Among all the candidates I've scrutinized so far in this year's presidential election campaign, energy independence has emerged as a common theme. Each of the candidates approaches it with different emphasis and solutions, but the worries about our reliance on unstable regimes for our energy supplies span both parties, as does the concern that our remittances for imported oil are funding our enemies in the War on Terror. My systematic review of the 2008 presidential aspirants now turns to one of the best known candidates on either side, Senator Hillary Clinton (D-NY,) winner of the New Hampshire Democratic Primary and the Nevada Democratic Caucuses. She treats energy policy as a key issue and combines it with a focus on stronger measures to address climate change.
Anyone curious about Senator Clinton's views and proposals on energy and the environment needn't look much farther than her campaign website, which includes a summary page and links to a 14-page energy plan, other policy documents, and speeches. It would take me a week's worth of postings to enumerate and evaluate all of the details, which include expanding US biofuels production to 60 billion gallons per year, increasing fuel economy to 55 mpg, and phasing out incandescent lights. Knowing the intellectual resources at her disposal, I'm not surprised by the granularity of the Senator's proposals. At the highest level, all of these ideas support three goals that she articulates consistently: reducing greenhouse gas emissions by 80% by mid-century, reducing US oil imports by two-thirds (compared to current projections of approximately 13 million barrels per day) by 2030, and building a green-energy sector that will provide millions of new jobs. Unlike the goals of complete energy independence or oil independence that other candidates have announced, Senator Clinton's oil import target just might be achievable, leaving us importing 3-4 million barrels per day of crude oil, about what we get from Canada and Mexico today.
The centerpiece of her plan is the creation of a "strategic energy fund" amounting to $50 billion over 10 years for expanding R&D on energy efficiency, renewables and other alternative energy sources. This figure includes significant funding for demonstration projects to prove the feasibility of applying carbon sequestration to "clean coal" power plants, which would apparently be the only kind of coal facilities she would allow to be built. But when Senator Clinton says that she knows where to get the money for this fund, you know what is coming next. As described in a key speech on energy, the money would come from "ending the tax breaks that oil companies receive to maintain the existing oil dependence economy" and by enacting some form of a windfall profits tax on the oil industry. It would also receive revenue from the greenhouse cap-and-trade system she envisions, with 100% of emissions allowances auctioned, rather than allocated to existing sources. Additional funds for emerging energy would come from new "Energy Independence Bonds."
Concern about climate change shapes all of Senator Clinton's energy proposals, resulting in programs intended to reduce energy dependence while also reducing emissions. This includes an idea from former Vice President Gore, for the establishment of a "carbon-neutral mortgage association" or "Connie-Mae," that would finance home improvements that reduced energy consumption and emissions.
Although many of these ideas and proposals are well thought-out and address urgent problems, particularly with regard to tackling energy security and climate change simultaneously, I am concerned about the Senator's adversarial approach to the existing energy industry, which must play a key role, if her goal of reducing our reliance on imported oil is to be achieved. I don't see how we can close the enormous and growing gap in our energy supplies, while taking away financial resources from the industry that accounts for 45% of domestic energy production. I'm sure Senator Clinton understands that, because she voted in 2006 to expand offshore drilling in the Gulf of Mexico. In addition, although not explicitly anti-nuclear, she has apparently ruled out any role for new nuclear power in reducing greenhouse gas emissions or providing the power for the plug-in vehicles that she sees as a key strategy for reducing oil use.
On the "experience vs. change" scale, Senator Clinton's proposed energy policies represent significant departures from the status quo. Her team has taken a systematic approach to energy and the environment, connecting technologies such as renewable power and advanced biofuels to the smart-grid and flexible-fuel infrastructure needed to maximize their usefulness. Although her target for reducing oil imports is less ambitious than that of Senator Obama, her emphasis on climate change matches his, and the specificity of her energy proposals exceeds that of any other candidate I've reviewed to date. At the same time, I have been surprised by the populist tone of much of her campaign rhetoric. It extends to implying that oil refiners collude to drive up prices, a charge on which the industry has been exonerated numerous times. This doesn't match the seriousness and pragmatism she has applied to her Senate role over the past seven years, but it certainly reflects the dynamics of the current three-way race for the Democratic nomination.
Wednesday, January 23, 2008
Tuesday, January 22, 2008
Energy and the Economy
We're currently being provided with an uncomfortable reminder that the economy trumps all other issues, when it's doing badly. Energy has been a big part of this story, at least in terms of perception. However, in part because weak refining margins have sheltered consumers from the full impact of $90 oil, and because natural gas has temporarily uncoupled from oil prices, on average Americans still pay less for energy than we did during most of the 1960s, 1970s and into the 1980s. Of course, that's cold comfort for those who have seen their fuel outlays double in the last four years. The important question now is how energy will affect a weakening economy, and vice versa. In lieu of a comprehensive answer that would tie up a team of economists for weeks, here are a few thoughts on the subject.
Energy and the economy are deeply intertwined. Economic growth pushes up energy demand, though at a much slower rate than in the past. Energy prices rise in turn, and that stimulates supply, albeit with a significant lag. In this cycle we've seen the impact of supply constraints from infrastructure, resource nationalism, and the availability of equipment and experienced technical staff. Now throw in the rapid economic transformation of China, India and the rest of Asia, along with the undetermined effects of unprecedented levels of financial speculation in oil. Prices haven't self-corrected as we might have expected, and the result has been dramatic energy price inflation of a type very different from the energy crisis of the 1970s. The financial flows this has created are enormous: a billion dollars per day, from the US alone.
So what happens next? That depends on how much influence the US market has on an increasingly globalized energy market. Even with the economy still growing, we've seen total US oil consumption has plateau for three years, now, and our imports of oil and petroleum products have been essentially flat since 2005. We're responsible for less than 15% of the 5 million barrel per day spurt of demand since 2003 that has used up most of the world's spare production capacity. If our consumption fell this year, that might not affect oil prices much, unless the US economic slowdown triggered a global economic contraction. Consider China, where rapidly increasing oil consumption has been led by domestic consumers, who are insulated from world oil price changes by regulated petroleum product prices, and by export industries that supply developed countries, including the US. Because China uses much more energy per unit of GDP than we do, a slowdown there would have a more dramatic impact on oil prices.
But if $90 oil represents a significant drag on the US economy, how much would oil prices have to fall in order to stimulate economic growth? That's hard to say, because during most of the run-up from $30 per barrel to $70 or so, our economy appeared to be immune to the consequences of higher oil prices. Right now analysts and markets seem most concerned about consumers, for whom the increase in gasoline prices since last January has added an average of about $65 per month in cost per household. Reversing that would require getting oil back to the mid-$50s, barring a big increase in refining margins, as refiners cut back on output that is losing them money.
How might oil revert to $50 per barrel this year? We can rule out the influence of alternative energy, in the short run. Biofuels output can't grow fast enough to make that kind of dent in demand. I also doubt we can convince OPEC to open their taps wide; they are unlikely to see that as being in their best interest, unless they thought it was the only option for preventing a global collapse that would shrink their revenues even more. That leaves speculation and demand. There's no consensus on how much of the current oil price is attributable to speculation. As the yields on other asset classes drop, are speculators more or less likely to invest in oil commodities? And how many of them will need to liquidate commodity holdings to cover losses on other positions? Even if the contribution of speculation dropped by $10 per barrel, we're still only talking about roughly $20 per month per household.
That leaves demand, though this is an example of the worm eating its tail. Demand growth is widely viewed as the biggest contributor to the increase in oil prices since 2003, so a global drop in oil demand of a couple of million barrels per day would probably deflate oil prices sharply. But in the short term, we can't create that big a fall in demand through higher efficiency alone. The scenario that comes closest to being able to deliver that looks similar to what we experienced in the Asian Economic Crisis of the late 1990s, when the combination of falling regional demand and rising global production cut oil prices in half. However, the global economy has become much more inter-dependent in the last ten years, and this kind of cure would almost certainly be worse than the disease.
Although oil prices have contributed to the current crisis, they didn't cause it. While oil prices will likely fall, if the US goes into recession and the global economy contracts, that by itself won't do much to restore the economy to sound health. Oil looks like a lagging, rather than leading indicator, here, and we need to turn elsewhere to solve the financial mess that has resulted from the popping of the US housing bubble and the debt problem that has created. Later this week I'll take a look at what this might mean for alternative energy.
Energy and the economy are deeply intertwined. Economic growth pushes up energy demand, though at a much slower rate than in the past. Energy prices rise in turn, and that stimulates supply, albeit with a significant lag. In this cycle we've seen the impact of supply constraints from infrastructure, resource nationalism, and the availability of equipment and experienced technical staff. Now throw in the rapid economic transformation of China, India and the rest of Asia, along with the undetermined effects of unprecedented levels of financial speculation in oil. Prices haven't self-corrected as we might have expected, and the result has been dramatic energy price inflation of a type very different from the energy crisis of the 1970s. The financial flows this has created are enormous: a billion dollars per day, from the US alone.
So what happens next? That depends on how much influence the US market has on an increasingly globalized energy market. Even with the economy still growing, we've seen total US oil consumption has plateau for three years, now, and our imports of oil and petroleum products have been essentially flat since 2005. We're responsible for less than 15% of the 5 million barrel per day spurt of demand since 2003 that has used up most of the world's spare production capacity. If our consumption fell this year, that might not affect oil prices much, unless the US economic slowdown triggered a global economic contraction. Consider China, where rapidly increasing oil consumption has been led by domestic consumers, who are insulated from world oil price changes by regulated petroleum product prices, and by export industries that supply developed countries, including the US. Because China uses much more energy per unit of GDP than we do, a slowdown there would have a more dramatic impact on oil prices.
But if $90 oil represents a significant drag on the US economy, how much would oil prices have to fall in order to stimulate economic growth? That's hard to say, because during most of the run-up from $30 per barrel to $70 or so, our economy appeared to be immune to the consequences of higher oil prices. Right now analysts and markets seem most concerned about consumers, for whom the increase in gasoline prices since last January has added an average of about $65 per month in cost per household. Reversing that would require getting oil back to the mid-$50s, barring a big increase in refining margins, as refiners cut back on output that is losing them money.
How might oil revert to $50 per barrel this year? We can rule out the influence of alternative energy, in the short run. Biofuels output can't grow fast enough to make that kind of dent in demand. I also doubt we can convince OPEC to open their taps wide; they are unlikely to see that as being in their best interest, unless they thought it was the only option for preventing a global collapse that would shrink their revenues even more. That leaves speculation and demand. There's no consensus on how much of the current oil price is attributable to speculation. As the yields on other asset classes drop, are speculators more or less likely to invest in oil commodities? And how many of them will need to liquidate commodity holdings to cover losses on other positions? Even if the contribution of speculation dropped by $10 per barrel, we're still only talking about roughly $20 per month per household.
That leaves demand, though this is an example of the worm eating its tail. Demand growth is widely viewed as the biggest contributor to the increase in oil prices since 2003, so a global drop in oil demand of a couple of million barrels per day would probably deflate oil prices sharply. But in the short term, we can't create that big a fall in demand through higher efficiency alone. The scenario that comes closest to being able to deliver that looks similar to what we experienced in the Asian Economic Crisis of the late 1990s, when the combination of falling regional demand and rising global production cut oil prices in half. However, the global economy has become much more inter-dependent in the last ten years, and this kind of cure would almost certainly be worse than the disease.
Although oil prices have contributed to the current crisis, they didn't cause it. While oil prices will likely fall, if the US goes into recession and the global economy contracts, that by itself won't do much to restore the economy to sound health. Oil looks like a lagging, rather than leading indicator, here, and we need to turn elsewhere to solve the financial mess that has resulted from the popping of the US housing bubble and the debt problem that has created. Later this week I'll take a look at what this might mean for alternative energy.
Monday, January 21, 2008
Coal Fights Back
It was inevitable that the US coal industry would answer last year's "Coal Is Filthy" ad campaign with a campaign of their own, and here it is. The Washington Post describes this effort as focused on key primary states, with the aim of enhancing the image of coal and stirring up opposition to legislation on climate change. Although the ads' tag-line isn't quite as visceral as that of coal's opponents, their appeal to energy security seems timely, and the assertion that coal is "the fuel that powers our way of life" is more accurate than many Americans would like to acknowledge. In 2006 coal generated 49% of US electric power, while all zero-emission sources, including nuclear, large hydropower, wind and grid-connected solar only accounted for 29%. But although the campaign touts the potential of coal to produce emissions-free power in the future, thanks to the technology of carbon sequestration, that will only happen if the government regulates CO2 emissions in some fashion. Without putting a value on greenhouse gas emissions, the economic incentive to increase the capital and operating costs of coal facilities in order to capture those emissions won't exist.
