The image that will stick with me from yesterday's failed attempt by Senator Mary Landrieu of Louisiana to avoid a filibuster on her bill to approve the Keystone XL pipeline is that of her Senate colleague, Barbara Boxer (D-CA) standing next to a blown-up photo of choking smog, presumably in China. Inconveniently, the greenhouse gases at the heart of this debate are invisible and global in effect, rather than local like the pollution from unscrubbed coal plants half a world away. Senator Boxer's smog ploy epitomizes the confusion and misinformation surrounding this project.
That extends to the White House, where the President's recent arguments against the pipeline reflect beliefs, rather than facts, and stand in contrast to the findings of his own administration on the economic and environmental impact of the pipeline, or of oil exports, should some of Keystone's oil be sold into the global market from the Gulf Coast.
Yesterday's defeat is likely to be more final for Senator Landrieu than for the pipeline. She goes into next month's runoff election as a distinct underdog, based on recent polling. The pipeline, however, will likely get another opportunity in the new Congress early next year, when supporters are expected to have an easier time coming up with the 60 votes necessary to bring a bill to the Senate floor for an up-or-down vote. The project may even benefit from having avoided a Presidential veto now, since the fig-leaf of letting the review process run its course would have been more transparent this time than when the President rejected the pipeline in 2012.
Showing posts with label senate. Show all posts
Showing posts with label senate. Show all posts
Wednesday, November 19, 2014
Wednesday, February 05, 2014
Interpreting the State Department's Latest Assessment of the Keystone XL Pipeline
Earlier today, I participated in a webchat hosted by The Energy Collective on the subject of the emissions and market impact of the Keystone XL Pipeline (KXL). It was prompted by last week's release of the State Department's "Final Supplemental Environmental Impact Statement" (SEIS) on the project. I encourage you to view the Youtube video of the event, but I thought I should also share some of what I learned in the course of preparing for the webchat, along with a few thoughts there wasn't time to discuss online.
The full SEIS runs around 2,000 pages. I focused on the 38-page Executive Summary and referred to the relevant sections of the longer document when I needed more detail. In particular, I wanted to understand how the authors of the report had assessed the project's impact on greenhouse gas emissions (GHGs), including how they went about trying to gauge how the market would behave with and without the controversial northern leg of the pipeline, linking the Alberta oil sands developments to the main US oil storage and trading hub in Cushing, OK. (The southern segment of the pipeline, from Cushing to the Gulf Coast, is already in operation, because it didn't require a permit to cross an international border.)
President Obama's stated criterion--I still believe he will make the final call--is ensuring the project does not "significantly exacerbate the climate problem." In terms of emissions, the SEIS analysis shows a range of incremental lifecycle GHG impact of 1.3-27.4 million tons of CO2 equivalent per year. For a project this size, that falls below what I'd consider a reasonable threshold for "significantly". It's equivalent to 0.02-0.4% of total US emissions. On the low end that's on par with US emissions from making glass--not generally considered an important emitter.
Yet even if you don't accept State's conclusion that at expected oil prices over the next few decades the oil that would be carried by KXL would be produced with or without the pipeline, the total direct emissions of 147-168 million tons/yr would still only constitute 0.3% of global emissions of around 50 billion tons. As Jesse Jenkins of the Energy Collective pointed out in the webchat, the emissions of any project would look small compared to global emissions. That's precisely the point, when opponents have characterized them as "game over" for the world's climate.
The key to the conclusions in the SEIS is that these barrels will find a market somewhere, and in the process they will back out some other crude oil. As a result, they would have a minimal impact on the global oil price, and so would be unlikely to increase demand, which is what determines how much oil is refined globally. It's also the case that the alternative crude oils the incremental oil sands production would displace aren't much lower in lifecycle emissions, e.g., heavy Venezuelan or Middle East crudes.
Meanwhile, the report indicates that alternative dispositions would involve either longer or more energy-intensive transportation, including rail and/or tanker, entailing around a million tons per year in higher emissions, along with more spillage than expected from KXL. On that basis, it's hard to read this report as anything other than an endorsement of the view that the pipeline would have a minimal net impact, relative to the likely outcomes that would follow if it is not built.
One of the main points we didn't have much time to discuss in the webchat concerned the role of the SEIS in the decision that the administration must eventually make about the project's permit. I thought the most insightful recent comment on this came from President Obama's first Secretary of Energy, Dr. Steven Chu. He sees Keystone as a mainly a political choice. I agree. However, I wonder if the political considerations have started to shift.
Until recently, it seemed that the balance of political costs and benefits favored continuing to delay the decision as long as possible, by whatever means came to hand. That was certainly the case in 2012, with the White House at stake. An approval then might have pleased independent voters, but it would also have deterred an important segment of the President's political base. This year, with control of the US Senate--and thus the administration's agenda in its final two years--potentially up for grabs, the costs might be rising. At least four Democratic Senators in states that voted for Governor Romney in 2012 (Alaska, Arkansas, Louisiana and North Carolina) have made recent statements in support of the permit for KXL. An October surprise on Keystone might come too late to help them.
Nothing in the Supplemental Environmental Impact Report altered my previous view that President Obama should approve the permit for KXL. Yet because it was written after the Lac-Megantic rail disaster, I thought its figures on the potential for more rail accidents and fatalities if the pipeline isn't built added a compelling argument. Oil by rail is a new reality of the North American energy economy; KXL won't change that fact, one way or the other. However, the addition of up to 1,000 more rail cars of crude oil per day, passing through many more communities than the pipeline would, is a sobering reality to weigh against opposition that I heard another participant in today's webchat suggest was at least partly symbolic.
The full SEIS runs around 2,000 pages. I focused on the 38-page Executive Summary and referred to the relevant sections of the longer document when I needed more detail. In particular, I wanted to understand how the authors of the report had assessed the project's impact on greenhouse gas emissions (GHGs), including how they went about trying to gauge how the market would behave with and without the controversial northern leg of the pipeline, linking the Alberta oil sands developments to the main US oil storage and trading hub in Cushing, OK. (The southern segment of the pipeline, from Cushing to the Gulf Coast, is already in operation, because it didn't require a permit to cross an international border.)
President Obama's stated criterion--I still believe he will make the final call--is ensuring the project does not "significantly exacerbate the climate problem." In terms of emissions, the SEIS analysis shows a range of incremental lifecycle GHG impact of 1.3-27.4 million tons of CO2 equivalent per year. For a project this size, that falls below what I'd consider a reasonable threshold for "significantly". It's equivalent to 0.02-0.4% of total US emissions. On the low end that's on par with US emissions from making glass--not generally considered an important emitter.
Yet even if you don't accept State's conclusion that at expected oil prices over the next few decades the oil that would be carried by KXL would be produced with or without the pipeline, the total direct emissions of 147-168 million tons/yr would still only constitute 0.3% of global emissions of around 50 billion tons. As Jesse Jenkins of the Energy Collective pointed out in the webchat, the emissions of any project would look small compared to global emissions. That's precisely the point, when opponents have characterized them as "game over" for the world's climate.
The key to the conclusions in the SEIS is that these barrels will find a market somewhere, and in the process they will back out some other crude oil. As a result, they would have a minimal impact on the global oil price, and so would be unlikely to increase demand, which is what determines how much oil is refined globally. It's also the case that the alternative crude oils the incremental oil sands production would displace aren't much lower in lifecycle emissions, e.g., heavy Venezuelan or Middle East crudes.
Meanwhile, the report indicates that alternative dispositions would involve either longer or more energy-intensive transportation, including rail and/or tanker, entailing around a million tons per year in higher emissions, along with more spillage than expected from KXL. On that basis, it's hard to read this report as anything other than an endorsement of the view that the pipeline would have a minimal net impact, relative to the likely outcomes that would follow if it is not built.
