Green Project

GM on the Ropes, an Israeli Air Strike? and Peering Inside the Black Box of the Oil Companies

New York.  Signs that the Third Oil Shock is beginning to do real damage to the economy were evident in GM's close below $10 yesterday, its lowest level since 1954, that drove stocks in to solid bear territory.  Jobs also declined sharply.  The impact of high fuel prices is sure to be a major topic around grills this Fourth of July as people drive or fly to be with friends.  Here is the latest on GM and the economy.

The Financial Times has an interesting story showcasing the shadow boxing now taking place between various actors around a potential Israeli raid on Iran's nuclear reactors that some expect this fall. The US Chairman of the Joint Chiefs of Staff worried publicy about opening up a third front in the region in addition to Iraq and Afghanistan while Iran made it known it would retaliate by blocking off oil routes.  Israel recently conducted maneuvers that some viewed as a trial run for a raid. 

Yesterday, the FT ran another interesting story on Shell Oil.  In the US debate over what to do about high oil prices--drill in the Arctic, force the oil companies to explore the federal land they already lease and so forth--conspiciously absent are the views of the oil companies.  They are the Black Box of the question, keeping a low profile with the public while funding immense lobbying and advertising campaigns behind the scenes.  Their views are presumably known to Dick Cheney and the Bush Administration but whether they are dictating policy to the Republicans or the Republicans are just messaging on their issue is an open question.  The FT article gives an interesting glimpse into one company, Shell and the challenges it is facing as Nigerian rebels step up their attacks on facilities in the oil-rich Forcados River delta and now Nigeria's offshore platforms.  Shell's overall production is declining as Nigerian oil which had been rising until the violence fails to compensate for declining North Sea oil.  Shell's story, if representative, suggests that oil is slowly running out around the world and growing harder to find.  Paradoxical, then, that profits have never been higher.  And, there is something odd about the way that oil is inevitably interwined with voilence--what in the 19th Century was called the Great Game when the players were Russia and England vying for oil around the Caspian Sea.  It is past time to move onto fuels that do not provoke constant wars.

No Country for Old Mavericks

The last couple weeks have seen copious coverage of John McCain's inconsistency on energy policy. These discrepancies have been noted with some curiousity, but with a series of ads on energy security, McCain is clearly attempting to assume the energy security mantle in this campaign, and perhaps it is worth taking greater notice of them. After all, climate change is his signature "maverick" issue - the main issue that he claims not to follow President Bush on.

The problem is that his biggest maverick endorsers - those that he can use to paint himself as bipartisan (or as putting "Country First," his new slogan) - don't really agree with him on his maverick issue. Arnold Schwarzenegger, one of the most progressive executives in the country on energy issues and a McCain endorser, criticized McCain's offshore drilling plan as "blowing smoke." From the Los Angeles Times:

Gov. Arnold Schwarzenegger made a veiled swipe at Republican presidential hopeful John McCain on Thursday when he said at a climate conference here that anyone suggesting offshore oil drilling could bring down gas prices was "blowing smoke."

The remark was also a dig at his host, Florida Gov. Charlie Crist, who riled environmentalists, tourism promoters and the state's political leaders on both sides of the aisle last week when he voiced support for McCain's proposal to lift bans on exploring for oil off the coasts of California, Florida and the Eastern Seaboard.

From his podium at the conference, Schwarzenegger said, "Politicians have been throwing around all kinds of ideas in response to the skyrocketing energy prices, from the rethinking of nuclear power to pushing biofuels and more renewables and ending the ban on offshore drilling," Schwarzenegger said. "But anyone who tells you this would bring down gas prices any time soon is blowing smoke."

Another issue McCain faces is that Joe Lieberman, sponsor of the leading climate change legislation in the Senate this year, supports McCain, but John McCain's climate change goals are far more modest than Lieberman's legislation. In fact, McCain skipped the Senate vote on the issue, and indicated that he did not support the legislation.

So, if McCain is a maverick on energy, why don't his two signature maverick endorsers - both leaders on his signature maverick issue - agree with him on fundamental aspects of that very issue?

US Sen. Jeff Bingaman to Deliver Major Address on Climate Change to NDN

NDN’s Green Project is pleased to announce that one of the U.S. Senate’s most well-regarded leaders, U.S. Sen. Jeff Bingaman (NM), Chairman of the Energy and Natural Resources Committee, is scheduled on Wednesday, July 9, to deliver a major policy address on climate change to the NDN community.

