STUDY: Repealing Tax Deductions on U.S. Energy Companies Exacerbates Federal Deficit, Increases U.S. Debt

July 12, 2011 by AEA 1 Comment

LSU Economist Finds Administration’s Dual Capacity and Section 199 Proposals Would Reduce Federal Tax Revenue by More Than $53 Billion

Click here to read the PDF

Click here to read the one pager

WASHINGTON, D.C. – Louisiana State University Endowed Chair of Banking and nationally-renowned economist Dr. Joseph R. Mason today released a just-completed study that finds the Administration’s proposal to carve out U.S. energy firms from receiving certain tax deductions would have a net negative impact on federal revenues. In his study, “Budget Impasse Hinges on Confusion among Deficit Reduction, Tax Increase and Tax Reform: An Economic Analysis of Dual Capacity and Section 199 Proposals for the U.S. Oil and Gas Industry,” Dr. Mason finds repealing tax deductions for American energy manufacturers would result in:

• $30 billion in Federal tax revenue at the expense of some $341 billion in economic output;
• Over 155,000 lost jobs, $68 billion in lost wages, and $83.5 in reduced tax revenues; and,
• A net fiscal loss of $53.5 billion in tax revenues.

“The administration’s proposal to eliminate tax deductions on U.S. oil and gas companies is grossly counterproductive toward the goal of increasing federal revenues,” Dr. Mason said. “Such a move would have a net negative impact on revenue, thereby increasing federal deficits.”

“If the goal is deficit reduction, a far more meaningful approach would be reforming federal tax and business policies that encourage economic growth. Expansion of oil and gas exploration and production on the Outer Continental Shelf, for example, would generate an estimated $11 billion annually in Federal tax revenue in the short run, and $55 billion annually in Federal tax revenue in the long run.

“Reform supports business development in both developing and developed countries, alike. The best reformers have several things in common. First, their reforms are part of a broad agenda of boosting global competitiveness and, second, they never stop. Even developing countries previously stung by fiscal imbalances and committed to business reform rarely retreat to increased taxes as a way to raise revenues. The U.S. should also step up to the challenge of reform.”

Dr. Mason’s conservative economic analysis employs the same economic used in government modeling – the U.S. Commerce Department’s RIMS II system.

Dr. Mason’s report was sponsored by the American Energy Alliance (“AEA”). To learn more and get exclusive information on upcoming projects, sign up for AEA’s In The Pipline<http://www.americanenergyalliance.org/>.

Thomas Pyle, president of the American Energy Alliance, issued the following statement in response to the study’s findings:

“This study confirms that President Obama’s insistence on imposing discriminatory tax changes on American oil and gas companies has nothing to do with deficit reduction – it has everything to do with satisfying his anti-energy agenda. The president’s insistence on these senseless tax hikes is further proof of his outright hostility to the oil and gas industry – an industry that provides over 9 million jobs and billions in revenue to the federal government.”

Founded in May, 2008, The American Energy Alliance (“AEA”) is a not-for-profit organization that engages in grassroots public policy advocacy and debate concerning energy and environmental policies. AEA is the advocacy arm of the Institute for Energy Research (IER), a not-for-profit organization – founded in 1989 – that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets.

Filed Under: News, Press Releases

Repealing Tax Deductions on U.S. Energy Companies Exacerbates Federal Deficit, Increases U.S. Debt

July 12, 2011 by AEA Leave a Comment

Budget Impasse Hinges on Confusion among Deficit Reduction, Tax Increase, and Tax Reform:

An Economic Analysis of Dual Capacity and Section 199 Proposals for the U.S. Oil and Gas Industry

Click here to download the PDF

By Joseph Mason

As the deadline for approving an increase in the Federal debt ceiling approaches, the tax treatment of oil and gas companies’ revenues has become enmeshed in the policy debate over debt reduction and tax reform. That debate, however, is presently confusing three concepts: deficit reduction, tax reform, and tax increases. While sometimes related, those three concepts are not guaranteed to be equivalent. It is crucially important, therefore, that policymakers maintain the distinction between the three in the highly charged budget debates in order to enact meaningful deficit reduction policies.

The stated goal of all participants in the budget debates has been deficit reduction. Reduced deficits are crucial to eventually reducing the debt burden to a sustainable level. The simplest deficit reductions can be attained by decreasing spending or increasing government revenues. But there are other policy options to alter regulatory and public goods policies in ways that promote economic growth without raising tax rates.

That is important because even increased tax rates, in and of themselves, do not guarantee increased tax revenues. One need only look at the famous Laffer curve hypothesis, combined with the type of economic theory and empirical tests carried out by Gary Becker (of the University of Chicago) and subsequent work to see the logic that taxpayers rationally choose to pay the lower of the costs of tax avoidance or tax liabilities. Indeed, the problems currently unwinding in Greece and other European countries are to a large extent caused by tax avoidance behavior in an environment of very high marginal income taxes. Hence, it should not be taken as a foregone conclusion that increased tax rates result in increased tax revenues. Moreover, when increased tax rates actually do increase tax revenues, they create a drag on economic growth. Hence, it is not clear that tax rate increases are sensible in the current economic situation.

Tax reform, while laudable, similarly need not necessarily result in deficit reduction. Tax reform is sometimes motivated by tax simplification, other times by interests in reducing inequities in the tax code, and yet other times by the desire to advance social agendas. Similar to tax rate increases, only to the extent to which tax reform could lead to greater tax revenues do the two concepts align to advance the overall goal of deficit reduction.

The present paper is meant to enlighten policymakers’ approach to some recent popular tax proposals using relationships between deficit reduction and tax policy described above. Throughout the recent budget debate, President Obama has consistently proposed increasing the effective tax rates paid by the oil and gas industry as a necessary condition for achieving a compromise. Part of President Obama’s proposal for increasing the oil and gas industry’s tax-burden is the elimination of the Section 199 tax deduction for oil and gas companies and adding substantial additional restrictions to the foreign tax credit rules by changing the so-called “Dual Capacity” taxpayer rules.

That policy has been motivated variously as a social agenda tax reform and as a deficit reduction measure. The important question to sort out, however, is whether it can be both. Putting aside for the moment whether greater restrictions on the U.S. oil and gas industry are desirable, the question becomes one of whether such policy can be expected to generate greater tax revenues that can contribute, even slightly, toward deficit reduction. If so, the policy could qualify as a deficit policy candidate. If not, however, the proposal should be dismissed.

The remainder of this report compares estimates of the changes in economic activity—including economic activity, jobs, wages, and tax revenues—that could reasonably be expected to result from repealing Section 199 and changing Dual Capacity to estimates of the revenue expected to be raised as a result of these tax rate increases. The proposed revisions to Section 199 and Dual Capacity for the oil and gas industry are expected by the Treasury to raise approximately $30 billion in Federal tax revenue over the next ten years. But this comes at the expense of industry cutbacks that can reasonably be expected to cost the economy some $341 billion in economic output, 155,000 jobs, $68 billion in wages, and $83.5 billion in reduced tax revenues. The net fiscal effect, a loss of $53.5 billion in tax revenues, suggests that the policy proposals exacerbate, rather than alleviate, the Federal deficit.

