Before delving into the details of Senator McCain's energy plans, it's worth noting how remarkable it is that our final choice should be between two candidates who view our energy and environmental challenges so similarly, even if their preferred solutions differ markedly, both in execution and in their underlying philosophy. It was not at all a forgone conclusion that the ultimate Republican nominee for President would consider climate change as a problem rivaling energy security, or that he would regard action on the former as a means of addressing the latter. Several of Senator McCain's challengers in the primaries appeared to view climate change as either a hoax or a nuisance issue. In essence, Senator McCain's proposals would create a transition plan for moving the US economy towards using much less imported oil, improving overall energy efficiency and reducing emissions. This would be achieved by ramping up domestic energy production, encouraging new energy and efficiency technology, and putting a market price on greenhouse gas emissions.
If you asked me for the single-sentence summary of the McCain energy plan, it would be nearly identical to one for the Obama Plan: "Make the US more energy independent and reduce greenhouse gas emissions through an emissions cap and trade system and other measures." The energy and climate sections of Senator McCain's campaign website mirror these priorities. Although it has gained considerable detail since I reviewed it in January, it remains less specific than Senator Obama's site. That no longer appears to be an omission, but rather a reflection of a profound philosophical difference in their approaches.
Where Senator Obama's energy plan relies heavily on mandates or incentives for specific technology pathways--electrified vehicles, for example--Senator McCain's emphasizes outcomes and offers incentives based on making progress towards them. For example, his Clean Car Challenge provides consumers with incentives for purchasing advanced technology vehicles based on the reduction of CO2 emissions they achieve, with zero-emission vehicles (tank-to-wheel) qualifying for a $5,000 tax credit. In addition to a tax credit for R&D, he proposes an X-Prize-like $300 million payoff for a quantum leap in vehicle battery technology. He would also end both the subsidy for domestic corn ethanol and the tariff on imported ethanol, forcing US ethanol producers to compete with other fuels, and particularly with more energy-efficient cane ethanol from Brazil and the Caribbean.
This emphasis on outcomes also applies to Senator McCain's approach to vehicle efficiency. Rather than calling for further increases in the recently-enacted 35 mpg Corporate Average Fuel Economy target for 2022, he has proposed strengthening CAFE enforcement by increasing the fines for missing the targets already in place--something that has received scandalously-little attention. This currently amounts to $55 per car for each mile-per-gallon below the standard. In 2006, for example, Daimler Chrysler paid $30 million in fines on 196,000 imported Mercedes Benzes, or $154/car. If CAFE is to be an effective tool for promoting fuel efficiency, rather than just measuring it, it must have sharper teeth than that.
Senator McCain's approach to climate change builds on the first cap & trade bill that he co-authored with Senator Lieberman in 2003 and reintroduced in the Senate in 2005 and 2007. His current version of this proposal would reduce US greenhouse gas emissions by 60%, compared to 1990 emissions, with milestone targets along the way. The first of these would see US emissions return to 2005 levels by 2012. That would make for a relatively soft transition, since 2006 emissions were below 2005's, and a slowing economy is liable to reduce them further. The gradual phase-in of auctioning for emissions permits would also ease the transition into this otherwise radical means of transforming the US energy economy. However, as I noted in my analysis of Senator Obama's plans, cap & trade would still function much like a tax on the entire economy, with potentially serious consequences during a major economic downturn. The odds of enacting and implementing such a system in the next two years have clearly diminished within the last month, no matter how high a priority either candidate deems climate change to be.
The most notable departure from Senator McCain's focus on outcomes, rather than specifying technology, involves nuclear power. He has described nuclear energy as a centerpiece of his energy security and climate change program and proposed building 45 new nuclear reactors in the US by 2030, with a target for eventually building 100 new plants--presumably to counteract the eventual retirement of most of the existing fleet of 104 reactors, some of which date to the early 1970s, with the newest having been completed in 1996. This is a very ambitious goal, and it represents one of the biggest differences between the energy plans of the two candidates. Senator McCain's confidence in nuclear power appears to rely as much on the decades-long experience of the US Navy with nuclear propulsion as on the current power reactor fleet that supplied 19% of all US electricity generated last year. Senator Obama has frequently expressed concerns about the safety, security, waste disposal and proliferation risks of nuclear power, and although he supports it in principle, it is not obvious that any of the nuclear plants for which permit applications have already been submitted would proceed in an Obama administration.