Contrast this with the potential of energy efficiency. Engineers and scientists have always known that we waste more of the energy from our primary fuels than we actually use. Efficiency experts argue that if the standards in the Energy Bill and various state regulations were applied consistently, we wouldn't need any new, large power plants for years to come. Among other things, the Energy Bill has written the epitaph for the incandescent light bulb, as we have known it, but it has done so without banning the bulb, but by means of lighting efficiency standards that conventional incandescents can't meet. Even today's compact fluorescent lights must eventually improve or give way to LEDs or other tech. However, our experience with efficiency so far has been that any net reduction in demand is likely to prove temporary. We love our gizmos too much, and it has usually been easier to add new power plants than to convince everyone to invest in better appliances, insulation, and other energy-saving measures. Climate change could be about to alter that balance, and it's getting harder to build new distribution infrastructure, too, but the jury is out.
Now factor in the rapid growth of renewable electric power, admittedly from a very small base, compared to coal. Last year US wind capacity grew by an amazing 45%. Although that additional 5,244 MW of wind generation will only produce about as much electricity as 1,700 MW of gas, coal or nuclear capacity, wind continues to grow at sustained rates that make it more consequential each year.
All of this makes for a very challenging planning environment for coal producers and the states that are home to the country's enormous coal reserves. Efficiency is reducing the size of the total future power market, renewables and a resurgent nuclear industry are competing for its future market share, and the gathering response to climate change will likely erase most of coal's cost advantage in levelized electricity costs. Those are daunting uncertainties, and no amount of PR can neutralize them.
Contrast this with the potential of energy efficiency. Engineers and scientists have always known that we waste more of the energy from our primary fuels than we actually use. Efficiency experts argue that if the standards in the Energy Bill and various state regulations were applied consistently, we wouldn't need any new, large power plants for years to come. Among other things, the Energy Bill has written the epitaph for the incandescent light bulb, as we have known it, but it has done so without banning the bulb, but by means of lighting efficiency standards that conventional incandescents can't meet. Even today's compact fluorescent lights must eventually improve or give way to LEDs or other tech. However, our experience with efficiency so far has been that any net reduction in demand is likely to prove temporary. We love our gizmos too much, and it has usually been easier to add new power plants than to convince everyone to invest in better appliances, insulation, and other energy-saving measures. Climate change could be about to alter that balance, and it's getting harder to build new distribution infrastructure, too, but the jury is out.
Now factor in the rapid growth of renewable electric power, admittedly from a very small base, compared to coal. Last year US wind capacity grew by an amazing 45%. Although that additional 5,244 MW of wind generation will only produce about as much electricity as 1,700 MW of gas, coal or nuclear capacity, wind continues to grow at sustained rates that make it more consequential each year.
All of this makes for a very challenging planning environment for coal producers and the states that are home to the country's enormous coal reserves. Efficiency is reducing the size of the total future power market, renewables and a resurgent nuclear industry are competing for its future market share, and the gathering response to climate change will likely erase most of coal's cost advantage in levelized electricity costs. Those are daunting uncertainties, and no amount of PR can neutralize them.
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.
Thursday, January 17, 2008
Raising Fuel Taxes
At the same time that I was writing about the demand response to higher fuel prices on Tuesday, a Congressionally-appointed commission was meeting in Washington to propose an increase in the gasoline tax that would raise those prices further, in order to maintain the nation's highways. Last summer's bridge collapse in Minneapolis delivered a warning about the condition of America's road infrastructure. Without an increase in the federal highway budget, and in the 18.4 cent per gallon federal gasoline tax that funds it, the situation will get worse. This proposal will test our attitude towards a tax that has long been regarded as untouchable. It will also have implications for the US response to climate change.
Every year that goes by without an increase in the road tax, the purchasing power of the revenue it generates shrinks. If the new 35 mpg CAFE standard succeeds in reducing fuel consumption, then that tax revenue will begin to decline in nominal terms, as well. The recommendation of the National Surface Transportation Policy and Revenue Study Commission for a series of annual 5 cent-per-gallon tax increases suggests that we will be in catch-up mode for some time. But without diminishing the important safety concerns underlying the commission's work, the road tax is the tip of the iceberg. The necessity of reducing greenhouse gas emissions from the transportation sector makes it likely that some form of additional fuel taxation, either directly, in the form of a carbon tax, or indirectly, through a cap-and-trade system, will be a key component of national climate change policy within a few years.
As a new study from the Congressional Budget Office confirms, higher fuel prices stimulate changes in driving behavior and habits, along with consumer preferences for more efficient cars. Considering the amount by which we must reduce emissions over the next several decades, and the changes in consumption necessary to achieve those reductions, this will take a lot more than an extra 5 or 10 cents per gallon, on top of what is required to bring the highway trust fund back into the black. If the cost of CO2 credits under a greenhouse gas cap-and-trade plan reaches $20 or $30/ton, then in fairly short order consumers would see gasoline prices rise by 20 or 30 cents per gallon, dictated by the simple chemistry of hydrocarbon combustion and the increase in producers' costs. Depending on the severity of cuts desired, $100/ton--or $1.00/gallon--is possible.
None of this will be easy. Even without predictable opposition from groups that object to higher taxes of any stripe--a position to which I'm normally sympathetic--it will not be popular to tell Americans who have already seen retail gasoline prices double in the last four years and triple in the last ten that they still aren't paying enough. The burden will fall disproportionately on lower-income folks, and that will complicate both the politics and implementation. Throw in a looming recession, and the obstacles become formidable. Nevertheless, if we want to keep our roads and bridges in good repair, improve our energy security, and reduce greenhouse gas emissions, higher motor fuel taxes now seem unavoidable.
Every year that goes by without an increase in the road tax, the purchasing power of the revenue it generates shrinks. If the new 35 mpg CAFE standard succeeds in reducing fuel consumption, then that tax revenue will begin to decline in nominal terms, as well. The recommendation of the National Surface Transportation Policy and Revenue Study Commission for a series of annual 5 cent-per-gallon tax increases suggests that we will be in catch-up mode for some time. But without diminishing the important safety concerns underlying the commission's work, the road tax is the tip of the iceberg. The necessity of reducing greenhouse gas emissions from the transportation sector makes it likely that some form of additional fuel taxation, either directly, in the form of a carbon tax, or indirectly, through a cap-and-trade system, will be a key component of national climate change policy within a few years.
As a new study from the Congressional Budget Office confirms, higher fuel prices stimulate changes in driving behavior and habits, along with consumer preferences for more efficient cars. Considering the amount by which we must reduce emissions over the next several decades, and the changes in consumption necessary to achieve those reductions, this will take a lot more than an extra 5 or 10 cents per gallon, on top of what is required to bring the highway trust fund back into the black. If the cost of CO2 credits under a greenhouse gas cap-and-trade plan reaches $20 or $30/ton, then in fairly short order consumers would see gasoline prices rise by 20 or 30 cents per gallon, dictated by the simple chemistry of hydrocarbon combustion and the increase in producers' costs. Depending on the severity of cuts desired, $100/ton--or $1.00/gallon--is possible.
None of this will be easy. Even without predictable opposition from groups that object to higher taxes of any stripe--a position to which I'm normally sympathetic--it will not be popular to tell Americans who have already seen retail gasoline prices double in the last four years and triple in the last ten that they still aren't paying enough. The burden will fall disproportionately on lower-income folks, and that will complicate both the politics and implementation. Throw in a looming recession, and the obstacles become formidable. Nevertheless, if we want to keep our roads and bridges in good repair, improve our energy security, and reduce greenhouse gas emissions, higher motor fuel taxes now seem unavoidable.
Wednesday, January 16, 2008
Turning Up the Heat
Climate change hasn’t generated much controversy in the US presidential campaign, yet, but that could change, based on the latest observations of the global climate. In separate reports, preliminary tallies of the average global temperature in 2007 place it among the warmest years since records have been kept, while scientists conclude that the Antarctic icecap is melting faster than previously thought. When combined with the recent conclusions of one of America’s best-known climate scientists, the pressure on politicians to lead a more aggressive response to the problem could intensify this year.
It’s understandable that the issue hasn’t attracted more attention, so far. All of the Democratic front-runners espouse aggressive action to deal with climate change, so it hasn’t been a major differentiator among them. And while the Republican candidates offer a more diverse set of views on climate, the issue hasn’t become a major point of contention, as has immigration. At the same time, climate change has generally been subsumed within the more prominent, “hot button” subject of energy policy, driven by sustained $3 per gallon gasoline and oil prices hovering in the neighborhood of the inflation-adjusted record high.
Although climate change might rise to greater prominence in the election campaign naturally, once the primaries are over and the two parties’ nominees face each other—presumably exposing larger differences in emphasis and proposed policies—the issue could heat up even sooner, as the recent climate news percolates through the media and public awareness. Even subtler and more worrying than the news about Antarctic ice and a warm 2007 are the concerns of NASA scientist James Hansen, who has apparently concluded that the atmospheric concentration of carbon dioxide and other greenhouse gases already exceeds the level at which it must eventually be stabilized, in order to avoid catastrophic consequences. If his view becomes the consensus, it has serious implications.
The positions of many of the non-US delegations to the recent Bali conference on climate change reflected the goal of stabilizing atmospheric CO2 at 450 parts per million (ppm,) which climate models suggest would probably limit the global temperature increase to 2 degrees Celsius. With the actual concentration currently at 385 ppm and global emissions still increasing, as the industrialization and deforestation of the developing world proceeds, 450 ppm is a challenging goal, but one that might still be achieved without wrecking the global economy. 450 is no one’s idea of a “soft landing”, but the fact that we are still 65 ppm away, while increasing at 2 ppm per year, appears to leave us some headroom, particularly if we allow for a bit of “overshoot.” Unfortunately, Dr. Hansen, whose views have garnered significant attention in the past, now believes that 450 ppm is too high, and that the safe target ought to be 350 ppm, which we passed in the late 1980s.
The point of all this isn’t to argue whether 350 or 450 ppm is the right target for atmospheric CO2, or whether either one is even feasible. Rather, it is that people take Dr. Hansen seriously, and this development, together with observed changes in the climate, could significantly ratchet up the urgency of taking strong action to tackle the US contribution to global warming—with unpredictable political consequences. The conventional wisdom seems to be against pushing the Warner-Lieberman greenhouse gas cap-and-trade bill to a vote in the Senate, which would effectively put both parties on the record on the issue in an election year. Will that assessment hold up, if the public latch onto the latest developments in a big way, or one of the presidential candidates uses them to turn up the heat? Or will bad economic news drown out anything short of an immediate environmental crisis?
It’s understandable that the issue hasn’t attracted more attention, so far. All of the Democratic front-runners espouse aggressive action to deal with climate change, so it hasn’t been a major differentiator among them. And while the Republican candidates offer a more diverse set of views on climate, the issue hasn’t become a major point of contention, as has immigration. At the same time, climate change has generally been subsumed within the more prominent, “hot button” subject of energy policy, driven by sustained $3 per gallon gasoline and oil prices hovering in the neighborhood of the inflation-adjusted record high.
Although climate change might rise to greater prominence in the election campaign naturally, once the primaries are over and the two parties’ nominees face each other—presumably exposing larger differences in emphasis and proposed policies—the issue could heat up even sooner, as the recent climate news percolates through the media and public awareness. Even subtler and more worrying than the news about Antarctic ice and a warm 2007 are the concerns of NASA scientist James Hansen, who has apparently concluded that the atmospheric concentration of carbon dioxide and other greenhouse gases already exceeds the level at which it must eventually be stabilized, in order to avoid catastrophic consequences. If his view becomes the consensus, it has serious implications.
The positions of many of the non-US delegations to the recent Bali conference on climate change reflected the goal of stabilizing atmospheric CO2 at 450 parts per million (ppm,) which climate models suggest would probably limit the global temperature increase to 2 degrees Celsius. With the actual concentration currently at 385 ppm and global emissions still increasing, as the industrialization and deforestation of the developing world proceeds, 450 ppm is a challenging goal, but one that might still be achieved without wrecking the global economy. 450 is no one’s idea of a “soft landing”, but the fact that we are still 65 ppm away, while increasing at 2 ppm per year, appears to leave us some headroom, particularly if we allow for a bit of “overshoot.” Unfortunately, Dr. Hansen, whose views have garnered significant attention in the past, now believes that 450 ppm is too high, and that the safe target ought to be 350 ppm, which we passed in the late 1980s.
