Press Conference Confusion

After listening to the energy portions of the presidential press conference last Friday, I found myself confused about the administration's approach to energy. Although I heard the President defending certain US energy policies, they weren't mainly those of his administration, nor were many of the outcomes he highlighted the result of actions he has taken. What's odd about that is that this administration has pursued as clear a set of energy policies, explicit and implicit, as any administration in recent memory; they just happen to be focused on a very different set of goals than attempting "to boost domestic production of oil and gas". And while I haven't agreed with all of them, his administration's actual policies concerning energy are certainly defensible in the context of putting the highest national priority on concerns about climate change. Before looking at this in more detail, I want to share a few thoughts on the aftermath of the quake and tsunami in Japan.

Having spent many years in earthquake country, I have deep sympathy for what the people of northeastern Japan are experiencing. The cleanup and recovery will take years, and the tectonic and emotional aftershocks will persist for a long time. The aftershocks for energy are more difficult to assess. It seems premature to draw conclusions about the impact on Japan's nuclear reactor fleet and the future of the global nuclear power industry. However, if the damage to several reactors is as bad as reports suggest, then the Japanese power grid must make up for the lost generation using either spare capacity at fossil fuel plants or with new technology. That could affect global fuel markets and the global demand for quickly-deployed generation, including both photovoltaic power and conventional small generators. At the same time, the extent of disruption the quake has caused to the global supply chains for such technologies is not yet clear. I'll be watching for discernible trends on these concerns in the weeks and months ahead.

Now back to the press conference. Two years into this administration, it has a track record on energy. The President campaigned on a platform of refocusing the government's energy efforts on renewables and energy efficiency, and he has followed through on that. The stimulus bill enacted in February 2009 included nearly $17 billion for those areas and not a penny for oil and gas. The administration's latest budget proposes slashing funding for R&D on fossil energy technology and ending tax incentives for domestic oil and gas production, using the savings to increase support for renewables and efficiency, consistent with his State of the Union remarks about investing in tomorrow's energy instead of "yesterday's". The President also supported comprehensive energy legislation, the explicit purpose of which was to make energy derived from fossil fuels--especially oil--more expensive. Although I have disagreed with many of these measures because I thought they took too little cognizance of the realities of the energy sector that supports our economy and the length of time a transition to cleaner energy entails, there was at least an admirable--and defensible--consistency to them. I would not have expected the President to tack away from defending these policies the first time oil and gasoline prices seriously spiked since his inauguration.

Then there's the matter of appearing to take credit for the recent recovery in US oil production by citing it twice in his remarks. The increase is real enough, though most experts, including the administration's own Department of Energy expect it to be short-lived, as the lagged effects of the post-Deepwater Horizon deepwater drilling moratorium work their way through the system. In fact, lags are the key to the whole question. If you have had experience with large projects, and particularly oil projects, then you realize that it typically takes a lot longer than two years for them to go through all the stages from inception to first production, including leasing, exploration, permitting, procurement and construction. The last time I looked at this in detail for oil the average time lag involved was around 7 years.

What was happening seven or eight years ago? Well, oil prices were in the early stages of the long climb that peaked in July 2008 at $144. It's no coincidence that a wave of new projects should have been coming onstream over the last couple of years, because the attractiveness of investing in them increased tremendously when prices broke out of their long-standing $20-30 per barrel price range. Yet it can be no more than a coincidence that the resulting increase in production should appear during an administration that has put in place policies restricting access to oil & gas development, delaying permits, and in some cases rescinding previously awarded leases.

The President's statement about undeveloped oil leases is a further reflection of how short his administration is on staff with industry experience. Companies don't lease these tracts with the intention of letting them sit idle. Instead, they continually prioritize their drilling prospects and pursue the best ones first, adding new leases to their inventory when they appear to have higher potential than those in their backlog. This process benefits taxpayers as well as the companies involved by helping to maximize the production on which royalties are paid and displacing more imports. And in the meantime, the Department of Interior continues to collect rental payments on any undeveloped leases, having already pocketed the bid bonuses on the basis of which they were awarded in the first place.

President Obama isn't the first politician to take credit for the results of actions taken in another administration. Considering the blame presidents often receive for events over which they likewise had little control or responsibility, it might even be understandable. Still, I can't help being surprised when the leader of an administration that has focused 90% of its energy efforts on resources and technologies that account for about 5% of our energy consumption and treated oil and gas as a legacy of a previous, less enlightened era suddenly embraces rising oil output. Whatever the reason, the change is welcome. And he has certainly learned the lesson of not being overly specific in explaining the circumstances under which the Strategic Petroleum Reserve would be tapped. All that's needed now is a shift of emphasis to recognize both the large potential of the renewable energy technologies in which we are investing and the enormous contribution of the domestic oil and gas that supply 37% of our energy needs and can do even more in the medium term, under the right policies.