Energy and the 2016 Presidential Primaries

With another round of important primary elections taking place this week, I am sadly tardy in taking a high-level look at the energy positions of the candidates. The winnowing that has already taken place simplifies the task, even as it raises the stakes: A further contraction of the field after the voting in Florida, Illinois, North Carolina and Ohio could eliminate whole approaches to national energy policy.

The divide on energy between the Republican and Democratic fields also seems wider than in recent years. In 2008, when oil prices were approaching an all-time high, Republicans placed more emphasis on resource access--"drill baby, drill"--but both major party nominees supported cap-and-trade to address climate change. After recent remarks by Secretary Clinton and Senator Sanders, this November's election is shaping up as a binary choice between the continuation of the energy revolution that has saved the US hundreds of billions of dollars, and the elevation of environmental concerns as the main criteria for future energy decisions.

I'll take a closer look at the energy positions of the remaining Democratic candidates in a future post. For now I want to focus on the Republican field, because the first round of winner-take-all primaries looks like a make-or-break moment for the two candidates with the most detailed published positions on energy:

• Kasich - On his campaign website the Ohio governor argues for increasing US energy supplies from all sources, including efficiency and conservation.  He endorses North American energy independence, but also sees the need for innovation in clean energy technology. He would rein in regulation, including the Clean Power Plan, to "balance environmental stewardship with job creation." And while he has supported the development of Ohio's Utica shale, putting the state in the top rank of natural gas producers for the first time in decades, he has also led an effort to increase state taxes on oil and gas production. The appeal of Governor Kasich's positions to moderates is understandable, although no one would mistake them for a 2016 Democrat's energy platform.
• Rubio - The Florida senator's energy proposals are even more detailed, with more of a legislative focus than Governor Kasich's. Their tone is simultaneously positive and adversarial: Senator Rubio has an upbeat vision for the role energy can play for the US, and much of it is presented on his website in counterpoint to the actions and priorities of an administration he clearly believes has largely been mistaken on energy. There's a "wonkish" flavor to much of the content, such as his argument for education reform to fill the jobs energy development can help create. Although a reference to support for the Transatlantic Trade & Investment Partnership might be a red flag in a year dominated by populist sentiment, most of the ideas here fall solidly within the mainstream of recent conservative thought on energy.

Each of the other two remaining Republicans represents a more significant departure from their party's recent approach to energy, at least at the presidential level:

• Cruz - Senator Cruz appears to take a more overtly libertarian stance on energy and what he calls the Great American Energy Renaissance. He wouldn't just lighten federal regulation of energy, as his rivals advocate; he would take on the government's ability to regulate. For example, in addition to opposing the Clean Power Plan, he co-sponsored legislation that would make it much harder for the EPA and administration to use the federal Clean Air Act to devise other ways to regulate greenhouse gas emissions from power plants. Consistent with his plan to abolish the IRS, he would also eliminate the Department of Energy. He supports an all-of-the-above energy strategy, but on a level playing field. Ethanol, for example, after his phase-out of the Renewable Portfolio Standard, would have to find its way into the energy mix without a federal mandate or subsidies.  
• Trump - From my quick perusal of it, the Trump website lacks the kind of specifics on energy that are found on the other candidates' sites. We are left to piece together Mr. Trump's positions on energy based on his answers to specific questions or issues, elsewhere. You can find a number of quotes from those on Google. If there's a unifying principle to his views on energy, he seems to be as deal-focused as on other topics, and less allergic to using the power of government than his opponents.  For example, he supported the Keystone XL pipeline but apparently thought we could get a better deal from Canada and the project developer. If Dilbert creator Scott Adams is correct in his analysis of Donald Trump as a Master Persuader, the details of his views on any issue like this matter less in an election than how he frames them.  

The energy context of the 2016 election could not be more different than that of four or eight years ago. A global oil glut and natural gas priced low enough to edge out coal for the top spot in US power generation are giving candidates a rare luxury. They can address energy without the pressure of angry consumers demanding immediate answers. However, even if the election will not be decided based on energy, it remains a major pillar of the economy. How candidates view energy can shed important light on the consistency of their other positions. I expect to return to this point in the weeks ahead.

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. 

US Natural Gas Prices and the Election

Every fall my natural gas utility asks if I'd like to lock in my gas price for the next 12 months.  In some respects the timing for this looks ideal.  Commodity natural gas prices haven't been lower than this year's average since 1999.  Gas is also historically cheap relative to other fuels.  Heating oil recently averaged above $4 per gallon, while the fixed price my natural gas provider is offering equates to $1.36 per gallon, including distribution charges.  However, overhanging this relatively simple choice are big uncertainties related to the economy and the potential impact of regulations on shale gas production.  To complicate matters further, both of these uncertainties are entangled with the outcome of the US presidential election, and my gas provider wants my answer by next Monday.

When I last looked at this question in detail, in 2010, I concluded that the utility's offer was attractive, after scrutinizing then-current gas futures prices and the historical relationship between the futures market and "city gate" prices for Virginia, where I live.  Using the same methodology, this year's offer of $0.62/therm ($6.20/MMBTU) looks reasonable.  Much has changed in the interim, though, in ways that undermine the rationale for locking in consumer gas prices.  The biggest benefit of a fixed price is avoiding nasty surprises during winter heating season.  More than four-fifths of my household's gas consumption occurs from November through March, a period when gas prices used to be alarmingly volatile.  