The point of all this isn’t to argue whether 350 or 450 ppm is the right target for atmospheric CO2, or whether either one is even feasible. Rather, it is that people take Dr. Hansen seriously, and this development, together with observed changes in the climate, could significantly ratchet up the urgency of taking strong action to tackle the US contribution to global warming—with unpredictable political consequences. The conventional wisdom seems to be against pushing the Warner-Lieberman greenhouse gas cap-and-trade bill to a vote in the Senate, which would effectively put both parties on the record on the issue in an election year. Will that assessment hold up, if the public latch onto the latest developments in a big way, or one of the presidential candidates uses them to turn up the heat? Or will bad economic news drown out anything short of an immediate environmental crisis?
Tuesday, January 15, 2008
The Demand Response
An article on the relationship between oil prices and oil demand in today's Wall Street Journal reveals that data to be released shortly by the International Energy Agency will show a slight decline in oil consumption among the OECD countries during 2007. The article also quotes Department of Energy figures showing that US consumption for last year was up slightly, by 0.2%. Compared to our average annual increase from 2000-2006 of 0.8%, this appears to reflect some response to higher oil prices, though as the article notes, it is disappointingly small, compared to the dramatic reduction in demand experienced in the late 1970s and early 1980s. But while data at this extremely high level of aggregation are relevant to global oil supply and demand, and thus oil prices, they mask some very interesting details, including the impact of our increasing use of ethanol.
The article doesn't provide any information on gasoline demand, and the online database of the Energy Information Agency of the Department of Energy still only reflects actual supply and demand through October 2007. When I combine the EIA's monthly data for gasoline supplied with their weekly estimates for November and December, gasoline consumption for the year seems to have increased by about 0.5%. That shouldn't be too surprising, because despite the big run-up at the end of last year, average retail gasoline prices for 2007 were only about 20 cents per gallon higher than in 2006. It's worth noting, however, that 2007's retail gasoline prices were a full dollar per gallon higher than the average for 2003-2004, when many of the new models being launched at the current Detroit Auto Show were planned.
But how do these figures look if we adjust for the contribution of ethanol? As of October, ethanol use in 2007 was on a pace to reach 6.8 billion gallons for the year, compared with 5.4 billion gallons in 2006. If we back the difference out of the approximately 143 billion gallons of motor gasoline supplied in the US last year, then on a comparable basis our consumption of petroleum-based gasoline actually shrank by about 0.5%. Making the same adjustment to the aggregate crude oil and petroleum product demand figure cited by the Journal suggests that total oil demand in the US might have actually declined by 0.2% last year. That's consistent with the proportionally larger apparent drop in US imports of crude oil and petroleum products.
I want to be careful about drawing sweeping conclusions from the hodgepodge of actual and estimated data I have relied on above. However, a couple of things seem reasonably clear. Although fuel prices in the US are high enough to cause consumers serious pain, they aren't yet high enough to stimulate dramatic changes in consumption patterns, even if they seem to be driving consumers in the direction of choosing more efficient new cars. US motor fuel demand is still increasing, but apparently at a rate slower than the growth of the population. At the same time, for all its shortcomings, our only consistent alternative fuel strategy for the last two decades--corn ethanol--is finally growing fast enough to affect the country's overall oil supply and demand balance. These two observations offer a ray of hope that the combination of higher biofuels production and fuel economy mandated by the recent Energy Bill will be able to reverse--however gradually--the steady increase in US oil imports that we have experienced since the late 1980s.
The article doesn't provide any information on gasoline demand, and the online database of the Energy Information Agency of the Department of Energy still only reflects actual supply and demand through October 2007. When I combine the EIA's monthly data for gasoline supplied with their weekly estimates for November and December, gasoline consumption for the year seems to have increased by about 0.5%. That shouldn't be too surprising, because despite the big run-up at the end of last year, average retail gasoline prices for 2007 were only about 20 cents per gallon higher than in 2006. It's worth noting, however, that 2007's retail gasoline prices were a full dollar per gallon higher than the average for 2003-2004, when many of the new models being launched at the current Detroit Auto Show were planned.
But how do these figures look if we adjust for the contribution of ethanol? As of October, ethanol use in 2007 was on a pace to reach 6.8 billion gallons for the year, compared with 5.4 billion gallons in 2006. If we back the difference out of the approximately 143 billion gallons of motor gasoline supplied in the US last year, then on a comparable basis our consumption of petroleum-based gasoline actually shrank by about 0.5%. Making the same adjustment to the aggregate crude oil and petroleum product demand figure cited by the Journal suggests that total oil demand in the US might have actually declined by 0.2% last year. That's consistent with the proportionally larger apparent drop in US imports of crude oil and petroleum products.
I want to be careful about drawing sweeping conclusions from the hodgepodge of actual and estimated data I have relied on above. However, a couple of things seem reasonably clear. Although fuel prices in the US are high enough to cause consumers serious pain, they aren't yet high enough to stimulate dramatic changes in consumption patterns, even if they seem to be driving consumers in the direction of choosing more efficient new cars. US motor fuel demand is still increasing, but apparently at a rate slower than the growth of the population. At the same time, for all its shortcomings, our only consistent alternative fuel strategy for the last two decades--corn ethanol--is finally growing fast enough to affect the country's overall oil supply and demand balance. These two observations offer a ray of hope that the combination of higher biofuels production and fuel economy mandated by the recent Energy Bill will be able to reverse--however gradually--the steady increase in US oil imports that we have experienced since the late 1980s.
Friday, January 11, 2008
Candidates & Energy: Obama
Continuing my look at the energy proposals of this year's presidential candidates, let's turn to the other winner of the Iowa Caucuses, Senator Barack Obama (D-IL.) Where Governor Huckabee's proposals for energy and the environment appeared broad and somewhat generic, Senator Obama's are quite detailed, including specific targets for emissions, fuel economy, renewable energy and vehicle technology and performance. Despite this contrast, however, the Senator's views reflect a very similar concern about the security and environmental implications of our energy use. Although I'm skeptical about some of Mr. Obama's energy goals, such as eliminating oil imports by 2030, he has clearly devoted much thought and attention to these issues.
Energy and the environment have been consistent themes of the Obama campaign from the start. Youtube has numerous clips of his comments on energy from speeches in many different venues, along with this historical primer on energy independence, highlighting the consistent, bi-partisan failure to deliver on this goal since the 1970s. It suggests that Mr. Obama knows how to achieve it, where others before him--including two Democratic administrations--didn't. Could politics and an absence of plain speaking really be the only reasons this goal hasn't been met?
The main pathways that Mr. Obama promotes for improving energy security and reducing emissions are clean energy and efficiency. He advocates much greater use of solar, wind and geothermal power--measured against a 25% renewable electricity standard for 2025--and more biofuels, including conventional ethanol, biodiesel, and cellulosic ethanol. He would expand the Renewable Fuel Standard in the 2007 Energy Bill from 36 billion gallons in 2022 to 60 billion gallons per year by 2030. And recognizing that none of this will spring from thin air, he proposes an Apollo Program-like R&D effort to advance a broad range of energy technologies, along with capacity-building measures such as cleantech job training and manufacturing conversion.
Unsurprisingly for a Senator from Illinois, Obama supports the development and deployment of clean coal technology. However, I couldn't find any mention of nuclear power on his campaign's website. When asked about nuclear power at an event, his carefully calibrated response indicated that he doesn't regard nuclear as an important element of his energy strategy. He implied that waste and safety concerns haven't been adequately met, though he failed to cite politics as a key obstacle in addressing the former. The part of his answer that I liked best was when he said, "There is no perfect energy source. Everything has some problems right now."
With regard to climate change, the Senator calls for a stricter version of the Warner-Lieberman greenhouse gas cap-and-trade legislation currently working its way through the Congress, referencing the earlier Sanders-Boxer Bill (S.309,) which he co-sponsored. His plan differs from Warner-Lieberman in requiring deeper cuts by mid-century and auctioning 100% of the emission allowances, rather than allocating a portion to various industries and organizations. It's a simpler approach, though when MIT compared Sanders-Boxer to, among others, the McCain-Lieberman cap-and-trade bill that was the precursor of Warner-Lieberman, they concluded that the former would result in a significantly higher CO2 cost, equivalent to adding about $1.00 per gallon onto then-current gasoline prices by 2030 and $2.00/gal. by 2050.
As with his other positions, Senator Obama articulates his views on energy in a forceful and compelling fashion. He conveys a sense that he understands the challenges, has a comprehensive plan for addressing them, and knows how to create the bi-partisan political and public momentum to get it done. But although he doesn't suggest this will be cheap--citing billions of dollars for his new Apollo Program--he does imply that it will be easier than Americans ought to expect. For example, when he talks about advancing automobile fuel efficiency to 43 miles per gallon, 8 mpg above the new CAFE standard for 2020 that emerged from the arduous negotiations for the 2007 Energy Bill, he says, "That is something that we can do, right now." Perhaps, if every car were a Prius-sized hybrid. Even Toyota's Camry hybrid--a model more similar to what most Americans actually purchase--only averages 34 mpg, and all but the smallest SUV hybrids are still in the 20s. Attaining 43 mpg across the whole fleet would be tough, and it would require significant changes in vehicle technology and in the kind of vehicles we drive. As I've noted before, even plug-in hybrids aren't quite the silver bullet they appear to be, in total energy terms. That's even more true for flexible-fuel vehicles.
As bold and comprehensive as Senator Obama's energy proposals are--certainly satisfying any definition of change--they don't break with party orthodoxy or embrace some pragmatic options that could accelerate his timetable for eliminating oil imports. He ignores the option of natural gas as a lower-emission, lower-cost alternative to oil, and he has dismissed the potential of our large, untapped oil and gas resources. In 2006 he voted against even a modest expansion of the allowed area for offshore drilling in the Gulf of Mexico. Although Mr. Obama prides himself on telling people what they need to hear, rather than just what they want to hear, I don't see much that might be unpopular with the party's base.
You can't watch Senator Obama speak without understanding his infectious popularity, especially with new voters and those jaded by partisan politics, pessimism and gridlock. In my corporate career and subsequent consulting, I have seen how difficult it is to strike a balance between the old and the new, between the things that provide the lifeblood of the organization today, and those that will be needed to sustain it into the future. Senator Obama has a big chunk of the latter down pat, when it comes to energy and the environment. Perhaps my age is showing, however, when I worry that a campaign that is so focused on new ideas and change could have a hard time accepting that some of those ideas might not be workable, or taking a fact-based look at why some elements of the energy status quo cannot be rejected out of hand, without disrupting the supply lines on which our economy depends. It's that sort of tempering that I'll be watching for, in the weeks and months ahead.
Energy and the environment have been consistent themes of the Obama campaign from the start. Youtube has numerous clips of his comments on energy from speeches in many different venues, along with this historical primer on energy independence, highlighting the consistent, bi-partisan failure to deliver on this goal since the 1970s. It suggests that Mr. Obama knows how to achieve it, where others before him--including two Democratic administrations--didn't. Could politics and an absence of plain speaking really be the only reasons this goal hasn't been met?
The main pathways that Mr. Obama promotes for improving energy security and reducing emissions are clean energy and efficiency. He advocates much greater use of solar, wind and geothermal power--measured against a 25% renewable electricity standard for 2025--and more biofuels, including conventional ethanol, biodiesel, and cellulosic ethanol. He would expand the Renewable Fuel Standard in the 2007 Energy Bill from 36 billion gallons in 2022 to 60 billion gallons per year by 2030. And recognizing that none of this will spring from thin air, he proposes an Apollo Program-like R&D effort to advance a broad range of energy technologies, along with capacity-building measures such as cleantech job training and manufacturing conversion.
Unsurprisingly for a Senator from Illinois, Obama supports the development and deployment of clean coal technology. However, I couldn't find any mention of nuclear power on his campaign's website. When asked about nuclear power at an event, his carefully calibrated response indicated that he doesn't regard nuclear as an important element of his energy strategy. He implied that waste and safety concerns haven't been adequately met, though he failed to cite politics as a key obstacle in addressing the former. The part of his answer that I liked best was when he said, "There is no perfect energy source. Everything has some problems right now."
With regard to climate change, the Senator calls for a stricter version of the Warner-Lieberman greenhouse gas cap-and-trade legislation currently working its way through the Congress, referencing the earlier Sanders-Boxer Bill (S.309,) which he co-sponsored. His plan differs from Warner-Lieberman in requiring deeper cuts by mid-century and auctioning 100% of the emission allowances, rather than allocating a portion to various industries and organizations. It's a simpler approach, though when MIT compared Sanders-Boxer to, among others, the McCain-Lieberman cap-and-trade bill that was the precursor of Warner-Lieberman, they concluded that the former would result in a significantly higher CO2 cost, equivalent to adding about $1.00 per gallon onto then-current gasoline prices by 2030 and $2.00/gal. by 2050.