One of the main points we didn't have much time to discuss in the webchat concerned the role of the SEIS in the decision that the administration must eventually make about the project's permit. I thought the most insightful recent comment on this came from President Obama's first Secretary of Energy, Dr. Steven Chu. He sees Keystone as a mainly a political choice. I agree. However, I wonder if the political considerations have started to shift.
Until recently, it seemed that the balance of political costs and benefits favored continuing to delay the decision as long as possible, by whatever means came to hand. That was certainly the case in 2012, with the White House at stake. An approval then might have pleased independent voters, but it would also have deterred an important segment of the President's political base. This year, with control of the US Senate--and thus the administration's agenda in its final two years--potentially up for grabs, the costs might be rising. At least four Democratic Senators in states that voted for Governor Romney in 2012 (Alaska, Arkansas, Louisiana and North Carolina) have made recent statements in support of the permit for KXL. An October surprise on Keystone might come too late to help them.
Nothing in the Supplemental Environmental Impact Report altered my previous view that President Obama should approve the permit for KXL. Yet because it was written after the Lac-Megantic rail disaster, I thought its figures on the potential for more rail accidents and fatalities if the pipeline isn't built added a compelling argument. Oil by rail is a new reality of the North American energy economy; KXL won't change that fact, one way or the other. However, the addition of up to 1,000 more rail cars of crude oil per day, passing through many more communities than the pipeline would, is a sobering reality to weigh against opposition that I heard another participant in today's webchat suggest was at least partly symbolic.
Tuesday, January 28, 2014
The Pros and Cons of Exporting US Crude Oil
- Calls for an end to the effective ban on exporting most crude oil produced in the US are based on a growing imbalance in domestic crude quality.
- At least recently, the ban has likely benefited refiners more than consumers. Assessing the impact of its repeal on energy security requires further study.
This isn't just a matter of politics, or of self-interest on the part of those benefiting from the current rules. Questions of economics and energy security must also be considered. The main reason these restrictions are still in place is that for much of the last three decades US oil production was declining. The main challenges for the US oil industry were slowing that decline while ensuring that US refineries were equipped to receive and process the increasingly heavy and "sour" (high sulfur) crudes available in the global market. The shale revolution has sharply reversed these trends in just a few years.
No one would suggest that the US has more oil than it needs. Despite the recent revival of production, the US still imported around 48% of its net crude oil requirements last year. Even when production reaches its previous high of 9.6 million barrels per day (MBD) as the Energy Information Agency now projects to occur by 2017, the country is still expected to import a net 38% of refinery inputs, or 25% of total liquid fuel supply. The US is a long way from becoming a net oil exporter.
The driving force behind the current interest in exporting US crude oil is quality, not quantity, coupled with logistics. If the shale deposits of North Dakota and Texas yielded oil of similar quality to what most US refineries have been configured to process optimally, exports would be unnecessary; US refiners would be willing to pay as much for the new production as any non-US buyer might. Instead, the new production is mainly what Senator Murkowski's report refers to as "LTO"--light tight oil. It's too good for the hardware in many US refineries to handle in large quantities, and for most that can process it, its better yield of transportation fuels doesn't justify as large a price premium as for international refineries with less complex equipment.
As a result, and with exports to most non-US destinations other than Canada or a few special exceptions effectively barred, US producers of LTO must discount it to sell it to domestic refiners. Based on recent oil prices and market differentials, producers might be able to earn as much as $5-10 per barrel more by exporting it. Meanwhile the refiners currently processing this oil are enjoying something of a buyer's market and are able to expand their margins. The export issue thus pits shale oil producers and large, integrated companies (those with both production and refining) such as ExxonMobil against independent refiners like Valero.
Producers are justified in claiming that these regulations penalize them and threaten their growth as available domestic refining capacity for LTO becomes saturated. Additional production is forced to compete mainly with other LTO production, rather than with imports and OPEC.
I believe producers are also largely correct that claims that crude exports would raise US refined product prices are mistaken. The US markets for gasoline, diesel fuel, jet fuel and other refined petroleum products have long been linked to global markets, with prices especially near the coasts generally moving in sync with global product prices, plus or minus freight costs. I participated in that trade myself in the 1980s and '90s. What's at stake here isn't so much pump prices for consumers as US refinery margins and utilization rates.
Petroleum product exports have become a major factor in US refining profitability, and refiners are reportedly investing and reconfiguring to enhance their export capabilities. This provides a hedge against tepid domestic demand. Nationally, refined products have become the largest US export sector and contributed to shrinking the US trade deficit to its lowest level in four years. If prices for light tight oil rose to world levels US refineries might be unable to sustain their current export pace. It's up to policymakers to assess whether that risk is merely of concern to the shareholders of refining companies or a potential threat to US GDP and employment.
The quest to capture the "value added"--the difference between the value of manufactured products and raw materials--from petroleum production is not new. It helped motivate the creation of the integrated US oil companies more than a century ago and impelled national oil companies such as Saudi Aramco, Kuwait Petroleum Company, and Venezuela's PdVSA to purchase or buy into refineries in Europe, North America and Asia in the 1980s and '90s.
On the whole, OPEC's producers probably would have been better off investing in T-bills or the stock market, because the return on capital employed in refining has frequently averaged at or below the cost of capital over the last several decades. It's no accident most of the major oil companies have reduced their exposure to this sector. When today's US refiners argue that it is in the national interest to preserve the advantage that discounted LTO gives them they are swimming against the tide of oil industry history.
The energy security case for crude exports looks harder to make. An excellent article from the Associated Press quoted Michael Levi of the Council on Foreign Relations as saying, "It runs against the conventional wisdom about what oil security means. Something seems upside-down when we say energy security means producing oil and sending it somewhere else." The argument hinges on whether allowing US crude exports would simultaneously promote more production and increase the pressure on global oil prices. That makes sense to me as a former crude oil and refined products trader, but it will be a harder sell to Senators, Members of Congress, and their constituencies back home.
The politics of exports may be easing somewhat, though, as a Senate vacancy in Montana could lead to a new Chair at Energy & Natural Resources who would be a natural partner for Senator Murkowski on this issue. (That shift may incidentally be part of a strategy to help Democrats retain control of the Senate.) Will that be enough to overcome election-year inertia and the populist arguments arrayed against it?
As for logistics, the administration could ease the pressure on producers without opening the export floodgates by exempting the oil output from the Bakken, Eagle Ford and other shale deposits from the Jones Act requirement to use only US-flag tankers between US ports. That could open up new domestic markets for today's light tight oil, while allowing Congress the time necessary to debate the complex and thorny export question.
Senator Murkowski wasn't alone in calling for an end to the oil export ban. In his annual State of American Energy speech presented the day as the Senator's remarks, Jack Gerard, CEO of the American Petroleum Institute, noted, "We should consider and review quickly the role of crude exports along with LNG exports and finished products exports, because of the advantages it creates for this country and job creation and in our balance of payments." In a similar address on Wednesday, the head of the US Chamber of Commerce stated, "I want to lift the ban. It's not going to happen overnight, but it's going to happen." I'd wager he at least has the timing right.
A different version of this posting was previously published on the website of Pacific Energy Development Corporation.
Thursday, November 08, 2012
Push-me/Pull-you: Post-election Energy Policies
I've seen numerous commentaries on the energy implications of President Obama's narrow, 51%/49% victory. One of the most intriguing of these, from Reuters, concerned the prospects for exporting a portion of the growing output of natural gas produced from US shale deposits. This issue doesn't only affect gas drillers and their residential and industrial customers, but also developers of renewable energy projects, because of the way that gas and renewables compete in electricity markets. As much as the President's reelection, the failure of Republicans to capture control of the US Senate might turn out to be a key factor in determining the fate of potential gas exports, and by extension the environment within which renewables like wind and solar power must compete.