As helpful as more nuclear power plants would be for reducing the emissions that accompany our current reliance on coal-fired power plants, along with enabling truly zero-emission electric vehicles--as opposed to those that merely shift their emissions to a central power plant--nuclear is no quick fix. Considering that the only US nuclear power plant already under construction--following a 20-year hiatus--is not expected to start up until 2013, the 2030 timeline for achieving the 45-reactor goal looks just barely long enough. Perhaps that explains Senator McCain's emphasis on drilling for oil and gas in portions of the US currently off-limits to exploration, as a transition strategy to buy time for renewables and nuclear power to ramp up.
His support for expanded drilling covers the estimated 18 billion barrels of undiscovered potential oil resources and 77 trillion cubic feet of natural gas that were restricted by the recently-expired federal drilling ban, but it apparently does not extend to lifting the ban on drilling in the Arctic National Wildlife Refuge (ANWR.) While the mantra of "Drill Here, Drill Now" may seem overly simplistic, inclusion of conventional energy recognizes two key facts of our energy security challenge: The US still possesses enough remaining hydrocarbons to make a serious dent in our oil imports--though not to displace them entirely--and those hydrocarbons represent a concentrated and efficient energy source (in the energy return on energy invested in producing them, EROEI,) on a scale that renewable energy will not attain for years to come.
Although many of the elements of Senator McCain's plan look sensible, I still struggle with the notion of energy independence that underpins much of his--and Senator Obama's--energy strategies. Although Senator McCain has recently refined his goal of "strategic independence" to encompass backing out Middle Eastern and Venezuelan oil, we might get greater benefits from a more positive strategy of working with our natural hemispheric allies, such as helping Mexico revitalize its flagging energy industry and partnering with Brazil to develop its vast new oil finds, while we expand our own sources and use energy more efficiently. That would enhance energy security in a manner more consistent with the Senator's general espousal of free trade principles.
With regard to energy and the environment, voters face a difficult--and thus extremely fortunate--choice between two candidates who treat the energy crisis and climate change with the seriousness that these closely-connected issues deserve. The proposals of either one would move us much closer to a coherent and practical national energy policy, something that we have not had for far too long. At the same time, the differences in their approaches are significant and merit careful consideration. While Senator Obama's plans may depend too heavily on help from a federal government that could be over-extended by a number of other pressing concerns, Senator McCain's may rely too much on free market solutions that would be a tough sell in light of perceptions concerning the causes of the current financial crisis. And if elected, either one would find himself facing a powerful Congressional majority with its own ideas for solving these problems. The one certainty is that I will not lack for suitable topics on which to blog in 2009.
Showing posts with label mccain. Show all posts
Showing posts with label mccain. Show all posts
Monday, October 20, 2008
Friday, April 11, 2008
Calling A Halt
The management of the nation's Strategic Petroleum Reserve has long been a bone of contention between Congressional Republicans and Democrats, with the former tending to support the administration's fill-at-any-price strategy and the latter generally supporting a more interventionist approach. Senator McCain's call yesterday for a halt to SPR additions, until oil prices are lower, signals an important shift. If the government followed his suggestion, the results might be more dramatic than anyone expects, because of the limited size and nearly unlimited leverage of the domestic market for light, sweet crude oil.
Yesterday's posting, which was cited in today's WSJ Environmental Capital blog, looked at how oil trading has changed in the last couple of decades, focusing on the tremendous growth in the influence of the New York Mercantile Exchange's West Texas Intermediate (WTI) crude oil futures contract. Because it is the largest and most transparent oil market in the US, it has provided a handy reference point for traders transacting deals for physical oil, often with very different properties of sulfur, specific gravity, and other characteristics. The typical structure of an oil deal now involves an agreed premium or discount to the prevailing WTI price over an agreed period, often related to the time that a cargo of oil is loaded, or a pipeline shipment delivered. So while the global oil market has expanded to some 85 million barrels per day (MBD), with US refineries consuming on average 16 MBD of that, the price for a surprisingly large proportion of those barrels is set by a domestic light sweet crude futures market that is backed by only a few million barrels per day of physical oil: the domestic oil production and suitable imports connected by pipeline to the Cushing, OK delivery point for WTI.