As with his other positions, Senator Obama articulates his views on energy in a forceful and compelling fashion. He conveys a sense that he understands the challenges, has a comprehensive plan for addressing them, and knows how to create the bi-partisan political and public momentum to get it done. But although he doesn't suggest this will be cheap--citing billions of dollars for his new Apollo Program--he does imply that it will be easier than Americans ought to expect. For example, when he talks about advancing automobile fuel efficiency to 43 miles per gallon, 8 mpg above the new CAFE standard for 2020 that emerged from the arduous negotiations for the 2007 Energy Bill, he says, "That is something that we can do, right now." Perhaps, if every car were a Prius-sized hybrid. Even Toyota's Camry hybrid--a model more similar to what most Americans actually purchase--only averages 34 mpg, and all but the smallest SUV hybrids are still in the 20s. Attaining 43 mpg across the whole fleet would be tough, and it would require significant changes in vehicle technology and in the kind of vehicles we drive. As I've noted before, even plug-in hybrids aren't quite the silver bullet they appear to be, in total energy terms. That's even more true for flexible-fuel vehicles.
As bold and comprehensive as Senator Obama's energy proposals are--certainly satisfying any definition of change--they don't break with party orthodoxy or embrace some pragmatic options that could accelerate his timetable for eliminating oil imports. He ignores the option of natural gas as a lower-emission, lower-cost alternative to oil, and he has dismissed the potential of our large, untapped oil and gas resources. In 2006 he voted against even a modest expansion of the allowed area for offshore drilling in the Gulf of Mexico. Although Mr. Obama prides himself on telling people what they need to hear, rather than just what they want to hear, I don't see much that might be unpopular with the party's base.
You can't watch Senator Obama speak without understanding his infectious popularity, especially with new voters and those jaded by partisan politics, pessimism and gridlock. In my corporate career and subsequent consulting, I have seen how difficult it is to strike a balance between the old and the new, between the things that provide the lifeblood of the organization today, and those that will be needed to sustain it into the future. Senator Obama has a big chunk of the latter down pat, when it comes to energy and the environment. Perhaps my age is showing, however, when I worry that a campaign that is so focused on new ideas and change could have a hard time accepting that some of those ideas might not be workable, or taking a fact-based look at why some elements of the energy status quo cannot be rejected out of hand, without disrupting the supply lines on which our economy depends. It's that sort of tempering that I'll be watching for, in the weeks and months ahead.
The Oil Price Tax
An article in today's Washington Post compared the recent rise in oil prices to a $150 billion dollar-per-year tax on the US economy, enough to negate the various economic stimulus plans being discussed by the Congress and White House. It's a shocking figure, and it helps feed the forecasts of recession, which tend to be at least partially self-fulfilling. But before we accept that $150 million figure at face value--despite its impressive pedigree--it's worth spending a moment on a few ballpark validations. Above all, we should remind ourselves that if high oil prices are a tax, they tax producers, not consumers, who rarely purchase crude oil to use in our homes or vehicles.
The article cites a 2004 comment from Fed Chairman Bernanke noting that firms don't always have the ability to pass on the full effect of a commodity price shock to their customers. At least for oil refineries, now is such a time. Most of last year's oil price appreciation occurred following the end of peak driving season, after Labor Day. Between August and December, the average monthly futures price for West Texas Intermediate crude oil on the New York Mercantile Exchange went up by $19.38 per barrel. The average for January so far would add another $5 to that, so let's call it $25/bbl. With US refineries running at 15.5 million barrels per day, and using the increase in WTI as a proxy for the change in the oil prices actually paid by refiners, their costs have gone up by about $11.5 billion/month. That's close to Professor Nordhaus's $150 billion annualized pseudo-tax.
As I noted above, however, consumers don't buy oil; they buy gasoline, diesel fuel and heating oil. Although the prices of all those products have gone up considerably since Labor Day, only retail heating oil has gone up by as much as crude oil. So far, the average retail price of diesel fuel has risen by about $20/bbl and gasoline by only about $13/bbl. At current consumption rates, the direct impact on consumers is thus around $6.6 billion/month, or $80 billion per year. That ignores increases in the cost of plane tickets, plastics, food and many other things that consumers buy that include a significant energy component, but then, the prices of those goods and services are influenced by many other factors aside from the price of energy. That indirect impact has been further buffered by the relatively low price of natural gas, which supplies a large fraction of the energy and feedstock for the broader manufacturing, chemicals and power sector, and which has been virtually unaffected by the recent change in oil prices.
When we consider the net impact on the entire US economy, we see an increase in the price we pay for imported oil and petroleum products on the order of $9 billion/month since September, or $108 billion/year. Consumers have experienced about three-quarters of that, with businesses absorbing the rest, for now, along with the residual higher cost of domestically-produced oil. If the price of oil remains at this level, more of the increase will flow through to consumers, particularly with the seasonal return of higher gasoline demand in the spring.
$100 billion is not a trivial sum, particularly when it's added to the ongoing expense of two wars and the ultimate cost of repairing the damage caused by the sub-prime debt meltdown. In particular, taking the annualized equivalent of $80 billion out of consumers' disposable income has to worry any business hoping to sell them some product or service this year. But in an economy with nearly $10 trillion of consumer spending, it's the rough equivalent of a 1% tax. Consumers, businesses and policy-makers might want to keep that in perspective, before they panic.
The article cites a 2004 comment from Fed Chairman Bernanke noting that firms don't always have the ability to pass on the full effect of a commodity price shock to their customers. At least for oil refineries, now is such a time. Most of last year's oil price appreciation occurred following the end of peak driving season, after Labor Day. Between August and December, the average monthly futures price for West Texas Intermediate crude oil on the New York Mercantile Exchange went up by $19.38 per barrel. The average for January so far would add another $5 to that, so let's call it $25/bbl. With US refineries running at 15.5 million barrels per day, and using the increase in WTI as a proxy for the change in the oil prices actually paid by refiners, their costs have gone up by about $11.5 billion/month. That's close to Professor Nordhaus's $150 billion annualized pseudo-tax.
As I noted above, however, consumers don't buy oil; they buy gasoline, diesel fuel and heating oil. Although the prices of all those products have gone up considerably since Labor Day, only retail heating oil has gone up by as much as crude oil. So far, the average retail price of diesel fuel has risen by about $20/bbl and gasoline by only about $13/bbl. At current consumption rates, the direct impact on consumers is thus around $6.6 billion/month, or $80 billion per year. That ignores increases in the cost of plane tickets, plastics, food and many other things that consumers buy that include a significant energy component, but then, the prices of those goods and services are influenced by many other factors aside from the price of energy. That indirect impact has been further buffered by the relatively low price of natural gas, which supplies a large fraction of the energy and feedstock for the broader manufacturing, chemicals and power sector, and which has been virtually unaffected by the recent change in oil prices.
When we consider the net impact on the entire US economy, we see an increase in the price we pay for imported oil and petroleum products on the order of $9 billion/month since September, or $108 billion/year. Consumers have experienced about three-quarters of that, with businesses absorbing the rest, for now, along with the residual higher cost of domestically-produced oil. If the price of oil remains at this level, more of the increase will flow through to consumers, particularly with the seasonal return of higher gasoline demand in the spring.
$100 billion is not a trivial sum, particularly when it's added to the ongoing expense of two wars and the ultimate cost of repairing the damage caused by the sub-prime debt meltdown. In particular, taking the annualized equivalent of $80 billion out of consumers' disposable income has to worry any business hoping to sell them some product or service this year. But in an economy with nearly $10 trillion of consumer spending, it's the rough equivalent of a 1% tax. Consumers, businesses and policy-makers might want to keep that in perspective, before they panic.
Thursday, January 10, 2008
The Context of Efficiency
Here's a nice example of the vital distinction between consumption and efficiency. If I told you that a company was about to introduce a new car model that was expected to average 56 miles per gallon, and that it was going to be so cheap that nearly anyone could afford one, that would sound like great news, wouldn't it? Perhaps it depends on the context in which that car is introduced, and our assumptions about what it will displace. The car in question is Tata Motors' eagerly-awaited "1-Lakh" car--referring to its 100,000 Rupees price equating to $2546 at yesterday's exchange rate--and the target market is millions of Indians who haven't been able to afford a car yet. Even at an expected efficiency of 56 mpg, though, the Nano, to give its proper name, will create incremental consumption of petroleum products and new greenhouse gases emissions.
At an initial 60,000 units per year, the Nano will hardly alter the global oil supply and demand balance overnight. If driven 5000 miles each, the entire first year's production would consume only 350 barrels per day of fuel, or about as much as 11,000 average American cars. Of course, we're talking about a potential market of tens of millions of such cars, and as today's Wall Street Journal reminds us, there are a number of carmakers and models competing for that market. Selling 50 million such cars here would increase our fleet average efficiency to 32 mpg and save over 800,000 barrels per day of gasoline and 120 million tons per year of CO2. Selling 50 million of them in India, however, could increase consumption by 300,000 barrels per day, while adding 42 million tons per year of CO2.
While efficiency is probably the single most powerful tool available to us in trying to bring global energy use and emissions under control, it doesn't tell the whole story. Consumption is what counts, and at least in the case of Tata's new model, every new car out the door adds to consumption, no matter how many miles per liter it gets, because at the entry level it's displacing bicycles, mass transit, and walking. That isn't the case in the US, where the market is mature and most new cars replace older cars. Here the fuel economy indicated on a new car's sticker is only one variable that will determine its ultimate consumption, along with the city/highway driving mix, total miles driven, and the owner's driving style and maintenance habits.
You might also expect a car powered by a 32-HP engine and weighing 40% less than Toyota's smallest US offering, the 36 mpg Yaris, to do even better than 56 mpg. Unfortunately, $2,500 won't buy much in the way of sophisticated engine efficiency upgrades, let alone pay for the kind of hybrid approach used in the Prius. In this light, the 100 mpg initial target that the MIT-led Vehicle Design Summit is working toward for an entry-level car for India looks pretty ambitious.
Value judgments about this sort of thing are complex. At the same time we recognize that the expansion of personal mobility in developing countries complicates the energy and environmental challenges we all face, we might also experience a vicarious thrill at the benefits it should bring, provided that Indians don't feel obligated to repeat every mistake we've made in the one hundred years (this October) since the first of 15 million Model Ts rolled off Mr. Ford's assembly line. Sharing the lessons we've learned about transportation may be every bit as important as the technology sharing that was a major theme at the Bali climate change conference last month.
At an initial 60,000 units per year, the Nano will hardly alter the global oil supply and demand balance overnight. If driven 5000 miles each, the entire first year's production would consume only 350 barrels per day of fuel, or about as much as 11,000 average American cars. Of course, we're talking about a potential market of tens of millions of such cars, and as today's Wall Street Journal reminds us, there are a number of carmakers and models competing for that market. Selling 50 million such cars here would increase our fleet average efficiency to 32 mpg and save over 800,000 barrels per day of gasoline and 120 million tons per year of CO2. Selling 50 million of them in India, however, could increase consumption by 300,000 barrels per day, while adding 42 million tons per year of CO2.
While efficiency is probably the single most powerful tool available to us in trying to bring global energy use and emissions under control, it doesn't tell the whole story. Consumption is what counts, and at least in the case of Tata's new model, every new car out the door adds to consumption, no matter how many miles per liter it gets, because at the entry level it's displacing bicycles, mass transit, and walking. That isn't the case in the US, where the market is mature and most new cars replace older cars. Here the fuel economy indicated on a new car's sticker is only one variable that will determine its ultimate consumption, along with the city/highway driving mix, total miles driven, and the owner's driving style and maintenance habits.
You might also expect a car powered by a 32-HP engine and weighing 40% less than Toyota's smallest US offering, the 36 mpg Yaris, to do even better than 56 mpg. Unfortunately, $2,500 won't buy much in the way of sophisticated engine efficiency upgrades, let alone pay for the kind of hybrid approach used in the Prius. In this light, the 100 mpg initial target that the MIT-led Vehicle Design Summit is working toward for an entry-level car for India looks pretty ambitious.
Value judgments about this sort of thing are complex. At the same time we recognize that the expansion of personal mobility in developing countries complicates the energy and environmental challenges we all face, we might also experience a vicarious thrill at the benefits it should bring, provided that Indians don't feel obligated to repeat every mistake we've made in the one hundred years (this October) since the first of 15 million Model Ts rolled off Mr. Ford's assembly line. Sharing the lessons we've learned about transportation may be every bit as important as the technology sharing that was a major theme at the Bali climate change conference last month.
Wednesday, January 09, 2008
Candidates & Energy: Huckabee
With the Iowa Caucuses and the New Hampshire Primary behind us, and Super Duper Tuesday less than a month away, it seems timely to look at where the major presidential candidates stand on energy and energy-related environmental issues. I'd like to start with a candidate whom I would have relegated to the also-ran category prior to his impressive win in Iowa, former Arkansas Governor Mike Huckabee. Mr. Huckabee's positions on energy represent an interesting mix that doesn't neatly match the "conservative" label with which he is generally tagged. Some elements are refreshing, while others strike me as naively unrealistic--although not necessarily more than those of other, more prominent politicians. This isn't meant to be a comprehensive examination, nor should it be construed as any kind of endorsement.
