Was 2014 Really the Warmest Year?

• The media is widely reporting 2014 as the warmest year on record, yet the underlying data don't support that conclusion.
• The data actually lead to a different finding, of 2014 tied with 2010 and 2005 within the margin of error, reflecting little warming since 2005.

When I opened today's Washington Post and turned to the Opinion section, I found two op-eds that began almost identically: Eugene Robinson's column stated, "We now know that 2014 was the hottest year in recorded history," while Catherine Rampell announced, "Last year, government scientists tell us, was the hottest year on record." The President even repeated this in his State of the Union address. However, that is not really what the figures in question indicate.

I suppose it's understandable that the Post's editors and those of many other media reporting the same finding might rely on the expertise of the government agencies involved, rather than digging deeper. The Post's columnists apparently based their comments on information provided to the media by NASA's Goddard Space Flight Center. The NASA press release, entitled, "NASA, NOAA Find 2014 Warmest Year in Modern Record," included links enabling one to scrutinize the raw data upon which this conclusion was based. I've reproduced the relevant portion below in picture form as of noon today, since this data is subject to periodic revisions.

NASA's dataset displays the differences between measured temperatures and the 14.0°C average from 1951-80. On this basis it confirms that the average recorded temperature in 2014 was 0.02°C higher than the average for the previous warmest year, 2010, which was in turn 0.01°C higher than 2005's. Unfortunately, neither that page nor the press release includes any information about the uncertainty inherent in these figures, which turns out to be larger than the increase from 2010-14.

All physical measurements, including those from the weather stations providing data to NASA, are plus-or-minus some error. Averaging them doesn't entirely negate that. Within the accuracy of these temperatures, it's not possible to distinguish among 2005, 2010 and 2014; they represent a statistical tie. That fact was explained more clearly than I have done in a report on January 14, 2015, from the team of scientists at Berkeley Earth. Hardly climate skeptics, this is the same group that made headlines a couple of years ago with a comprehensive study of existing climate data.

Why does this distinction matter? After all, measured temperatures have warmed nearly 2° Fahrenheit since the early 20th century, as shown in the graph above. Whether last year or 2010 was warmer might seem like more of an academic point than a practical one. However, the refrain of "record temperature" reports gives a false sense that the warming is accelerating. Instead, as the Berkeley Earth report found, "the Earth's average temperature for the last decade has changed very little." That's a very different impression than the one created by the stories I saw, with implications for how we respond to the risks of climate change.
 

The White House 2014 Budget Energy Proposals: Stuck in A Timewarp

• The President's budget proposal would increase taxes on energy in ways that would harm US competitiveness and consumers.
• Presenting the Energy Security Trust as a zero-sum game undermines its potential effectiveness and bi-partisan appeal.

After spending some time going through the White House's proposed budget for 2014-23, several conclusions were inescapable.  First, this administration still hasn't thought through the implications of the energy revolution that's currently unfolding in the US, as a result of the technology to develop our enormous shale oil and gas resources, which grew even larger this week. Not satisfied to see tax revenues and royalties from oil and gas expand as production grows, they miss no opportunity to seek to slice more from the current pie. This failure of imagination extends to the proposed Energy Security Trust Fund, which sounded intriguing when President Obama mentioned it in this year's State of the Union speech, but now appears to be mainly an accounting gimmick based on a zero-sum mentality.  Meanwhile, the budget's proposals for renewable energy and advanced technology vehicles seem largely divorced from our experience of the last several years.

Let's start with the tax changes and quickly dismiss them, because they're mostly a rehash of provisions in the administration's last four budgets and stand no better chance of Congressional approval this side of comprehensive tax reform.  Once again, we see proposals to eliminate about $4 B per year worth of tax treatment for the oil and gas industry, including provisions like the Section 199 deduction enjoyed by all US manufacturers.  Now add proposed changes in the treatment of foreign taxes, which would subject this highly international industry to double taxation on its activities outside the US, under the misappropriated label of "reform."  (True reform would move toward the territorial system used by most advanced economies.) Finally, the President's budget would eliminate both the widely used last-in, first-out (LIFO) and lower-of-cost-or-market (LCM) methods of cost accounting for inventories.  I don't know how much of the $87 B of higher revenue over ten years ascribed to that shift would come from the oil and gas industry, but it would certainly be in the billions, if this weren't all dead on arrival.