As Chairman of the Energy and Natural Resources Committee, Sen. Bingaman has been a strong voice for addressing our nation's energy challenges through reducing America’s reliance on fossil fuels, cutting greenhouse gas emissions and increasing investment in innovation and technology necessary to build a clean energy future.

Chairman Bingaman's speech is scheduled for 8 a.m. in Room 325 of the Russell Senate Office Building, in Washington, DC.

Sen. Bingaman has been a long-time friend of NDN and has supported the missions and goals of NDN throughout the years.

NDN’s Green Project is a program of the Globalization Initiative that seeks to develop the legislative and regulatory framework to address climate change, enhance energy security, and accelerate the development of green technologies to promote economic growth.

NDN’s Green Project Hosts Senate Energy and Natural Resources Chairman Jeff Bingaman for Major Policy Address
325 Russell Senate Office Building
Wednesday, July 9
8 a.m.
Click here to RSVP

The Third Oil Shock: To Raise or Not to Raise

The decision by the Fed yesterday to leave rates unchanged--despite inflationary pressures from soaring oil prices on the one hand and a weakening economy on the other, testifies to the conundrum an oil shock creates. There are, in essence, two possible choices when a shock sends prices soaring. One is to raise rates to squeeze the inflation out of the economy. The other is to allow the inflation. Neither is a pleasant option. However, they have quite different consequences.

To see the potential impact of either policy, one only needs to look at the first two oil shocks in the 1970s, for each exemplifies one approach.

The First Oil Shock in 1973, was a watershed in economic history. The immediate trigger was the Yom Kippur war pitting Israel against Egypt and Syria. However, the pre-conditions for the spike were already present in the decision of Nixon to take the US dollar off the gold standard in 1971 which allowed the dollar to depreciate reducing the revenues of oil producers combined with the failure of the Seven Sisters oil companies to cut a deal with the still-docile oil producing nations on revenues. In October, when war broke out, what we now call OPEC announced it had become a cartel and blocked oil shipments to countries supporting Israel, ie the US, Europe and Japan, causing prices to spike.

Accustomed to getting endless oil for practically nothing--it was western companies like BP and Mobil after all that had dug the oil wells in the desert--the West went into a panic. In the US, daylight savings time was suspended, gas rationing went into place and auto races were cancelled. The US economy went into recession. In due course, the CAFE standads came into being in 1975 and Americans began buying small Japanese cars.

However, faced with this challenge, central bankers decided not to raise interest rates and, in fact, to cut them once the economy tanked, allowing the economy to inflate. The result was what we now call stagflation, a stagnant economy combined with inflation that cut stock prices in half. Stagflation characaterized the 70s in the US and in Europe set the stage for the drive for a European Union to combat eurosclerosis.

Fast forward to 1979, the year of the Second Oil Shock. This time, the trigger was the Iranian revolution and subsequent invasion of Iran by Iraq that cut production in both countries by about 6.5 million per day. This time, however, the West reacted in a far different manner. As inflation soared, Central Bankers decided to face it straight on and take the bitter medicine of monetarism. Fed Chairman Paul Volker began raising rates until they rose into the double digits.

The result was another recession. However, the Fed kept the heat on, leaving rates high through 1981 and putting the economy through the proverbial wringer. By 1984, inflation had been wrung out of the economy and the US finished its conversion frrm an industrial to a post-industrial economy This transition involved the shuttering of the steel industry, the shipping industry, the old electronics industry and much of America's industrial base. However, in its wake emerged the post-industrial US economy of finance and technology that characterized the expansions of the 1980s and 1990s.

Two shocks; two courses of action; two outcomes: stagflation, or wrenching restructuring of the economy.

Of the two, the latter was the more painful but ultimately the better choice. However, it marked the end of one era of American economic and social history and the beginning of a new one.

Are we at a similar juncture in history? Quite possibly. If the world really faces up to the new demand for energy, we may be looking at the end of the high carbon economy and the beginning of a new, low carbon one. But the change will be momentous.

On the other hand, the alternative, putting off the reckoning and allowing staglation to emerge may be easier in the short run but may only delay the inevitable.

In addition to interest rate policy, whether the world gets serious about lowering carbon emissions and makes the needed investments in renewable energies are also important questions that will determine the shape and pain of the needed adjustment.