Deficit reduction policies, however, are not limited to changes in the tax code. Expansionary policies take all shapes and forms, including but not limited to sensible regulatory policies and expansionary public goods policies that can attract businesses and increase economic activity. Policies that promote economic growth without government expenditures are a “free lunch” as far as the budget debate is concerned. Indeed, it is well established that countries that use periods of fiscal pressure to reform the business environment experience faster economic recoveries than those that do not.

A simple example of the possibilities of such policies is the estimated economic benefits that would arise from the expansion of oil and gas exploration and production on the Outer Continental Shelf (“OCS”). I show that encouraging exploration and production in the OCS represents a highly effective means of increasing Federal tax revenues generated by the oil and gas industry while simultaneously stimulating the economy, potentially contributing $73 billion annually in economic activity, $16 billion annually in wages, $11 billion annually in Federal tax revenue, $5 billion annually in state and local tax revenue, and 250,000 jobs in the short run exploration phases of development. Those effects can be expected to be followed by another $275 billion annually in economic activity, $70 billion annually in wages, $55 billion annually in Federal tax revenue, another $14 billion annually in Federal royalty payments, $19 billion annually in state and local tax revenue, and 1.2 million jobs in the long-run production phases of development. Moreover, those effects are most likely conservative since they do not include Federal lease payments, which could reasonably be expected to be at an all-time high in the present environment of high crude oil prices.

Of course, tax reform could still be worthwhile. In fact, tax reform that alleviates the need for complex dual capacity adjustments could potentially be valuable for the industry while increasing tax revenues. For instance, recently proposed territorial tax schemes could have the potential to increase reported U.S. profits of U.S. oil and gas firms in a way that could contribute substantially to deficit reduction goals in Congress. But as long as policymakers in Washington continue to needlessly confuse social policy as deficit reduction, economically valuable reforms will most likely remain elusive.

I. Policy Assessment of the Proposal to Repeal Section 199 and the Dual Capacity Tax Credit

A. Summary of Section 199 and Dual Capacity Tax Provisions
A key part of the Obama administration’s 2011 budget proposal consists of increased taxes on the oil and gas sector. In particular, the measures do away with two key tax provisions. It is important to note, however, that those tax provisions are not subsidies specific to the oil and gas industry, but rather tax credits available to most every American company. I suggest below that the proposed changes, which would apply solely to oil and gas companies, have little to do with deficit reduction and more to do with dogmatic approaches to offshore drilling safety and energy policies. Hence, the changes appear to be merely punitive policies that are now finding a place in the sun in the post-Gulf drilling crisis political environment.

The administration wants to eliminate essential tax provisions that all taxpayers are entitled to under Section 199 of the American Jobs Creation Act (“Section 199”) and Section 901 of the Internal Revenue Code and Section 1.901-2 of the U.S. Treasury Regulations (regarding “Dual Capacity” taxpayers). In doing so, it would override rules “adopted in 1983 after almost a decade of legislative and administrative debate,” as well as legislation put in place by President Bush in 2004 that help U.S. industries engaged in producing and manufacturing within the United States.

Section 199 of the Internal Revenue Code was created under the American Jobs Creation Act to “provide a permanent benefit … to taxpayers in a wide variety of industries.” It allows taxpayers that produce or manufacture in the United States to deduct from their taxable income a certain percentage of such domestic production activity each year. In 2005, the Congressional Budget Office estimated that the provision “effectively reduced the United States’ highest federal statutory corporate tax rate for income from domestic production from 35 percent to 31.85 percent.” The adjusted rate for U.S. corporations brings the American rate closer to (though still not as low as) the average rate for nations of the Organization of Economic Cooperation and Development, helping U.S. corporations doing business domestically compete against lower-taxed foreign competitors.

Unlike Section 199, which effectively lowers the tax rate on domestic production activities in the U.S., the foreign tax credit rules, including the Treasury’s Dual Capacity provisions, are meant to avoid double-taxing U.S. firms’ income from abroad, encouraging tax fairness for U.S. multinational firms. All U.S. firms are entitled to a credit against their U.S. tax liability on foreign earned income for foreign income taxes already paid on that income. Specific, more restrictive rules apply to certain taxpayers, called Dual Capacity taxpayers, including oil and gas companies. Under Dual Capacity, a U.S. oil and gas company that does foreign business may only “credit the portion of [a foreign tax] levy in the amount of what the generally imposed [foreign] income tax would be”, unless it can show some higher amount is in fact an income tax, and no portion of that higher amount is a royalty or disguised royalty (or, in the words of the regulations, a payment for a “specific economic benefit”). If a taxpayer can meet this extraordinary burden of proof, then it is entitled to treat such additional amount paid as income taxes eligible as offsets against potential U.S. income tax on such foreign income. This provision is crucial for many U.S. energy firms competing with foreign state-run corporations from such countries as Russia, Venezuela, and China, or with companies based in countries outside the U.S., such as those headquartered in France, the U.K., the Netherlands, etc., which generally do not impose home country income tax on income earned outside of their borders (generally territorial taxation systems). Without the foreign tax credit, U.S. oil and gas firms would be double-taxed on revenues from their foreign operations in other countries.

1. Section 199 Tax Deduction

In 2004, under the American Jobs Creation Act, the Congress enacted a new tax deduction for U.S. businesses under Section 199 of the Tax Code. The legislation grants taxpayers the right “to receive a deduction based on qualified production activities income resulting from domestic production.” According to the stipulations of the law, qualified production activities include goods “manufactured, produced, grown, or extracted … in whole or in significant part within the United States.” The definition clearly covers oil and gas produced in the United States.

The deduction went into effect for taxable years beginning after December 31, 2004 and was phased in over several years. In 2005 taxpayers qualifying for the deduction received a three percent deduction. According to the U.S. Department of the Treasury, in 2005 the deduction would be applied as “three percent of the lesser of: (a) taxable income derived from a qualified production activity; or (b) taxable income, for the taxable year.” The calculation for a taxable year is capped at 50 percent a taxpayer’s W-2 wages over the calendar year. The total amount of the deduction is computed by subtracting the percentage of the taxpayer’s income that was earned as a result of qualified domestic activities from the total taxable income. The percentage of qualified income subject to the deduction has increased to six percent in 2007, and to nine percent of qualified income beginning in 2010.

In August of 2008, a group of ten senators, dubbed the “Gang of 10” proposed the exclusion of energy firms from Section 199 as part of the New Energy Reform Act of 2008 (“ERA”). By excluding energy firms from Section 199, the senators hoped to raise tax revenues that could be redistributed to favored projects. In the Emergency Economic Stabilization Act of 2008, the Section 199 deduction amount was frozen at six percent of qualified income for oil and gas companies. The Obama administration’s fiscal proposal would exclude oil and gas companies entirely from Section 199.

Critics of the exclusion demonstrated early on that the change to Section 199 would bring about harmful changes in employment, earnings and economic output throughout the U.S. economy. A 2008 report by the Congressional Research Service reached the same conclusion. While the CRS analysis suggested that there will be little effect in the short run, “all taxes distort resource allocation, and even a corporate profit tax … would reduce the rate of return and reduce the flow of capital into the industry,” in the long run. Rates of return to investment in oil and gas “would decline, causing a decline in capital flows to this industry, and an increase in capital flowing to other industries, including foreign industries.” Recent Office of Management and Budget estimates show that excluding the oil and gas industry from Section 199 would increase the Federal government’s revenues by $18.3 billion over the next ten years while most likely having an adverse effect on the U.S. energy sector, including industries that support the production and transportation of oil and gas.