A variety of energy issues has been in limbo for months, pending the outcome of Tuesday's election. That includes approval of the Keystone XL crude oil pipeline from Canada, which might have gotten a favorable nudge as a result of Senate wins by pro-pipeline Democrats in North Dakota and Montana. Environmentalists are committed to blocking the pipeline, so the President must soon choose which part of his winning coalition he will disappoint. By comparison, the question of natural gas exports has received much less attention in the media, although it's been discussed extensively within energy and manufacturing circles. The likely incoming chairman of the Senate Energy and Natural Resources Committee, Ron Wyden (D-OR), appears to have strong views on the subject.
If Senator Wyden does replace the outgoing chairman, Senator Bingaman (D-NM), as expected, this would represent a shift in constituencies from a state with significant oil and gas production to one with essentially none. Senator Wyden thus brings mainly an end-user perspective to his Energy and Natural Resources role, and from that standpoint his concern about the potential price impact of gas exports, whether in the form of LNG or otherwise, is understandable, although I would argue it is also short-sighted and potentially detrimental to renewable energy, which he strongly supports.
On the surface, restrictions on the export of US gas should result in lower domestic natural gas prices than if large quantities of gas were shipped offshore. After all, low US natural gas prices, compared to those in Europe and Asia, are the main driver behind the desire to build export facilities, such as the Sabine Pass project of Cheniere Energy. Natural gas is cheaper in the US than elsewhere for several reasons, including the high and growing output from shale gas resources, as well as the epic disconnect between the natural gas price and crude oil prices, which are the basis for most international LNG contracts. US gas at the wellhead is currently trading for the oil equivalent of $21 per barrel, compared to UK Brent Crude at $107 per barrel. The extent to which exports might increase domestic prices is a matter of much speculation and study, and I wouldn't venture a guess. However, we can't just look at demand in gauging the impact of export restrictions.
The efficacy of holding down US prices by keeping more gas here also depends on the response of producers. If legislators or regulators turn the US gas market into a capped bottle, why would producers be content to supply steadily increasing quantities of gas at prices that don't provide them an attractive return? To some degree the low prices we've seen this year were the result of the combination of a weak economy and a supply glut created by contractual commitments on the part of drillers to develop gas leases at a specified pace. My understanding is that most such commitments have lapsed, and that a significant proportion of current gas supply is coming from wells that depend on the economics of their liquids output (crude oil and gas liquids), with the associated natural gas effectively a byproduct. It's not clear how rapidly gas production can continue to grow without natural gas prices that make gas-only wells economically attractive. So a US gas market with no export outlets would likely produce less gas in the long run, and that would constrain opportunities to use our abundant gas resources to support new industries, displace oil from transportation, and further reduce the use of coal in power generation.
Moreover, keeping a lid on the US gas market would compound the obstacles for renewable sources of electricity. Wind power developers and turbine manufacturers now face the expiration of the Wind Production Tax Credit (PTC). Even if it is extended, the output of wind farms competes with the output of gas turbines, while the grid relies on gas-fired power to provide a back-up for the intermittent output of wind and solar power. The cheaper the gas, the tougher it will be for renewables to make a profit. Market competition with gas will become an even bigger issue for renewables as they expand beyond the capacity of a cash-strapped federal government to continue to subsidize them. The one-year extension of the PTC under consideration could cost as much as $12 billion, an annual price tag that would only grow as renewables scale up--as they must if they are going to matter.
Navigating the complexities of allowing or restricting natural gas exports, and balancing the various constituencies involved, could provide an early test of the administration's commitment to an all-of-the-above energy strategy. That's because "all of the above"--if not merely a slogan--implies more than just producing energy from a variety of sources. It also entails competition among all these sources within a market in which some sectors of demand are declining, others growing, and new ones--including exports--are appearing all the time. Pushing back on one part of this market will have large consequences in other parts, and regulators could soon be overwhelmed by unintended consequences.
A variety of energy issues has been in limbo for months, pending the outcome of Tuesday's election. That includes approval of the Keystone XL crude oil pipeline from Canada, which might have gotten a favorable nudge as a result of Senate wins by pro-pipeline Democrats in North Dakota and Montana. Environmentalists are committed to blocking the pipeline, so the President must soon choose which part of his winning coalition he will disappoint. By comparison, the question of natural gas exports has received much less attention in the media, although it's been discussed extensively within energy and manufacturing circles. The likely incoming chairman of the Senate Energy and Natural Resources Committee, Ron Wyden (D-OR), appears to have strong views on the subject.
If Senator Wyden does replace the outgoing chairman, Senator Bingaman (D-NM), as expected, this would represent a shift in constituencies from a state with significant oil and gas production to one with essentially none. Senator Wyden thus brings mainly an end-user perspective to his Energy and Natural Resources role, and from that standpoint his concern about the potential price impact of gas exports, whether in the form of LNG or otherwise, is understandable, although I would argue it is also short-sighted and potentially detrimental to renewable energy, which he strongly supports.
On the surface, restrictions on the export of US gas should result in lower domestic natural gas prices than if large quantities of gas were shipped offshore. After all, low US natural gas prices, compared to those in Europe and Asia, are the main driver behind the desire to build export facilities, such as the Sabine Pass project of Cheniere Energy. Natural gas is cheaper in the US than elsewhere for several reasons, including the high and growing output from shale gas resources, as well as the epic disconnect between the natural gas price and crude oil prices, which are the basis for most international LNG contracts. US gas at the wellhead is currently trading for the oil equivalent of $21 per barrel, compared to UK Brent Crude at $107 per barrel. The extent to which exports might increase domestic prices is a matter of much speculation and study, and I wouldn't venture a guess. However, we can't just look at demand in gauging the impact of export restrictions.
The efficacy of holding down US prices by keeping more gas here also depends on the response of producers. If legislators or regulators turn the US gas market into a capped bottle, why would producers be content to supply steadily increasing quantities of gas at prices that don't provide them an attractive return? To some degree the low prices we've seen this year were the result of the combination of a weak economy and a supply glut created by contractual commitments on the part of drillers to develop gas leases at a specified pace. My understanding is that most such commitments have lapsed, and that a significant proportion of current gas supply is coming from wells that depend on the economics of their liquids output (crude oil and gas liquids), with the associated natural gas effectively a byproduct. It's not clear how rapidly gas production can continue to grow without natural gas prices that make gas-only wells economically attractive. So a US gas market with no export outlets would likely produce less gas in the long run, and that would constrain opportunities to use our abundant gas resources to support new industries, displace oil from transportation, and further reduce the use of coal in power generation.
Moreover, keeping a lid on the US gas market would compound the obstacles for renewable sources of electricity. Wind power developers and turbine manufacturers now face the expiration of the Wind Production Tax Credit (PTC). Even if it is extended, the output of wind farms competes with the output of gas turbines, while the grid relies on gas-fired power to provide a back-up for the intermittent output of wind and solar power. The cheaper the gas, the tougher it will be for renewables to make a profit. Market competition with gas will become an even bigger issue for renewables as they expand beyond the capacity of a cash-strapped federal government to continue to subsidize them. The one-year extension of the PTC under consideration could cost as much as $12 billion, an annual price tag that would only grow as renewables scale up--as they must if they are going to matter.
Navigating the complexities of allowing or restricting natural gas exports, and balancing the various constituencies involved, could provide an early test of the administration's commitment to an all-of-the-above energy strategy. That's because "all of the above"--if not merely a slogan--implies more than just producing energy from a variety of sources. It also entails competition among all these sources within a market in which some sectors of demand are declining, others growing, and new ones--including exports--are appearing all the time. Pushing back on one part of this market will have large consequences in other parts, and regulators could soon be overwhelmed by unintended consequences.
Wednesday, August 01, 2012
Last Hurrah for the Wind Power Tax Credit?