That brings me to the Energy Security Trust Fund, described in the State of the Union as a way to employ revenue from oil and gas development to fund R&D on reducing our dependence on oil.  That looked clever, if applied to incremental resource opportunities.  More production would fund more research, in an almost virtuous cycle.  Yet that's not how the idea would be implemented in this budget.  Instead of opening up new areas for drilling, and earmarking the royalties that would generate, the $2 B for the Trust would come mainly from diverting royalties from leases already in the budget, and from further "reform": higher royalties on US production and higher rentals and shorter lease terms to provide "incentives to diligently develop leases."  The latter echoes the "idle leases" canard we've heard since 2008, reflecting a continued misunderstanding of how the industry actually works, along with the real-world factors that often impede faster lease development, such as permitting delays and lawsuits.

So at least this part of the President's "all of the above" energy agenda is reduced to measures that, rather than "encouraging responsible domestic energy production", would make the US a much less attractive place to invest in developing oil and gas resources, and likely reverse our recent successes.  Yet if the new budget treats conventional energy as a slush fund to be raided, renewables and efficiency are treated to what would amount to a reprise of the 2009 stimulus.  I tallied $39.8 B through 2023 for programs such as alternative fuel vehicles, advanced technology vehicle manufacturing, advanced energy equipment manufacturing, bioenergy crop assistance, home energy efficiency retrofit credits, efficient buildings, and the Energy Security Trust Fund.  44% of the total would go to a single measure: making the production tax credit (PTC) for wind and other renewable energy permanent, instead of phasing it out, as even the American Wind Energy Association has suggested.  That's a bad idea for two reasons. 

First, it ignores a growing body of analysis pointing to the need for significant innovation in wind, solar and other renewable energy technologies, rather than continuing to pay project developers indefinitely to deploy the current technologies.  It also exposes a basic logical flaw in the argument for more subsidies: Renewables cannot simultaneously be approaching the point of becoming competitive with conventional energy, as they must if they are to capture significant shares of the energy market--wind accounted for 3.5% of US net electricity generation last year, and solar just 0.1%--while still needing permanent subsidies at rates orders of magnitude higher, on an energy-equivalent basis, than the tax breaks for oil & gas that the administration seeks to end.

After four years in office, it's reasonable to expect an administration to have learned what works and what doesn't. The President and his officials seldom miss an opportunity to brag about the enviable record of oil and gas production growth that has occurred since 2008, yet continue to propose and enact policies that, had they been in place in the previous decade--when the seeds of this growth were actually planted in an environment of rapidly rising energy prices--might well have nipped that growth in the bud. Nor do they seem to have learned much from the track record of business failures that has dogged their efforts in the renewable energy and advanced vehicles space--a record that extends well beyond the over-used example of Solyndra.  Taxing oil and gas much harder won't lead to more US production, nor will handing investors additional billions in taxpayer funds make renewables and electric vehicles competitive, without significant further improvements in the technologies.

The State of the Union's Two Energy Revolutions

It was no surprise that energy and climate change featured prominently in last night's State of the Union speech, giving me plenty to discuss in my on-camera interview with Reuters this morning. The President devoted an entire section of his address to these topics, leading into it in a very upbeat way: "Now is the time to reach a level of research and development not seen since the height of the Space Race.  And today, no area holds more promise than our investments in American energy."  You'd never guess from that introduction that this president faces a strikingly different energy challenge than his seven most recent predecessors. There are two energy revolutions underway in the US, and the unplanned one is racing ahead of the one to which he devoted most of his remarks--and most of his efforts on energy for the last four years.