Such deleterious effects can reasonably be expected because although the administration claims that “the [previously] lower rate of tax … distorts markets by encouraging more investment in the oil and gas industry than would occur under a neutral system,” the move disadvantages oil and gas firms relative to other firms—meaning all of U.S. manufacturing outside of oil and gas—that remain taxed at the lower rate. Thus, the current proposed budget could be expected to place U.S. oil and gas firms at a disadvantage when competing for capital with other U.S. firms. The current proposal will therefore likely discourage investment in “energy infrastructure and would threaten the production rates of energy companies themselves.”

2. Dual Capacity Taxpayer Rules

The Dual Capacity taxpayer rules were finalized 25 years ago, with the express intent of helping U.S. firms compete with foreign companies on a level playing field by avoiding double income taxation. Any company dealing with “a foreign country as both the sovereign and as the grantor of an economic benefit, such as a concession for developing the country’s natural resources” is classified under the regulations as a Dual Capacity taxpayer. Similar to Section 199, Dual Capacity is particularly important for oil and gas companies, even though they are technically applicable to all firms.

The regulations were finalized in 1983 after significant debates during both the Carter and Reagan administrations. The rules impose stringent burdens of proof on Dual Capacity taxpayers, more stringent than on non-Dual Capacity taxpayers. Dual Capacity taxpayers must prove that no portion of the amounts claimed as income taxes is in fact a payment for the other governmental benefit. It can do this under a “facts and circumstances” test or under a “safe harbor” test. Under the safe harbor test, where there is a generally applicable tax in the country that applies to non-Dual Capacity taxpayers, the taxpayer can utilize a specific formula to “credit the amount that would be produced … by the application of the income tax generally imposed by the foreign sovereign on all taxpayers.”

The regulation also includes “a safe harbor [provision] if the foreign country does not generally impose an income tax.” In such a case, the safe harbor was set “to limit the credit to the amount of all [payments to foreign sovereigns] attributable to foreign oil and gas income, multiplied by the U.S. tax rate.”

In addition to eliminating oil and gas companies from Section 199, the current administration’s 2011 fiscal budget also recommends significantly adjusting the Dual Capacity rules. The change would eliminate the “facts and circumstances test” and the safe harbor applicable where there is no generally applicable tax, and in all other cases limit the creditable tax to the amount that non-Dual Capacity taxpayers would pay. The effect would levy a double-tax on U.S.-based oil and gas producers, while effectively completely exempting companies headquartered in other countries. Unlike Section 199, the current administration intends to make the changes to Dual Capacity applicable to all taxpayers. Nevertheless, the energy sector will be severely affected since U.S. oil and gas companies often compete with foreign state-owned corporations. U.S. oil and gas firms are among the largest U.S. firms in terms of multinational revenues and can therefore be expected to be the most dramatically affected by the policy shift. The effects measured here are limited to that industry and do not estimate the broader impact of the repeal.

The adjustment to Treasury’s Dual Capacity regulation would put U.S. firms at a significant competitive disadvantage against both foreign oil and gas firms as well as other U.S. firms competing for limited investment capital. The proposed modifications for Dual Capacity companies would change how foreign levies would qualify under the provision. The proposed change would “allow the taxpayer to treat as a creditable tax the portion of a foreign levy that does not exceed the foreign levy that the taxpayer would pay if it were not Dual Capacity taxpayer.” As noted, this would completely eliminate the facts and circumstances test and one of the safe-harbor provisions put in place to keep U.S. firms from being disadvantaged versus their foreign counterparts. Thus, “if a foreign country imposes no other tax to which a Dual Capacity taxpayer would be subject, it appears that the taxpayer would not be permitted to claim any foreign tax credits for payments to that country,” [emphasis added] even if the country still charged a tax to the firm.

The administration estimates that the total tax revenues from revising Dual Capacity in this fashion amount to $11 billion over ten years, and Americans for Tax Reform confirms that oil and gas firms will bear the lion’s share of the burden.

B. The Economic Effects of Removing Section 199 and Changing Dual Capacity Rules

Section 199 and Dual Capacity rules maintain a level domestic and international playing field for U.S. oil and gas firms and, in turn, benefit the U.S. economy, as a whole.

The U.S. oil and gas sector is a significant part of the overall economy. Hundreds of both large and small companies in the U.S. oil and gas industry create close to 10 million jobs “not just in exploring, producing, refining, transporting, and marketing oil and natural gas, but also through the purchases [they make] of other goods and services that support the industry’s operations.” In 2008 alone, the U.S. oil and natural gas industry paid approximately $95.6 billion in U.S. income taxes and contributed about $1 trillion to the U.S. economy.

In order to measure how the proposed tax policies affect this sector, it is helpful to break the sector down into its economic subparts. U.S. oil and gas projects have three distinct phases: (1) the initial exploration and development of offshore facilities; (2) the extraction of reserves; and (3) the refining of raw product. All three phases support numerous local and national industries, such as shipbuilding, food services, and other necessary services. The refining phase, especially, contributes large “spill-over” effects around the country even though capacity is largely concentrated in California, Illinois, New Jersey, Louisiana, Pennsylvania, Texas, and Washington.

In a September 2010 report entitled “The Regional and National Impact of Repealing Section 199 and Dual Capacity Tax Credit for Oil and Gas Producers,” I estimated the probable economic consequences of abolishing Section 199 and modifying Dual Capacity in terms of output, employment, wages, and state and local and Federal tax revenues generated by the oil and gas industry. In this report, I use those estimates as a basis for comparing the economic value of repealing these tax provisions as a means to reduce the budget deficit. In short, the expected contraction in tax revenues arising from decreased business activity is far larger than the expected revenue increases anticipated by the Treasury. As a result, there is no basis for classifying changes to Section 199 and Dual Capacity as deficit reduction measures. Rather, those changes remain squarely within the confines of the Obama administration energy policy, creating a tax drag on economic growth in an attempt to engineer a social shift away from fossil fuels.

The September 2010 report used “input-output” analysis to estimate the economic effects of abolishing Section 199 and significantly changing Dual Capacity for oil and gas companies. That methodology, originally developed by Nobel Economic Laureate Wassily Leontief, has been refined by the U.S. Department of Commerce and is known as the Modern Regional Input-Output Modeling System II or “RIMS II.” The model is premised on the idea that when a company has to pay $1 more in taxes, it must take that amount from other sources: reducing workers’ pay (either through wage cuts or layoffs); reducing the returns on shareholders’ investments (through lower share price or dividends); and/or reducing its purchases of inputs. In turn, the amount is subtracted directly from funds used to pay the company’s suppliers, the suppliers’ workers, suppliers’ capital owners, etc., and impacts every member of a company’s production chain. In this way, a tax on even just a small number of firms can be felt throughout the economy. The Department of Commerce publishes tables of RIMS II multipliers that indicate how a change in one industry or state can affect the rest of the economy. A detailed description of how I applied this model can be found in the report.