Ahead of Thursday's meeting of the Senate Finance Committee, a bipartisan deal has apparently omitted the expiring production tax credit (PTC) for wind power from a package of "tax extenders"--various expiring federal tax provisions, including the annual "patch" for the Alternative Minimum Tax. This development might surprise some of the industry's supporters, but the politics of wind have changed since I last examined this issue in February. A measure that once enjoyed solid bi-partisan support is now caught between two presidential campaigns that hold diametrically opposed views on its fate.
A quick review of the PTC seems in order. This tax credit, which covers a variety of technologies but with wind as the main beneficiary, dates back to 1992--interrupted by several past expirations but then revived in essentially its present form. That's significant, because during the same 20 years in which the PTC has been escalating annually with inflation--from 1.5 ¢ per kilowatt-hour (kWh) to the present level of 2.2 ¢/kWh--the cost of wind turbines and their output has fallen significantly. In the same period, US installed wind capacity grew from 1,680 MW to nearly 49,000 MW as of the first quarter of 2012. So in effect, we're subsidizing today's relatively mature onshore wind technology by a larger proportion than we did when it was in its infancy. That makes no sense, especially in the current environment.
The US wind industry has received substantial government support in recent years. When the long-standing tax credit against corporate profits proved to be much less beneficial during the financial crisis, the administration gave wind developers a better option within the stimulus: a 30% investment tax credit that could be claimed as up-front cash grants, instead of having to wait until power was generated and sold over the normal 10 year period of the PTC. From 2009-11 the wind industry received a cumulative $7.7 B, in addition to ongoing tax credits on older projects, manufacturing tax credits for new wind turbine factories, and loan guarantees for selected wind farms. And even with new turbine installations in 2012 running well below their record rate of 10,000 MW in 2009, the wind projects that qualify for the PTC this year could receive a total of $4.5 B over the next decade.
Many people seem to want to equate the tax breaks that wind and other renewable energy technologies receive with the controversial tax benefits for the oil and gas industry, without realizing how unfavorable that comparison truly is for renewables. Subsidies for technologies such as wind are much higher per unit of energy produced, consistent with their intended purpose of bridging the competitive gap vs. conventional energy. Yet since the total output of new renewables is still relatively small, the disparity in total subsidies is much larger than it appears. One way to illustrate that is that if the oil and natural gas produced in the US received tax credits at the same rate per equivalent kWh as wind power, then the annual oil and gas tax preferences that the Congress and President Obama have been sparring over for the last three years wouldn't be $4.8 B per year, but around $100 B per year.
As the Reuters article makes clear, there will be other opportunities for the PTC to be reinserted in the extenders bill or other legislation. However, by persistently arguing for extending the existing credit without modification, the wind industry and its supporters may be misreading the public's appetite for such generous subsidies in a period of protracted economic weakness, notwithstanding the recent Iowa poll. Despite its rapid recent growth wind still contributes less than 4% of the nation's electricity and just 1% of our total energy consumption, and the green jobs angle is wearing thin. Last year's expiration of the ethanol blenders credit set a precedent for ending another large, generous subsidy before its beneficiaries agreed they were done with it. If congressional Republicans line up behind their party's standard bearer on this issue, the wind industry will have missed its opportunity for a graduated, multi-year phaseout of the PTC, instead of stepping off a cliff in 2013.
A quick review of the PTC seems in order. This tax credit, which covers a variety of technologies but with wind as the main beneficiary, dates back to 1992--interrupted by several past expirations but then revived in essentially its present form. That's significant, because during the same 20 years in which the PTC has been escalating annually with inflation--from 1.5 ¢ per kilowatt-hour (kWh) to the present level of 2.2 ¢/kWh--the cost of wind turbines and their output has fallen significantly. In the same period, US installed wind capacity grew from 1,680 MW to nearly 49,000 MW as of the first quarter of 2012. So in effect, we're subsidizing today's relatively mature onshore wind technology by a larger proportion than we did when it was in its infancy. That makes no sense, especially in the current environment.
The US wind industry has received substantial government support in recent years. When the long-standing tax credit against corporate profits proved to be much less beneficial during the financial crisis, the administration gave wind developers a better option within the stimulus: a 30% investment tax credit that could be claimed as up-front cash grants, instead of having to wait until power was generated and sold over the normal 10 year period of the PTC. From 2009-11 the wind industry received a cumulative $7.7 B, in addition to ongoing tax credits on older projects, manufacturing tax credits for new wind turbine factories, and loan guarantees for selected wind farms. And even with new turbine installations in 2012 running well below their record rate of 10,000 MW in 2009, the wind projects that qualify for the PTC this year could receive a total of $4.5 B over the next decade.
Many people seem to want to equate the tax breaks that wind and other renewable energy technologies receive with the controversial tax benefits for the oil and gas industry, without realizing how unfavorable that comparison truly is for renewables. Subsidies for technologies such as wind are much higher per unit of energy produced, consistent with their intended purpose of bridging the competitive gap vs. conventional energy. Yet since the total output of new renewables is still relatively small, the disparity in total subsidies is much larger than it appears. One way to illustrate that is that if the oil and natural gas produced in the US received tax credits at the same rate per equivalent kWh as wind power, then the annual oil and gas tax preferences that the Congress and President Obama have been sparring over for the last three years wouldn't be $4.8 B per year, but around $100 B per year.
As the Reuters article makes clear, there will be other opportunities for the PTC to be reinserted in the extenders bill or other legislation. However, by persistently arguing for extending the existing credit without modification, the wind industry and its supporters may be misreading the public's appetite for such generous subsidies in a period of protracted economic weakness, notwithstanding the recent Iowa poll. Despite its rapid recent growth wind still contributes less than 4% of the nation's electricity and just 1% of our total energy consumption, and the green jobs angle is wearing thin. Last year's expiration of the ethanol blenders credit set a precedent for ending another large, generous subsidy before its beneficiaries agreed they were done with it. If congressional Republicans line up behind their party's standard bearer on this issue, the wind industry will have missed its opportunity for a graduated, multi-year phaseout of the PTC, instead of stepping off a cliff in 2013.
Monday, May 16, 2011
Honey, I Shrunk the Oil Industry
I finally finished watching the archived video from last week's Senate Finance Committee hearing with the heads of the five largest major oil companies in the US, including the two that are based in the EU. The few nuggets of real information and insight that were exchanged were nearly drowned out by political posturing, but my hat is off to Chairman Baucus (D-MT) for his willingness to engage in a genuine give and take with his guests. I attribute much of the frustration that was on display to the conflict between the facts and their context: Although the companies are mostly right on the principles and consequences involved in the proposal to strip them of their tax incentives, it's nearly impossible for anyone outside the industry to get past the large profits these companies are making and the out-of-control federal deficit that the Congress must endeavor to rein in. Perhaps I can offer a bit of perspective for both sides of the argument.
First, neither this Congress nor the administration is proposing windfall profits taxes--government's traditional threat when oil profits soar--nor are there serious calls for nationalization of the industry. Having watched other countries make a hash of such moves, it appears we've learned a thing or two in the last three decades. The measures currently under consideration are much less extreme than that, and I imagine they sounded reasonable and fair to a lot of Americans who are in sticker shock every time they drive by a gas station. However, that doesn't make them good policy--energy or tax.
At the same time, despite Senator Hatch's pie chart showing the relative size of the US oil industry compared to the global industry, including OPEC, few of those grilling the CEOs seemed to grasp the scale involved--a major factor in the absolute magnitude of the profits in question--including the size of companies with which these firms must compete for opportunities around the world. For comparison I couldn't turn up an estimate of Saudi Aramco's first quarter earnings through a Google search, so I had to devise one myself. Based on an average OPEC basket price of $101/bbl and a conservative production cost of $20/bbl, Aramco's average volume of oil exports in January and February, as reported in the database of the Joint Organizations Data Initiative, implies quarterly earnings of around $50 billion--more than the total of the five companies represented at the hearing--and that's assuming that every barrel Aramco refines and sells within the Kingdom is at a breakeven. When it comes to oil profits, big is relative. Even the much smaller Petrobras, 64% owned by the Brazilian government, posted $6.7 B in first quarter earnings, beating US #2 Chevron, in which I own shares.