Right now it's too early to predict how the world will react to the third oil shock, but without real backbone and leadership, 1970s style staglation appears to be the outcome toward which the US is slouching



Energy is Number One

A Gallup Poll released today shows that energy and gas prices are considered by more Americans to be extremely important than any other issue in the Presidential election.

Additionally, 19 percent more Americans believe that Barack Obama would be better able to handle energy issues. He leads John McCain 47 - 28. For more of NDN's Green Project work on energy security and climate change, click here.

Oil Price Woes

Yesterday, Saudi Arabia did what everyone--including George W. Bush on bended knee--has been asking it to do for months: agree to increase production.  Prices closed up a dollar.  The Saudi move and its non-impact on the market shows just how tight supplies remain.  While it was designed in large part to offset declines in Nigerian production due to rebel violence in the oil rich, poverty stricken Niger Delta, it might have sent a psychological signal of easing supplies but it did not.

Meanwhile, back in Washington, another panel of oil traders told Chairman Dingell's House Energy and Commerce oversight subcommittee that speculation is driving up oil prices and tighter oversight of commodities futures markets could lower prices. Staffers released data to the effect that 70% of trades are now speculative, up from 30% not long ago.

While Congress should act to shore up oversight of markets, the resistance of prices to downard signals shows just how difficult the problem of soaring commodity prices has become.  In related news yesterday, China which renegotiates major price deals annually, agreed to pay twice as much next year for iron as last.  As many commentators have written, soring oil and other commodities prices partially reflect the weak dollar.  But to a far greater degree they reflect real shortages created by the white hot growth of India, China and other developing countries that Fareed Zakaris has dubbed the "rise of the rest".

So what can we expect?  With oil supplies this tight, the markets remain hostage to any sudden supply disruption.  For example, an air strike on Iran's nuclear facilities--hinted at by recent Israeli exercises--if it affected Iran's supply of oil--could send prices higher.  So could more attacks in Nigeria.  Indeed, a disuption anywhere could have outsized effects.

Amid all the suggestions that America can drill it's way out of the crisis offshore or in Alaska, no one has mentioned the fact that Iraqi oil production--as a result of the war--is still about 400,000 barrels below what it was before the invasion--close to what the Arctic National Wildlife Refuge could be expected to produce at its peak in about 20 years.  The fact is, it is far easier to disrupt oil production than create it.

For all these reasons, the long term answer to hair trigger oil markets is to get off of oil.  As Tom Friedman wrote in a recent much-emailed column, increasing the addict's supply does not break the addiction.  Only a sensible, comprehensive energy policy to break the addition and exchange fossil fuels for a distributed network of renewables can end our dependence on this most interruption-prone and volatile of commodities.

Big Three on Credit Watch

While news about high fuel prices this past week centered on disingenous calls by President Bush and others to drill our way out of the crisis, perhaps the most significant--and ominous event--was the barely publicized action by Standard and Poors yesterday to place the Big Three US automakers on a credit watch.  In taking the action, S&P cited "renewed concerns about the three carmakers future cash flows".

Given Ford's pre-existing troubles--accentuated by its announcement last week as well that it is postponing relaunch of its star vehicle, the F150 truck, Chrysler's undertain future under private equity management and GM's plummeting market share the announcement raises real questions about the survival of the US auto industry. 

Domestic car sales were already down about 2 million vecicles this year from their high in 2006 before the current fuel crisis.  Plummeting sales and oceans of red ink--as customers struggling under the weight of sky high consumer debt payments and declining wages, eschew the gas guzzling stars of only two years ago--threaten its very existence.  The potential collapse of the once great US auto industry--still the second largest employer in the country after the government--calls into question--as I have written on this blog before--the very essence of the American way of life.

What can be done?  One proposal raised by Jack Hidary at a recent conference on plug-in hybrids--is to offer incentives to retire old gas guzzling cars.  Brazil and Japan, among others, have done this with succsss, incidentally strenthening their domestic car markets which benefits local carmakers.  Another measure that would prove greatly helpful to the industry is health care reform since America's disproportionately high healthcare costs create a major cost disadvantage relative to countries with public health care.  Finally, Congress needs to address the crisis in consumer debt where the steady erosion of consumer protections over the last decade, boosted bank profits but left consumers struggling under an unsustainable load of debt. However, this is only the beginning.  Carmakers must understand the enormity of the shift underway--possibly from an oil based car industry to one that will run on electricity--and the government must be ready to help in this massive transition.

