Energy Independence


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.

McCain Running on Empty

Sen. John McCain has a new ad out today on climate change. Check it out:

Sounds great right? John McCain doesn’t follow the President on climate change and wants to curb greenhouse gasses.

Not so fast.

From the New York Times’ Elisabeth Bumiller:

Mr. McCain, the presumptive Republican nominee, is to provide an audience of Houston oil executives with more details of his proposal to lift the federal moratorium on offshore oil and gas exploration in states that want it. Mr. McCain’s position is welcome news for the oil industry, which has called for years for the ban to be lifted.

"With gasoline running at more than four bucks a gallon, many do not have the luxury of waiting on the far-off plans of futurists and politicians," Mr. McCain plans to say. "We have proven oil reserves of at least 21 billion barrels in the United States. But a broad federal moratorium stands in the way of energy exploration and production, and I believe it is time for the federal government to lift these restrictions and to put our own reserves to use." Mr. McCain first made public his position on the moratorium on Monday in Virginia.

Just so this is clear: On the same day that John McCain releases a new ad discussing his commitment to confronting climate change, he also proposes drilling for offshore oil and gas.

Politically, McCain may be seeking the energy security mantle, but he will have trouble claiming to care about climate at the same time, especially when it looks like he is just giving handouts to the oil industry. This move will not help in the short term as wells in these places will not come online tomorrow, and the amount of oil and natural gas extracted would not lower prices in any meaningful way.

Plus, offshore drilling is so unpopular in Florida, that even Jeb Bush opposed it as Governor. In fact, as First Read points out:

No Republicans in Florida have gotten elected statewide without endorsing the moratorium on off-shore oil drilling.

Between this drilling proposal and the gas tax holiday, it sounds like John McCain’s Straight Talk Express may be in bad need of a fill-up.

The Price of Energy Security

The Front Page of yesterday’s Wall Street Journal features an excellent article by Guy Chazan entitled “Russia Outflanks EU’s Pipeline Bid.” The article describes Russia’s efforts to dominate European natural gas supply and politics by outmaneuvering American backed European attempts to build a pipeline to make them less reliant on Russian natural gas. The potential for heavy-handed petropolitics, exemplified by Russia’s 2006 shut-off of gas to Ukraine, has American policy makers concerned once more about Russia’s political influence in Europe.

During the Cold War, the balance of power was measured in nuclear warheads. Now a new kind of contest is playing out. The battlefield is Europe's energy market. The objective is pipeline proliferation. And Russia is winning.

Europe is witnessing a race between two mammoth pipeline projects that would bring natural gas to the Continent from the Caspian and beyond. One of the plans -- hatched in Europe, championed by Washington and named for a Verdi opera -- has been hobbled by bureaucracy. The other, backed by the Kremlin, is rolling ahead with a speed and success that has surprised and frustrated the West. The outcome could shape energy supplies, and political influence, in Europe for decades to come.

Europe is not the only place this dynamic is playing out. Chinese influence in oil-rich African nations has been much maligned due to a policy emphasis energy security, even at the expense of human rights. (Sudan is only one, albeit the most publicized, example of Chinese influence on the region.) This political turmoil, as well as high prices domestically, means that energy security has emerged as a hot topic in American media.

Responding to Chazan’s article on the Wall Street Journal’s "Environmental Capital" blog, Keith Johnson argues that:

You can have energy security, you can give consumers a break, or you can do something for the environment. But aiming for all three at once—that is, what passes for energy policy in the U.S. and Europe—appears next to impossible.

Take the U.S. High oil prices have given legs to Big Oil’s demand for more access to federal lands and coastal areas—a bid for energy security–even while many in Congress are still opposed. But environmentalists figure high oil prices will spur alternative energy and help fight climate change. The Liberman-Warner climate bill foundered thanks in part to high energy prices right now. Meanwhile, the consumer gets whacked regardless—with higher gas prices, or higher electricity bills, or both.

As the scramble for energy heats up, it’s useful to remember that the rules of the game aren’t changing—the game itself is. Energy policy isn’t a cardigan moment or a Rose Garden speech—it’s become the currency of international influence. And the countries that ruthlessly focus on one pillar, rather than trying to juggle all three, are more likely to come out ahead.