That's less of a concern, now, with US gas inventories high and supply ample. The same shale gas revolution that has increased domestic supply and backed out imports has also reduced volatility and promoted big shifts in demand. Since 2009 residential gas demand has been essentially flat, while demand from commercial and industrial users has grown by 6.5% and consumption in power generation is up by more than 10%, despite a lackluster economy.  (Gas for use in transportation grew even faster but still constitutes less than 0.2% of total gas demand.)  As a result of these shifts, peak monthly average natural gas prices since the winter of 2009-10 have occurred in summer, coinciding with air conditioning demand. With less winter price volatility, the decision to lock in prices now is mainly a bet on gas prices for the next 12 months.  The outcome of that bet hinges on future supply and demand.

On the supply side, will the surge of US shale gas production continue?  New regulations are among the biggest potential constraints on output.  The EPA has set new rules on emissions during well completion and production, with the most expensive aspect phasing in by 2015.  EPA will also issue new rules on wastewater disposal from fracking by 2014. There is growing pressure on the administration to impose federal regulation of most aspects of shale development, superseding management by the states.  Thus far, the White House has avoided a sweeping crackdown that would disrupt gas markets, and the EPA administrator is on record opposing comprehensive federal regulation of all wells.  However, it's not obvious whether such reticence stems from a basic belief in the national importance of this resource or the simple expedient of not killing the golden goose before the election.  Governor Romney has proposed streamlining regulations affecting gas production. Next Tuesday's outcome should resolve this uncertainty.

The other big uncertainty surrounding gas prices concerns demand.  High shale gas output isn't the only reason gas is cheap today.  Anemic GDP growth such as the 2% rate for the third quarter reported last Friday has helped keep gas prices low.  A stronger economy with higher full-time employment would put upward pressure on prices by soaking up much of the surplus production that has depressed them.  However, the consequences of failing to mitigate January's "fiscal cliff"--federal budget "sequestration" and the expiration of many tax cuts--would likely drive natural gas back toward the lows we saw this spring.  With the economy still the number one issue for most voters, its likely future impact on gas demand is linked with our perceptions of the candidates' economic programs and promises. 

My best bet is to convince my supplier to let me wait until after the election to reply.  There's nothing like additional information to improve the value of a decision. Failing that, I'm inclined to pass on this opportunity.  The possibility of cheaper natural gas next year acts as a modest hedge against the risk of another recession, while the benefits of a stronger economy would more than outweigh any natural gas price increases I might experience on the upside.

Election 2012: Romney on Energy

After last week's review of President Obama's energy record and campaign materials on energy, Governor Romney's energy plans present a sharp contrast. They are based on a fundamentally different view of energy and the economy, relying on markets to allocate capital to the most productive opportunities, rather than on government to guide a mix of public and private investments along specific paths towards designated ends. They also emphasize technologies that are already deployed at scale today, not those still under development or striving to attain scale. Implicitly, the Romney plan prioritizes supplying the energy for a robust economic recovery over programs designed to address long-term environmental challenges like climate change. These positions present voters with a serious and consequential choice on November 6th.

The Romney campaign's website on energy arrays the candidate's ideas mainly in words, rather than with the kind of images and interactive features that dominate the Obama campaign's sites. Energy is the first plank of Governor Romney's five-point "Plan for a Stronger Middle Class", though it requires a little work to explore the details of his energy program. A list of bullet points  is backed up by a lengthy policy paper with numerous references to external sources, but you have to look for it.

The Romney energy plan focuses mainly on oil, gas, coal and nuclear energy, which together meet 91% of current US primary energy demand and which the Department of Energy projects will still provide nearly 90% in 2020 under the policies in place today. You won't find much on his campaign's website about the new renewables that generated electricity equivalent to 2% of our energy use last year, beyond a critique of the administration's investment in Solyndra and a commitment to R&D on new energy technologies.

Among the details of his plan are support for expanded offshore drilling, including areas such as offshore Virginia that were originally in the Obama administration's early-2010 offshore development blueprint, along with a comprehensive assessment of US resources using current technology, rather than further extrapolations based on 1980s technology. Governor Romney proposes expanding energy cooperation with both Canada and Mexico and would approve the entire Keystone XL pipeline. His goal of attaining North American energy independence is aggressive, yet recent analysis by Citigroup puts it within the realm of possibility. It appears to be based on an assessment by Wood Mackenzie, a top-notch energy consultancy, indicating that US oil and natural gas liquids output could expand by 7.6 million barrels per day, with 6.7 million of that coming from federal lands and waters currently off-limits to development. That compares to US net petroleum imports of 8.5 million barrels per day in 2011.

Another aspect of the plan aimed at streamlining the permitting of energy projects could be just as useful for utility-scale renewable energy projects as for oil and gas exploration and production. Regulatory and permitting delays are among the key reasons it takes longer and costs more to develop crucial energy and infrastructure projects here than in many of the countries against which our competitive standing has been slipping. Governor Romney also proposes giving states greater control of permitting on their non-park federal lands. That could substantially increase energy access and output, especially in the west, where the federal government owns over 280 hundred million acres, or 37% of those 11 states, net of tribal lands.

There are also some missing elements. I would have liked to see more about how renewables fit into Governor Romney's vision. He apparently supports the Renewable Fuels Standard but is silent about the increasingly urgent need to reform it. He is on record against the extension of the wind Production Tax Credit (PTC), a 20-year old subsidy roughly equivalent to the current price of natural gas, yet misses the opportunity to explain how all types of energy would be treated under his proposal to reduce corporate income tax rates while broadening the tax base--policy-speak for closing loopholes and eliminating incentives. In last night's debate he said, referring to the $2.8 billion in annual tax incentives for oil and gas identified by the Department of Energy, "... if we get that tax rate from 35 percent down to 25 percent, why that $2.8 billion is on the table. Of course it's on the table. That's probably not going to survive (if) you get that rate down to 25 percent." I'd also like to hear more about how Governor Romney would address greenhouse gas emissions once the economy returns to stronger growth.