I estimated that if Section 199 was repealed and Dual Capacity was changed as proposed in 2011, the U.S. could suffer approximately $341 million in lost output over the 2011-2020 period. I also estimated that President Obama’s proposals could cost approximately 155,000 jobs in 2011 and 115,000 for each year thereafter until 2020 and that workers could suffer approximately $68 billion in lost wages from 2011 to 2020. Finally, I estimated that as a consequence of the decrease in economic activity state and local governments could lose $18 billion in tax revenue while the Federal government could lose $65 billion in tax revenue over the relevant time period. The following table summarizes my estimation of the losses that would result over the 2011-2020 period as a consequence of repealing those tax provisions:

Table 1: Summary of the Estimated Decrease in U.S. Economic Activity from Repeal of Section 199 Deduction and Change to Dual Capacity Taxpayer Rules, 2011-2020
Output ($ Mil)	$341,314
Employment (Jobs*)	154,901
Wages ($ Mil)	$67,800
Tax Revenues ($ Mil)	$83,500

* A job is defined by the BEA in terms of “full time person years of employment.” Total full-time person-years are divided by ten to measure jobs lost for the entire decade.

One region of the country that stands to be hit the hardest is the Gulf of Mexico. That region, already recovering from numerous recent disasters, could lose another $126 billion in economic output, more than $24 billion in wages, 56,709 jobs, and about $600 million in state and local tax revenues over the ten year period analyzed.

Updating the numbers in Table 1 for the present 2012-2021 budget cycle increases the estimated effects because of the combined influences of general and energy price inflation. Since such inflationary influences may be transitory, however, I advance my earlier estimates as more conservative and representative of the probable policy effects than those updated to the current economic environment.

As is to be expected in an integrated economy, the effects of repealing Section 199 and modifying Dual Capacity are not concentrated in the oil and gas sector. I showed in my September 2010 study that job losses are not only in the energy sector, but also across the entire economy. Table 2 summarizes the effects for representative sectors of the job market.

Table 2: U.S. Jobs Lost from Repeal of Section 199 Deduction and Changes to Dual Capacity Taxpayer Rules, 2011-2020
Industry	Number of Jobs
Agriculture, forestry, fishing, and hunting	516
Mining	3,690
Utilities	1,221
Construction	2,822
Manufacturing	20,490
Wholesale trade	4,265
Retail trade	9,537
Transportation and warehousing	4,197
Information	1,572
Finance and insurance	3,856
Real estate and rental and leasing	5,239
Professional, scientific, and technical services	5,079
Management of companies and enterprises	2,905
Administrative and waste management services	6,790
Educational services	1,421
Health care and social assistance	7,808
Arts, entertainment, and recreation	1,371
Accommodation	890
Food services and drinking places	5,842
Other services	4,711
Source: Treasury Department; Bureau of Economic Analysis; U.S. Department Commerce

Table 2 shows that a large proportion of job losses (38 percent) occur in professional fields such as health care; real estate; professional, scientific, and technical services; administration; finance; education; the arts; information; and management. Manufacturing, which includes food and textile manufacturing, is also hard hit, with 21% of the total employment losses. Only about one fourth of the losses are in mining manufacturing, which includes oil and gas production and refining.

Recent estimates suggest that the repeal of Section 199 and modification of Dual Capacity will raise $18.3 billion and $10.8 billion in revenue from the oil and gas industry respectively for the Federal government between 2012 and 2021. Thus, even my conservative September 2010 estimates suggest that the predicted increase in Federal tax revenue of approximately $30 billion would induce a $53.5 billion net loss in tax revenue due to reduced economic activity in the oil and gas sector. Of course, that should not come as a surprise since the Obama administration is not promoting the repeal of Section 199 and modification of Dual Capacity as deficit reduction measures. The analysis is clear: the proposal is for punitive taxes meant to consciously kill jobs and economic activity in the oil and gas sectors in a conscious shift away from oil and gas pursuant to President Obama’s promise to the G-20.

Of course, there is some degree of error around all of the estimated tax revenue and economic effects. However, even if the error around both estimates is large, these figures suggest that it is highly unlikely that the repeal of Section 199 and the modification of Dual Capacity will result in substantially increased revenue for the Federal government. Furthermore, when one also considers the losses in output, jobs, and wages, it becomes apparent that changes to Section 199 and Dual Capacity are simply social policies with “contractionary” economic effects.

II. As Far as the Oil and Gas Industry is Concerned, A More Effective Deficit Reduction Strategy Would Be to Stimulate Production.

The sections above demonstrated that the proposed changes to Section 199 and Dual Capacity are motivated by social goals rather than deficit reduction goals. The present section shows that there are energy policy options that can contribute substantially to deficit reduction. If the administration truly prioritizes deficit reduction over other policy imperatives it is not inconceivable that dogmatic adhesions to social goals and economic engineering could take a back seat to strict fiscal imperatives. If the financial condition of the nation is as dire as it appears, such a policy shift will have to happen sooner or later. Better to undertake that shift consciously and manage the transition rather than face Greek-style popular uprisings in the face of sudden large-scale changes.

From an economic perspective, policies that encourage economic growth are effectively a “free lunch” in terms of deficit reduction, because such policies simultaneously increase the economic benefits enjoyed by the public and increase Federal tax revenue: in other words, they expand the economic pie.

Significant oil and gas reserves lie under the U.S. Outer Continental Shelf (OCS). According to the EIA, the OCS (including Alaska OCS Planning Areas) contains approximately 86 billion barrels of recoverable oil and approximately 420 trillion cubic feet of recoverable natural gas. Even the White House notes that the OCS estimates are woefully conservative.

Of the total OCS reserves, a significant portion remains unavailable to exploration. Specifically, Presidential and Congressional mandates ban production from OCS Planning Areas covering approximately 18 billion barrels of recoverable oil and 77.61 trillion cubic feet of recoverable natural gas. These bans cover approximately 31 percent of the total recoverable OCS oil reserves and 25 percent of the total recoverable OCS natural gas reserves.

Figure 1, which was originally produced by the EIA, visually demonstrates the areas (in blue) that were previously unavailable. As noted previously, the estimated reserves illustrated in Figure 1 should be considered very conservative lower bounds of recoverable energy resources.

Figure 1: OCS Planning Areas and Estimated Reserves

Source: Phyllis Martin, Unpublished U.S. Energy Information Administration memorandum (based on MMS Assessment of Undiscovered Technically Recoverable Oil and Gas Resources Of the Nation’s Outer Continental Shelf, 2006), on file with the author.

Note: Alaska OCS Planning Areas not shown here. Only one Alaska OCS Planning Area (Northern Aleutians) was subject to an exploration and production moratorium.

In contrast to other industries, the high fixed investment costs associated with offshore oil and gas production produce large initial investments that reverberate throughout the economy. Once oil or gas reserves are located, billions of dollars must be spent before the well produces even $1 of revenue. For example, oil exploration costs can amount to between $200,000 and $759,000 per day per site. The fixed expenditures that precede actual offshore oil and gas production can amount to billions of dollars.