If the auto industry and government get it wrong, the cost could be devastating in terms of lost equity, jobs and ultimately US industrial strength.  Cars are just too important to the US economy to allow them to go the way of steel, ships, electronics and so many once great US industries.

Drilling Our way Out of the Fuel Crisis - Part II

While numerous people from Paul Krugman to Barack Obama have stepped forward to dash water on President Bush's call this week to try to drill our way out of the oil crisis, perhaps no more effective rebuttal came than one, not from environmentalists or economists, but from Red Caveney, CEO of the American Petroleum Institute.

In an oped in yesterday's Wall Street Journal, Caveney laid out the reasons that America can not drill its way out of the current crisis. Explaining to non-oil specialists, the uncertainty inherent to oil exploration, Caveney writes: "Exploration is time consuming, very costly and involves a great deal of risk. Importantly, you see neither a drop of usable oil nor a cubic fot of natural gas while it is going on." Oil exploration, Caveney argues, is a long term project, not a next quarter solution.

What prompted his oped was the "use it or lose it" proposal by Democrats to incent oil companies to drill on the 68 million acres of federal land they already lease. But the argument also neatly dispenses with the idea that drilling today has anything to do with oil prices in the near term or even over the next decade.

Adding mere "blocks on the map" as Caveney calls them to the millions of acres already open to exploration--including millions in the Gulf of Mexico at best might have a minor psychological effect on the market. However, in a business dominated by an oil cartel, the issue quickly comes down to real supply and more blocks on the map would have no impact on that. Nor will they reduce our dependence on foreign oil, wean us off fossil fuels or improve the climate.

Ironically, what now seems to be accomplishing all three of those goals is the market. But these are not the type of market forces that get votes.

Why More Drilling is Not the Anwer

Of the various false solutions being proposed to the current oil shock perhaps none is more disingenous than the idea that it can be solved by drilling in the Alaskan wilderness and along the continental shelf. This is the idea that the right wing media, recently, John McCain and now President Bush have been pushing as a cureall for soaring oil prices. Since many Democrats oppose this drilling, the next false step of logic is to say Democrats are to blame. This was the thrust of President Bush's energy proposal yesterday, one that only highlights the intellectual dishonesty and partisanship of this failed Administration.

Is more drilling the answer? No for three reasons.

First, the amount of potential oil in the Arctic National Wildlife Refuge or ANWR is simply not enough to make a dent in global world consumption. The entire estimated reserves of ANWR are estimated to equal current US consumption in one year. The mere increase in China's consumption in the next few years will exceed the entire Alaskan reserves. Since the reserves would be harvested over decades, the quantity of oil they would produce each year would amount at most to a few drops in the global oil bucket.

Second, oil exploration and drilling takes years. Even if exploration began tomorrow, we would probably not see significant quantities of oil from Alaska or offshore for close to a decade.

Third, the oil companies already have millions of acres allocated to them that they have not gotten around to exploring let alone drilling in. When asked the delicate question, as some have been recently, why they have not explored these millions of acres to which the federal government has granted them rights, oil companies typically respond that the public should understand that oil exploration takes time.

There may be some opportunities for targeted, ecologically sensistive drilling off of America's shores that would make economic sense. But more drilling will not address either the current oil shock shock or the long term situation. And of course, it will worsen, not mitigate the climate.

Solar Credit Fails Cloture Vote Again

What is it about our need to develop alternative sources of energy given sky high oil prices, global warming and political instability in oil producing regions that our elected officals don't understand?  This was the question that would seem to flow naturally out of today's failure again of the Senate to obtain cloture to extend the solar tax credit.

It's not as though the solar investment tax credit is a novel or unproven idea that requires additional study.  The ITC is largely responsible for the rebirth of America's solar industry in recent years--as other flavors of credits are responsible for the growth of solar energy in other countries.  In order to bring down the cost of solar, scale is needed and to drive scale, incentives are the obvious solution. 

Congress probably wil renew the ITC eventually this year.  The problem is that delays create uncertainty and the long lead times of solar projects mean that many have already been canceled causing solar installers to lose business and lay off workers. It is time for the Senate and House to put differences over the paygo system aside and agree on legislation that both can pass.

Syndicate content