Let's start with the positives.  Even more than in last year's speech, President Obama presented energy as a bigger opportunity than a problem. He described our impressive recent progress in oil and natural gas production, renewable energy generation, and the reduction of greenhouse gas emissions.  As fact-checkers have pointed out, he stepped into aspiration when he claimed credit for doubling automobile fuel economy--a goal that might or might not be attained by 2025--but even this fits within a broad set of energy trends that are all finally moving in the right direction.

The President also endorsed a very good idea that has been floating around for a long time, but has never been seized upon.  He suggested funding R&D for electric and natural gas vehicles and biofuels with the revenue from federal oil and gas lease bid premiums and royalties.  This "Energy Security Trust" would yoke the success of future energy technology to the enormous cash cow represented by the vast oil and gas resources beneath public lands and waters.  He'll have to sort out the allocation of revenues with the states, who surely won't want the new set-aside to come from their share.  If he can work that out, the government will have an even bigger vested interest in ensuring that responsible oil and gas development on these lands proceeds, in order to advance energy innovation.

Yet as pleased as I was with those aspects of his remarks, I couldn't help noticing that he still speaks about renewable energy in much the same way he did four years ago, as though we've learned nothing in the meantime.  He wants us to out-China China in investing in solar energy, despite the fact that many of China's leading solar manufacturers are struggling with the same low margins that have led to a string of solar bankruptcies in Europe and the US, as rampant global over-capacity fuels cutthroat competition.  He also apparently wants to make the wind Production Tax Credit permanent, rather than reforming and phasing it out, as even the leading US wind energy trade association has suggested.  The fact remains that no government on earth can afford to subsidize renewables at the current generous rates all the way up to full-scale deployment.  They need to be encouraged to become fully competitive with conventional energy as soon as possible and then set free. 

Nor has the President lost his enthusiasm for citing statistics like the doubling of the energy that "we generate from sources like wind and solar."  Yet increasing wind power from 1.3% of US electricity generation to 3%, and solar from 0.02% to 0.1%, are not what has set the stage for the US to become a significant net exporter of various forms of energy, and possibly even energy independent.  He spoke strongly in favor of natural gas last night and briefly noted oil's gains, but it's not clear that he sees them as the engines of economic growth that they could be for the next decade and beyond. 

Perhaps that's because after a long stretch in which US efforts on climate change and energy security seemed perfectly aligned, they are now moving out of sync. The 12% reduction in energy-related CO2 emissions since 2007 is largely attributable to fuel switching from coal to gas in the power sector, along with reduced oil demand in a lethargic economy.  There's additional scope for both; however, if all the present trends continue it will become harder to fit the reality of surging oil production and looming natural gas exports into a constrained emissions box. 

In that context, the President's call for a new, "bipartisan, market-based solution to climate change," and his threat to act via executive order if Congress fails, left enormous gaps of necessary detail.  Does President Obama really want another bitter contest over cap-and-trade, as one might conclude from his reference to the McCain-Lieberman efforts of 2003-5, or is "market-based" to be interpreted as a carbon tax, which is coming back into favor in some circles?  What was entirely missing was the necessary admonition to Congress to avoid larding any future climate bill with the kind of distortions and pork-barrel spending that turned its most recent effort, the bill by Reps. Waxman and Markey--both of whom were presumably in the room last night and deserve to feel slighted--into a 1427 page monstrosity.

Judging by my inbox this morning, many people liked what they heard last night concerning energy and climate.  Groups as diverse as the Blue-Green Alliance and the American Petroleum Institute cited portions of the address in support of their agendas.  And at least in the Energy Security Trust idea there were hints of the revitalized energy vision I was hoping for, in which the US rides the wave of shale-driven energy transformation while innovating the technologies of renewable energy, transportation and energy efficiency to the levels necessary to take over from oil and gas by mid-century.  There's always next year.