For example, Chevron’s “Tahiti” project in the Gulf of Mexico is representative of the large investments that firms must make before production is achieved. In 2002, Chevron explored the Tahiti lease—which lies 100 miles off the U.S. coast at a depth of 4,000 feet—and found “an estimated 400 million to 500 million barrels of recoverable resources.” Chevron estimated that it would take seven years to build the necessary infrastructure required to begin production at Tahiti. The firm estimated that its total development costs will amount to “$4.7 billion—before realizing $1 of return on our investment.”

As a typical U.S. offshore project, the Tahiti project provides a wealth of information regarding the up-front investment costs, length of investment, and lifespan of future OCS fields. As noted above, the Tahiti field is estimated to hold between 400 million and 500 million barrels of oil and oil equivalents (primarily natural gas) and is expected to require an initial fixed investment of $4.7 billion. Using the mid-point reserve estimate of 450 million barrels of oil equivalent, up-front development costs amount to approximately $10.44 per barrel of oil reserves or $1.86 per 1,000 cubic feet of natural gas reserves. These costs will be spread over an average of 7 years, resulting in average up-front development expenditures equal to $1.49 per barrel of oil and $0.27 per 1,000 cubic feet of natural gas. Chevron also estimates that the Tahiti project will produce for “up to 30 years”. Although investment and production times vary widely, the analysis uses the Tahiti project numbers—an average initial investment period of seven years followed by an average production period of 30 years—as indicative of the “typical” offshore project.

The speed of OCS development also factors into the analysis. Because most areas of the U.S. OCS have been closed to new exploration and production for almost forty years, it is unclear how quickly firms would move to develop new offshore fields. Given its large potential reserves, however, the OCS is sure to attract significant investment. Without the benefit of government data, a rough estimate suggests that annual total investment in OCS fields would be $9.09 billion per year.

My February 2009 report entitled “The Economic Contribution of Increased Offshore Oil Exploration and Production to Regional and National Economies,” applied the RIMS II model to assess the economic consequences of allowing oil and gas exploration and production in the designated OCS Planning Areas located between 3 and 200 miles off the coast of 20 U.S. States. The economic analysis was based on assessing the economic activity generated during the three phases of development in the oil and gas industry and breaking those economic effects into short- and long-term dynamics.

The following table summarizes my findings of the economic benefits that would accrue from exploration and production in the OCS on an annual basis in the short-term pre-production stage and long-term production stage and in terms of output, employment, wages, tax revenue, and royalties:

Table 3: Summary of the Estimated Economic Effects of
Opening the OCS to Development

	Short-Run	Long-Run
Annual Output	$73.0 billion	$273.0 billion
Employment	0.27 million	1.20 million
Annual Wages	$15.7 billion	$70.0 billion
Annual Federal Tax and Royalty Revenue	$11.1 billion	$69.0 billion
Annual State and Local Tax Revenue	$4.8 billion	$18.7 billion

Note: Short-run effects are those provided annually during the first seven years of the investment (pre-production) phase; Long-run effects are those provided annually during the thirty-year production phase.

Updating the numbers in Table 3 for the present economic environment increases the estimated effects because of the combined influences of general and energy price inflation. Since such inflationary influences could be transitory, however, I advance my earlier estimates as more conservative and representative of the probable policy effects than those updated to the current economic environment.

Additionally, the estimates in Table 3 do not include lease revenues that would accrue to the Treasury in the near term. Such revenues would be expected to amount to a sizeable fiscal fillip for the Treasury, albeit one that has waned significantly in the past several years. In 2008, the Treasury collected “more than $10 billion in bonus bids paid by companies to lease tracts for offshore energy exploration on the Outer Continental Shelf in the Gulf of Mexico and Alaska, as well as from onshore lease sales.” In 2009 bonus bid revenues fell to just under $2 billion and in 2010 they fell further to $1.3 billion. Hence, there is reason to believe that bonus bids would result in a substantial cash inflow for the Treasury, one that could potentially—given the massive size of the OCS—make a significant dent in near-term budget deficits.

As before, the BEA data also allow an analysis of the types of employment that would be supported by increased offshore oil and gas extraction. Increased investment and production in previously unavailable OCS oil and gas extraction and the ancillary industries that support the offshore industry would produce thousands of new jobs in stable and valuable industries. Again, the immediate and the long-run benefits are considered separately. The benefits are broken down using specific BEA multipliers for each industry, which can be used to determine which industries will benefit the most from increased offshore oil and gas production.

Table 4, Column A, reports the expected total increase in annual employment over the first years of the investment phase. Table 4, Column A, gives a sense of the distribution of the 271,572 jobs created in the investment phase and sustained during the first seven years of the investment cycle. The majority of new positions (162,541 jobs, or 60 percent) would be created in high-skills fields, such as health care, real estate, professional services, manufacturing, administration, finance, education, the arts, information, and management. Only about eight percent of the jobs, 21,550, are directly in the oil and gas sector (mining).

Table 4, Column B reports the estimated total increase in employment over the life of the production phase. Although the largest total increase in employment would occur (quite naturally) in the mining industry, that still only accounts for about a quarter of jobs created. Significant numbers of jobs would be created in other industries, many of those in high-skills fields. These high-skills sectors represent approximately 49 percent of all new jobs and approximately 61 percent of all new non-mining jobs.

Table 4: Changes in Employment from Production in
Previously Unavailable OCS Planning Areas and Ongoing Refining

Industry	(A) Short-term Employment Increase	(B) Long-term Employment Increase
Mining	21,550	236,075
Health care and social assistance	20,760	125,430
Retail trade	10,343	117,946
Accommodation and food services	7,741	81,487
Real estate and rental and leasing	39,537	80,882
Professional, scientific, and technical services	15,290	74,952
Manufacturing	22,920	69,890
Administrative and waste management services	12,806	69,742
Finance and insurance	8,007	63,081
Other services	14,077	60,236
Transportation and warehousing	11,918	42,206
Wholesale trade	14,238	34,859
Educational services	5,149	31,683
Arts, entertainment, and recreation	12,045	24,005
Information	6,341	20,532
Management of companies and enterprises	19,685	19,184
Agriculture, forestry, fishing, and hunting	5,046	18,269
Construction	12,885	7,609
Households	9,823	7,050
Utilities	1,409	4,867

Total	271,572	1,189,983

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Analysis shows that it is clear that allowing exploration and production in the OCS raises Federal tax revenues and increases economic growth prospects by reforming the business environment favorably in a time of budgetary crisis. In fact, none of those developments needs to be antithetical to improving prospects for green energy, increasing energy efficiency, and even achieving greater energy independence if the focus is on creating a systematically sensible business environment rather than just giving away natural resources and allowing firms to pollute, as such policy is often characterized in the West. Of course, opponents of the oil and gas companies may have other motivations for their desire to stifle the industry, be they genuinely green interests or short investment positions (or both).

At the end of the day, however, it becomes clear that a careful economic analysis reveals that repealing Section 199 and adversely modifying Dual Capacity are straw man issues as far as the budget debate is concerned and that maintaining these tax provisions along with expanding exploration and production in the OCS can provide a healthy economic stimulus over the next decade and beyond.