Superficially, much of the Romney energy agenda evokes a return to the pre-2008 status quo: heavy on oil, gas and coal, light on renewables, and largely ignoring climate change. I see it from a different perspective: When Barack Obama began running for President in 2007, the US was considered by many to be tapped out on conventional energy, with domestic oil and natural gas production exhibiting signs of deep and permanent decline. In that context it made sense to look beyond those resources to the potential of renewable energy and vehicle electrification, even if the transition involved would be lengthy. That approach also appeared synergistic with reducing greenhouse gas emissions, and a strategy was born. In the meantime, however, it turned out that US oil and gas were far from exhausted, and the most productive new energy technology of this decade wasn't wind, solar or biofuels, but the combination of hydraulic fracturing ("fracking") and horizontal drilling that has unlocked hundreds of trillions of cubic feet of shale gas and tens of billions of barrels of shale oil or "tight oil" resources. Since 2008 the expansion of shale gas drilling has added as much new US energy production as over 250,000 MW of wind turbines or solar panels--8x the wind and solar power added in the same interval. To the surprise of many, the big global energy opportunity of the 20-teens is US hydrocarbons. The Romney plan reflects the unexpected energy transformation we're experiencing.

As in 2008, this blog isn't in the business of endorsing candidates. Energy remains an issue that, like the Cold War, demands bi-partisan cooperation and some level of consistency from one administration or Congress to the next. However, that doesn't prevent me from observing that the energy agendas of the two campaigns are not equally well-suited for a period of serious US fiscal constraints and shrinking federal discretionary expenditures, in which our energy security and economic growth will still depend largely on fossil fuels. In that context, it's highly relevant that the "all of the above" credentials of one candidate depend on oil and gas outcomes that his policies did little to support. Of course, energy isn't the only issue that matters, but then you wouldn't be reading this if you didn't think it was important.

Candidates & Energy 2012: Obama

It's curious that energy hasn't been as big an issue in this year's presidential campaign as it was in 2008, the year of "Drill, baby, drill."  The price of unleaded regular gasoline has averaged roughly a dime per gallon higher through September than either last year or the same period in 2008, when prices peaked at $4.11 per gallon in July.  Gas prices are higher this year because global oil prices are also higher, with UK Brent crude averaging $15 per barrel over its 2008 full-year average, though without a similar spike.  One explanation for the reduced focus on energy is that President Obama co-opted his opponents' "all of the above" prescription, while indicators such as US crude oil production and natural gas output and prices have been moving in favorable directions.  The Obama campaign and key administration officials routinely draw a strong causal connection between those two facts, forming the basis of their campaign on energy.  But is that claim true?  Like the Washington Post fact checker's assessment of another frequent presidential assertion about energy, a finding of "true but false" seems appropriate.

Although I had intended to provide a side-by-side comparison of President Obama's and Governor Romney's energy agendas, it quickly became obvious that that was impractical, due to length and complexity.  I'll take a look at the challenger's ideas next week.  Since any re-election bid is fundamentally a referendum on the incumbent, it made sense to start with the record of an administration that came into office with an unusually clear and clearly articulated vision on energy, experienced some notable victories and defeats along the way, and ended up embracing a pair of big, emerging trends that it had done virtually nothing to foster. 

That is readily apparent when it comes to oil production, which must be a core element of any "all of the above" approach, since that "all" implicitly includes fossil fuels along with renewables and efficiency.  Go to the Obama campaign web page on energy and you'll see this chart:

It's a rescaled version of the chart below, which appears on the WhiteHouse.gov site on gas prices:

Aside from the fact that changing the axis scale makes the trend look much more dramatic, what's entirely missing from both these charts and the websites where they appear is any cogent explanation of why oil production is rising.  That requires some context about the industry and oil markets that I've overlaid in the following graphs:

Most oil projects big enough to matter aren't accomplished overnight. The process typically involves acquiring onshore or offshore leases, obtaining the necessary permits, conducting exploration activities that only proceed to the next step based on success, planning the required production wells and processing facilities, competing for internal funding against other company projects, obtaining additional permits, constructing facilities and drilling the production wells. Every step takes time.  Depending on the complexity of the project, the overall timeline can span from three to seven years, and that's if no one sues to block the project.  To see why oil production has been rising since 2009, we need to ask what was happening in 2003-6.  The answer is that after many years of being stuck in a range of $20-30 per barrel--with an excursion down to single digits in the late 1990s--oil prices tripled during that period, mainly due to the combination of global economic growth, especially in Asia, and the lagged effect on oil project investments from that late-'90s price crash.  In other words, production went up mainly because five or six years earlier the financial rewards for drilling suddenly got much bigger.