Mr. Huckabee's official website, mikehuckabee.com, identifies energy independence as a key issue for his campaign. It proclaims, "We will achieve energy independence by the end of my second term," and lays out a broad agenda that includes conservation, technology, oil exploration, biofuels, renewable electricity, clean coal and nuclear power. It alludes to a "comprehensive plan for energy independence," although it is not clear whether this already exists or would be created early in a Huckabee administration. Without the specifics, we have only the site's rhetoric from which to surmise that the plan would rely heavily on market-based solutions and federal R&D support, rather than mandates. Among other things, he is on record supporting drilling in the Arctic National Wildlife Refuge.
Governor Huckabee's approach to energy seems generally consistent with the Geo-Green movement that's been percolating for a while in policy circles. He explicitly links energy and the War on Terror, citing the widely-heard "funding both sides" argument. His suggestion that he'd like to "treat Saudi Arabia the same way I treat Sweden" will be popular with voters who see Middle East oil--of which the US actually consumes relatively little--as the root of all evil.
The obverse of the security focus in the Geo-Green framework is environmental policy, and here Mr. Huckabee stands out, along with Senator McCain, as being most aggressive among the Republican candidates on the subject of climate change, which he accepts--though he tends to sidestep the question of its anthropogenic origin. On moral grounds he supports a cap and trade approach to greenhouse gas emissions and places this in a broader context of environmental stewardship. Despite this, I could not find a direct reference to climate change on his campaign's website.
So how does all this strike me? It's hard for me to get past the choice of energy independence as a focal point for his energy policy. Even if this goal were technically possible and desirable--both points are debatable--the idea that it could be done within eight years simply isn't credible. When you consider the legislative, permitting, capital, and engineering & construction elements of such a timeline, it would be quite an accomplishment if the first wave of major facilities envisioned in such a plan--nuclear power and coal liquefaction plants, arctic oil wells--were onstream by the end of his second term in office. Perhaps it's meant metaphorically and not literally, as it seems. I've also never been very comfortable with the "beggar-thy-neighbor" tone of some of the Geo-Green arguments. I see strong synergies between energy security and climate change, but those benefits stand up quite well without being put into an adversarial, anti-Arab context.
On balance, Governor Huckabee's approach to energy fits the climate change/energy security template that has become increasingly mainstream in the last few years and that ought to appeal to independent voters and some Democrats, while emphasizing markets in ways that won't alienate Republicans. There's not a lot of depth evident, however, and if Mr. Huckabee ultimately wants to compete with Democrats who have developed extremely detailed energy proposals, his staff has a lot of work ahead of them.
Mr. Huckabee's official website, mikehuckabee.com, identifies energy independence as a key issue for his campaign. It proclaims, "We will achieve energy independence by the end of my second term," and lays out a broad agenda that includes conservation, technology, oil exploration, biofuels, renewable electricity, clean coal and nuclear power. It alludes to a "comprehensive plan for energy independence," although it is not clear whether this already exists or would be created early in a Huckabee administration. Without the specifics, we have only the site's rhetoric from which to surmise that the plan would rely heavily on market-based solutions and federal R&D support, rather than mandates. Among other things, he is on record supporting drilling in the Arctic National Wildlife Refuge.
Governor Huckabee's approach to energy seems generally consistent with the Geo-Green movement that's been percolating for a while in policy circles. He explicitly links energy and the War on Terror, citing the widely-heard "funding both sides" argument. His suggestion that he'd like to "treat Saudi Arabia the same way I treat Sweden" will be popular with voters who see Middle East oil--of which the US actually consumes relatively little--as the root of all evil.
The obverse of the security focus in the Geo-Green framework is environmental policy, and here Mr. Huckabee stands out, along with Senator McCain, as being most aggressive among the Republican candidates on the subject of climate change, which he accepts--though he tends to sidestep the question of its anthropogenic origin. On moral grounds he supports a cap and trade approach to greenhouse gas emissions and places this in a broader context of environmental stewardship. Despite this, I could not find a direct reference to climate change on his campaign's website.
So how does all this strike me? It's hard for me to get past the choice of energy independence as a focal point for his energy policy. Even if this goal were technically possible and desirable--both points are debatable--the idea that it could be done within eight years simply isn't credible. When you consider the legislative, permitting, capital, and engineering & construction elements of such a timeline, it would be quite an accomplishment if the first wave of major facilities envisioned in such a plan--nuclear power and coal liquefaction plants, arctic oil wells--were onstream by the end of his second term in office. Perhaps it's meant metaphorically and not literally, as it seems. I've also never been very comfortable with the "beggar-thy-neighbor" tone of some of the Geo-Green arguments. I see strong synergies between energy security and climate change, but those benefits stand up quite well without being put into an adversarial, anti-Arab context.
On balance, Governor Huckabee's approach to energy fits the climate change/energy security template that has become increasingly mainstream in the last few years and that ought to appeal to independent voters and some Democrats, while emphasizing markets in ways that won't alienate Republicans. There's not a lot of depth evident, however, and if Mr. Huckabee ultimately wants to compete with Democrats who have developed extremely detailed energy proposals, his staff has a lot of work ahead of them.
Tuesday, January 08, 2008
OPEC's Strategy
For many years there was a general sense in the oil world that OPEC had learned an important lesson from the energy crisis of the 1970s: let the price get too high for too long, and their customers will find ways to reduce their demand, by becoming more efficient and switching to other fuels. Until recently, analysts and pundits liked to guess at whether $50, $60 or $70 per barrel constituted the level at which that worry would kick in again, and the floodgates of supply would open. A snippet in Sunday's Washington Post started me wondering whether this paradigm were not only outdated, but has actually been supplanted by a new strategy of near-term revenue maximization. What if, aside from the serious challenges impeding the construction of enough new production capacity to keep up with rapidly growing global demand, OPEC has considered the implications of our growing concerns about climate change and energy security, and concluded it only has a few decades left in which to extract the most value from its resources?
While I read with amusement the satirical conspiracy report from former CIA Director James Woolsey in the Post's Outlook section, I don't imagine OPEC frets much about the prospect of food-based biofuels eroding their market share and profits. The entire 15 billion gallon-per-year "conventional biofuel" (a.k.a. corn ethanol) mandate in the new US Renewable Fuel Standard will add less than 400,000 barrels per day of oil-equivalent volume to a world market currently running at 85 million barrels per day , and cellulosic ethanol is not yet ready for prime time. OPEC can do their sums as well as we can, and they can see that with China and India growing as rapidly as they are, there is ample room for both oil and biofuels. However, they might not be so sanguine about the prospect of a serious effort to reduce greenhouse gas emissions by 70 or 80% by mid-century in the US and Europe.
What would emissions reductions of that magnitude mean for oil producers? Well, the EU and California--assuming it wins it suit against the EPA--are targeting specific tailpipe CO2 reductions that would require cars to consume 20-30% less fuel than the current fleet, within a few years. That will be achieved through a combination of hybridization, dieselization, downsizing, and the incorporation of other efficiency technologies. If the rest of the US follows California's lead, or even just meets the new 35 mpg CAFE standard, then together with Europe we're looking at several million barrels per day less consumption in 10-15 years, and that's just the beginning. Furthermore, the introduction of plug-in hybrid cars opens the door to a more serious potential competitor to oil than biofuels: electricity. And since oil accounts for a small and declining share of the world's electricity generation, that's a game in which OPEC won't participate, though it will benefit some OPEC countries like Iran and Algeria that are also large exporters of natural gas.
So if OPEC is facing a demand curve that may be going up today, but looks like it might peak within a decade, how worried should we suppose they are about the possibility that high prices might prematurely destroy some of that demand, compared with maximizing their cumulative oil revenue before the carbon era ends? If greater fuel efficiency and lower oil consumption are inevitable in the long run, anyway, why wouldn't they want to generate the highest possible income today, even if it accelerated that trend?
An editorial in this week's Economist suggests that high oil prices owe more to "peak nationalism" than Peak Oil. That's a theme to which I've devoted a lot of space for the last four years. Resource nationalism has been building for at least a decade, for reasons having little to do with concerns about climate change. But having found their way to a world of oil prices higher than they could have realistically hoped for not long ago, producers have ample reasons--including the idea that oil might go out of fashion sooner than previously expected--to want to remain there. We shouldn't delude ourselves that OPEC's interests and ours are aligned.
While I read with amusement the satirical conspiracy report from former CIA Director James Woolsey in the Post's Outlook section, I don't imagine OPEC frets much about the prospect of food-based biofuels eroding their market share and profits. The entire 15 billion gallon-per-year "conventional biofuel" (a.k.a. corn ethanol) mandate in the new US Renewable Fuel Standard will add less than 400,000 barrels per day of oil-equivalent volume to a world market currently running at 85 million barrels per day , and cellulosic ethanol is not yet ready for prime time. OPEC can do their sums as well as we can, and they can see that with China and India growing as rapidly as they are, there is ample room for both oil and biofuels. However, they might not be so sanguine about the prospect of a serious effort to reduce greenhouse gas emissions by 70 or 80% by mid-century in the US and Europe.
What would emissions reductions of that magnitude mean for oil producers? Well, the EU and California--assuming it wins it suit against the EPA--are targeting specific tailpipe CO2 reductions that would require cars to consume 20-30% less fuel than the current fleet, within a few years. That will be achieved through a combination of hybridization, dieselization, downsizing, and the incorporation of other efficiency technologies. If the rest of the US follows California's lead, or even just meets the new 35 mpg CAFE standard, then together with Europe we're looking at several million barrels per day less consumption in 10-15 years, and that's just the beginning. Furthermore, the introduction of plug-in hybrid cars opens the door to a more serious potential competitor to oil than biofuels: electricity. And since oil accounts for a small and declining share of the world's electricity generation, that's a game in which OPEC won't participate, though it will benefit some OPEC countries like Iran and Algeria that are also large exporters of natural gas.
So if OPEC is facing a demand curve that may be going up today, but looks like it might peak within a decade, how worried should we suppose they are about the possibility that high prices might prematurely destroy some of that demand, compared with maximizing their cumulative oil revenue before the carbon era ends? If greater fuel efficiency and lower oil consumption are inevitable in the long run, anyway, why wouldn't they want to generate the highest possible income today, even if it accelerated that trend?
An editorial in this week's Economist suggests that high oil prices owe more to "peak nationalism" than Peak Oil. That's a theme to which I've devoted a lot of space for the last four years. Resource nationalism has been building for at least a decade, for reasons having little to do with concerns about climate change. But having found their way to a world of oil prices higher than they could have realistically hoped for not long ago, producers have ample reasons--including the idea that oil might go out of fashion sooner than previously expected--to want to remain there. We shouldn't delude ourselves that OPEC's interests and ours are aligned.
Monday, January 07, 2008
The Biofuel Gap
When I was writing last Wednesday's posting on the year ahead, I was tempted to call 2008 the Year of Biofuel. That's wasn't because I think biofuel will necessarily be the most important energy development of the year, but because, of all of the provisions of the recently-enacted Energy Bill, its greatly expanded renewable fuel standard (RFS) will have the most immediate impact on domestic energy markets, and not all of it good. The new standard requires an increase in ethanol use in 2008 that could not be met by the domestic production facilities existing at the time of the bill's passage, or with current levels of imports, which already face a substantial tariff barrier. So while some ethanol producers struggled in 2007, with margins squeezed between rising corn prices and flat wholesale prices to blenders, it's hard to see how their fortunes could fail to improve this year.
The phase-in of the RFS in the Energy Bill instantaneously increased the size of the US ethanol market, starting on 1/1/08. The RFS previously in effect called for 5.4 billion gallons of renewable fuel to be used in 2008--well below the 6.4 billion gallons of ethanol the industry was on track to deliver in 2007. The new law hiked that to 9 billion gallons per year (GPY) of "conventional biofuel"--mostly corn ethanol--this year and 10.5 billion next year, increasing to 15 billion by 2015. With domestic production running at just over 7 billion GPY in October, the last month for which data is available, and imports contributing perhaps another half billion GPY, meeting the federal target this year will require a lot of new facilities to start up, or a lot more imports. In other words, demand suddenly exceeds supply, by mandate, and that ought to translate into a healthy increase in ethanol margins, once the EPA gears up to administer the new standard.