Since current SPR additions are only 0.07 MBD (70,000 bbl/day), how much effect could foregoing them have on oil prices? Measured against 85 MBD, virtually none, but that's not the relevant comparison. What really counts is the Mid-continent light sweet crude system, consisting of pipelines going into and out of storage at Cushing, serving a number of inland refineries, including five sweet crude refineries in Oklahoma with a combined capacity of 0.5 MBD. Thus, while the volume of "paper barrels" traded on the "Merc" can mount into the hundreds of millions of barrels per day, the physical market underpinning them is orders of magnitude smaller. Anyone doubting the disproportionate impact of that system on crude prices need only look back one year, when Cushing was full and the value of the WTI "marker" was in doubt, with the WTI price consistently below that of its UK Brent cousin.
With its three current royalty-in-kind swaps consisting of 58% sweet crude grades, according to a DOE spokesman I contacted this morning, the government has a 40,000 bbl/day lever with which to nudge the balance point of the physical WTI market by reselling the oil that would otherwise go into the SPR. Because that still only amounts to a few percent of actual WTI deliveries, I wouldn't expect the market to drop by $10/bbl. But when you add the psychological impact of the government shifting its stance from buyer to seller--a net swing of 80,000 bbl/day--I wouldn't be surprised to see a change in the speculative logic driving oil ever higher. That ought to knock off at least a few bucks per barrel, while dampening the market's exuberance going forward.
As with climate change, we now see all three remaining presidential candidates signaling a break with the present SPR strategy, starting next January. Unlike climate change, it wouldn't require a change of heart or ideology on the part of the administration to shift from its policy of continuing to fill the SPR above 700 million barrels to putting the government's royalty oil back into the market. That could be done with the stroke of a pen and would be greeted warmly on both sides of the aisle, and by most Americans, with the possible exception of a few hedge fund or commodity fund managers. If it turned out to have no effect, the government could quietly resume SPR additions once its sales contracts ended. With every dollar increase in WTI adding $4 billion per year to our trade deficit and 2 cents per gallon at the gas pump, that looks like a low-risk, high-reward strategy to me.
Yesterday's posting, which was cited in today's WSJ Environmental Capital blog, looked at how oil trading has changed in the last couple of decades, focusing on the tremendous growth in the influence of the New York Mercantile Exchange's West Texas Intermediate (WTI) crude oil futures contract. Because it is the largest and most transparent oil market in the US, it has provided a handy reference point for traders transacting deals for physical oil, often with very different properties of sulfur, specific gravity, and other characteristics. The typical structure of an oil deal now involves an agreed premium or discount to the prevailing WTI price over an agreed period, often related to the time that a cargo of oil is loaded, or a pipeline shipment delivered. So while the global oil market has expanded to some 85 million barrels per day (MBD), with US refineries consuming on average 16 MBD of that, the price for a surprisingly large proportion of those barrels is set by a domestic light sweet crude futures market that is backed by only a few million barrels per day of physical oil: the domestic oil production and suitable imports connected by pipeline to the Cushing, OK delivery point for WTI.
Since current SPR additions are only 0.07 MBD (70,000 bbl/day), how much effect could foregoing them have on oil prices? Measured against 85 MBD, virtually none, but that's not the relevant comparison. What really counts is the Mid-continent light sweet crude system, consisting of pipelines going into and out of storage at Cushing, serving a number of inland refineries, including five sweet crude refineries in Oklahoma with a combined capacity of 0.5 MBD. Thus, while the volume of "paper barrels" traded on the "Merc" can mount into the hundreds of millions of barrels per day, the physical market underpinning them is orders of magnitude smaller. Anyone doubting the disproportionate impact of that system on crude prices need only look back one year, when Cushing was full and the value of the WTI "marker" was in doubt, with the WTI price consistently below that of its UK Brent cousin.