Several of the Senators complained that the math didn't seem to work, in terms of understanding how the withdrawal of a couple of billion a year in tax incentives could have a serious impact on the five companies and shift investment away from the US, a much more serious concern than the effect on earnings. Having participated in the project portfolio process of a major oil company in the past, I believe I know what the Senators were missing.
It seems counter-intuitive, but corporate-level accounting profits reported after the fact have virtually nothing to do with project selection decisions, other than influencing how much money is available to invest. The choice of which new projects to pursue and which to leave on the shelf hinges on detailed comparisons of expected future after-tax earnings and cash flow for each project. Tax rates, deductions and credits play an important role in those calculations. For some projects the go/no-go decision rests on a knife edge of risked net present value, and in that environment a lost tax deduction (Section 199) or tax credit could make US projects look consistently less attractive than their foreign counterparts. (Ironically, these companies' renewable energy investments in the US would also suffer the same disadvantage.) Put enough US energy projects in that position, and the result is inevitable: fewer wells drilled here, less future US production as current production declines, and eventually a smaller domestic oil industry with fewer capabilities.
Despite a few half-hearted attempts to channel the ghost of William Jennings Bryan, I doubt that any of the Senators participating in the hearing really wants such an outcome. It wouldn't help the millions of Americans who are alarmed by high gas prices, and it's hardly consistent with the President's goals of reducing oil imports by one-third and improving US energy security. Unfortunately, because of the way the question has been framed, in terms of a narrow set of tax breaks the industry enjoys, there are no good answers. Those can only be found by expanding the conversation to encompass a truly constructive US energy policy promoting both conventional and renewable energy, along with meaningful deficit reduction.
First, neither this Congress nor the administration is proposing windfall profits taxes--government's traditional threat when oil profits soar--nor are there serious calls for nationalization of the industry. Having watched other countries make a hash of such moves, it appears we've learned a thing or two in the last three decades. The measures currently under consideration are much less extreme than that, and I imagine they sounded reasonable and fair to a lot of Americans who are in sticker shock every time they drive by a gas station. However, that doesn't make them good policy--energy or tax.
At the same time, despite Senator Hatch's pie chart showing the relative size of the US oil industry compared to the global industry, including OPEC, few of those grilling the CEOs seemed to grasp the scale involved--a major factor in the absolute magnitude of the profits in question--including the size of companies with which these firms must compete for opportunities around the world. For comparison I couldn't turn up an estimate of Saudi Aramco's first quarter earnings through a Google search, so I had to devise one myself. Based on an average OPEC basket price of $101/bbl and a conservative production cost of $20/bbl, Aramco's average volume of oil exports in January and February, as reported in the database of the Joint Organizations Data Initiative, implies quarterly earnings of around $50 billion--more than the total of the five companies represented at the hearing--and that's assuming that every barrel Aramco refines and sells within the Kingdom is at a breakeven. When it comes to oil profits, big is relative. Even the much smaller Petrobras, 64% owned by the Brazilian government, posted $6.7 B in first quarter earnings, beating US #2 Chevron, in which I own shares.
Several of the Senators complained that the math didn't seem to work, in terms of understanding how the withdrawal of a couple of billion a year in tax incentives could have a serious impact on the five companies and shift investment away from the US, a much more serious concern than the effect on earnings. Having participated in the project portfolio process of a major oil company in the past, I believe I know what the Senators were missing.
It seems counter-intuitive, but corporate-level accounting profits reported after the fact have virtually nothing to do with project selection decisions, other than influencing how much money is available to invest. The choice of which new projects to pursue and which to leave on the shelf hinges on detailed comparisons of expected future after-tax earnings and cash flow for each project. Tax rates, deductions and credits play an important role in those calculations. For some projects the go/no-go decision rests on a knife edge of risked net present value, and in that environment a lost tax deduction (Section 199) or tax credit could make US projects look consistently less attractive than their foreign counterparts. (Ironically, these companies' renewable energy investments in the US would also suffer the same disadvantage.) Put enough US energy projects in that position, and the result is inevitable: fewer wells drilled here, less future US production as current production declines, and eventually a smaller domestic oil industry with fewer capabilities.
Despite a few half-hearted attempts to channel the ghost of William Jennings Bryan, I doubt that any of the Senators participating in the hearing really wants such an outcome. It wouldn't help the millions of Americans who are alarmed by high gas prices, and it's hardly consistent with the President's goals of reducing oil imports by one-third and improving US energy security. Unfortunately, because of the way the question has been framed, in terms of a narrow set of tax breaks the industry enjoys, there are no good answers. Those can only be found by expanding the conversation to encompass a truly constructive US energy policy promoting both conventional and renewable energy, along with meaningful deficit reduction.
Wednesday, May 12, 2010
Finding Facts or Fault
I devoted several hours yesterday to watching Senate hearings on the Gulf Coast oil spill. The Energy and Natural Resources Committee hosted two panels, one a technical panel featuring a former official of the Minerals Management Service--the agency that Interior Secretary Salazar has announced he intends to split in two--and a Professor of Petroleum Engineering from Texas A&M. The second, juicier panel was composed of senior executives from the three main companies involved in the spill, BP, Transocean and Halliburton. Despite the importance of these hearings in putting a face on this disaster and giving our elected representatives an opportunity to demonstrate their concern, I thought the panels served a useful educational purpose. And somewhat to my surprise, they also turned up at least one apparently new fact that might prove crucial in understanding what went wrong 5,000 feet below the Gulf of Mexico on April 20th.
I can't claim to be a great connoisseur of Congressional hearings. They offer some of the same morbid fascination as a car wreck: you know you shouldn't be watching, but you can't take your eyes off it. True to form, a few of the Senators treated the session as an opportunity to show their outrage and alignment with their constituents' concerns. Most, however, followed the tone set by the Chairman, Senator Bingaman (D-NM), in asking thoughtful, probing questions--though I couldn't help chuckling when one Senator seemed to imply that she had participated in the 1986 Space Shuttle Challenger hearings in that same room--alluding to their famous "O-ring" revelation--even though she would have just been elected to her state's legislature that year. Despite the obvious frustration of the committee members when the three executives deflected their efforts to pin the blame for the accident on each of them in turn, the discussion remained civil and the comments and questions mostly substantive.
I found two lines of questioning especially intriguing. The first related to the cause of the accident itself--as distinct from the subsequent leak--and whether it might have had something to do with the well having been cleared of drilling mud prior to setting the final concrete plug in the well. As I understand it, drilling mud is used to balance the pressure in the well between the higher reservoir pressures deep underground and the much lower pressure at the surface. Once the heavy mud was removed and replaced with lighter seawater, the barriers installed in the well (steel casing, cement, the first plug, and ultimately the blowout preventer, or BOP) would have had to withstand the full pressure in the reservoir, which Dr. F.E. Beck from the first panel estimated at 14,000 psi. Since this was apparently the last action performed by the drilling crew prior to the explosion, the sequence and timing of this step makes it an obvious candidate for one of the root causes leading to the explosion on the topsides of the Deepwater Horizon rig. Senator Sessions (R-AL), in particular, tried in vain to get any of the three witnesses to concur that it was contrary to normal practice for the mud to be displaced prior to the setting of the final cap.
