I don't know if the Speaker of Virginia's House of Delegates intended a double entendre when he referred to the state gasoline tax that Governor Bob McDonnell (R) just proposed eliminating as a "dinosaur tax". He was certainly correct that this tax is rapidly becoming outmoded as its capacity to keep pace with necessary infrastructure investment fades with every EV, hybrid, or other efficient car that's sold. In the Governor's remarks, he referred to the gas tax as a "stagnant revenue source." In a low-tax state like the Commonwealth, shifting the tax burden for transportation away from fuel taxes and toward registration fees and a higher general sales tax represents an innovative, though also controversial answer to a challenge that has concerned me for some time.
The scope of the underlying problem should be uncontroversial: Like most states, Virginia's $0.175 per gallon gasoline tax is a holdover from an era in which fuel sales grew in tandem with road use, and both expanded steadily year after year. I can personally vouch for Northern Virginia's traffic congestion, cited in this morning's Washington Post story on this issue. As in most states, Virginia's gasoline sales have been flat to declining since the recession that began in 2008, while the value of the fixed fuel tax has been further eroded by inflation. These trends seem likely to continue for years, with recent new-car fuel economy improving sharply. The gas tax simply can't cover the cost of repairing and extending Virginia's highways without a large increase now, followed by periodic increases as future fuel sales fall.
A key aspect of Governor McDonnell's proposal that appeals to me is that it doesn't rely on high-tech monitoring or low-tech inspections of actual miles driven, like many of the other solutions I've examined. Instead of trying to fix the fuel-tied tax, he would eliminate it entirely and shift revenue generation to a combination of higher annual fees, especially for alternative fuel vehicles that currently pay little or no road tax, and an increase in the Commonwealth's 5% sales tax to 5.8%. 0.5% of the current sales tax is already dedicated to transportation. The proposed shift exchanges one regressive tax for another, in a manner that recognizes that all Virginians stand to benefit from improved transportation networks, whether they personally use them or not.
The current Virginia gas tax costs an average motorist around $100 per year, based on 12,000 miles of annual driving. The rise in the sales tax would generate comparable revenue from $12,000 of annual spending subject to the sales tax. That likely equates to little or no tax increase for low-income drivers, and an increase of up to a few hundred dollars a year for the better-off, while still leaving Virginia's sales tax slightly lower than those in Maryland and the District of Columbia. Motorists would continue to pay the federal gasoline tax, currently set at $0.184/gal.
I can envision various objections to the Governor's proposal, including concerns that cutting the gas tax might increase gasoline demand--and emissions--and reduce the incentives for higher fuel efficiency. That seems unlikely in the current context for at least two reasons. First, eliminating the Virginia gas tax involves a reduction in pump prices of less than 5% of last year's average price in the region, and more importantly represents less than a quarter of the total range of gas-price volatility we experienced in 2012. Moreover, fuel economy improvements are already mandated under the new federal Corporate Average Fuel Economy regulations that will increase fleet-average miles per gallon to 54.5 mpg by 2025. Cars will continue to become more efficient, no matter what gasoline costs.
It will be interesting to watch how this proposal fares in Richmond. The Governor's party may control the House of Delegates and effectively the Senate, by virtue of a tie-breaking Lieutenant Governor, but 2013 is an election year, and Mr. McDonnell is barred by term limits from seeking reelection. I wish him luck with this idea, even though its enactment would probably result in a small net tax increase for my household. I'm sure other states will be watching, too.
Showing posts with label virginia. Show all posts
Showing posts with label virginia. Show all posts
Wednesday, January 09, 2013
Thursday, April 01, 2010
Half Full and Half Empty?
Yesterday's announcement by President Obama that his administration would allow new offshore drilling on selected portions of the Outer Continental Shelf (OCS) that had formerly been off-limits yielded a variety of reactions. Energy industry leaders were cautiously optimistic, environmentalists were disappointed or "outraged", and the Washington Post's print-edition headline called it a "political maneuver." From my perspective, it constitutes a welcome concession to the reality that the day when renewable energy sources can pick up the entire load now carried by fossil fuels is a long way off--decades, not just years--and that until then we still have some important levers to pull in minimizing the amount of foreign oil we must import. Yet however it plays in the Congressional dance to devise a "comprehensive energy bill"--the current terminology for describing legislation regulating greenhouse gas emissions--it clearly falls short of what would be required to put the medium-term energy needs of the country on a truly secure footing.
