national average. Guaranteed. Not that there’s anything wrong with that, since this will promote conservation.

Make Them Pay Their Fair Share. And Then Some.

Proponents of Prop 87 paint a picture in which oil companies operating in California are not paying their fair share for extracting California’s resources. They will note that Texas has an extraction fee, and argue that California is getting a raw deal from the oil companies. However, to get an accurate comparison, we have to look at the entire taxation picture.

There are a number of ways that states receive revenue as a result of oil and gas transactions. Extraction taxes are but one example. Corporate income taxes are another example. So, even though Texas has an extraction tax of 4.6%, versus none for California, Texas does not charge oil companies a corporate income tax. California, on the other hand, charges oil companies an income tax rate of 8.84%, one of the highest in the nation. When times are good and oil companies are making big profits, states like California share in the “windfall.”
According to the Long Beach Chamber of Commerce:

Oil producers pay the state corporate income tax on profits earned in California. California’s corporate income tax rate is among the highest of the top producing states. Texas, in fact, does not have a corporate income tax at all which provides producers a competitive advantage over California in trying to attract capital investment. California producers also pay a regulatory fee to the Department of Conservation (regulates oil production in the state) that is assessed on production, with the exception of production in federal offshore waters.

So, despite the claims that oil companies in California are not paying their fair share, they already pay a much greater percentage of their income to the state than they do in Texas. I bet oil companies would have no problem at all with the proposed extraction tax if California wants to waive the corporate income tax as Texas does.

Of course taxes on gasoline sales also provide a large revenue stream for state governments, but these taxes are paid directly by consumers. In California, not only does the state get $0.14 a gallon, they also assess a sales tax of 8.75%. When gasoline is $3 a gallon, this means that California receives $0.32 a gallon in combined sales and excise taxes. Here is the breakdown of gasoline taxes, according to the San Francisco Chronicle:

If you’re paying about $3 a gallon at the pump in Alameda County where the sales tax is 8.75 percent, here is an estimated breakdown of who gets what:

– Fuel price per gallon: $2.40
– Federal Excise Tax: $0.18
– State Excise Tax: $0.18
– Sales tax for state government: $0.14
– State bond debt payment: $0.01
– Sales tax for local government: $0.10

I can tell you without a doubt that the government take is significantly higher than the income that oil companies earn in California. In fact, according to the same article:

Since 2002, sales tax revenues on gas have been growing annually by $300 million to $400 million to reach $2.86 billion in 2005, according to the California Board of Equalization.

“There’s a lot of blame to go around (when it comes to high fuel prices), but the government certainly should be on the list,” said Bill Leonard, a member of the Board of Equalization. “The government is the biggest profiteer of them all.”

Higher prices at the pump are one reason the state will see a sizable revenue windfall this year. When Gov. Arnold Schwarzenegger updates his budget proposal Friday, he is expected to announce that the overall tax revenue is expected to be $5 billion more than his earlier estimate in January.

Isn’t it interesting that the government is receiving the biggest windfall of all? It would seem that the logical place for the Prop 87 proponents to grab alternative energy funds would be some of this government windfall, given that this tax is already in place.

It also appears that the high state gasoline tax is the primary reason per capita usage of gasoline in California is low. After all, there is a very strong correlation between the states with the highest gasoline taxes – New York, Hawaii, California, Nevada, and Illinois – and the lowest per capita users of gasoline. While low per capita gas usage is certainly a good thing, it indicates that high state taxes result in lower product sales for oil companies in California than if California had Texas’ $0.20/gallon gasoline tax rate. Again, I am sure oil companies wouldn’t object much to Prop 87 if there was going to be a reduction to the sales tax rate, because they would sell more product. But the point is that the high gasoline tax is also affects the profits of oil companies in California.

The bottom line? Texas adopted one model: No corporate income tax, low gasoline taxes (leading to higher consumption), but an oil extraction tax. California adopted a different model: High corporate income tax, high gasoline taxes (leading to lower consumption), but no oil extraction tax. To suggest that oil companies are not paying their fair share in California simply because they don’t pay an extraction tax is a grotesque mischaracterization of the actual tax situation.