III. There are Creative Options that can Potentially Achieve Tax Reform, Deficit Reduction, and Economic Stimulus

Some may be tempted to argue that while the economic and fiscal effects of opening up the OCS are large, they are not – by themselves – a solution to the deficit crisis. In my opinion, the difference comes about in future years’ tax revenues and additional avenues for growth in the U.S. economy, beyond mere oil and gas. Finding ourselves in a stressed fiscal environment, we can turn to lessons from other countries that have successfully managed their way to higher growth and lower deficits.

The World Bank’s Doing Business Report is spawning thousands of studies on the effects of business reforms, which are regularly featured in popular press such as the Economist. Developing countries find it necessary to reform to alleviate bureaucracy and corruption so that business can flourish. The Economist reports, “One study shows that, in poor countries, a ten-day reduction in the time it takes to start a business can lead to an increase of 0.4 percentage points in GDP growth. Another shows that people who have a formal title to their property invest as much as 47% more in their businesses.”

Of course, conditions in the U.S. are not as dire. Reform, nonetheless, supports business development in both high-flying developing and developed countries, alike. The best reformers have several things in common. First, their reforms are part of a broad agenda of boosting competitiveness. Over the past five years, even countries like Rwanda, Egypt, Colombia and Malaysia have each implemented at least 19 reforms.

Second, countries that successfully harness reform as a source of economic growth never stop. Asian tigers like Hong Kong and Singapore introduce substantial reforms each year. Even “Germany introduced laws to make it easier to establish joint-stock companies, scrapping ancient regulations, because so many German companies were taking advantage of the single European market and incorporating in Britain.”

It is clear that the “… willingness of governments to keep reforming in tough economic times strengthens the prospects for recovery. Sensible regulations not only make it easier for new firms to get started, but also help established firms change direction and clapped-out firms declare bankruptcy.” The question is whether the U.S. is up to the test. “It often takes a shock to set the reform machine in motion. Several countries that have been racked by civil wars, including Rwanda, Afghanistan and Sierra Leone, have brought in new company laws.” I can only hope that we choose to emulate countries whose growth and business policies we admire and do not wait for similar pressure.

Such a view is not out of place in the U.S. The National Commission on Fiscal Responsibility and Reform’s December 2010 “Moment of Truth” report explains “[t]he tax code is rife with inefficiencies, loopholes, incentives, tax earmarks, and baffling complexity. We need to lower tax rates, broaden the base, simplify the tax code, and bring down the deficit. We need to reform the corporate tax system to make America the best place to start and grow a business and create jobs.” Thus the key principles of tax reform as explained by the White House’s own commission are (1) simplicity, (2) reduction in overall tax rates to stimulate the economy and (3) expansion of the tax base.

However, the President’s proposal to abolish Section 199 and change Dual Capacity is not accompanied by any major simplification in corporate taxation. Rather, it raises tax rates on the oil and gas industry while leaving overall tax rates unchanged, and it will make U.S. companies less competitive internationally and impose restrictions for U.S. multinational oil and gas companies repatriating foreign profits to the United States. It will take concerted long-term efforts toward tax reform, and more, to increase U.S. competitiveness, restore growth, and curb the deficit.

IV. Conclusions

The present budget debate continues to confuse the three concepts of deficit reduction, tax reform, and tax increases. The comparison in this paper illustrates that the effect of energy-related tax policies in the Obama administration budget proposal is antithetical to the stated goal of deficit reduction. Moreover, such policies are restrictive to both business activity and economic growth. They therefore achieve the worst of both worlds: they hurt the economy while exacerbating the federal budget deficit.

The sad part of the continuing saga is that things don’t have to be this way. At the very least, the administration can try to clarify its policy goals and debate the merits of energy policies rather than trying to shoehorn them into the budget negotiations through confusion and obfuscation. At most, the administration might step down from their dogmatic approach to energy policy and show some flexibility with respect to OCS development, spurring jobs that can provide economic growth that feeds investment in new energy technologies.

With a little bit of creative thinking, the administration might even be able to squeeze increased tax revenues out of multinational firms by entertaining ideas about alternative tax policies. That, too, will require a departure from the same dogmatic energy policy and a firm focus on deficit reduction separate from pet energy issues.

Now is the time to decide what our fiscal priorities really are. In that respect, the budget debate has been right to hold up debt ceiling approval and other items in order to sort out priorities from pork barrel and logrolling politics. As the months have passed, enough time has passed to separate the approaches of all of the parties involved based upon their actions, rather than their rhetoric. On that basis, it is clear that the Section 199 and Dual Capacity tax proposals are related to energy policy, not deficit policy, and should be excluded from the budget debate outside of proposals for things like overall tax reform.

The implications of such findings go far beyond energy polices to business growth policies, generally. Most developing countries and many developed countries step up to the challenge of growing their economies through institutional reform in the style popularized by the Nobel Prize-winning work of Douglass C. North. The U.S. can, too. But identifying and addressing such reforms requires staunch long-term commitment and courage. Even developing countries previously stung by fiscal imbalances and committed to business reform rarely retreat to increased taxes as a way to raise revenues. The U.S. should also step up to the challenge of reform, rather than taxation. To the extent that opponents will argue that such an approach will only yield long-term benefits, I argue that the long-term begins now.

Filed Under: Studies

In The Pipeline 7/11/11

July 11, 2011 by AEA Leave a Comment

Arnold isn’t the only who said “I’ll be back” — oil is up above the pre Sagging Poll Reserve release Wall Street Journal (7/11/11) reports: Oil is back on the upswing, flying in the face of international efforts to keep prices low…After an initial drop, crude-oil futures are back above the levels seen before the International Energy Agency in late June announced a plan to release 60 million barrels of oil from emergency stockpiles, ending Friday at $96.20 a barrel on the New York Mercantile Exchange. The U.S. will release 30.6 million barrels toward that total…That futures contract is up more than 6% from the lows hit after the announcement. U.S. gasoline futures prices are up 11%, suggesting more pain at the pump in the weeks ahead…The rebound in Brent crude, a European benchmark, has been even steeper. Brent futures are up 13% from the lows. Last week alone, they surged almost 6%… Investors have overlooked the added oil and focused instead on expectations that relentless demand for oil, especially from consumers such as China, will continue to drive prices higher as the global economy recovers. Several Wall Street banks have raised their price targets for oil, arguing the IEA move won’t alleviate long-term supply worries. The gains underscore how little control governments have over oil prices, and financial markets in general…This is the third time the IEA has coordinated the release of strategic reserves among its member nations. The move was widely viewed by analysts as an alternative form of “quantitative easing,” aiming to drive down oil prices and prop up the economy, although the Paris-based energy watchdog for industrialized nations said the decision was mainly driven by the loss of Libyan production and an anticipated uptick in seasonal demand from refiners.