The other fascinating exchange occurred later in the hearing, at about 1:24 into C-SPAN's archive video, when the ranking member, Senator Murkowski (R-AK), questioned Transocean's CEO, Mr. Newman, about reports that Deepwater Horizon's BOP had been modified. According to Mr. Newman, one of the five "ram" preventers on the BOP stack was converted "from a conventional well-bore-sealing ram preventer to a BOP test-ram", to "allow for more efficient testing of the BOP." He went on to explain the economic benefits of such a modification, which apparently has been done on other rigs, in reducing the cost and delays associated with testing the BOP. Unfortunately, although Senator Murkowski followed up with a question about whether any modified BOPs had experienced incidents, she didn't ask whether that modification had reduced the capability of the BOP to respond to a catastrophic failure of well control.
Perhaps I've misunderstood Mr. Newman's remarks, and the modification would have had no impact at all on the operation of the BOP. Or it's possible that one extra ram might have made no difference at all, in conjunction with the cascade of other failures necessary to produce a blowout of this magnitude. However, this certainly seems like a topic that should be examined in much greater depth during the full incident investigation that must follow.
I didn't have time to catch the afternoon hearings, in which the same executives were grilled by the Senate Environment and Public Works Committee, or the House hearings this morning. I'll be interested to see if any other new insights emerge, though a couple of things seem clear. First, and with due respect to the Senators and their staffs who clearly worked hard to get up the steep learning curve on this subject, they are simply not equipped to conduct an engineering investigation into an accident of the technical complexity involved in deepwater drilling. Moreover, the format and adversarial approach aren't well-suited to eliciting the necessary level of candor and cooperation from witnesses who've essentially been told they are auditioning for the role of chief villain in the piece. If anything, that understandable tendency to prioritize blame-apportionment over impartial fact-finding seems to have been amplified by the financial crisis and recession. But while it's easy to write such hearings off as political theater, they can still serve a useful purpose, because that same lack of technical knowledge on the part of these committees constrains the dialog to a level that the average American actually has a chance of understanding. That makes it all the more essential that the Congress should refrain from leaping to premature conclusions that could turn out to be wrong, but very hard to correct later with the public.
I can't claim to be a great connoisseur of Congressional hearings. They offer some of the same morbid fascination as a car wreck: you know you shouldn't be watching, but you can't take your eyes off it. True to form, a few of the Senators treated the session as an opportunity to show their outrage and alignment with their constituents' concerns. Most, however, followed the tone set by the Chairman, Senator Bingaman (D-NM), in asking thoughtful, probing questions--though I couldn't help chuckling when one Senator seemed to imply that she had participated in the 1986 Space Shuttle Challenger hearings in that same room--alluding to their famous "O-ring" revelation--even though she would have just been elected to her state's legislature that year. Despite the obvious frustration of the committee members when the three executives deflected their efforts to pin the blame for the accident on each of them in turn, the discussion remained civil and the comments and questions mostly substantive.
I found two lines of questioning especially intriguing. The first related to the cause of the accident itself--as distinct from the subsequent leak--and whether it might have had something to do with the well having been cleared of drilling mud prior to setting the final concrete plug in the well. As I understand it, drilling mud is used to balance the pressure in the well between the higher reservoir pressures deep underground and the much lower pressure at the surface. Once the heavy mud was removed and replaced with lighter seawater, the barriers installed in the well (steel casing, cement, the first plug, and ultimately the blowout preventer, or BOP) would have had to withstand the full pressure in the reservoir, which Dr. F.E. Beck from the first panel estimated at 14,000 psi. Since this was apparently the last action performed by the drilling crew prior to the explosion, the sequence and timing of this step makes it an obvious candidate for one of the root causes leading to the explosion on the topsides of the Deepwater Horizon rig. Senator Sessions (R-AL), in particular, tried in vain to get any of the three witnesses to concur that it was contrary to normal practice for the mud to be displaced prior to the setting of the final cap.
The other fascinating exchange occurred later in the hearing, at about 1:24 into C-SPAN's archive video, when the ranking member, Senator Murkowski (R-AK), questioned Transocean's CEO, Mr. Newman, about reports that Deepwater Horizon's BOP had been modified. According to Mr. Newman, one of the five "ram" preventers on the BOP stack was converted "from a conventional well-bore-sealing ram preventer to a BOP test-ram", to "allow for more efficient testing of the BOP." He went on to explain the economic benefits of such a modification, which apparently has been done on other rigs, in reducing the cost and delays associated with testing the BOP. Unfortunately, although Senator Murkowski followed up with a question about whether any modified BOPs had experienced incidents, she didn't ask whether that modification had reduced the capability of the BOP to respond to a catastrophic failure of well control.
Perhaps I've misunderstood Mr. Newman's remarks, and the modification would have had no impact at all on the operation of the BOP. Or it's possible that one extra ram might have made no difference at all, in conjunction with the cascade of other failures necessary to produce a blowout of this magnitude. However, this certainly seems like a topic that should be examined in much greater depth during the full incident investigation that must follow.
I didn't have time to catch the afternoon hearings, in which the same executives were grilled by the Senate Environment and Public Works Committee, or the House hearings this morning. I'll be interested to see if any other new insights emerge, though a couple of things seem clear. First, and with due respect to the Senators and their staffs who clearly worked hard to get up the steep learning curve on this subject, they are simply not equipped to conduct an engineering investigation into an accident of the technical complexity involved in deepwater drilling. Moreover, the format and adversarial approach aren't well-suited to eliciting the necessary level of candor and cooperation from witnesses who've essentially been told they are auditioning for the role of chief villain in the piece. If anything, that understandable tendency to prioritize blame-apportionment over impartial fact-finding seems to have been amplified by the financial crisis and recession. But while it's easy to write such hearings off as political theater, they can still serve a useful purpose, because that same lack of technical knowledge on the part of these committees constrains the dialog to a level that the average American actually has a chance of understanding. That makes it all the more essential that the Congress should refrain from leaping to premature conclusions that could turn out to be wrong, but very hard to correct later with the public.
Wednesday, January 20, 2010
What Now for Cap & Trade?
In the course of a single month, from the conclusion of the Copenhagen climate conference to yesterday's special election in Massachusetts, the anticipated global response to climate change has shifted dramatically. What had once seemed a likely scenario of coordinated, mandatory cuts in global greenhouse gas emissions suddenly looks unattainable, at least any time soon, and the whole approach to addressing climate change is in urgent need of a rethink. While much of the attention in last night's election was focused on the prospect of a 41st Senate vote to block pending health care legislation, the same dynamic almost certainly applies to cap & trade, at least along the lines of the Waxman-Markey bill passed last June by the House of Representatives.
I'll leave it to others to comment on the extent of the political upheaval that the voters of Massachusetts have created by sending a Republican to fill the US Senate seat held for decades by the late Senator Kennedy, and by his brother before him. Whatever this means for the administration's health care agenda, you only need to view a short video clip from Senator-elect Brown's campaign to realize that President Obama's plans for cap & trade, on which only one chamber had acted while the Democrats held a 60-vote super-majority in the Senate, look like further collateral damage from last night's result. While supporting more energy from renewables and nuclear power, Mr. Brown opposes cap & trade, or at least the version now on the table.
I'm probably in a minority of those concerned about climate change who welcome the demise of the Waxman-Markey approach. As I've noted before, it made little sense to adopt a methodology designed to create a level playing field for energy technologies based on their emissions, if it was established on such an intentionally-uneven foundation of excessive free allowances handed out to favored sectors and constituencies. And on top of its basic flaws, Waxman-Markey exemplified the recent Congressional tendency to load up any big bill with mountains of pork and reams of tangential provisions.
Does this mean cap & trade itself is now dead? I hope not, because I believe its underlying concept remains the most efficient way to recognize the cost of the environmental externalities associated with our use of fossil fuels--which cannot be replaced overnight--and to shift our energy habits toward greater efficiency and a growing reliance on more sustainable energy sources. But the politics of that now look challenging, particularly in an election year that is shaping up so unpredictably. Democrats still hold commanding majorities in the Senate and House, but no bill without bi-partisan support could get past a cloture vote in the Senate. That gives greater leverage to the negotiations of Senators Lindsey Graham (R-SC) and John Kerry (D-MA) for a bi-partisan climate bill incorporating much broader support for domestic energy production--something that might be marketed as a genuine jobs bill without the cynicism of "green jobs" hype.