On the positive side, yesterday's announcement sets the stage for oil producers finally to gain access to offshore acreage that had been off-limits for decades as a result of a combination of Congressional and Executive drilling moratoria. So while it does not strictly speaking open up these areas for drilling--that happened in 2008 when the previous bans expired or were lifted--the President made it clear that he will not reinstate a ban for the Atlantic coast south of New Jersey or for the Chukchi and Beaufort Seas off Alaska. If you are concerned about the energy security of this country and the enormous sums we pay to import oil from abroad, that is good news, even if it will take years to go through the process that Interior Secretary Salazar has outlined.
As usual the traditional media has gauged the potential resources involved with its customary lack of insight into how oil & gas are produced in the real world, comparing them to a few years of total US consumption. The subtext here is clear: how much should we risk for a couple more years' supply of a depleting resource? The reality is quite different. Even at the low end of 39 billion barrels of recoverable oil cited by Secretary Salazar, the new zones could eventually contribute several million bbl/day for a couple of decades. If ramped up quickly enough, that could overcome the underlying decline rate of current US output and add significant net production for a decade or two, at a time when competition for the oil we are currently importing is likely to be fiercest: as the growth of Asia continues and the domestic energy needs of exporting countries skyrocket, but before renewables, conservation and vehicle electrification can achieve their full impact.
Perspective is crucial in situations like this, so let's start with some figures already familiar to my regular readers. If 39-63 billion barrels of oil doesn't sound like much compared to the vast energy appetite of the US, which even in last year's recession-dampened economy consumed 18.7 million bbl/day of oil, or when compared to the enormous reserves of the Middle East, consider that cumulative US oil production stands at around 200 billion barrels from reserves that at no point exceeded 39 billion barrels. If that sounds like a contradiction, it's because the industry has always found more oil and more ways to extract it than expected when the resources were first discovered. There is no reason to believe that won't still hold true, particularly compared to resource estimates based on technology that was current when PCs running on Intel's 286 chip were cutting-edge and cellphones were scarce and looked like bricks.
It's also worth thinking about the prospect of an extra couple of million barrels per day of domestic oil in the context of how much renewable energy we'd have to produce to provide a similar quantity of energy. Wind turbines and solar panels don't even enter into this discussion, because they do not displace any meaningful quantity of oil. That's because they produce electricity, and last year oil accounted for less than 1% of all the electricity generated in the US. On an energy-equivalent basis, each million barrels per day of additional oil production equates to the energy content of 27.9 billion gallons per year of ethanol, or more than 2.5 times last year's record US ethanol production. In terms of useful energy contributed after accounting for the energy used to produce it, that comparison grows to more like 5x: the equivalent benefit of more than 50 billion gallons per year of ethanol, or about half-again the ultimate contribution of the entire 36 billion gallon federal Renewable Fuel Standard. And even if we threw away everything but the gasoline yield from this oil, it would still displace as much imported energy as 40 million plug-in electric vehicles--for which we'd still need to come up with an electricity source.
So if there's so much potential in the areas that the President has offered up for drilling, why would anyone be disappointed or see this as a glass half empty? For starters, it imposes new drilling bans on the entire Pacific Coast and carves out of the eastern Gulf of Mexico some of the most prospective acreage closer to the Florida coast, where large natural gas deposits have already been found. And of course it doesn't even mention the Arctic National Wildlife Refuge, which the USGS estimated to contain another 10 billion barrels, give or take a few billion. Simply put, outside of the Gulf of Mexico more acreage will again be placed off-limits than will be made available for drilling, and even the expansion into the eastern Gulf will require the approval of a Congress that has not looked favorably on drilling there since it placed its own ban on that region in 2006. My disappointment at those limitations is mitigated by the knowledge that drilling there now would be a non-starter, politically. Better to begin where state and local governments are willing and some even eager. Closer to home for me, it appears that Secretary Salazar is postponing the bidding on the Lease Sale 220 area off Virginia that I blogged about a couple weeks ago from 2011 into 2012, holding up lease revenues my state badly needs to plug serious budget gaps. (This would also require Congressional approval of revenue-sharing for these bids and royalties, similar to what the Gulf Coast states currently enjoy.)
In his comments at Andrews Air Force Base President Obama made it clear that additional offshore drilling must be viewed in the context of a broader plan for addressing US energy needs. Yet because of the structure of our energy economy and the enormous relative impact of additional oil production compared to renewables at their current scale, only massive fuel economy improvements and conservation can contribute as much to reducing US oil imports, which even after last year's big drop still averaged 9.7 million bbl/day and cost approximately $210 billion. Opening up more of the OCS, which lies beyond visible range from the nation's shoreline, is a good step forward, and it is one that future administrations of both parties can build on.