So at a minimum it's a stretch--mere spin--to claim credit for higher production that is attributable to events and perhaps policies on your predecessor's watch.  However, the picture looks worse when we factor in the policies and attitudes that went into effect when this administration took office in early 2009.  Recall that one of the first energy decisions of the new administration was Interior Secretary Salazar's cancellation of previously awarded oil leases in Utah.  Later that year a senior Treasury official--currently chairman of the President's Council of Economic Advisers--testified before Congress that US policies were promoting the "overproduction of US oil and gas", just as the now-touted production surge was starting.  For at least its first several years, the rhetoric and actions of the Obama White House were generally consistent with that view and with Mr. Obama's portrayal of oil and gas as "yesterday's energy" in his 2011 State of the Union address.  The brief offshore drilling opening signaled in spring 2010 was quickly retracted following the Deepwater Horizon accident, with the imposition of a six-month offshore drilling moratorium and subsequent "permitorium". Those responses--justified or not--resulted in Gulf of Mexico production falling by 22% since mid-2010, a decline that has been masked by the tremendous success of "tight oil" exploration and production in Texas and North Dakota. (The time lag for the moratorium's effects was negligible, because the deepwater projects that were halted had already been planned and permitted.)

In fact, the President's adoption of "all of the above" is fairly recent, making headlines following his 2012 State of the Union. It represents quite an evolution from Senator Obama's 2008 emphasis on renewable energy and climate change mitigation. President Obama certainly pursued those agendas with vigor, incorporating billions of dollars of federal grants and loan guarantees for renewables in the 2009 stimulus, backing the Waxman-Markey cap-and-trade bill, and at both the Copenhagen and Cancun UN climate conferences committing the US to significant greenhouse gas reduction targets and further negotiations. 

It hasn't all worked out as planned, though.  Notwithstanding the high-profile bankruptcies of Solyndra--a colossal failure of due diligence by the administration--and other loan guarantee and grant beneficiaries, the output of wind, solar and other non-hydro renewable energy generation has indeed grown by 55% since 2008, increasing from 3.1% to 4.7% of total US electricity generation, equivalent to 1.9% of total energy consumption.  Yet sadly the wind and solar manufacturing sectors that were to have produced so many "green jobs" are caught up in parallel waves of excess global production capacity that could take years--or wrenching consolidation--to work off.  The overcapacity that has blighted the prospects of many of these companies is largely attributable to the generous incentives provided by the US and other governments from Europe to Asia.  Direct wind and solar jobs accounted for just 54,000 of the US "clean economy jobs" tallied by Brookings and Battelle in their study last year, and they look no more secure than non-green jobs.

Climate policy is another area featuring a big disconnect between effort and results. With control of both Houses of Congress, the President backed a climate bill that exhibited all the worst tendencies of that body: 1,092 pages of bloated regulations and carve-outs for favored constituencies.  Even to someone who had supported the idea of cap and trade for a decade, it was a dog's breakfast, configured mainly as a production-inhibiting tax on the US petroleum sector.  Waxman-Markey failed to pass the Senate, and a more bi-partisan bill died in the aftermath of Deepwater Horizon and the recession. Whatever one's views on the science of climate change, costly climate legislation looked like a bad bet in a weak economy.  Actual emissions have fallen, however, as a result not of policy but of another trend that wasn't on the administration's radar screen until it grew too large to ignore: shale gas.  Emissions are at a 20-year low, mainly due to fuel switching from coal to cheap natural gas in the utility sector.

Another key trend cited as evidence of the effectiveness of the administration's energy policies is the reduction of oil imports that has occurred since 2008.  Yet like the facts on oil production, the causes are only tenuously connected to those policies.  From 2008-11, US net petroleum imports fell by 2.6 million bbl/day (MBD), including refined products.  That goes a long way toward achieving then-candidate Obama's goal of reducing imports by an amount equivalent to what the US imported from the Middle East and Venezuela.  However, the biggest contributor to this reduction was the 1.1 MBD increase in total US petroleum production (including natural gas liquids), followed by a 0.6 MBD drop in demand that had more to do with reduced driving and the weak economy than the early gains from tougher fuel economy rules. Increasing biofuel production associated with the 2007 Renewable Fuel Standard contributed another 0.3 MBD, although that policy now stands in urgent need of reform.

I have watched many elections in my life, and I can't honestly say I'm surprised to see an administration running on something other than its actual energy record, which in this case includes positives such as funding ARPA-E's potentially transformational energy R&D and having enough sense to keep largely out of the way of the shale gas revolution--at least for now. Yet having focused 90% of its efforts on a set of technologies that look important for the future but will still meet less than 10% of our energy needs for some time to come, they have now hitched their electoral wagon to an oil production surge that they didn't help and partly hindered.  I can only imagine that this would be deeply disappointing to those who supported Mr. Obama in 2008 because of his vision for alternative energy and the environment.  Nor does it provide much comfort to those who found large portions of that agenda ill-considered or premature. The President's 11th-hour conversion to "all of the above" creates great uncertainty about the course he would pursue with regard to energy for the next four years, if reelected. 

Exports Raise the Bar for US Strategic Petroleum Releases

I've seen a number of Tweets suggesting that the US will release oil from its Strategic Petroleum Reserve (SPR) sometime in the next month or two, perhaps in tandem with other member countries of the International Energy Agency.  Although circumstances might provide several possible rationales for such a release, including the implementation of tougher sanctions on Iran's oil sector and the possibility that Hurricane Isaac will disrupt some production in the Gulf Coast, it's hard to avoid a political interpretation, as well.  As we head into a close Presidential election, gas prices are rising again, and that's never good for an incumbent.  Selling oil from the SPR is one of the few levers available that might affect short-term energy prices.  However, much has changed since the Clinton administration released 30 million barrels (via exchange) in the lead-up to the 2000 election.  In particular, the country's switch from net importer to net exporter of petroleum products implies that a release in response to events other than a physical disruption in oil supplies could result in some of the benefit of such a release being exported, as well.