Johnson is incorrect to argue that this is a new dynamic, however. Energy security has been the backbone of American politics in the Middle East since the Presidency of Franklin Roosevelt, and what has been called a “New Great Game” in Central Asia has been an ongoing chess match over oil and natural gas for decades. Johnson is correct that a ruthless pursuit of energy security is more likely to work than other approaches, but the solution to this energy security issue has little to do with climate or economic security. Rather, Europe needs to employ stronger policies and act in a more hard-nosed fashion against Russian advances, and doing so does not mean subverting goals of handling climate change. This is more a matter of having leadership that knows when the trade-off of playing hardball in favor of political security is well worth it.

Securing Energy and the Economy: Avoiding short-term policy traps

The fundamentally new elements of the energy paradigm are that these resources are no longer available on the cheap in the Western world, in large part due to the rise of the developing world, especially Asia, and the concern about climate change. Johnson seems to argue that pursuing energy and climate security while trying to keep energy costs low is impossible. In the short term, he is probably correct. In the longer term, he couldn’t be more wrong. And, in the short term, there are better ways to protect consumers.

The link between energy and economic security is easy to see. If countries do not pursue energy security, they become unable to feed their economies and maintain economic security – talk about a hit to consumers. In the short term though, pursuing lower energy prices can come at the expensive of both energy and climate security and results in silly ides, like a gas tax holiday or opening up off shore drilling.

Thomas Friedman
, in yesterday’s New York Times, weighed in on the dire policy consequences of Egypt’s attempts to keep energy prices low:

From Shubra we drive into the desert toward Alexandria. The highway is full of cars. How can all these Egyptians afford to be driving, I wonder? Answer: The government will spend almost $11 billion this year to subsidize gasoline and cooking fuel; gas here is only about $1.30 a gallon. Sounds like a good deal for the poor — only the poor have no cars, and the fuel subsidies mean less money for mass transit.

Think about these numbers: This year Egypt will spend $6 billion on education and $3 billion on health care, far less than the subsidies for fuel. This is a terrible trap. The subsidies should have been phased out when food and fuel prices were lower. Now that they have soared, the pain of removing the subsidies would be politically suicidal. So education and health care get killed instead.

America is not currently in the trap Friedman describes, but with the wrong policies, could find itself moving in that direction. Incentives must be designed to stimulate infant technologies and decrease in amount over time as those technologies commercialize and scale, not the other way around.

Securing Energy and Climate: Building the 21st Century Economy

Climate and energy security are also not mutually exclusive. If all the West cared about was energy security, America could just build all the coal plants it wanted. We are, after all, the Saudi Arabia of coal. But that is fundamentally not in our climate or economic security interests.

What America needs is a policy that is focused on energy and climate security, indeed such a policy must see the two as interrelated, and must encourage the scaling of technologies capable of taking the place of fossil fuels. Building a 21st century post-carbon economy will not be simple and will not happen tomorrow, by this November, or by November of 2012, but failing to get on that path will ultimately prove the most difficult available option, as failure means economic surrender. Conventional sources of energy will remain important into the future, but the faster America is able to transition away from a hydrocarbon economy, the better our economic, energy, and climate security will be.

Renewables and the Plug-In Hybrid

The movie Who Killed the Electric Car about the the birth, recall and eventual crushing of every last example of the popular but short lived GM EV-1, blamed a variety of culprits for the car's demise.  But as evidenced by the standing room only crowd at last week's and Brookings conference on plug-in hybrids, enthusiasm for the car has returned. 

12 electric vehicles were on display at the conference where a variety of speakers talked about the potential of electric cars, the obstacles in their path and the needed role, if any, of the government.  The moment is auspicious.  The new Tesla sports car which can travel from 0 to 60 in 4 seconds and has a battery range of 240 miles, backed by Vantage Point Capital and Kleiner Perkins went in to production last month.  Meanwhile, the sleek Chevy Volt, a serial hybrid that can travel 40 miles on its battery before using any gas--but uses gas as a backup--slated for production in 2010, is enjoying extraordinary buzz.