With its three current royalty-in-kind swaps consisting of 58% sweet crude grades, according to a DOE spokesman I contacted this morning, the government has a 40,000 bbl/day lever with which to nudge the balance point of the physical WTI market by reselling the oil that would otherwise go into the SPR. Because that still only amounts to a few percent of actual WTI deliveries, I wouldn't expect the market to drop by $10/bbl. But when you add the psychological impact of the government shifting its stance from buyer to seller--a net swing of 80,000 bbl/day--I wouldn't be surprised to see a change in the speculative logic driving oil ever higher. That ought to knock off at least a few bucks per barrel, while dampening the market's exuberance going forward.
As with climate change, we now see all three remaining presidential candidates signaling a break with the present SPR strategy, starting next January. Unlike climate change, it wouldn't require a change of heart or ideology on the part of the administration to shift from its policy of continuing to fill the SPR above 700 million barrels to putting the government's royalty oil back into the market. That could be done with the stroke of a pen and would be greeted warmly on both sides of the aisle, and by most Americans, with the possible exception of a few hedge fund or commodity fund managers. If it turned out to have no effect, the government could quietly resume SPR additions once its sales contracts ended. With every dollar increase in WTI adding $4 billion per year to our trade deficit and 2 cents per gallon at the gas pump, that looks like a low-risk, high-reward strategy to me.
Wednesday, February 13, 2008
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.
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.
Friday, January 18, 2008
Candidates & Energy: McCain
As I continue to evaluate the positions of the presidential candidates on energy and the environment, I'm finding the process quite different than in past elections. Access to video resources on the web, and in particular on Youtube.com, makes it much easier to get a feel for the candidates that goes beyond their published positions and televised speeches. That's as true of a veteran campaigner like Senator John McCain (R-AZ) as for relative newcomers such as Messrs. Obama and Huckabee. Since I'm tackling them more or less in the order in which they won primaries, and alternating between the parties, it's now Senator McCain's turn. Like many other candidates, he favors strong measures to increase our energy independence, but his focus on climate change as an organizing principle for energy policy, rather than just another issue, differentiates him from the entire Republican field.
It's a good thing that Youtube and Google convey ample information on Senator McCain's views about energy and the environment, because his campaign website is a bit sparse on both topics, particularly compared to the level of detail provided by Senator Obama. From his comments in various speeches, town halls, and small events, it's clear that he is very concerned about our dependence on foreign oil, on both economic and national security grounds. He emphasizes the instability or governmental hostility of many of the countries from which our imports flow, frequently citing Nigeria, Venezuela and Russia as examples. I wasn't surprised to see him make the "funding both sides of the War on Terror" argument in the principal energy policy document on his website. National security is Senator McCain's strong suit, and he places energy squarely within this context.
The measures he proposes for improving energy security cover the same themes as many other candidates, including wind and solar power, higher fuel economy standards, electrification of transportation via plug-in hybrids and batteries, and biofuels. He also strongly supports nuclear power, based on its low greenhouse gas emissions. Surprisingly, given the intensity of his views on energy independence--which seem to include an unrealistic expectation of how soon it could be achieved--he would leave offshore drilling to the discretion of the nearest affected states, and he opposes drilling in the Arctic National Wildlife Refuge. I think he is missing a bet, there, but it's consistent with the theme of environmental stewardship that runs through the whole McCain campaign.
Climate change is a major element of that theme, and of the Senator's legislative agenda. He has criticized the Bush administration's approach to global warming, and together with Senator Joe Lieberman (I-CT) he sponsored a greenhouse gas cap-and-trade bill that was the precursor of the Warner-Lieberman bill currently under consideration in the Senate. It's not hard to find video clips of the Senator talking about climate change and the inter-generational responsibility he feels in this regard. (I look forward to reviewing Governor Romney's position on this issue, since the Romney campaign has labeled Senator McCain's approach to climate change as "radical" and "wrong-headed.")
Ethanol is one aspect of energy policy on which McCain differs with many of his rivals. You have to admire someone who campaigns seriously in Iowa on a platform of ending subsidies for corn ethanol, and in Michigan on higher fuel economy standards. Still, when confronted with the charge that he has "flip-flopped" on this issue--that he was entirely against ethanol previously but now only opposes subsidies for it--his response was somewhat less convincing than it might have been. In any case, his aversion to subsidies is apparently not confined to ethanol, extending beyond energy to agricultural commodities, consistent with his overall emphasis on free markets and fiscal conservatism. He expects alternative energy to advance on a "level playing field"--leveled further by monetizing the climate externality via market-based mechanisms.