State of the Union: "All-Out, All-of-the-Above Energy"

Anyone expecting the announcement of big new energy initiatives in this year's State of the Union address was disappointed last night. What was new, however, was a welcome shift in the President's emphasis on conventional energy--the fuels he referred to as "yesterday's energy" in last year's speech. Never mind that the resurgent oil production for which Mr. Obama took credit is demonstrably the result of events and policies that preceded his inauguration, or that his administration has pursued policies that have held back faster development. If his remarks signal a return to federal energy policy that expends more than 10% of its effort on the sources that account for more than 80% of the energy we use, we should applaud him. The other new ingredient last night was an effort to ground the rationale for greater support for renewable energy in the argument that it took federally sponsored R&D to make the shale gas revolution possible--R&D that ironically wouldn't have occurred under the research priorities this President has set for the Department of Energy. I hope President Obama is serious about an "all-out, all-of-the-above strategy" for energy, because that's precisely what we need.

The best way to put that in perspective is with the figures in the 2012 Early Release of the Annual Energy Outlook from the Energy Information Agency of the DOE. It was released just in time for the President's speech, and there are few coincidences in today's Washington. The reference case of their forecast for 2035 shows the US consuming 10% more energy within 24 years--an improvement from the 16% predicted in last year's Outlook. It also shows the contribution of renewable energy in the mix increasing from 6.7% today to 8.3%, including mature hydropower. So even after two more decades of strong emphasis on clean energy, oil, gas and coal would continue to provide 80% of our energy. It's clear that there's a disconnect between the lofty rhetoric of last night's speech and the analysis of the government's energy experts. I'll leave it to you to assess whether the discrepancy is due to unrealistic expectations, inadequately ambitious forecasting, or some combination of the two.

A couple of other points from the State of the Union are worth noting. The President called for Congress to "Pass clean energy tax credits," presumably a reference to the Production Tax Credit (PTC) for wind and other renewables that expires at the end of this year. Yet he didn't devote a word to whether the PTC should be restructured and gradually phased out in light of the steadily narrowing competitive gap between renewable and conventional power, let alone the kind of major tax reform he alluded to later in the speech. Mr. Obama also called for a Clean Energy Standard in lieu of a comprehensive climate bill. This is small beer when most of the states with attractive renewable energy resources already have fairly aggressive state-level Renewable Portfolio Standards. Meanwhile, the development of 3 million homes' worth of clean energy sources on public lands that he is directing his administration to allow equates to less than 1% of US electricity demand--helpful, though hardly transformational.

With little likelihood of a divided Congress enacting much that is new on energy this year, the President's remarks last night are mainly interesting for what they suggest about the energy platform on which he will run for reelection this fall. In terms of clean energy, that seems to mean more of the same from 2008 and the last three years, but with much less emphasis on climate change than we heard in his last campaign. The new element is his pivot to embrace rising oil production and the possibilities created by shale gas, even as he cautiously distances himself from the technologies (hydraulic fracturing and horizontal drilling) that make these two trends possible. Although this might appeal to independent voters, it's also vulnerable to deflation by fact-checking and stands in tension with his rejection--for now--of the Keystone XL pipeline. And if tensions in the Persian Gulf or some other oil hot spot were to increase, so would the scrutiny applied to the administration's energy policies. I'll take a much closer look at those policies when the campaign heats up.

Cutting the Federal Budget Wisely

This week the administration issued its third budget since taking office in January 2009. In a year otherwise focused on belt-tightening, the proposal includes a 12% increase for the Department of Energy, focused on additional R&D for renewables and nuclear power. The increase would be offset by cuts in fossil energy programs and the elimination elsewhere in the budget of various tax deductions and tax credits--"tax expenditures" in Beltway parlance--that benefit the US oil and gas industry. Also new for this year are proposed additional fees on the industry to cover the increased cost of issuing drilling permits in the aftermath of the Deepwater Horizon accident, along with another provision to raise the cost of holding inactive oil and gas leases. Aside from the politics involved, this exercise reminds me of the periodic waves of cost-cutting I experienced at Texaco, Inc. in the 1980s and '90s. Unfortunately, the government hasn't yet learned the vital lesson that my former company and many in other industries finally figured out after years of experience: Reducing expenses only helps your bottom line when the items you are cutting contribute less in revenue than they cost.