Henry Ford thought that that electric engine would eventually beat out the internal ombustion one and electricity is an attractive fuel because it creates no carbon mess--mechanics working on electric cars don't have to wash their hands--and it currently costs only about one fifth as much as gas.  The barriers have always been two fold, the difficulty of storing electric energy in a battery as opposed to the chemical energy stored in oil, and the time needed to recharge--a matter of hours--as opposed to several minutes at the pump.  New battery technologies are on the verge of solving the first problem.  A variety of creative solutions--from swapping out batteries to installing public plugs have the potential to address the second.

However, a key sub-text of the conference last week--that was not addressed--is where will the power come from.  Analysts at Oak Ridge Laboratories and EPRI estimate that to meet future demand for electric cars, if people choose to charge during the day and unless they can be persuaded to only charge at night, hundreds of new power plants will need to be built.

Indeed, electricity demand is rising anyway, just from rising population, new gadgets and fancier living.  And herein lies a potential problem.  There is no obvious solution to the need for more power.  Consider the options: Nuclear power is extremely expensive and may be obsolete.  No plant has been greenlighted in 30 years; the US still has no viable plan for storing nuclear waste as the Yucca mountain plan is stalled; the costs of building a plant have exploded; and the US has not trained nuclear engineers in decades.  Building a new nuclear plant in the US is at least a decade away.

Coal, a fuel almost always preceded by the adjective "cheap" has climbed in price.  Perhaps more significantly, the price of a coal plant has ballooned due to the rising costs of concrete, raw materials, construction labor and compliance making new coal plants an increasingly unattractive economic option.  Banks are also reluctant to finance coal plants due to concern over climate change regulation.  And of course coal creates a lot of CO2.

A few years ago, localized, clean natural gas plants appered to be the future.  But many private investors in gas power plants lost their shirts when soaring gas prices made their plants unprofitable  To the degree more utilities turn to natural gas for electricity generation, this would drive its price up further.
The leaves renewable energy, such as hydro, wind and solar power.  Most of the good hydro sites have been exploited.  Wind, however, has emerged as growing, economic source of power and solar is growing more attractive daily.  Renewables have the advantage of zero cost of feedstock.  The cost consists only of plant and operations.  The key fact to remember is that while renewables only account for a tiny fraction of existing power consumption, they accounted for over 30% of new power capacity last year.

In short, the fates of electric cars and renewable energy are inextricably linked.  For the electric car to realize its potential, renewable power will have to come onstream in a major way.

Time to Lead on Energy and Climate

Buried in Wednesday’s NBC News/Wall Street Journal Poll was this fact: 18 percent of Americans view energy and the cost of gas as the most important issues for the federal government to address. That number ranked third, behind the economy and the war in Iraq, and ten points ahead of health care. Add that to the 4 percent of Americans who see the environment and global warming and the environment as the number one issue, and 22 percent of Americans see some sort of energy concern as the most important federal issue.

Concern about the fact that only four percent see global warming as the most important issue notwithstanding, this is a welcome shift in political consciousness. The next step is for our leaders to explain why the top two issues, the economy and the war in Iraq, are actually related to energy and the cost of gas, and why confronting global warming relates to all three.

Unfortunately, political rhetoric and action is not yet where it needs to be on these issues. Instead of convincing dialogue about building a clean energy future that enhances energy and climate security, the American people get irresponsible talk from a supposedly pro-climate candidate about a gas tax holiday. The Senate debates cap and trade legislation, but won’t even extend the Solar Investment Tax Credit. Four dollar a gallon gasoline means that it is time to move forward to new sources of energy, not despair about the fact that the old ones aren’t working for us as well as we’d like.

High energy prices are here to stay, and the American people are struggling because of it. For now, it seems that many politicians are unwilling or unable to tell the American people that we have to innovate, not drill, out of this problem, and that there is no short-term solution.

Leadership means connecting the dots, from high energy prices, to climate change, to green collar jobs, to turmoil in the Middle East. It means realizing that four dollar a gallon gasoline is related to the Solar ITC. America is nowhere close to leading on energy, and the consequences will be grim should we take a pass on building the premier 21st century green economy. Thankfully, it seems that the market is taking hold. Companies like GM are starting to get the picture that we need to build plug-in hybrids like the Chevy Volt, and California is primed to install 200-250 Megawatts of solar in 2008 alone. Let’s hope political leadership can create the policy needed to support them.

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