For someone whose candidacy was written off not long ago, Senator McCain appears to have as good a chance of capturing his party's nomination in this wide-open contest as any of his competitors. With former Senator Thompson, he also represents the last shot at the White House for his generation, which experienced World War II as children and came of age in the 1950s, but has yet to produce a President. Although he occupies the Senate seat formerly held by Barry Goldwater, John McCain's ideas on energy and the environment are up-to-date and would not be out of place among this year's Democratic candidates--with the possible exception of his unwavering support for nuclear power. His proposals reflect both change and experience. My long-time readers would be forgiven for noting a high degree of overlap between many of Senator McCain's positions on energy security and climate change and the themes that I've been writing about here for four years. That shouldn't be construed as an endorsement, however.
It's a good thing that Youtube and Google convey ample information on Senator McCain's views about energy and the environment, because his campaign website is a bit sparse on both topics, particularly compared to the level of detail provided by Senator Obama. From his comments in various speeches, town halls, and small events, it's clear that he is very concerned about our dependence on foreign oil, on both economic and national security grounds. He emphasizes the instability or governmental hostility of many of the countries from which our imports flow, frequently citing Nigeria, Venezuela and Russia as examples. I wasn't surprised to see him make the "funding both sides of the War on Terror" argument in the principal energy policy document on his website. National security is Senator McCain's strong suit, and he places energy squarely within this context.
The measures he proposes for improving energy security cover the same themes as many other candidates, including wind and solar power, higher fuel economy standards, electrification of transportation via plug-in hybrids and batteries, and biofuels. He also strongly supports nuclear power, based on its low greenhouse gas emissions. Surprisingly, given the intensity of his views on energy independence--which seem to include an unrealistic expectation of how soon it could be achieved--he would leave offshore drilling to the discretion of the nearest affected states, and he opposes drilling in the Arctic National Wildlife Refuge. I think he is missing a bet, there, but it's consistent with the theme of environmental stewardship that runs through the whole McCain campaign.
Climate change is a major element of that theme, and of the Senator's legislative agenda. He has criticized the Bush administration's approach to global warming, and together with Senator Joe Lieberman (I-CT) he sponsored a greenhouse gas cap-and-trade bill that was the precursor of the Warner-Lieberman bill currently under consideration in the Senate. It's not hard to find video clips of the Senator talking about climate change and the inter-generational responsibility he feels in this regard. (I look forward to reviewing Governor Romney's position on this issue, since the Romney campaign has labeled Senator McCain's approach to climate change as "radical" and "wrong-headed.")
Ethanol is one aspect of energy policy on which McCain differs with many of his rivals. You have to admire someone who campaigns seriously in Iowa on a platform of ending subsidies for corn ethanol, and in Michigan on higher fuel economy standards. Still, when confronted with the charge that he has "flip-flopped" on this issue--that he was entirely against ethanol previously but now only opposes subsidies for it--his response was somewhat less convincing than it might have been. In any case, his aversion to subsidies is apparently not confined to ethanol, extending beyond energy to agricultural commodities, consistent with his overall emphasis on free markets and fiscal conservatism. He expects alternative energy to advance on a "level playing field"--leveled further by monetizing the climate externality via market-based mechanisms.
For someone whose candidacy was written off not long ago, Senator McCain appears to have as good a chance of capturing his party's nomination in this wide-open contest as any of his competitors. With former Senator Thompson, he also represents the last shot at the White House for his generation, which experienced World War II as children and came of age in the 1950s, but has yet to produce a President. Although he occupies the Senate seat formerly held by Barry Goldwater, John McCain's ideas on energy and the environment are up-to-date and would not be out of place among this year's Democratic candidates--with the possible exception of his unwavering support for nuclear power. His proposals reflect both change and experience. My long-time readers would be forgiven for noting a high degree of overlap between many of Senator McCain's positions on energy security and climate change and the themes that I've been writing about here for four years. That shouldn't be construed as an endorsement, however.
Subscribe to:
Posts (Atom)