On the surface, this doesn't sound like much of a problem. After all, doesn't every additional gallon of ethanol reduce the amount of foreign energy we have to import and benefit the environment by reducing greenhouse gas emissions and local pollution? For a thorough answer to that question, I refer to you the excellent article on biofuels in the current issue of MIT's Technology Review, available in three parts on the Internet. But even if ethanol were as beneficial as its most ardent advocates claim, the Congress and President cannot sweep away with the stroke of a pen the logistical bottlenecks involved in getting ethanol from distilleries to gasoline blending terminals all over the country. Those problems helped depress ethanol prices last year and will have to be overcome on the ground, in order to expand the use of ethanol beyond the oxygenated fuel markets from which it has successfully displaced MTBE, which has fallen out of favor due to product liability concerns, or where its supply has been cheap and reliable enough to compete as a separate product, in the form of E-85 for "flexible-fuel vehicles."
As I understand it, companies unable to secure enough ethanol to meet their new quotas would have to purchase blending credits from other companies that blended in excess of their quotas--something that would only be possible if shortages were local, rather than national, and that could run afoul of the current 10% upper limit (E-10) on ethanol/gasoline blends into conventional cars. That would also increase the cost of fuel in areas that can't easily be supplied with ethanol. The alternative would be to apply for a waiver of the portion of the RFS that couldn't be filled practically. That could prove controversial, if the production from new ethanol facilities--however remote from the actual demand--were going begging. When I ponder what this is likely to mean for the business of getting motor fuel reliably to over 100,000 retail sites, I don't envy my former colleagues in the supply and distribution segment of the oil industry.
However unenthusiastic many of us are about corn ethanol, the new RFS is a fact, and our focus should be on minimizing the disruptions it could create in fuel markets. At least until the logistical problems can be addressed by new infrastructure, the best outcome would probably be for as much as possible of the incremental ethanol requirement to be consumed in the form of E-85 in the Midwest, where most corn ethanol will continue to be produced, thus minimizing the cost and constraints associated with distributing it to the most remote corners of the country for E-10 blending. One can only hope that the painful experience gained from this exercise will be useful in smoothing the way for the eventual introduction of cellulosic ethanol, which should be more economical and environmentally-beneficial, and for which a separate RFS quota starts to ramp up in 2010.
The phase-in of the RFS in the Energy Bill instantaneously increased the size of the US ethanol market, starting on 1/1/08. The RFS previously in effect called for 5.4 billion gallons of renewable fuel to be used in 2008--well below the 6.4 billion gallons of ethanol the industry was on track to deliver in 2007. The new law hiked that to 9 billion gallons per year (GPY) of "conventional biofuel"--mostly corn ethanol--this year and 10.5 billion next year, increasing to 15 billion by 2015. With domestic production running at just over 7 billion GPY in October, the last month for which data is available, and imports contributing perhaps another half billion GPY, meeting the federal target this year will require a lot of new facilities to start up, or a lot more imports. In other words, demand suddenly exceeds supply, by mandate, and that ought to translate into a healthy increase in ethanol margins, once the EPA gears up to administer the new standard.
On the surface, this doesn't sound like much of a problem. After all, doesn't every additional gallon of ethanol reduce the amount of foreign energy we have to import and benefit the environment by reducing greenhouse gas emissions and local pollution? For a thorough answer to that question, I refer to you the excellent article on biofuels in the current issue of MIT's Technology Review, available in three parts on the Internet. But even if ethanol were as beneficial as its most ardent advocates claim, the Congress and President cannot sweep away with the stroke of a pen the logistical bottlenecks involved in getting ethanol from distilleries to gasoline blending terminals all over the country. Those problems helped depress ethanol prices last year and will have to be overcome on the ground, in order to expand the use of ethanol beyond the oxygenated fuel markets from which it has successfully displaced MTBE, which has fallen out of favor due to product liability concerns, or where its supply has been cheap and reliable enough to compete as a separate product, in the form of E-85 for "flexible-fuel vehicles."
As I understand it, companies unable to secure enough ethanol to meet their new quotas would have to purchase blending credits from other companies that blended in excess of their quotas--something that would only be possible if shortages were local, rather than national, and that could run afoul of the current 10% upper limit (E-10) on ethanol/gasoline blends into conventional cars. That would also increase the cost of fuel in areas that can't easily be supplied with ethanol. The alternative would be to apply for a waiver of the portion of the RFS that couldn't be filled practically. That could prove controversial, if the production from new ethanol facilities--however remote from the actual demand--were going begging. When I ponder what this is likely to mean for the business of getting motor fuel reliably to over 100,000 retail sites, I don't envy my former colleagues in the supply and distribution segment of the oil industry.
However unenthusiastic many of us are about corn ethanol, the new RFS is a fact, and our focus should be on minimizing the disruptions it could create in fuel markets. At least until the logistical problems can be addressed by new infrastructure, the best outcome would probably be for as much as possible of the incremental ethanol requirement to be consumed in the form of E-85 in the Midwest, where most corn ethanol will continue to be produced, thus minimizing the cost and constraints associated with distributing it to the most remote corners of the country for E-10 blending. One can only hope that the painful experience gained from this exercise will be useful in smoothing the way for the eventual introduction of cellulosic ethanol, which should be more economical and environmentally-beneficial, and for which a separate RFS quota starts to ramp up in 2010.
Friday, January 04, 2008
Blaming the Buck
The lead editorial in today's Wall Street Journal (subscription required) attributes much of the recent increase in oil prices to the weakness of the dollar, and to the monetary policies of the Federal Reserve. As evidence for this argument, they present a chart of the relative value of oil in dollars, Euros, and gold for the last eight years. Although the editors make the obligatory nod to the growth of demand and problems of supply, they contribute to the general sense that our energy problems can be blamed on some unaccountable party: OPEC, oil companies, or now the Fed. This absolves us from the contribution of our personal consumption habits, while failing to differentiate cause from effect.
The Journal is hardly the first to notice the inconvenient relationship between a depreciating dollar and higher commodity prices. Among others, I suggested a few months ago that this might constitute a worrying feedback loop, with higher oil prices further weakening the dollar, a weaker dollar driving up oil prices, and so on. A closer look at the relative value chart in the editorial provides a sense of the relative importance of this factor among the many affecting global energy prices. Using gold as the measure of price stability ignores its status as an important industrial commodity, participating in the same global commodity trends affecting steel, copper, grains, and other goods affected by the sustained rapid growth of China, India and other developing countries. If instead we choose the Euro as our proxy for stable value, we see that the real price of oil has at least doubled since 2000, reflecting the 11% increase in global oil demand that consumed the surplus production capacity that had been left after the collapse of oil prices in the late 1990s, along with virtually every barrel of new capacity put into service since then. A weak dollar exaggerates but did not create this trend.
The other implication raised by the editorial is that Federal Reserve policy might offer a mechanism for pushing oil prices back to more comfortable levels. There's something to this, though the cure might be worse than the disease. A couple of interest rate hikes could pull the dollar out of its current slump, and lower oil prices would likely follow, not just because the dollar would be more valuable, but because the US economy would be pushed into recession, thereby reducing estimates of future US demand and easing speculative pressure on oil. That's hardly an appealing scenario, however.
What we're left with, then, is an interesting observation about another consequence of US policies that have generally promoted consumption but not production--and not just for oil--but one that offers no real help in addressing the problem. That lies with the fundamentals of supply and demand, more sensible energy policies, and the creation of a public consciousness that connects the results of policy and personal choices with the price at the pump--whether denominated in dollars, Euros, or ounces of gold.
The Journal is hardly the first to notice the inconvenient relationship between a depreciating dollar and higher commodity prices. Among others, I suggested a few months ago that this might constitute a worrying feedback loop, with higher oil prices further weakening the dollar, a weaker dollar driving up oil prices, and so on. A closer look at the relative value chart in the editorial provides a sense of the relative importance of this factor among the many affecting global energy prices. Using gold as the measure of price stability ignores its status as an important industrial commodity, participating in the same global commodity trends affecting steel, copper, grains, and other goods affected by the sustained rapid growth of China, India and other developing countries. If instead we choose the Euro as our proxy for stable value, we see that the real price of oil has at least doubled since 2000, reflecting the 11% increase in global oil demand that consumed the surplus production capacity that had been left after the collapse of oil prices in the late 1990s, along with virtually every barrel of new capacity put into service since then. A weak dollar exaggerates but did not create this trend.
The other implication raised by the editorial is that Federal Reserve policy might offer a mechanism for pushing oil prices back to more comfortable levels. There's something to this, though the cure might be worse than the disease. A couple of interest rate hikes could pull the dollar out of its current slump, and lower oil prices would likely follow, not just because the dollar would be more valuable, but because the US economy would be pushed into recession, thereby reducing estimates of future US demand and easing speculative pressure on oil. That's hardly an appealing scenario, however.
What we're left with, then, is an interesting observation about another consequence of US policies that have generally promoted consumption but not production--and not just for oil--but one that offers no real help in addressing the problem. That lies with the fundamentals of supply and demand, more sensible energy policies, and the creation of a public consciousness that connects the results of policy and personal choices with the price at the pump--whether denominated in dollars, Euros, or ounces of gold.
Thursday, January 03, 2008
Oil and Politics
When the price of oil on the New York Mercantile Exchange touched $100 momentarily yesterday, it sent ripples through the markets, media and politics. The reactions of the presidential candidates were as interesting as the event itself, since they almost uniformly reflected a sense of national victimization that seems out of place for a country that is still the world's third-largest oil producer, however much we must import to satisfy our appetite for the stuff. While OPEC and the broader global resource nationalism movement share responsibility for today's high prices, oil's long climb to $100 has been led at least as much by our insatiable demand for energy and the low priority we've attached to efficiency. The candidates missed a golden opportunity to remind Americans that we have largely made our own problem, when it comes to oil.
I must admit to a classic expert's failure to anticipate how the $100 price event would play out. As a former commodities trader, I had assumed that only a market close above $100.00 would trigger the flurry of reactions we saw yesterday, rather than what appears to have been a single, nearly meaningless trade executed at the magic level. Stepping back from the details, however, it's clear that whether oil closed at $100.01 or yesterday's actual $99.62/bbl, for all practical purposes we have reached a major threshold in our perception of the cost of the world's key commodity.
But while comments blaming oil companies for a price they don't control--in a market in which they hold a small and shrinking claim on the basic resource--reflect a worrying strain of populism, there's a lot of truth to Mr. Romney's suggestion that the situation reflects "lack of progress" on energy in Washington, DC. In fact, we are now paying for more than a decade of dysfunctional national energy policy, in which consumption was encouraged through fuel taxes well below the average of other large oil importing countries (and via the "SUV loophole"), while we simultaneously made it increasingly harder for companies to extract the significant quantities of oil that remain untapped under our lands and waters.
The good news is that although we still don't have anything that resembles a coherent national strategy for energy, we now have a number of useful components upon which we could build one, if we can give up all the tired, blame-shifting rhetoric and tackle the basics of supply demand: setting higher energy efficiency standards for vehicles and buildings, to ensure that we extract more value from the energy we use, while higher prices drive the technology and turnover of vehicle fleets and other capital stock to implement them; combining wind and solar power with resurgent nuclear power, to supply the necessary mix of baseload and peak power for a smarter, greener electricity grid that doesn't need imported fossil fuels; and deploying the amazing technology that US companies have created to tap arctic and offshore oil with the lowest environmental impact possible, fueling our existing fleet, while we convert it to electricity and more sustainable fuels.
$100 oil is telling us something, though we must be astute enough to interpret the message. Sensible responses to the first energy crisis, in the form of deregulation, diversification, and improved energy efficiency paved the way for an extended period of low energy prices and strong economic growth. Unfortunately, we clung to them too long, and we are reaping the harvest. We now have an opportunity to build the structure that will eventually wean us off fossil fuels entirely, while importantly providing a stable transition to that distant point. In the weeks ahead, I'll be reviewing the energy platforms of all the leading presidential candidates to see how they measure up to that standard.
I must admit to a classic expert's failure to anticipate how the $100 price event would play out. As a former commodities trader, I had assumed that only a market close above $100.00 would trigger the flurry of reactions we saw yesterday, rather than what appears to have been a single, nearly meaningless trade executed at the magic level. Stepping back from the details, however, it's clear that whether oil closed at $100.01 or yesterday's actual $99.62/bbl, for all practical purposes we have reached a major threshold in our perception of the cost of the world's key commodity.
But while comments blaming oil companies for a price they don't control--in a market in which they hold a small and shrinking claim on the basic resource--reflect a worrying strain of populism, there's a lot of truth to Mr. Romney's suggestion that the situation reflects "lack of progress" on energy in Washington, DC. In fact, we are now paying for more than a decade of dysfunctional national energy policy, in which consumption was encouraged through fuel taxes well below the average of other large oil importing countries (and via the "SUV loophole"), while we simultaneously made it increasingly harder for companies to extract the significant quantities of oil that remain untapped under our lands and waters.