When it comes to uses of the SPR, I'm a purist, probably because I can recall sitting in gas lines and participating involuntarily in the bizarre "odd-even" rationing-by-license-plate scheme introduced during the oil crisis following the Iranian Revolution.  The SPR was designed to provide a backstop for our vital energy supplies in a true physical emergency, not as a tool for price manipulation.  I've also suggested for some time that the SPR is overdue for a comprehensive reassessment of its structure.  Our energy situation has changed significantly since the mid-1970s, when the present SPR was established, and we are in the midst of the biggest changes in US energy supply and demand patterns in decades.  We ought to invest the time and money required to bring this institution into the 21st century.  Earlier this year, I also suggested an alternative mechanism for leveraging SPR inventories without depleting them. These are tasks for after the election, whoever wins.  For now, we have what we have, and we should think carefully about the implications of using it in situations less compelling than a war in the Persian Gulf or an unanticipated disruption in North American or global supplies.

One of the changes that must be taken into account is our recent shift in refined product exports, about which I've written previously.  US refineries are capitalizing on the expansion of domestic oil production in a period of weak US demand to continue to operate at high utilization rates and export the resulting surplus output to growing economies in Latin America and elsewhere.  This is generally a good thing, because it helps preserve capacity that might otherwise no longer be available when our own economy eventually resumes healthier growth. It also sustains employment we would sorely miss in a terrible job market.  Furthermore, we have benefited greatly in reliability and flexibility from participating on both sides of the global market in refined products. Still, although I view our petroleum product exports as generally positive--just as I do Boeing's exports of jetliners--I wouldn't advocate using petroleum stockpiles purchased with tax dollars to drive down oil prices to give these refiners an even bigger export advantage.  Yet because of its temporary nature, in contrast to new pipelines or new production, that's exactly where at least some of the benefit of SPR oil released in the absence of a serious supply crisis would go now. 

That doesn't mean I regard rising oil or gasoline prices as harmless to the economy. Consumers are facing the highest pump prices heading into Labor Day weekend since 2008, and that could have a ripple effect throughout the economy.  But even if one ignores the longstanding bi-partisan principle that the SPR is intended only as a crisis-management tool, its effectiveness at moderating oil-price volatility is limited.  Last year's coordinated SPR release, prompted by the Libyan revolution, had little persistent effect on either oil or gasoline prices. A release now is likely to be no more effective when US refineries are already running above 90% utilization and the current 4-week averages show 3.6% of US gasoline production and 23% of diesel output being exported. None of these statistics suggest refiners are experiencing difficulties in obtaining feedstocks, other than on price.  Putting SPR oil into such a market might boost refiners' margins for a while, but it's doubtful it would do much for the product prices that matter to consumers. 

There are sharp differences between President Obama and Governor Romney, not least on energy policy. We're sure to hear more about energy from both campaigns in the weeks ahead, and I plan to analyze their positions closer to election day.  However, one factor this election doesn't need is a release of oil from the SPR that appears to be aimed at dampening gasoline prices that often decline after Labor Day without intervention, rather than being justified by a tangible threat to US oil supplies, and that fails to take into account the added complexity of net product exports. That wouldn't serve the interests of voters, taxpayers or consumers, and it would come at the expense of a little bit of our collective energy security. 

"Energy Reality"

Earlier today I attended a luncheon and press conference rolling out the annual "State of American Energy" report from the American Petroleum Institute. API's President and CEO, Jack Gerard, also used the occasion to launch a new "Vote 4 Energy" campaign, which he described as a non-partisan effort intended to start a conversation about energy during a key election year. He also touched on a number of issues that are very familiar to readers of this blog, including the Keystone XL Pipeline decision, the need for greater access to US energy resources, along with energy security and jobs. A phrase that Mr. Gerard used in his remarks, and that recurred several times during the press conference, was "energy reality." This struck me as an apt encapsulation for the energy policies that should be addressed by President Obama and whomever his Republican challenger turns out to be, from the shrinking pool of candidates.

I was pleased to hear Mr. Gerard cite the need for a full range of energy solutions, with renewables, nuclear energy and energy efficiency prominently mentioned along with the expected references to oil and gas. That is precisely the energy reality we should be pursuing: tapping the hydrocarbon riches with which the US is endowed, in order to reduce our dependence on unstable foreign suppliers, even as we ramp up the wind, solar, biofuel and other renewable energy sources that must take over the energy burden in the long run, and with all of it used more efficiently than today. Yet energy reality should also take account of the tremendous disparities of scale that still exist between conventional energy and renewables, and that are likely to persist for some time. After a decade of rapid growth, wind power accounted for less than 3% of the electricity generated here last year, and solar for much, much less than that--with neither displacing any meaningful amount of imported oil, since less than 1% of our electricity is generated from oil.

Energy reality came up again in the context of a question about the EPA's Renewable Fuel Standard, which was recently finalized for 2012 to require the use of 8.65 million gallons of cellulosic biofuel--a reduction of 98% from the 500 million gallons previously specified for this year in the RFS enacted by the Congress in 2007. Biofuel from corn, soy and animal fat has expanded to contribute nearly 10% of the US gasoline supply and a smaller fraction of diesel fuel. However, a law requiring the use of advanced fuels that don't yet exist in commercial quantities--and may not for many years--and forcing refiners to purchase credits in place of these non-existent gallons is certainly out of touch with objective energy reality and ultimately constitutes another tax on consumers.