A Transfer of Wealth

While the stated intent of Prop 87 is to make California less dependent on petroleum, let’s be clear on exactly what it will do. Prop 87 is a transfer of wealth from one industry to a competing industry. In most cases, various subsidies are funded by taxes that we all pay in, and in fact many of the alternative technologies that Prop 87 would fund already receive very generous government subsidies. But on top of that, the proponents argue that it is appropriate to take from one special interest and give to another, because oil dependence is not good for us.

Let’s put this in perspective. Fast food isn’t good for us. Would most people consider it appropriate to place an additional tax on McDonalds and Burger King, and funnel the proceeds into health food stores? Would it be appropriate if I funded an initiative to achieve this, while at the same time investing in the health food stores that would benefit? Does anyone have a problem with that? Wouldn’t it be more effective to assess a tax on the people who frequent McDonalds, if my goal is to reduce dependence on McDonalds? Why is it appropriate to assess an additional tax burden on one industry and funnel the money to a competitor? Why is it not more appropriate to funnel the windfall that government has received to fund alternative energy projects?

Most supporters of this transfer of wealth don’t have a problem with it, but the money will mostly come from average working families and retirees who invested their money into company shares or into a mutual fund that owns company shares. These are the owners of Big Oil. It isn’t primarily the Lee Raymond’s that you are taking money from. The $4 billion comes from shareholders, and the “free lunch” comes at their expense.

And where is the accountability here? Let’s say that Prop 87 does not have the desired effect of reducing petroleum consumption. Furthermore, let’s say that it does indeed increase gasoline prices for California consumers, despite the assurances of the proponents. Ignoring for now the fact that Big Oil will of course be blamed for the increase in gas prices, how will Prop 87 proponents rectify this with the people of California? How will they rectify it with the shareholders from whom they extracted the $4 billion? The truth is, they won’t be accountable for the failure of this measure. It will just be a $4 billion “oops”, that is going to end up financially hurting a lot of people.

Lessons from Proposition 42

In 2002, California voters approved Proposition 42. According to this analysis of Proposition 42:

Proposition 42 would permanently dedicate revenues from the state’s share of the sales tax on gasoline to transportation projects. This sales tax on gasoline is already collected at the pump and generates roughly $1.3 billion a year.

Now that seems like a pretty good proposition to me. Take the sales tax that is being collected, and dedicate some of those funds to reducing the demand for petroleum (sort of like Prop 87, except you aren’t taking money from the shareholders). 20% of the funds were supposed to be spent for mass transit and intercity rail. Fast forward to 2006:

Sales Tax on Gasoline a Bonanza for State

We find that the words “permanently” and “dedicated” are quite easily dispensed with:

Revenue from state sales tax on gasoline is supposed to go for transportation projects under Proposition 42, which voters approved in 2002. But in recent years, legislators and the governor have invoked special provisions of the ballot measure that allowed them to dip into that fund, moving about $2.5 billion to pay for other expenses.

Hopefully, Prop 87 funds can’t be similarly diverted. But it does make me wonder whether the legislature might be able to divert these funds into other areas.

Conclusion

I predict Prop 87 will pass, primarily because people see it as a way to stick it to Big Oil. I think the measure will decrease gasoline consumption in California, by making gasoline more expensive. Furthermore, I predict that the measure will be abandoned well before $4 billion is raised as the price disparity in California’s gasoline market widens over the national average.

I actually favor higher gas prices, though. I think that will extend our supplies of oil. But I do have a problem with deceptive claims, especially when they are aimed at my industry. If I was in California, I am still not sure how I would vote. I think proponents missed an opportunity to write a much better proposition. I understand their need to write a politically palatable initiative, but I am turned off by hollow political promises. In conclusion, if you cast your vote for Prop 87, at least make sure you are voting based on facts, and not on spin.