It also shifts attention to the EPA's Endangerment Finding on CO2 and that agency's proposals for regulating CO2 emissions. Last week the Washington Post was shocked by the apparent involvement of lobbyists in drafting proposed legislation to block any action by the EPA. Did their editors ever bother to scrutinize Waxman-Markey, which read like a lobbyist bonanza? Either way, extending the regulations of the Clean Air Act to CO2 would be a very expensive bad idea. CO2 is only a pollutant in the traditional sense by legal courtesy, and regulating the primary result of all carbon combustion in the same way we regulate much more easily managed fuel impurities and combustion byproducts like SOx and NOx--for which the term "Best Available Control Technology" actually has some meaning--looks orders of magnitude more expensive than a system that channels emissions reductions to the lowest-cost sources.
With a 52-47 election victory for Scott Brown, voters in Massachusetts have completed the work begun in Copenhagen of upending the best-laid plans for dealing with climate change. Instead of a binding global treaty to replace the expiring Kyoto Protocol, we have the voluntary goal-tallying of the Copenhagen Climate Accord, and instead of legislative momentum towards mandatory cap & trade in the US, we have renewed uncertainty and the necessity of a scaled-back bi-partisan approach--if any at all this year--that must focus more on what we should add than on what should be taken away--with the threat of EPA regulations and endless legal wrangling over them lurking in the background. I'll be very interested to see what emerges from this.
I'll leave it to others to comment on the extent of the political upheaval that the voters of Massachusetts have created by sending a Republican to fill the US Senate seat held for decades by the late Senator Kennedy, and by his brother before him. Whatever this means for the administration's health care agenda, you only need to view a short video clip from Senator-elect Brown's campaign to realize that President Obama's plans for cap & trade, on which only one chamber had acted while the Democrats held a 60-vote super-majority in the Senate, look like further collateral damage from last night's result. While supporting more energy from renewables and nuclear power, Mr. Brown opposes cap & trade, or at least the version now on the table.
I'm probably in a minority of those concerned about climate change who welcome the demise of the Waxman-Markey approach. As I've noted before, it made little sense to adopt a methodology designed to create a level playing field for energy technologies based on their emissions, if it was established on such an intentionally-uneven foundation of excessive free allowances handed out to favored sectors and constituencies. And on top of its basic flaws, Waxman-Markey exemplified the recent Congressional tendency to load up any big bill with mountains of pork and reams of tangential provisions.
Does this mean cap & trade itself is now dead? I hope not, because I believe its underlying concept remains the most efficient way to recognize the cost of the environmental externalities associated with our use of fossil fuels--which cannot be replaced overnight--and to shift our energy habits toward greater efficiency and a growing reliance on more sustainable energy sources. But the politics of that now look challenging, particularly in an election year that is shaping up so unpredictably. Democrats still hold commanding majorities in the Senate and House, but no bill without bi-partisan support could get past a cloture vote in the Senate. That gives greater leverage to the negotiations of Senators Lindsey Graham (R-SC) and John Kerry (D-MA) for a bi-partisan climate bill incorporating much broader support for domestic energy production--something that might be marketed as a genuine jobs bill without the cynicism of "green jobs" hype.
It also shifts attention to the EPA's Endangerment Finding on CO2 and that agency's proposals for regulating CO2 emissions. Last week the Washington Post was shocked by the apparent involvement of lobbyists in drafting proposed legislation to block any action by the EPA. Did their editors ever bother to scrutinize Waxman-Markey, which read like a lobbyist bonanza? Either way, extending the regulations of the Clean Air Act to CO2 would be a very expensive bad idea. CO2 is only a pollutant in the traditional sense by legal courtesy, and regulating the primary result of all carbon combustion in the same way we regulate much more easily managed fuel impurities and combustion byproducts like SOx and NOx--for which the term "Best Available Control Technology" actually has some meaning--looks orders of magnitude more expensive than a system that channels emissions reductions to the lowest-cost sources.
With a 52-47 election victory for Scott Brown, voters in Massachusetts have completed the work begun in Copenhagen of upending the best-laid plans for dealing with climate change. Instead of a binding global treaty to replace the expiring Kyoto Protocol, we have the voluntary goal-tallying of the Copenhagen Climate Accord, and instead of legislative momentum towards mandatory cap & trade in the US, we have renewed uncertainty and the necessity of a scaled-back bi-partisan approach--if any at all this year--that must focus more on what we should add than on what should be taken away--with the threat of EPA regulations and endless legal wrangling over them lurking in the background. I'll be very interested to see what emerges from this.
Tuesday, November 11, 2008
The Shifting Senate
Although overshadowed by the presidential contest, there was much speculation going into last Tuesday's election about whether Democrats could capture a filibuster-proof majority of 60 seats in the US Senate. This would have had profound implications, not only for the ability of an incoming Democratic president to push his agenda through Congress, but for Congress to pass a number of measures that the leadership likely considers unfinished business. That includes major legislation on energy and climate change. Although three contests remain unresolved at this point, leaving this possibility tantalizingly open, a review of the voting on a couple of key bills suggests that even if they all went the Democrats' way, that outcome might be less useful than it appears, because several of the Republicans who retired or have been turfed out were moderates who voted with the majority on the measures in question.
Today's topic might seem overly focused on "inside-the-Beltway" concerns, but I think it could have serious consequences outside Washington, DC. Consider two key pieces of energy-related legislation that came before the Congress this year. The Boxer-Warner-Lieberman Bill, S.3036, would have enacted an increasingly-restrictive cap on greenhouse gas emissions, enforced through a national emissions-trading system ratcheting up energy prices and the prices of energy-intensive goods, in order to reduce US emissions of CO2 and other GHGs. After extensive debate, the bill failed on a "cloture vote", which would have brought it to the floor of the Senate for an up-or-down vote, which it might well have passed. The vote was 48-36, but should probably be counted as 54-36, due to some key absences. That would still have fallen short of the 60 votes required to end debate. Adding the six Senate seats the Democrats have already picked up in this election might lead one to see cap-and-trade as a shoe-in in the next Congress. That math doesn't quite work, however. Of those Senators who voted against cloture, only two lost their seats, while four of the six seats that changed hands were already in the "aye" column. Even if the unresolved races in Alaska, Georgia and Minnesota all send Democrats to Washington, they would still come up one vote short, unless another Senator who voted no or did note vote could be brought around.
The prospect of a windfall profits tax on oil companies looks equally shaky at this point, for similar reasons. Consider the voting on the "Consumer First Energy Bill of 2008", S.3044, which in addition to a 25% tax on "windfall" profits of the major integrated oil companies--over and above the taxes they already pay--would have allowed OPEC to be sued for anti-trust violations in US courts and imposed restrictions on energy commodity speculation. This bill also failed its cloture vote, by 51-43. When we adjust for the seats that have already changed hands, that improves to 55-39. Yet if Senators Stevens (R-AK) and Chambliss (R-GA) fall, it would only extend to 57-36, still short of the magic 60 votes.
So even if the new Senate tallies 58 Democrats and only 40 Republicans, not counting the two Independents who have historically voted with the Democratic caucus, enacting major energy legislation will likely require serious consideration of the views of the minority. While that will disappoint partisans and those desiring the strictest possible climate change legislation, the practical necessity of a bi-partisan approach to energy could pay dividends over the long haul, by preventing the majority from passing measures that could be overturned the next time the balance of power in the Congress shifts. Like the Cold War, solving our energy and climate problems is not the work of one Congress or one Administration, but will require a cumulative effort spanning decades. That should align with the necessity of avoiding further shocks to the economy, as well.