Start with the oil and gas subsidies, which I've discussed previously. The newly submitted budget estimates these at approximately $4 billion per year. As we heard the President say in his latest State of the Union address, "I'm asking Congress to eliminate the billions in taxpayer dollars we currently give to the oil companies. (Applause.) I don't know if--I don't know if you've noticed, but they're doing just fine on their own. (Laughter.) So instead of subsidizing yesterday's energy, let's invest in tomorrow's." It's a guaranteed applause line, as the White House's own text indicates, despite including potentially serious errors of fact.

Now, one could argue in the abstract whether a tax credit or deduction constitutes a gift of "taxpayer money" (i.e., the government's) or an opportunity for the taxpayer in question to remit less of his own money to the government. I know how I feel about that when it comes to filing my form 1040. One might even arrive at different answers in different situations. As a practical matter, however, what counts in the current context is not whose money this is in the first place, but whether taking more of it leaves either the federal government or the US economy better off. Even from the perspective of tax revenue, a recent study found that after an initial increase, the long-term impact of higher taxes on the oil & gas industry resulted in reduced government revenue. Higher taxes on US oil & gas production will translate into less of both--and so less to tax--while also yielding more future imports and higher trade deficits, along with reduced energy security.

The President's remarks also suggested incorrectly that oil and gas are yesterday's energy, and not also today's and tomorrow's. In 2009 oil and gas accounted for 62% of our energy consumption, and the US Department of Energy expects them to continue to supply as much as 57% of our needs in 2035, after subtracting the contribution of liquid biofuels. Treating these key energy sources as undesirable could have serious consequences for our energy and economic security in the years ahead. Nor would it assist our efforts to reduce greenhouse gas emissions. Natural gas can contribute significantly to reducing the emissions from the power sector, which accounts for 40% of US CO2 emissions, and the main opportunities for reducing emissions from transportation, where most of our oil use takes place, are on the user side--conservation and more efficient cars, trucks and planes--and not on the extraction, refining and distribution side of the industry.

If the administration couldn't get these tax changes enacted in the previous Congress, they stand even less chance this term. However, that might not be the case for the additional "user fees" and lease fees, since they are new this year. The former are related to the redesign of the oversight agency for offshore drilling and were recommended by the Presidential commission investigating the accident. As I noted when their report came out, we already have a mechanism for recouping the expenses that the Bureau of Ocean Energy, Management, Regulation and Enforcement (formerly the Minerals Management Service) incurs in the course of reviewing leases and drilling permits and monitoring offshore activity. That mechanism is the lease bids and royalties that brought in $8 billion from onshore and offshore oil and gas in fiscal 2010. In a good year these sums could cover the entire Interior Dept. budget, let alone that of BOEMRE. Adding new fees on top of the existing royalties further reduces the attractiveness of drilling in US waters, on top of the "moratorium/permitorium" --now in its tenth month--for which critics finally received a belated explanation earlier this month. The net result of new fees would be less drilling here and more drilling in places like offshore Brazil.

Then there's the notion of "establishing fees for new non-producing oil and gas leases (both onshore and offshore) to encourage more timely production." This is clearly an outgrowth of the "idle leases" canard that was making the rounds in 2008. However, in light of protracted delays in issuing new permits and the likelihood that fewer permits will be issued in the future than in the past, it seems almost Kafkaesque to penalize companies for not drilling sooner on more of their leases. In truth, companies already pay twice for non-producing leases: once when they pay a bid bonus to acquire the lease, and then every year in the form of a lease rent that is due as long as the lease remains undeveloped. Companies factor this into the bonuses they bid, along with their assessment of the likelihood that a lease contains commercial quantities of oil or gas. Additional fees on non-producing leases seem likely to result in one or more of the following outcomes: lower bonus bids, fewer bids, and an increased focus outside the US. None of that would help either the deficit or energy security.