I would argue that the decision that the President now has less than 60 days to make on whether to allow the Keystone XL Pipeline to go ahead also hinges on his understanding of energy reality. He must choose between the urgent concerns of employment and energy security articulated repeatedly in Mr. Gerard's answers to numerous questions on the subject, and an objective assessment of the environmental impact it might cause. Stripping away the various red herrings that sprang up in the course of the debates and protests over the pipeline, the latter boils down to the incremental greenhouse gas emissions from the extra oil sands production that the pipeline would facilitate, compared to the emissions from the conventional crude we would otherwise have to import from the Middle East or elsewhere. I've seen some wild exaggerations about that, including the doozy I ran across over the holidays from former Vice President Gore, to the effect that a Toyota Prius running on fuel refined from oil sands crude would have emissions equivalent to a Hummer. (When you do the math, it actually works out to the equivalent of a Ford Fusion hybrid.) In fact, the incremental emissions at stake in the Keystone decision amount to around 0.3% of total 2009 US emissions. That's the basis of the trade-off Mr. Obama must make, and no matter which side he chooses he will infuriate those supporting the other side.

As the 2012 presidential election approaches, I expect to find many opportunities for comparing campaign rhetoric to this kind of energy reality barometer. Elections tend to focus on the differences between candidates, and I have little doubt that the differences on energy will be significant. However, when the dust settles on November 7th it will be high time to start work on a new bi-partisan consensus on energy policy that might actually survive the next change in administrations, unlike the disruptive pattern we've been in for the last five cycles or so. Not reality? Perhaps, but certainly worth aspiring to. Happy New Year!

Will Energy Determine the 2012 Election?

A year from today Americans will know who will serve as President from 2013 to 2017. Even though $4 gasoline was still fresh in the minds of voters, energy played only a minor role in the outcome of the 2008 election, overshadowed by two wars and a crippling financial crisis. Will that be the case again in 2012, or will energy loom larger, propelled by its close connection with the economy? Several Republican candidates have already raised energy as a campaign issue, and the administration has repeatedly emphasized the linkages between energy, jobs and taxes. Whether any of those arguments gains traction in a race that at this point seems likely to be dominated by unemployment and deficits could depend on how deftly the administration handles decisions such as the Keystone XL Pipeline permit, as well as the degree to which voters become interested in the details of the country's shifting energy balances.

From day one, the Obama administration has taken a calculated risk on energy by focusing most of its non-crisis-response attention on promoting renewables such as biofuels and wind, solar and geothermal power. According to the latest figures from the Energy Information Agency the combined contribution to our total energy diet from these sources increased from 2.2% in 2008 to 3.2% in 2010. Rightly or wrongly, the Solyndra fiasco could leave voters questioning the wisdom of the whole suite of renewables policies that promise large future benefits but have had little tangible impact so far. Nor do the administration's efforts to claim credit for increasing US oil production look very credible when they demonstrably reflected the characteristic time lags of investments made during the Bush years, and occurred largely in spite of policies such as the Gulf of Mexico drilling moratorium and various onshore lease cancellations.

Meanwhile, the single largest energy development of recent years, the harnessing of vast shale gas resources, which last year supplied the equivalent of more than triple the combined output of US wind, solar and geothermal power, has occurred against a background of governmental ambivalence and occasional outright hostility, as in the case of New York's state moratorium on hydraulic fracturing, or "fracking". Unless the Obama administration moves to embrace shale gas, which David Brooks of the New York Times referred to in his column last week as a "wondrous gift", it might not be very hard for the President's challenger next year to portray his policies as being focused on only 3% of the energy that drives the economy, while neglecting the other 97%.

In that context, the Keystone XL decision could prove crucial. The State Department has signaled that the decision, which was anticipated by year-end, might be delayed into next year or beyond. Recent remarks hinted that the President may make the call personally. And in an interview during last Thursday's Washington Post Smart Energy Conference, Energy Secretary Chu backed away from his previous partial endorsement of the project. Taken together, these moves have me questioning the conventional wisdom that expects a grudging approval of Keystone. Turning it down outright, or killing it by attaching a set of uneconomical conditions to a contingent approval, would play well with portions of the President's base, but it might be hard to defend to independent voters later, particularly if higher oil prices or some event moved energy up the list of top election issues. Delaying a decision past the election would probably satisfy no one.

Whoever wins in 2012, the nation will need a renewed energy policy that balances the need to continue funding research and development aimed at delivering renewable energy technologies that can compete with conventional energy with little or no need for further subsidies, while simultaneously and just as vigorously promoting domestic and wider North American production of the conventional energy sources we will still need for at least another several decades, if we don't want to return to our former trend of becoming steadily more dependent on imported energy. Even if today's 3% from new renewable sources grows to 30%, we will still depend on oil, gas, nuclear and coal for the other 70%, nor can we rely on energy efficiency to end our reliance on the latter sources. I look forward to seeing more detailed energy proposals from both sides over the next year.

Interpreting the Election Results

The results of yesterday's election will be interpreted and spun in many ways in the days and weeks ahead. Republicans gained control of the House of Representatives and several key governorships but fell short of capturing control of the Senate. In the process they picked up enough seats--along with at least one like-minded Democratic Senator-elect--to put cap & trade or a national carbon tax out of reach for at least the next two years. Meanwhile, voters resoundingly defeated a ballot initiative in California that would have forestalled implementation of the state's tough greenhouse gas policies. But even if comprehensive federal energy legislation is off the table, divided government doesn't rule out the possibility of a national renewable energy standard or other energy measures, provided they don't involve significant additional expenditures.