Next Tuesday I will be speaking on the climate change implications of the election at a breakfast panel in Manhattan hosted by my sponsor, IHS Herold. The topic of the session is "Investment Insights in Alternative Energy." If you are interested in attending, please email Bianca Smothers.
Today's topic might seem overly focused on "inside-the-Beltway" concerns, but I think it could have serious consequences outside Washington, DC. Consider two key pieces of energy-related legislation that came before the Congress this year. The Boxer-Warner-Lieberman Bill, S.3036, would have enacted an increasingly-restrictive cap on greenhouse gas emissions, enforced through a national emissions-trading system ratcheting up energy prices and the prices of energy-intensive goods, in order to reduce US emissions of CO2 and other GHGs. After extensive debate, the bill failed on a "cloture vote", which would have brought it to the floor of the Senate for an up-or-down vote, which it might well have passed. The vote was 48-36, but should probably be counted as 54-36, due to some key absences. That would still have fallen short of the 60 votes required to end debate. Adding the six Senate seats the Democrats have already picked up in this election might lead one to see cap-and-trade as a shoe-in in the next Congress. That math doesn't quite work, however. Of those Senators who voted against cloture, only two lost their seats, while four of the six seats that changed hands were already in the "aye" column. Even if the unresolved races in Alaska, Georgia and Minnesota all send Democrats to Washington, they would still come up one vote short, unless another Senator who voted no or did note vote could be brought around.
The prospect of a windfall profits tax on oil companies looks equally shaky at this point, for similar reasons. Consider the voting on the "Consumer First Energy Bill of 2008", S.3044, which in addition to a 25% tax on "windfall" profits of the major integrated oil companies--over and above the taxes they already pay--would have allowed OPEC to be sued for anti-trust violations in US courts and imposed restrictions on energy commodity speculation. This bill also failed its cloture vote, by 51-43. When we adjust for the seats that have already changed hands, that improves to 55-39. Yet if Senators Stevens (R-AK) and Chambliss (R-GA) fall, it would only extend to 57-36, still short of the magic 60 votes.
So even if the new Senate tallies 58 Democrats and only 40 Republicans, not counting the two Independents who have historically voted with the Democratic caucus, enacting major energy legislation will likely require serious consideration of the views of the minority. While that will disappoint partisans and those desiring the strictest possible climate change legislation, the practical necessity of a bi-partisan approach to energy could pay dividends over the long haul, by preventing the majority from passing measures that could be overturned the next time the balance of power in the Congress shifts. Like the Cold War, solving our energy and climate problems is not the work of one Congress or one Administration, but will require a cumulative effort spanning decades. That should align with the necessity of avoiding further shocks to the economy, as well.
Next Tuesday I will be speaking on the climate change implications of the election at a breakfast panel in Manhattan hosted by my sponsor, IHS Herold. The topic of the session is "Investment Insights in Alternative Energy." If you are interested in attending, please email Bianca Smothers.
Wednesday, June 11, 2008
Throw Out The Kitchen Sink
As I was watching a bit of the Senate debate on the latest energy legislation on C-SPAN, I couldn't help noticing how dysfunctional this process has become. This bill was assembled like Frankenstein's monster, out of mismatched provisions selected more for their potential to satisfy key constituencies than for the likelihood they might bring down gasoline prices or reduce this country's dependence on foreign oil. What if the Congress broke with all precedent by separating these provisions into individual bills and proceeded to a straight up-or-down vote on each one? While that might deprive some members of the opportunity to use another member's support or opposition to the aggregated bill as political weapon, that should hardly be a primary consideration when addressing the ongoing energy crisis.
Although the current bill, the America-First Energy Act of 2008 (S.3044) contains an interesting proposal on commodity trading margin limits that might reduce some of the speculation that many believe is contributing to high oil prices, it also includes a windfall profits tax on oil, at the rate of 25% on "the excess of the adjusted taxable income of the applicable taxpayer for the taxable year over the reasonably inflated average profit for such taxable year." The latter curious notion is defined as, "an amount equal to the average of the adjusted taxable income of such taxpayer for taxable years beginning during the 2002-2006 taxable year period (determined without regard to the taxable year with the highest adjusted taxable income in such period) plus 10 percent of such average" but reduced by excess of "qualified investments of such applicable taxpayer for such taxable year" over an average from 2002-2006. Those "qualified investments" refer to wind, solar, biomass and a variety of other renewable energy technologies. This entire provision would only apply to any "major integrated oil company." In other words, any profits of ExxonMobil, Chevron, ConocoPhillips, or the US divisions of Shell and BP not reinvested in alternative energy would be subject to a 25% surtax, after paying income taxes at the full corporate rate.
Now, whether or not you believe that the profits of oil companies should be taxed at more than the effective 40% rate to which they are already subject, or that these companies should invest more in renewable energy, it should be painfully obvious that even if such a bill received a majority of votes in the Senate and House, it would promptly be vetoed by the President. Whatever other valuable provisions this bill may contain have been made hostage to a measure that would further handicap US oil companies that already operate at a disadvantage in the intense global competition for new resources now underway. The inclusion of this Poison Pill for partisan political purposes exemplifies the unseriousness of our present approach to energy policy.
The real solutions to our energy problems must be genuinely bi-partisan and endure from one administration to the next, much as our Cold War strategies did. This bill in its current form violates that principle. If its provisions are as sensible and beneficial for the American public as its sponsors apparently believe, then they should be willing to disentangle them and offer them up for separate votes, on their merits. That may not be the way things are usually done, but then perhaps this is the kind of change that voters consistently say they are seeking in this election cycle.
Note: My personal portfolio includes shares of one or more of the companies mentioned above.
Although the current bill, the America-First Energy Act of 2008 (S.3044) contains an interesting proposal on commodity trading margin limits that might reduce some of the speculation that many believe is contributing to high oil prices, it also includes a windfall profits tax on oil, at the rate of 25% on "the excess of the adjusted taxable income of the applicable taxpayer for the taxable year over the reasonably inflated average profit for such taxable year." The latter curious notion is defined as, "an amount equal to the average of the adjusted taxable income of such taxpayer for taxable years beginning during the 2002-2006 taxable year period (determined without regard to the taxable year with the highest adjusted taxable income in such period) plus 10 percent of such average" but reduced by excess of "qualified investments of such applicable taxpayer for such taxable year" over an average from 2002-2006. Those "qualified investments" refer to wind, solar, biomass and a variety of other renewable energy technologies. This entire provision would only apply to any "major integrated oil company." In other words, any profits of ExxonMobil, Chevron, ConocoPhillips, or the US divisions of Shell and BP not reinvested in alternative energy would be subject to a 25% surtax, after paying income taxes at the full corporate rate.
Now, whether or not you believe that the profits of oil companies should be taxed at more than the effective 40% rate to which they are already subject, or that these companies should invest more in renewable energy, it should be painfully obvious that even if such a bill received a majority of votes in the Senate and House, it would promptly be vetoed by the President. Whatever other valuable provisions this bill may contain have been made hostage to a measure that would further handicap US oil companies that already operate at a disadvantage in the intense global competition for new resources now underway. The inclusion of this Poison Pill for partisan political purposes exemplifies the unseriousness of our present approach to energy policy.
The real solutions to our energy problems must be genuinely bi-partisan and endure from one administration to the next, much as our Cold War strategies did. This bill in its current form violates that principle. If its provisions are as sensible and beneficial for the American public as its sponsors apparently believe, then they should be willing to disentangle them and offer them up for separate votes, on their merits. That may not be the way things are usually done, but then perhaps this is the kind of change that voters consistently say they are seeking in this election cycle.
Note: My personal portfolio includes shares of one or more of the companies mentioned above.
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