On the positive side, yesterday's announcement sets the stage for oil producers finally to gain access to offshore acreage that had been off-limits for decades as a result of a combination of Congressional and Executive drilling moratoria. So while it does not strictly speaking open up these areas for drilling--that happened in 2008 when the previous bans expired or were lifted--the President made it clear that he will not reinstate a ban for the Atlantic coast south of New Jersey or for the Chukchi and Beaufort Seas off Alaska. If you are concerned about the energy security of this country and the enormous sums we pay to import oil from abroad, that is good news, even if it will take years to go through the process that Interior Secretary Salazar has outlined.
As usual the traditional media has gauged the potential resources involved with its customary lack of insight into how oil & gas are produced in the real world, comparing them to a few years of total US consumption. The subtext here is clear: how much should we risk for a couple more years' supply of a depleting resource? The reality is quite different. Even at the low end of 39 billion barrels of recoverable oil cited by Secretary Salazar, the new zones could eventually contribute several million bbl/day for a couple of decades. If ramped up quickly enough, that could overcome the underlying decline rate of current US output and add significant net production for a decade or two, at a time when competition for the oil we are currently importing is likely to be fiercest: as the growth of Asia continues and the domestic energy needs of exporting countries skyrocket, but before renewables, conservation and vehicle electrification can achieve their full impact.
Perspective is crucial in situations like this, so let's start with some figures already familiar to my regular readers. If 39-63 billion barrels of oil doesn't sound like much compared to the vast energy appetite of the US, which even in last year's recession-dampened economy consumed 18.7 million bbl/day of oil, or when compared to the enormous reserves of the Middle East, consider that cumulative US oil production stands at around 200 billion barrels from reserves that at no point exceeded 39 billion barrels. If that sounds like a contradiction, it's because the industry has always found more oil and more ways to extract it than expected when the resources were first discovered. There is no reason to believe that won't still hold true, particularly compared to resource estimates based on technology that was current when PCs running on Intel's 286 chip were cutting-edge and cellphones were scarce and looked like bricks.
It's also worth thinking about the prospect of an extra couple of million barrels per day of domestic oil in the context of how much renewable energy we'd have to produce to provide a similar quantity of energy. Wind turbines and solar panels don't even enter into this discussion, because they do not displace any meaningful quantity of oil. That's because they produce electricity, and last year oil accounted for less than 1% of all the electricity generated in the US. On an energy-equivalent basis, each million barrels per day of additional oil production equates to the energy content of 27.9 billion gallons per year of ethanol, or more than 2.5 times last year's record US ethanol production. In terms of useful energy contributed after accounting for the energy used to produce it, that comparison grows to more like 5x: the equivalent benefit of more than 50 billion gallons per year of ethanol, or about half-again the ultimate contribution of the entire 36 billion gallon federal Renewable Fuel Standard. And even if we threw away everything but the gasoline yield from this oil, it would still displace as much imported energy as 40 million plug-in electric vehicles--for which we'd still need to come up with an electricity source.
So if there's so much potential in the areas that the President has offered up for drilling, why would anyone be disappointed or see this as a glass half empty? For starters, it imposes new drilling bans on the entire Pacific Coast and carves out of the eastern Gulf of Mexico some of the most prospective acreage closer to the Florida coast, where large natural gas deposits have already been found. And of course it doesn't even mention the Arctic National Wildlife Refuge, which the USGS estimated to contain another 10 billion barrels, give or take a few billion. Simply put, outside of the Gulf of Mexico more acreage will again be placed off-limits than will be made available for drilling, and even the expansion into the eastern Gulf will require the approval of a Congress that has not looked favorably on drilling there since it placed its own ban on that region in 2006. My disappointment at those limitations is mitigated by the knowledge that drilling there now would be a non-starter, politically. Better to begin where state and local governments are willing and some even eager. Closer to home for me, it appears that Secretary Salazar is postponing the bidding on the Lease Sale 220 area off Virginia that I blogged about a couple weeks ago from 2011 into 2012, holding up lease revenues my state badly needs to plug serious budget gaps. (This would also require Congressional approval of revenue-sharing for these bids and royalties, similar to what the Gulf Coast states currently enjoy.)