There are two things America got right: freedom and cars. Now, Obama is destroying both in record time The American Spectator (7/7/11) reports: Now Obama’s decided to ban cars outright…Not in so many words, perhaps, but his just-announced proposal that new cars be required by law to average 56.2 miles per gallon by 2025 will effectively do just that…Not one car sold in the United States currently averages 56 MPG — not even on the highway. Not even hybrids like the Toyota Prius, the best of the lot — which maxes out at 51 on the highway and 48 in city driving. The maximum highway mileage achieved by a current non-hybrid car (the 2012 Honda Civic HF) is 41 MPG. Its average mileage is 33 MPG…To achieve an average of 56 MPG, one or more of the following would be necessary:* Massive reduction in vehicle weight…It is easier – more efficient – to move a lighter car than a heavier car. A 2,000 lb. car will use less gas, all else being equal, than a 2,800 lb. car because a smaller, more fuel-efficient engine can do equivalent work in terms of accelerating the vehicle and maintaining speed…The problem is the engineering/economic conflict between weight and safety…For decades, the federal government has been passing one safety-minded mandate after another, each of which has had the effect of making newer cars heavier than their equivalents of the past. A current-year subcompact like the 2012 Fiat 500 weighs 2,363 lbs. — a porker in comparison to an equivalent subcompact from the ’70s such as an original model VW Super Beetle, which weighed about 1,900 lbs. That 400-plus pound weight difference is the main reason why, despite the Fiat’s 40-year advantage in technology — including computer-controlled fuel injection and overdrive transmissions — its gas mileage (30 city, 38 highway , 33 average) is only slightly better than the Beetle’s high 20s, low 30s.

The green movement is about money, population control and political power — don’t let anyone tell you different Daily Mail (7/11/11) reports: Energy bills are likely to double within five years as the Government drives a move to green power and building nuclear power stations, it is claimed…Energy Secretary Chris Huhne will outline plans this week for a major shift in power generation away from fossil fuels such as gas, coal and oil…The transformation is predicted to cost the nation £200billion, which will be passed on to consumers in the form of higher bills…The Government will put in place minimum price guarantees, higher than the normal market price, for the electricity generated by new wind farms and nuclear power stations…This will guarantee it is profitable to build and operate the expensive and controversial facilities. However, it will also mean the price paid by families for their electricity will also have to rise…Conservative estimates suggest energy bills will soar by 50 per cent over the next 20 years to fund the proposals – taking the annual average bill up by £500, to £1,500 a year. But City experts believe the real figure will be considerably higher.

Listen, do you want to know a secret? Do you promise not to tell, whoa, oh…Closer, let me whisper in your ear…wind energy is horrible for the environment Forbes (7/6/11) reports: The amount of energy available in the Earth system to be extracted by wind turbines is limited, and if sufficient energy is removed the world climate will be affected. These striking conclusions follow from a recent analysis by researchers at Germany’s Max Planck Institute for Biogeochemistry. Humans use energy in total at a rate of 17 TW (terawatts), 87% of which is provided by fossil fuels. In the effort to mitigate carbon emissions and climate change, sources of carbon-free renewable energy are sought, particularly wind power. From a simple engineering perspective, the more wind turbines are placed around the globe, the more energy can be extracted, with no particular effect on the overall energy of the atmospheric flow…From the various simulations used it was inferred that between 18 – 68 TW of mechanical wind power can be extracted from the atmospheric boundary layer, taken over all non-glaciated land surfaces. While a single wind-turbine does not affect the global atmosphere, the installation of a large number of such devices will interfere with the atmospheric circulation and diminish the extraction efficiency on the large scale, since any extraction of momentum will act in competition with natural wind-power energy dissipation by turbulence in the boundary layer.

Filed Under: Blog

In The Pipeline 7/8/11

July 8, 2011 by AEA Leave a Comment

America’s largest trading partner and ally has an energy “Picasso in the attic” called oil sands, but the usual anti-energy suspects prefer we use Venezuelan, Middle Eastern or Brazilian oil. Why? Do you remember the Buddhas of Bamiyan? Wall Street Journal (7/8/11) reports: In a 21st-century oil boom, this sparsely populated Canadian province has become one of the world’s newest petroleum powerhouses. Foreign investors are piling in, and Alberta plans to double production over the next decade…The problem is that the U.S.—the biggest consumer of Alberta petroleum—may not want the additional oil…Most of Alberta’s 1.5 million barrels of daily exports are extracted from oil sands, or bitumen. Turning this tar-like substance into oil is an energy-intensive process that generates lots of carbon dioxide, a gas suspected to contribute to global warming. Almost all the oil produced ends up in the U.S., where environmentalists and some powerful Democrats have lined up against importing any more of the stuff… Washington remains ambivalent about a proposed expansion of a pipeline that could nearly double exports from Alberta to the U.S. Another line—proposed to pipe Alberta oil to the Pacific, where it could be shipped to Asian markets—is opposed by native Canadian groups…”Alberta will be in a very difficult position” if either one of the two pipelines don’t go forward, Alberta’s Energy Minister Ron Liepert said. “By 2020, we’ll be landlocked in bitumen. We have to get it to market, and right now we don’t have the infrastructure in place.”..Canada’s constitution cedes ownership of its energy reserves to its provinces. That essentially makes Alberta its own petrostate. And Edmonton is mounting a public-relations war to find new markets for its oil.

Meanwhile, it looks like China could use the Picasso in the attic

China is Winning the Future

True courage — politicians are beating their chest for slimming down big corn, but no one likes ethanol except for corporate farmers and elitists who hate poor people New York Times (7/8/11) reports: Federal subsidies for corn ethanol have long been considered untouchable in Washington — not least because politicians want the votes of Iowans, who have traditionally held the first nominating caucuses in the contest for the presidency…But this year, cutting the budget deficit holds more allure than courting corn farmers, making a turning point in ethanol politics…In Washington, there is growing consensus that the ethanol industry has reached financial stability, making much government assistance unnecessary. A strong majority of the Senate recently voted to end most of the subsidies…The pressure prompted three influential senators to announce a compromise on Thursday that would drastically cut the financial support and end a tariff on foreign ethanol entirely by the end of July. The White House, which has supported a reduction of the subsidies, said it was encouraged by the latest proposal…Three Republican presidential candidates — Tim Pawlenty, Ron Paul and Rick Santorum — are also seeking to eliminate or phase out subsidies for the industry even if that hurts them in Iowa. Jon Huntsman has decided he will not even participate in the caucuses, in large part because of his antisubsidy record…No one is seeking to end the most important government support for ethanol — a federal mandate that gasoline blenders mix increasing amounts of ethanol into gasoline. But at a time when many tax breaks are under scrutiny, there seems to be little political will to continue giving $6 billion a year in federal tax credits to fuel blenders that must buy the ethanol anyway.

Just how China was smart enough to sell opium to the world, they are smart enough to sell renewable energy….and it looks like we’re chasing the dragon USA Today (7/8/11) reports: Overall, the $211 billion in 2010 investments in renewable energy — wind, solar, geothermal and related technologies — was driven by policies in nations that increasingly require such power worldwide. The United Nations Environment Programme report finds that Chinese wind farms and German solar rooftops led investments but, surprisingly, developing nations spent more on renewable energy utility projects, $72 billion, than developed ones, at $70 billion…”Quite a jump, considering the economic headwinds, a surprisingly positive result,” says UNEP’s Virginia Sonntag-O’Brien. The “Global Trends in Renewable Energy Investment 2011” report, the fifth in an annual series, analyzed 26,300 renewable power projects recorded for the year by the London-based Bloomberg New Energy Finance firm…Among the findings: •China led all nations with about $49.8 billion in investments, ahead of German spending of $41 billion and U.S. spending of $29.6 billion…•Big gains came in small-scale projects such as rooftop solar panels, up 91% to $60 billion, tied to stimulus spending by nations in 2010, and government research, up 121% to $5.3 billion.