The good news is that although we still don't have anything that resembles a coherent national strategy for energy, we now have a number of useful components upon which we could build one, if we can give up all the tired, blame-shifting rhetoric and tackle the basics of supply demand: setting higher energy efficiency standards for vehicles and buildings, to ensure that we extract more value from the energy we use, while higher prices drive the technology and turnover of vehicle fleets and other capital stock to implement them; combining wind and solar power with resurgent nuclear power, to supply the necessary mix of baseload and peak power for a smarter, greener electricity grid that doesn't need imported fossil fuels; and deploying the amazing technology that US companies have created to tap arctic and offshore oil with the lowest environmental impact possible, fueling our existing fleet, while we convert it to electricity and more sustainable fuels.
$100 oil is telling us something, though we must be astute enough to interpret the message. Sensible responses to the first energy crisis, in the form of deregulation, diversification, and improved energy efficiency paved the way for an extended period of low energy prices and strong economic growth. Unfortunately, we clung to them too long, and we are reaping the harvest. We now have an opportunity to build the structure that will eventually wean us off fossil fuels entirely, while importantly providing a stable transition to that distant point. In the weeks ahead, I'll be reviewing the energy platforms of all the leading presidential candidates to see how they measure up to that standard.
Wednesday, January 02, 2008
Energy Leap Year?
The complex uncertainties affecting energy markets will probably undo most of the forecasts that analysts and economists seem obliged to offer, as the new year dawns. I prefer to highlight the trends I'm following, since those tend to be more durable. Monday's look back at 2007 focused on oil prices and climate change. I expect both to feature prominently in 2008's energy-related news, connected in interesting ways with the Presidential election cycle. In addition to domestic politics and geopolitics, there is a growing list of key energy technologies that bear watching, with the possibility of developments that could change our perspective on the long-term future of energy. However much the global situation has begun to resemble a re-run of the 1970s, we have never had more energy options, or greater incentives to pursue them.
Oil prices have started the year at near-record levels, and the predictions that oil will shortly break $100/barrel seem pretty safe. The larger question is whether it will remain there, or gradually fall back, as demand growth moderates and the global oil industry produces as much of a supply response as it can. Warnings of a collapse below $40/bbl seem exaggerated, but no one investing in renewable energy or other alternatives can afford to ignore them entirely. That downside risk can be managed, but it could be an expensive distraction.
With regard to climate change, the negotiations on the Bali framework for a follow-on agreement to the Kyoto Protocol are unlikely to conclude this year, particularly since the international community recognizes that it could be dealing with a very different set of US counterparts beginning next January. It remains to be seen whether climate change will become a key election issue, in light of concerns about the economy, immigration, and other urgent problems. The fact that it hasn't, so far, is a reflection of the relative agreement among the Democratic candidates on the need for urgent action, and among most of the Republicans that climate change is real but can wait. Once they have chosen their nominees, the parties owe the country a lively debate on the their divergent views on this subject, since the enactment of limits on greenhouse gas emissions could transform our economy and way of life more than anything else the candidates are proposing.
Even if it doesn't become fodder for the election debates, the urgency of tackling climate change is likely to grow. The most prominent American climate scientist recently revised downward his assessment of the ultimate concentration at which atmospheric CO2 must be stabilized, to a level below the current 381 parts per million, in order to prevent catastrophic warming. Since achieving a stable 450 ppm was already going to require a 70% reduction of global emissions from current levels by mid-century, getting to 350 ppm effectively means cutting developed-world emissions radically, starting more or less now, and short-circuiting the prodigious growth of emissions in the developing world. If this view becomes the consensus, expect a lot more focus on preparing humanity to adapt to a hotter planet, because a lot of folks are going to conclude that 350 ppm can't be attained.
On a more optimistic note, the sheer number of companies and universities working on new energy technology greatly increases the chances of dramatic developments in biofuels, solar power, energy efficiency and other areas. 2008 could see the start-up of commercial-scale--if not yet economical--cellulosic ethanol production, and the start of construction on an advanced coal-fired power plant with full sequestration of its CO2 emissions. Meanwhile, a battery breakthrough along the lines of the "nanowire" battery recently announced by Stanford University would provide a big boost to the electrification of transportation via plug-in hybrid or all-electric cars, or potentially enable wind and solar power to compete into more attractive peak-load electricity markets.
I'll also be observing with great interest whether the growing public and media interest in "green" becomes embedded in a new set of greener social values, manifested by a shift in consumer and voter priorities. Governments can lead and markets nudge, but unless voters are prepared to support measures that will cause themselves personal pain, or hundreds of millions of consumers to change their preferences and usage patterns, it's going to be a long wait for technology alone to solve our problems.
No discussion of the trends affecting energy this year would be complete without at least a mention of macro-economic factors. The unfolding debt crisis, weak dollar, and increasing linkages between food and energy all bear watching. Throw in the inevitable Wild Cards--random, unpredictable events, such as last week's assassination--and 2008 promises to be at least as interesting in energy terms as 2007 was.
Oil prices have started the year at near-record levels, and the predictions that oil will shortly break $100/barrel seem pretty safe. The larger question is whether it will remain there, or gradually fall back, as demand growth moderates and the global oil industry produces as much of a supply response as it can. Warnings of a collapse below $40/bbl seem exaggerated, but no one investing in renewable energy or other alternatives can afford to ignore them entirely. That downside risk can be managed, but it could be an expensive distraction.
With regard to climate change, the negotiations on the Bali framework for a follow-on agreement to the Kyoto Protocol are unlikely to conclude this year, particularly since the international community recognizes that it could be dealing with a very different set of US counterparts beginning next January. It remains to be seen whether climate change will become a key election issue, in light of concerns about the economy, immigration, and other urgent problems. The fact that it hasn't, so far, is a reflection of the relative agreement among the Democratic candidates on the need for urgent action, and among most of the Republicans that climate change is real but can wait. Once they have chosen their nominees, the parties owe the country a lively debate on the their divergent views on this subject, since the enactment of limits on greenhouse gas emissions could transform our economy and way of life more than anything else the candidates are proposing.
Even if it doesn't become fodder for the election debates, the urgency of tackling climate change is likely to grow. The most prominent American climate scientist recently revised downward his assessment of the ultimate concentration at which atmospheric CO2 must be stabilized, to a level below the current 381 parts per million, in order to prevent catastrophic warming. Since achieving a stable 450 ppm was already going to require a 70% reduction of global emissions from current levels by mid-century, getting to 350 ppm effectively means cutting developed-world emissions radically, starting more or less now, and short-circuiting the prodigious growth of emissions in the developing world. If this view becomes the consensus, expect a lot more focus on preparing humanity to adapt to a hotter planet, because a lot of folks are going to conclude that 350 ppm can't be attained.
On a more optimistic note, the sheer number of companies and universities working on new energy technology greatly increases the chances of dramatic developments in biofuels, solar power, energy efficiency and other areas. 2008 could see the start-up of commercial-scale--if not yet economical--cellulosic ethanol production, and the start of construction on an advanced coal-fired power plant with full sequestration of its CO2 emissions. Meanwhile, a battery breakthrough along the lines of the "nanowire" battery recently announced by Stanford University would provide a big boost to the electrification of transportation via plug-in hybrid or all-electric cars, or potentially enable wind and solar power to compete into more attractive peak-load electricity markets.
I'll also be observing with great interest whether the growing public and media interest in "green" becomes embedded in a new set of greener social values, manifested by a shift in consumer and voter priorities. Governments can lead and markets nudge, but unless voters are prepared to support measures that will cause themselves personal pain, or hundreds of millions of consumers to change their preferences and usage patterns, it's going to be a long wait for technology alone to solve our problems.
No discussion of the trends affecting energy this year would be complete without at least a mention of macro-economic factors. The unfolding debt crisis, weak dollar, and increasing linkages between food and energy all bear watching. Throw in the inevitable Wild Cards--random, unpredictable events, such as last week's assassination--and 2008 promises to be at least as interesting in energy terms as 2007 was.
Monday, December 31, 2007
Looking Back at 2007
It's been quite a year for energy. Oil prices started the year in a slump that bottomed out just a shade above $50 per barrel for West Texas Intermediate crude (WTI), and then began a relentless march that matched the inflation-adjusted record price of the early 1980s and brought them within an eyelash of $100 per barrel. In light of all this drama, it seems surprising that the average price for the year will end up only about $6 per barrel higher than last year's average of $66.25. Along the way, though, high energy prices have seeped into the national consciousness, stimulating important new legislation and the beginnings of a major shift in long-established patterns of consumption. At the same time, energy has become even more inseparable from its consequences for the global climate. If 2008 proves half as volatile as 2007, we are in for some ride.
When 2006 ended, it appeared that oil prices had settled into a range that was just high enough to promote the development of biofuels and other alternatives, but not high enough to cause serious concern about the economy. That comfortable picture didn't last very long, however, as oil became intertwined with the problems of the dollar and the sub-prime credit crisis. WTI headed steadily higher, inflating at over 4% per month since January, despite the unraveling of one of the biggest geopolitical risks built into the market price, the prospect of armed conflict with Iran over its nuclear program. Only the post-Labor Day collapse of refining margins buffered consumers from the full impact of these increases, with US average retail gasoline prices ending 2007 only about half as much higher than they started, compared to crude oil prices. Nevertheless, $3.00 gasoline seems here to stay.
High prices were only half the energy story in 2007, however. If we had just been facing expensive fuel, I'm not sure the Congress would have been able to pass the recent Energy Bill, with its large increases in mandated fuel economy and biofuels production. Climate change came into its own as a mainstream issue for the American public this year, and it was a major factor in the Congressional debate over the energy bill. As I noted last week, "green" is now big, and that's because the scientific concerns about global warming are being matched by images of shrinking icecaps, encroaching sea levels, and drought-abetted fires.
When postings resume after New Year's Day, I'll look at the year ahead, as I did last year. It strikes me that the refurbishing of the ball that will drop in Times Square at midnight tonight with energy-efficient LED lights is a perfect reflection of the cusp at which we stand. Like many of the steps we took this year, it may be largely symbolic--considering how much energy can be saved in a device that only runs for a minute each year--but it could also be a harbinger of more serious measures to come. Happy New Year!
When 2006 ended, it appeared that oil prices had settled into a range that was just high enough to promote the development of biofuels and other alternatives, but not high enough to cause serious concern about the economy. That comfortable picture didn't last very long, however, as oil became intertwined with the problems of the dollar and the sub-prime credit crisis. WTI headed steadily higher, inflating at over 4% per month since January, despite the unraveling of one of the biggest geopolitical risks built into the market price, the prospect of armed conflict with Iran over its nuclear program. Only the post-Labor Day collapse of refining margins buffered consumers from the full impact of these increases, with US average retail gasoline prices ending 2007 only about half as much higher than they started, compared to crude oil prices. Nevertheless, $3.00 gasoline seems here to stay.
High prices were only half the energy story in 2007, however. If we had just been facing expensive fuel, I'm not sure the Congress would have been able to pass the recent Energy Bill, with its large increases in mandated fuel economy and biofuels production. Climate change came into its own as a mainstream issue for the American public this year, and it was a major factor in the Congressional debate over the energy bill. As I noted last week, "green" is now big, and that's because the scientific concerns about global warming are being matched by images of shrinking icecaps, encroaching sea levels, and drought-abetted fires.
When postings resume after New Year's Day, I'll look at the year ahead, as I did last year. It strikes me that the refurbishing of the ball that will drop in Times Square at midnight tonight with energy-efficient LED lights is a perfect reflection of the cusp at which we stand. Like many of the steps we took this year, it may be largely symbolic--considering how much energy can be saved in a device that only runs for a minute each year--but it could also be a harbinger of more serious measures to come. Happy New Year!
Friday, December 21, 2007
A Greener Christmas
I'm fascinated by the shifting emphasis this holiday season towards "greener" practices and greener presents. There's a growing trend toward holiday lights employing LED technology, which is much more efficient than incandescent bulbs, but without some of the drawbacks of the compact fluorescent lights (CFL) that are appearing in millions of homes and businesses. I've even received email solicitations suggesting emissions offsets as suitable holiday gifts. Now, I don't want to sound like the Grinch, here, but although these modest steps are all to the good, I think they still fall short of a genuinely greener Christmas. Efficient holiday lights are fine, but they're not going to halt global warming in a month's usage each year. If we're serious about solving the vast problems of climate change and energy security, the evolution of "green" into a marketing strategy can only be one element in a much larger effort.