In his comments at Andrews Air Force Base President Obama made it clear that additional offshore drilling must be viewed in the context of a broader plan for addressing US energy needs. Yet because of the structure of our energy economy and the enormous relative impact of additional oil production compared to renewables at their current scale, only massive fuel economy improvements and conservation can contribute as much to reducing US oil imports, which even after last year's big drop still averaged 9.7 million bbl/day and cost approximately $210 billion. Opening up more of the OCS, which lies beyond visible range from the nation's shoreline, is a good step forward, and it is one that future administrations of both parties can build on.
Monday, March 15, 2010
It's Time to Let Virginia Drill
At last Thursday's Summit on Virginia's Energy Future in Richmond, Governor Robert McDonnell delivered a detailed talk on the state's energy opportunities and the bi-partisan commitment of the legislature and Virginia's US Senators and Congressional delegation to capitalize on them, including its offshore oil, gas and wind resources. He also declared his goal of making Virginia the "energy capital of the East Coast." While neither Virginia nor any of its neighbors up and down the coast seems likely to compete with Texas or Louisiana in total energy production, the new Governor's aspiration might be more than just wishful thinking. However, as the business and governmental leaders who spoke at the session made clear, Virginia doesn't control its own destiny in this regard. The Commonwealth's plans for tapping the value of those resources to help close its budget deficit depend on the cooperation of the US Department of the Interior (DOI), which controls the leasing and permitting process for exploration and development on the Outer Continental Shelf (OCS).
Attending the summit provided me with a much better appreciation of my state's energy situation. When we moved our family here nearly four years ago, I confess I didn't spend a lot of time thinking about local energy issues, beyond confirming that electricity was cheaper and likely to be more reliable than where we had lived in Connecticut. Although Virginia produces essentially no crude oil, it does have respectable quantities of natural gas and coal, a bit of hydro and biomass power, and is home to two nuclear power plants, each with two reactors. Unfortunately, like many states, Virginia's own energy production isn't sufficient to meet our needs, and we must import significant quantities of power, along with 100% of our petroleum supplies, either as crude oil for the single small refinery at Yorktown, or as finished products. Several speakers mentioned that the Commonwealth is second only to California in state electricity imports.
Also like many other states, Virginia faces a significant budget shortfall as a result of lower tax receipts, mainly due to unemployment that, while lower than the national average, is still well above pre-2008 levels. A consistent theme from the participants at the summit was that although Virginia's offshore energy resources don't appear to be large enough to make it energy independent, a share of the bid premiums, rentals, and royalties similar to that received by Texas, Louisiana, Mississippi and Alabama for their OCS resources under the GOMESA law of 2006 would be very useful in addressing state funding shortfalls, particularly for transportation. Together with the job creation and non-royalty tax revenue that would accompany development, the offshore resources constitute a very attractive economic proposition.
Estimates of potential resources included in Virginia's first lease area are around 130 million barrels of oil and 1.1 trillion cubic feet of gas. That's a lot smaller than the kind of deposits that have been found in the deepwater Gulf of Mexico, though as several speakers pointed out these figures are based on outdated technology and would likely increase significantly with current techniques. That's important because when the surveys underlying these estimates were done, the state of the art most likely wouldn't have found any of the big plays now being exploited in the Gulf or off the coast of Brazil. And even if any resources discovered were closer to the DOI's current estimate than the 800 or 900 million barrel upside potential that a couple of Thursday's panelists mentioned, it could still create a valuable stream of royalties and taxes for a medium-sized state. In addition to its oil & gas potential, coastal Virginia also has an excellent wind resource in the Class 5/Class 6 category desirable for offshore wind farms, with several firms indicating interest.
Having passed legislation declaring the Commonwealth's support for offshore development, along with a bill allocating resulting government revenues to transportation funding and renewable energy R&D, Virginia is, as the Governor put it, "ready to go." Under the previous US administration DOI included Sale 220 for Virginia's OCS in the 2007-2012 leasing program of the Minerals Management Service. That put Virginia in the first lease round for the Atlantic and Pacific coastal regions that had previously been subject to the expired offshore drilling moratoria. The sale was expected to occur in 2011. With appropriate revenue sharing in place, Virginia wouldn't have to wait for production to begin in five or more years, but could begin receiving bid premium and rental income as soon as the sale is held. Unfortunately, the current management of DOI has not exhibited much enthusiasm for advancing these plans. Virginia officials, including the Governor and our two US Senators, have contacted Secretary Salazar to convey the urgency of proceeding with the sale.