On the surface, the election outcome appears to set up a return to the pre-2009 situation, when California and other states were pushing aggressively for action on climate change while the federal government remained deadlocked on the issue. Too much has changed since then for that picture to be accurate. In the absence of Congressional action on greenhouse gas emissions the EPA is forging ahead with its own regulations under the Clean Air Act, and that could provide an early test of the willingness of the new Congress to try to modify the administration's regulatory approach. Meanwhile, although the proposition that would have suspended California's A.B. 32 climate rules was swamped after being portrayed--unfairly, in my view--as mainly benefiting out-of-state oil companies at the expense of the state's new Cleantech industry, California voters passed another initiative, Proposition 26, that will make it harder to impose a variety of new fees on businesses and consumers, including fees related to the environment. Further complicating the outlook, the results of several key governor's races, including in New Mexico and possibly Oregon, could limit the number of other states that might "opt in" to A.B. 32, as well as raising the possibility of more defections from the Western Climate Initiative.

Although as I noted on Monday our fundamental energy situation is largely pre-determined for at least the next few years, last night's results could affect energy policy in a number of other ways, aside from climate change. One example is the President's desire to eliminate subsidies for conventional energy, as part of an initiative of the G-20 group of nations. The main subsidies targeted by this international effort are those that increase demand by limiting the price of fossil fuels for consumers, particularly in developing countries, yet President Obama has linked this to his goal of eliminating a variety of tax breaks benefiting domestic energy production, including the Section 199 tax deduction that all US manufacturers enjoy. Unless this measure is somehow passed in the lame duck session when Congress returns from its election break, it looks dead on arrival come January. From an energy security perspective we should be glad of that.

The change in control of the House also puts the extension of the expiring ethanol blending credit in doubt, along with the prospect of extending eligibility for Treasury renewable energy stimulus grants beyond the end of this year. Even though the latter appears deficit-neutral, and might thus attract bi-partisan support, it accelerates benefits that project developers would otherwise have to wait until their next tax filing to receive, and it probably lets some marginal projects that might not otherwise find private funding escape winnowing. If the lame duck doesn't pass this, the odds of the 112th Congress extending it or anything else connected to the stimulus look poor.

Ultimately the likelihood of meaningful energy legislation of any kind will hinge on the willingness of the President and the new Congress to meet somewhere in the middle to get things done. Otherwise, the scope is limited to a few lowest-common-denominator efforts, which might include a modest national renewable electricity standard, with everything else effectively blocked by the other chamber of Congress or the President's veto pen. I don't expect to lack for topics on which to blog in the next two years.

What Won't Change After the Election?

Tomorrow's US mid-term election dominates today's headlines, with most analysts expecting a dramatic shift in control, at least in the House of Representatives. However, from an energy perspective, many aspects of the situation in which we will find ourselves after the ballots are counted will remain largely predetermined for the next two years, going into the 2012 election. As candidates debate differing perspectives on energy it's worth recalling the tremendous inertia of our energy systems. The seeds of significant change have already been planted and are promoting a gradual transformation, but the results will be more evident when we look back at the end of the decade than while it is underway.

One given is that for at least the next two years, fossil fuels will continue to supply well over 90% of US transportation energy and more than 2/3rds of US electricity generation, with nuclear and conventional hydropower accounting for more than 80% of the low-emitting remainder. Even though wind and solar power are still growing rapidly, though the former has slowed down appreciably compared to last year, they are still too small to make a significant difference in our consumption or emissions, and that will remain the case in 2012. Advocates of wind power and other renewables lament the lack of comprehensive energy legislation or a more focused national renewable electricity standard, but weak fundamentals have at least as much to do with the slowing rate of wind installations. US electricity demand has recovered somewhat from its low point last year, but it remains around 2% below its high of 2007. That has made utilities more reluctant to add generation of any kind, particularly in light of the strong emphasis on efficiency measures in the policies enacted in the last several years, starting with the Energy Independence and Security Act of 2007 and reinforced by last year's stimulus.

Another given is that oil will continue to dominate our concerns about energy security. The economic slowdown reduced net US imports of crude oil and petroleum products by 20%, compared to 2007, but even at this level imports are still a third larger than domestic production of crude oil and natural gas liquids--a disparity that is set to grow for two reasons. First, the greatly reduced rate of drilling in the Gulf of Mexico following the Deepwater Horizon disaster and the moratorium that was imposed in response is already starting to reverse the gains in US oil output that we saw in the last several years. Mature offshore fields are declining, while new projects will be slower to come online. Not even the remarkable success of onshore drilling in the Bakken formation of the Dakotas and Montana, which has moved North Dakota up to number four among oil producing states--past perennial heavyweights like Louisiana and Oklahoma--is likely to compensate for slower growth from the Gulf.

Nor are biofuels likely to add enough production in the next two years to avoid an increase in our oil imports, as ethanol approaches the limits of corn ethanol output and faces the expiration of the tax credit it has enjoyed since 1978. And while the proliferation of hybrids, electric vehicles and other efficient car models is a step in the right direction, their numbers are too small for now to counteract any increase in miles traveled. Even a modest amount of demand growth from a recovering economy will set US oil and refined product imports climbing again, with a corresponding impact on world oil prices and our trade deficit.