Consider the presents we give and receive. I heard a statistic on the news the other night indicating that Americans would give out $8 billion in gift cards this year. As enthusiastic about emissions trading and voluntary offsets as I am, I don't see emissions credit gift cards overtaking the cash kind any time soon. Then consider the energy profile of some of last year's popular gifts, including those we gave ourselves. As I've noted before, one plasma TV wipes out the energy savings of multiple CFL bulbs. Even more modest consumer electronics such as cellphones, iPods and digital cameras make their own small contributions to higher energy consumption and the growing strain on our electrical infrastructure, particularly when we leave their recharging transformers plugged in all the time.
A truly Green Christmas would be one for which the most popular "gadget" gifts were either energy-saving devices themselves, such as the Kill-A-Watt meter, or more efficient replacements for existing gadgets with high energy consumption. And all gifts would come with clear disclosures of the energy used and emissions released during their production. If we're ever going to begin reducing energy consumption and greenhouse gas emissions in absolute terms, achieving a net carbon-neutral holiday season would be a great place to start.
We are a long way from that now, nor should we necessarily be consumed by guilt over this. A cultural change that deep can't happen overnight. Taking off my Scrooge hat, the good news is that it's not nearly as hard to imagine such a thing as it would have been only a couple of years ago. Perhaps we're starting to see climate change as our all-too-real Ghost of Christmas Future. Today, suggesting a carbon-neutral holiday season probably wouldn't get you laughed at, though it's not going to attract many invitations for eggnog and cookies. In that spirit, I would like to wish all my readers the joys of the season, even if it's not yet as green as it might be.
Energy Outlook will be on holiday break until 12/31.
Consider the presents we give and receive. I heard a statistic on the news the other night indicating that Americans would give out $8 billion in gift cards this year. As enthusiastic about emissions trading and voluntary offsets as I am, I don't see emissions credit gift cards overtaking the cash kind any time soon. Then consider the energy profile of some of last year's popular gifts, including those we gave ourselves. As I've noted before, one plasma TV wipes out the energy savings of multiple CFL bulbs. Even more modest consumer electronics such as cellphones, iPods and digital cameras make their own small contributions to higher energy consumption and the growing strain on our electrical infrastructure, particularly when we leave their recharging transformers plugged in all the time.
A truly Green Christmas would be one for which the most popular "gadget" gifts were either energy-saving devices themselves, such as the Kill-A-Watt meter, or more efficient replacements for existing gadgets with high energy consumption. And all gifts would come with clear disclosures of the energy used and emissions released during their production. If we're ever going to begin reducing energy consumption and greenhouse gas emissions in absolute terms, achieving a net carbon-neutral holiday season would be a great place to start.
We are a long way from that now, nor should we necessarily be consumed by guilt over this. A cultural change that deep can't happen overnight. Taking off my Scrooge hat, the good news is that it's not nearly as hard to imagine such a thing as it would have been only a couple of years ago. Perhaps we're starting to see climate change as our all-too-real Ghost of Christmas Future. Today, suggesting a carbon-neutral holiday season probably wouldn't get you laughed at, though it's not going to attract many invitations for eggnog and cookies. In that spirit, I would like to wish all my readers the joys of the season, even if it's not yet as green as it might be.
Energy Outlook will be on holiday break until 12/31.
Thursday, December 20, 2007
Calling Solomon
Since the passage of California's AB 32 legislation establishing a cap on greenhouse gas emissions, the state has been locked in a struggle with the federal Environmental Protection Agency over the implementation of its provisions on tailpipe emissions. The Supreme Court ruling in Massachusetts v. EPA was expected to pave the way for California to obtain the Clean Air Act waiver it sought, to regulate automotive CO2 emissions--and effectively fuel economy--at the state level. Yesterday, however, the EPA denied California's petition, setting up a court fight that could well find its way back to the Supreme Court, unless the 2008 Presidential Election resolves the matter, first. Both sides are at least half-right, and I don't envy those who will be called to discern where the greatest service to the national interest lies. In the end, I believe California will prevail.
California's argument for the waiver is straightforward. The Supreme Court has ruled that CO2 is a pollutant, and California has been granted waivers in the past to regulate pollutants more stringently than the country as a whole. Moreover, California's greenhouse gas emissions are large enough to matter on a global scale, and the state's elected representatives believe they have a mandate from their constituents to address those emissions aggressively and comprehensively. Failure to do so would contribute to the risk of adverse outcomes from climate change in California, with some pointing to reduced precipitation and coastal erosion as early indicators of such damage.
But while my heart is with California in this matter, my head is with the EPA. Even if we accept that CO2 is now recognized as a pollutant--the logic of this escapes me, but I concede my minority status--it still does not result in the kind of direct local impacts that provided the self-evident justification for granting the state's past waiver requests concerning regulation of the "criteria pollutants" that affect air quality and produce smog. Climate change is a global problem, the local ramifications of which cannot yet be predicted reliably. With the US struggling to maintain its competitive edge in a global marketplace for goods and services, should we really desire the further Balkanization of auto and fuel standards?
Both sets of arguments are legitimate and compelling. Where I believe the EPA's case fails is in the implied responsibility of turning down California's request. If there were a similarly comprehensive set of federal greenhouse gas regulations in place or waiting in the wings--even if it was not as stringent--the EPA would be right to ask California to follow the federal government's lead. Yet the energy bill provisions cited by the Administrator in defense of his decision don't constitute such a plan. Unless and until something like the Lieberman-Warner Bill, S.2191, passes, the closest thing we have to a national greenhouse gas regulation is an array of voluntary programs. And as the Washington Post pointed out, a list of states accounting for nearly half the nation's cars has lined up behind California, rather than the EPA.
There's an old saying, "Lead, follow, or get out of the way." The last year has seen the publication of an impressive collection of reports on the science of climate change and on the economic consequences of ignoring the problem or tackling it head-on. These reports, including three from the same Intergovernmental Panel on Climate Change (IPCC) that shared this year's Nobel Peace Prize with Mr. Gore, underline the urgency of the issue and provide the real underpinnings of California's waiver request. On these grounds and with the precedent of Mass. v. EPA, I believe the high court will ultimately find in California's favor, but time is wasting in the interim.
California's argument for the waiver is straightforward. The Supreme Court has ruled that CO2 is a pollutant, and California has been granted waivers in the past to regulate pollutants more stringently than the country as a whole. Moreover, California's greenhouse gas emissions are large enough to matter on a global scale, and the state's elected representatives believe they have a mandate from their constituents to address those emissions aggressively and comprehensively. Failure to do so would contribute to the risk of adverse outcomes from climate change in California, with some pointing to reduced precipitation and coastal erosion as early indicators of such damage.
But while my heart is with California in this matter, my head is with the EPA. Even if we accept that CO2 is now recognized as a pollutant--the logic of this escapes me, but I concede my minority status--it still does not result in the kind of direct local impacts that provided the self-evident justification for granting the state's past waiver requests concerning regulation of the "criteria pollutants" that affect air quality and produce smog. Climate change is a global problem, the local ramifications of which cannot yet be predicted reliably. With the US struggling to maintain its competitive edge in a global marketplace for goods and services, should we really desire the further Balkanization of auto and fuel standards?
Both sets of arguments are legitimate and compelling. Where I believe the EPA's case fails is in the implied responsibility of turning down California's request. If there were a similarly comprehensive set of federal greenhouse gas regulations in place or waiting in the wings--even if it was not as stringent--the EPA would be right to ask California to follow the federal government's lead. Yet the energy bill provisions cited by the Administrator in defense of his decision don't constitute such a plan. Unless and until something like the Lieberman-Warner Bill, S.2191, passes, the closest thing we have to a national greenhouse gas regulation is an array of voluntary programs. And as the Washington Post pointed out, a list of states accounting for nearly half the nation's cars has lined up behind California, rather than the EPA.
There's an old saying, "Lead, follow, or get out of the way." The last year has seen the publication of an impressive collection of reports on the science of climate change and on the economic consequences of ignoring the problem or tackling it head-on. These reports, including three from the same Intergovernmental Panel on Climate Change (IPCC) that shared this year's Nobel Peace Prize with Mr. Gore, underline the urgency of the issue and provide the real underpinnings of California's waiver request. On these grounds and with the precedent of Mass. v. EPA, I believe the high court will ultimately find in California's favor, but time is wasting in the interim.
Wednesday, December 19, 2007
Rethinking Fuel Economy
The President is expected to sign the compromise Energy Bill today. If sustained $3.00/gallon gasoline hasn't already put fuel economy front and center for American consumers, the bill's landmark 35 mile-per-gallon efficiency standard for the entire new car fleet should do so, as auto manufacturers start to modify their product lines to meet the new target. A recent episode of NPR's Science Friday included a fascinating discussion of what is possible in this regard, but the most interesting portion of the program focused on the efforts of a group of engineering students and faculty who are rethinking the entire concept of the car for new markets. As important as it is for the US to shift toward more efficient vehicles, the opportunity in large emerging markets such as India is even more critical, before consumers' expectations there are locked into a status quo that cannot be sustained, globally.
Contrary to some disingenuous comments we heard during the debate about the 35 mpg CAFE Standard, it is simply not realistic to imagine that US consumers will be able to purchase essentially the same cars as today, differing only in their ability to achieve dramatically better fuel economy. Consumer expectations of vehicle cost and performance and the engineering solutions necessary to deliver an average of about 10 mpg lower fuel consumption are headed for a minefield of trade-offs. Something must give, whether vehicle size and weight, performance, or sticker price. Two of the main constraints on Detroit are our expectations of being able to accelerate to highway speeds in 10 seconds or less, and traveling roughly 300 miles without refueling, regardless of vehicle size. What could engineers create if those expectations disappeared?
The work of the Vehicle Design Summit (VDS) seems aimed precisely at that conundrum, targeting a developing-country market in which consumers are seeking personal mobility without such preconceptions, and for which the notion of a 12 mpg SUV that can accelerate like a sports car is entirely alien. Their first-stage prototype is anticipated to achieve 100 miles per gallon, using a plug-in hybrid architecture with a small, highly-efficient onboard generator capable of running on a variety of fuels. And because it won't have to go 300 miles at a stretch, the size of the engine and battery pack can be minimized. That reduces both cost and weight, increasing energy economy further. And that's a key point; from what I can tell, VDS isn't just trying to reduce oil consumption, but rather the entire energy consumption of the vehicle, including the "embodied energy" and greenhouse gas emissions of the manufacturing process.
Having cars such as the ones VDS is designing available for developing-country consumers, as they reach the income levels at which car ownership rates take off, will be crucial in managing global emissions and getting the most out of the world's limited supplies of transportation fuels. As daunting as it may sound, it may actually prove easier to create an entirely new concept of the personal vehicle that is capable of achieving an actual 100 miles per energy-equivalent gallon, compared to boosting the current American car to 35 mpg by incorporating energy from electricity or biofuels that is conveniently ignored or under-counted for the purposes of the federal fuel economy regulations.
Contrary to some disingenuous comments we heard during the debate about the 35 mpg CAFE Standard, it is simply not realistic to imagine that US consumers will be able to purchase essentially the same cars as today, differing only in their ability to achieve dramatically better fuel economy. Consumer expectations of vehicle cost and performance and the engineering solutions necessary to deliver an average of about 10 mpg lower fuel consumption are headed for a minefield of trade-offs. Something must give, whether vehicle size and weight, performance, or sticker price. Two of the main constraints on Detroit are our expectations of being able to accelerate to highway speeds in 10 seconds or less, and traveling roughly 300 miles without refueling, regardless of vehicle size. What could engineers create if those expectations disappeared?
The work of the Vehicle Design Summit (VDS) seems aimed precisely at that conundrum, targeting a developing-country market in which consumers are seeking personal mobility without such preconceptions, and for which the notion of a 12 mpg SUV that can accelerate like a sports car is entirely alien. Their first-stage prototype is anticipated to achieve 100 miles per gallon, using a plug-in hybrid architecture with a small, highly-efficient onboard generator capable of running on a variety of fuels. And because it won't have to go 300 miles at a stretch, the size of the engine and battery pack can be minimized. That reduces both cost and weight, increasing energy economy further. And that's a key point; from what I can tell, VDS isn't just trying to reduce oil consumption, but rather the entire energy consumption of the vehicle, including the "embodied energy" and greenhouse gas emissions of the manufacturing process.
Having cars such as the ones VDS is designing available for developing-country consumers, as they reach the income levels at which car ownership rates take off, will be crucial in managing global emissions and getting the most out of the world's limited supplies of transportation fuels. As daunting as it may sound, it may actually prove easier to create an entirely new concept of the personal vehicle that is capable of achieving an actual 100 miles per energy-equivalent gallon, compared to boosting the current American car to 35 mpg by incorporating energy from electricity or biofuels that is conveniently ignored or under-counted for the purposes of the federal fuel economy regulations.
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