As I've noted on many occasions, the US still has significant undeveloped oil resources, and we're likely to need every barrel they can contribute in the years ahead as global demand grows. The Congressional and Presidential drilling moratoria that formerly blocked development on two of our coasts no longer apply, and it is in the financial and energy security interests of the nation to move ahead with development where the affected states support it. The clear message last Thursday was that it is now the official policy of the Commonwealth of Virginia to develop its offshore resources. By leasing Virginia's OCS oil and gas, DOI would turn the President's comments in support of offshore drilling in this year's State of the Union address into concrete action. That would produce immediate and long-term economic benefits for the state and local communities, while providing badly-needed revenue for the federal government. After decades of delay, there is no better time than now to move ahead with this.
FYI, I'll be traveling on business this week. Postings will likely resume Friday.
Attending the summit provided me with a much better appreciation of my state's energy situation. When we moved our family here nearly four years ago, I confess I didn't spend a lot of time thinking about local energy issues, beyond confirming that electricity was cheaper and likely to be more reliable than where we had lived in Connecticut. Although Virginia produces essentially no crude oil, it does have respectable quantities of natural gas and coal, a bit of hydro and biomass power, and is home to two nuclear power plants, each with two reactors. Unfortunately, like many states, Virginia's own energy production isn't sufficient to meet our needs, and we must import significant quantities of power, along with 100% of our petroleum supplies, either as crude oil for the single small refinery at Yorktown, or as finished products. Several speakers mentioned that the Commonwealth is second only to California in state electricity imports.
Also like many other states, Virginia faces a significant budget shortfall as a result of lower tax receipts, mainly due to unemployment that, while lower than the national average, is still well above pre-2008 levels. A consistent theme from the participants at the summit was that although Virginia's offshore energy resources don't appear to be large enough to make it energy independent, a share of the bid premiums, rentals, and royalties similar to that received by Texas, Louisiana, Mississippi and Alabama for their OCS resources under the GOMESA law of 2006 would be very useful in addressing state funding shortfalls, particularly for transportation. Together with the job creation and non-royalty tax revenue that would accompany development, the offshore resources constitute a very attractive economic proposition.
Estimates of potential resources included in Virginia's first lease area are around 130 million barrels of oil and 1.1 trillion cubic feet of gas. That's a lot smaller than the kind of deposits that have been found in the deepwater Gulf of Mexico, though as several speakers pointed out these figures are based on outdated technology and would likely increase significantly with current techniques. That's important because when the surveys underlying these estimates were done, the state of the art most likely wouldn't have found any of the big plays now being exploited in the Gulf or off the coast of Brazil. And even if any resources discovered were closer to the DOI's current estimate than the 800 or 900 million barrel upside potential that a couple of Thursday's panelists mentioned, it could still create a valuable stream of royalties and taxes for a medium-sized state. In addition to its oil & gas potential, coastal Virginia also has an excellent wind resource in the Class 5/Class 6 category desirable for offshore wind farms, with several firms indicating interest.
Having passed legislation declaring the Commonwealth's support for offshore development, along with a bill allocating resulting government revenues to transportation funding and renewable energy R&D, Virginia is, as the Governor put it, "ready to go." Under the previous US administration DOI included Sale 220 for Virginia's OCS in the 2007-2012 leasing program of the Minerals Management Service. That put Virginia in the first lease round for the Atlantic and Pacific coastal regions that had previously been subject to the expired offshore drilling moratoria. The sale was expected to occur in 2011. With appropriate revenue sharing in place, Virginia wouldn't have to wait for production to begin in five or more years, but could begin receiving bid premium and rental income as soon as the sale is held. Unfortunately, the current management of DOI has not exhibited much enthusiasm for advancing these plans. Virginia officials, including the Governor and our two US Senators, have contacted Secretary Salazar to convey the urgency of proceeding with the sale.
As I've noted on many occasions, the US still has significant undeveloped oil resources, and we're likely to need every barrel they can contribute in the years ahead as global demand grows. The Congressional and Presidential drilling moratoria that formerly blocked development on two of our coasts no longer apply, and it is in the financial and energy security interests of the nation to move ahead with development where the affected states support it. The clear message last Thursday was that it is now the official policy of the Commonwealth of Virginia to develop its offshore resources. By leasing Virginia's OCS oil and gas, DOI would turn the President's comments in support of offshore drilling in this year's State of the Union address into concrete action. That would produce immediate and long-term economic benefits for the state and local communities, while providing badly-needed revenue for the federal government. After decades of delay, there is no better time than now to move ahead with this.
FYI, I'll be traveling on business this week. Postings will likely resume Friday.
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