There's little doubt that the incoming 112th Congress will have a different approach to energy and its related environmental issues than the outgoing 111th has had. That could prove significant for many aspects of US energy policy, including climate policy. At the same time, the new members of the House and Senate are likely to find, as past Congresses have, that our energy challenges are less responsive to intervention than they assumed. I wouldn't be surprised if the biggest impact on energy in the next two years comes not from energy legislation, but from the indirect effect of whatever steps are taken to address our larger economic problems.

Electoral Skepticism

Now that the Democratic Party has a presumptive nominee, the general election campaign has begun in earnest. Messages geared to attracting party loyalists and broadening the base will give way to a focus on "battleground" states and independent voters. With gasoline now priced over $4 per gallon in many markets across the US, and with concerns about energy growing, we should expect to hear a good deal more about the candidate's proposals for tackling our reliance on imported energy, along with the environmental consequences of its use. As we absorb these messages, I hope we retain the natural skepticism with which Americans have generally regarded campaign promises. The unfortunate truth is that there is little that any president can do to bring down energy prices or dramatically reduce the country's reliance on foreign oil within the next four years.

I've heard many statements and suggestions from both parties with regard to energy over the past year. While some of them clearly reflected objective analysis and sincere beliefs, others were easily discernible as calculated efforts to bolster a candidate's standing with the voters of his or her party, and possessed only a tenuous connection to what is realistic or even possible. As the campaign shifts into general election mode, it is time to stop discounting these assertions for partisan content and subject them to serious scrutiny. When it comes to energy, in particular, a dose of healthy skepticism is in order.

Take the drumbeat from both parties for energy independence, as an example. Even if we assume that this phrase is intended in a relative, rather than absolute sense--as in more energy independence--the chance of a dramatic shift within the next four years on this metric is slight. The scale of our energy imports is too great and the net contribution of our preferred options too small at this point to make much of a dent in the net 12 million barrels of petroleum and 12 billion cubic feet of natural gas we import every day. Even if every new car sold in America delivered an actual city/highway average of 30 miles per gallon starting tomorrow, in four years this would only improve the average fuel economy of our total fleet by 2 mpg, which might reduce imports by one million barrels per day, if it wasn't partially offset by a rebound in vehicle miles traveled. Doubling our ethanol output --an increasingly dicey proposition, given concerns about food vs. fuel competition--would displace the equivalent of another 300,000 barrels per day of oil. Doubling our current wind power capacity might save the equivalent of 1 billion cubic feet per day of natural gas.

After adding up all these contributions and even assuming that some form of cap and trade or carbon tax will eventually be enacted, it remains an absolute certainty that the 2012 presidential election will take place in the context of very large US energy imports. The next president would be wise to eschew the temptation of quick fixes and instead focus his efforts on promoting energy efficiency and ensuring that the nation has diverse and reliable supplies of conventional energy, as we undertake the long transition to a more sustainable energy mix. If he instead creates the expectation of an energy revolution, how satisfied would the public be with the steady accumulation of incremental progress that is probably the best we can hope for in the near term?

A Pre-Determined Shift

The presidential race has shifted significantly with the results of Super Tuesday and the subsequent primaries, including yesterday's "Chesapeake" primaries, in ways that have important implications for US energy and environmental policy. Prior to Super Tuesday, it still looked possible that someone would win a major-party nomination without a strong commitment to addressing climate change. That prospect now seems very remote, and the impending alignment of a stronger federal focus on climate change with a greater emphasis from Corporate America suggests big changes ahead for how we produce and consume energy. The 2007 Energy Bill, with its mandates for biofuels and efficiency, was only a foretaste of what is likely to come.

One of the primary tools I use in my consulting practice is scenario planning, a process that assesses possible future outcomes for a specific question or issue by winnowing a broad range of uncertainties down to a few critical drivers of change. Periodically, this process also identifies fundamental forces that, upon examination, prove not to be very uncertain at all, making them quite powerful in shaping the future. A US Presidency that puts a high priority on addressing climate change aggressively now looks like such a pre-determined element.

Consider the positions of the two leading Democrats, Senator Clinton and Senator Obama, and the two leading Republicans, Governor Huckabee and Senator McCain. All four are on the record supporting a cap & trade system for reducing greenhouse gas emissions, with Senator McCain having co-authored the earlier legislation from which the pending Warner-Lieberman Cap and Trade Bill evolved. Their campaign websites, particularly those of Senators Clinton and Obama, are replete with proposals for improving energy efficiency and promoting renewable energy. Even though the Democratic Party's incredibly convoluted process for awarding delegates makes it extremely difficult to guess the outcome of the party's convention in Denver in August, and despite the slim possibility that someone other than Senator McCain could capture the Republican nomination in the Twin Cities in early September, the Intrade prediction market currently assesses the chances of someone other than the four candidates above becoming the next President at less than 2%.

Yesterday, at the annual energy industry conference hosted by Cambridge Energy Research Associates, a sister company of my sponsor John S. Herold, Inc., the CEO of ConocoPhillips expressed concern about a loss of US influence in the world, if we continue to "oppose action on climate change." I don't think he needs to worry. The leaders of the countries committed to combating global warming can read the tea leaves as well as Intrade's speculators; they see change coming, as we all should.

A dramatically different US stance on climate change in 2009 is now a virtual certainty. That means its consequences are, too: Sooner or later, we'll be paying even higher prices for fuel and electricity; efficient light bulbs and appliances will no longer be optional; and cars will generally become smaller, lighter, and more complex--and hence more expensive, at least in the short-to-medium term. I wonder if we're as ready for the reality of all that as many seem to be for the abstraction of tougher climate policies. We have about a year in which to prepare ourselves.