I'm entirely supportive of the government cutting expenses, including unwarranted subsidies, in order to begin the difficult task of bringing the federal budget closer to balance within the next few years. This seems essential if we're to avoid serious consequences for our credit rating, interest rates, and exchange rate. However, along the lines of what I saw when the oil industry reduced expenses in the aftermath of the big oil price drops of the mid-1980s and 1998-9, it would be counterproductive to do so in a manner that would actually result in lower overall tax receipts, while reducing domestic energy production in the bargain. Ultimately, it makes a lot more sense to target repealing the tax expenditures in question as part of the broader tax reform that seems inevitable if we want to get the deficit under control. That would eliminate specific tax breaks but simultaneously reduce overall corporate tax rates to make US industry more competitive globally, not less. A budget that proposes to double corporate income tax receipts by 2013--to a level higher than their 2007 asset bubble peak--is out of step with the competitiveness agenda that the administration has espoused, aside from its shortcomings in narrowing the long-term deficit.

Sputnik State of the Union

Energy didn't feature as prominently in last night's State of the Union Address as it has in some years, including last year's speech. Rather than making it a primary focus area, the President seemed to mention it more as an example of his broader innovation and competitiveness agenda. That's probably a good thing, because the administration's persistence in pitting conventional energy against renewables reflects the muddle in which US energy policy remains. We're desperately worried that China is getting ahead of us in renewable energy, yet we don't seem to notice that China is hardly treating oil and gas as yesterday's energy. I suspect that from China's perspective, their focus is not especially on renewable energy or clean energy but on cheap energy, which is what their economy needs to grow. I wouldn't think we're so different in that regard.

I won't waste time dissecting the President's suggestion to strip the oil & gas industry of its tax benefits in order to fund a new or expanded clean energy innovation effort. If the administration couldn't make that happen when its party dominated both houses of Congress by large majorities, then this idea is simply dead on arrival in an era of divided government. The best way to address those subsidies, along with the much larger per-barrel subsidy for ethanol, is through the kind of tax reform that would make all US industries more competitive globally. So I was pleased to hear the President suggest simplifying the tax code and reducing the corporate income tax.

Innovation and tax reform will indeed be crucial if the US wants to be a leader in clean energy technology, not just as the favored beneficiary of today's version of our periodic debate over industrial policy--picking winners--but as one part of a more robust and competitive US manufacturing sector. However, it's myopic to compare ourselves to China on infrastructure and clean energy innovation while ignoring China's full-court press to meet its rapidly growing demand for oil and gas. China doesn't have an offshore drilling moratorium or "permitorium"; instead it has focused on offshore drilling as a primary means for expanding its domestic production and limiting its oil imports, which a few years ago eclipsed those of Japan as the world's second largest, behind our own. Chinese companies are investing in oil & gas projects, joint ventures and acquisitions all over the world, because China recognizes that oil wasn't just the dominant fuel of the 20th century; it remains a key energy source in the 21st. And for those worried about China's lead in renewable energy, exemplified by the news that its wind power capacity surpassed that of the US last year, I recommend Michael Levi's article in Foreign Policy.

On a more positive note, President Obama seemed to signal his support for moving the debate on a national renewable energy standard toward encompassing all clean energy. His remarks suggested that this would include not just nuclear power--by far our largest source of low-emission energy today--but also natural gas and clean coal. With those inclusions, the goal he suggested of generating 80% of our electricity from "clean energy sources" by 2035 could be the most achievable energy goal his administration has put forward since taking office. With coal's share of electricity generation currently at 45%, it would require increasing the contribution from nuclear, renewables and natural gas by just under half--or less with some help from efficiency and conservation. Not easy, but not impossible, either, as long as we build enough new nuclear power plants to more than replace the ones that will likely have been retired by then.

Whether or not this is truly "our generation's Sputnik moment", the speech's recurring theme exhorting us to "win the future" was perhaps a bit too reminiscent of another presidential speech centered on a different kind of "WIN". Ensuring that this initiative doesn't share the fate of that earlier one in the Ford Administration might just depend on making sure that in an environment of tightening purse strings, the government's investments in new energy are focused on making clean energy cheap enough to compete without unsustainable subsidies. In the meantime, while we're waiting for that effort to bear fruit, it's worth recalling that America's conventional energy industry is still one sector in which we don't have to catch up with anyone else, unless we deliberately set out to hamstring it.