I’d hate to be a Quebecer in the winter — the government is making people decide between bacon or heat as their cap and tax scheme is bound to make energy prices skyrocket CBC News (7/8/11) reports: Quebecers face higher fuel costs as the province prepares to launch a cap-and-trade system to regulate greenhouse gas emissions beginning in 2013, Environment Minister Pierre Arcand acknowledged Wednesday…While the size of the increases remain unclear, he said the new system will prevent wild tax increases by encouraging businesses to innovate to reduce their emissions…”It’s clear that over the coming years there will certainly be increases and consumers need to be ready,” Arcand said at a news conference after unveiling a 60-day consultation period…The program is designed to reduce Quebec’s emissions by 20 per cent from 1990 levels by 2020. It will primarily affect about 100 Quebec companies that are responsible for 85 per cent of the province’s emissions…The transportation sector will be added to the system in 2015, but agriculture, forestry and garbage won’t be affected…Quebec is part of a co-ordinated regional effort of the Western Climate Initiative, which also includes Ontario, British Columbia and Manitoba representing three-quarters of the Canadian population and economic activity.

Filed Under: Blog

In The Pipeline 7/7/11

July 7, 2011 by AEA Leave a Comment

As the Beatles said, we get by with a little help from our friends — Senators Jim Webb and Mark Warner realize oil and gas is mother nature’s cash crop and urge Obama to lift moratorium Washington Times (7/6/11) reports: Sens. Jim Webb and Mark Warner have introduced legislation to lift a moratorium on drilling off the Virginia coast enacted by President Obama after last year’s oil rig explosion in the Gulf of Mexico…The bill from the Virginia Democrats would allow oil and natural gas exploration and production and direct half of any leasing revenues to be paid to Virginia to support a range of projects including land and water conservation, clean energy development, transportation and other infrastructure improvements in the state…Virginia was set to become one of the first East coast states to drill offshore for oil and natural gas. But after the Deepwater Horizon oil rig exploded in April 2010, spewing millions of gallons of oil into the gulf, Mr. Obama pulled the plug on a lease sale planned for 2012…“Opening up and expanding Virginia’s offshore resources to responsible natural gas and oil exploration holds significant promise for boosting needed domestic energy production, while bolstering the commonwealth’s economy,” Mr. Webb said…The U.S. will import almost 10 million barrels a day of crude oil and refined petroleum products in 2011, which is about half of all U.S. fuel consumption, according to forecasts by the U.S. Energy Information Administration…“We should not be sending hundreds of billions of dollars each year to oil-producing countries that do not like us,” Mr. Warner said. “Senator Webb and I firmly believe that Virginians should benefit from any energy resources that are developed off of our coast, and our legislation specifically requires the federal government to make reasonable royalty payments to the Commonwealth.”

There are two things Canadians get right — hockey and oil. Americans don’t care much about the former, but it’s Aboout damn time we start accepting the latter WSJ (7/7/11) reports: With 9.1% unemployment and gasoline prices in the stratosphere, President Obama must sometimes wish that some big corporation would suddenly show up and offer a shovel-ready, multibillion-dollar project to create 100,000 jobs and reduce U.S. reliance on oil from dictatorships…Oh, wait. His Secretary of State has had that offer sitting on her desk since she was sworn in. The trouble is that the Administration can’t approve it without upsetting its anti-fossil fuel constituency. And so the proposal sits…In September 2008 TransCanada applied to build a new pipeline—the Keystone XL—to bring diluted bitumen from the oil-rich tar sands of Alberta to thirsty American refineries on the Gulf Coast. It is hardly a radical proposal. Canadian crude has been flowing to the U.S. for decades. Another Canadian company—Enbridge—operates the Clipper pipeline across the Canadian border to Chicago. In July 2010 TransCanada began operating its Keystone pipeline from Alberta to Cushing, Oklahoma, which is a major storage and pricing depot…The Keystone XL would cut a slightly different path, through the American heartland to Port Arthur, Texas. Judging from its past experience and that of Enbridge, TransCanada expected that permitting would take roughly 23 months. Thirty-three months, two State Department studies and 208,000 public comments later, TransCanada is still waiting. On current trend, the company will be lucky to get its permit by January, or after 40 months. But even that is far from certain.

Psst….government….wanna save some money? Stop buying $50 per gallon jet fuel when you can buy better stuff for $3.03. Trillions in debt, and the geniuses downtown can’t figure this out? E&E News (7/7/11) reports: The policy provision preventing the federal government from buying alternative fuels with a higher greenhouse gas footprint than traditional petroleum is a boost for the Navy as it aims to become more energy independent, an official from the service said yesterday…The provision, known on Capitol Hill simply as “Section 526″ for its place in the 2007 Energy Independence and Security Act, has come under attack in Congress in recent weeks. Several stand-alone bills to repeal the rule have been introduced, including one by Rep. Morgan Griffith (R-Va.) (Greenwire, June 1) and one by Sens. John Barrasso (R-Wyo.) and Joe Manchin (D-W.Va.), at the same time that provisions have been tacked onto other bills exempting individual agencies such as the Defense Department from the provision (Greenwire, May 12)…Critics say the ban limits the military’s fuel choices, especially with respect to coal-to-liquid fuels. They also question whether the provision prevents the government from purchasing fuel made from Canadian oil sands…”If not repealed, Section 526 could increase fuel costs for our military and severely restrict the Pentagon’s ability to get fuel from our strongest ally, Canada,” Martin Durbin, executive vice president of the American Petroleum Institute said in a statement in March. “The DOD is the biggest consumer of jet fuel. At a time when American forces are combating terrorists abroad, it is especially necessary for the Pentagon to have the versatility to secure and develop alternative sources of fuel from a friendly ally.”…Chris Tindal, the Navy’s deputy director for battlefield energy, pushed back against that argument yesterday, saying that the department supports the goals and intent behind the provision.

This is why we do what we do — Brits are living in ‘energy poverty’ because their government will not let them develop or use affordable and reliable energy Mirror (7/7/11) reports: As energy prices go through the roof, shocking figures reveal one in four families has been plunged into fuel poverty…Single parents are the hardest hit with 39% of mother or father and child households struggling to pay bills…The figures are higher than the one in five first estimated and show for the first time wealthier families have also been hammered by spiralling fuel costs with 15% of middle classes now fuel poor…Research from price comparison website uSwitch found the number would leap to one in three if housing costs were added in…It means at least 18 million people are spending 10% or more of their take home pay on energy bills. Based on the new way of calculating fuel poverty, 47% of working class families and 22% of the middle classes fall into this bracket…A quarter of families with a stay-at-home parent are fuel poor but uSwitch argues this figure would soar to 44% if mortgages or rents were included. The number of fuel poor single parent families would jump from 39% to 52% while pensioner numbers would rise from 33% to 36%.

The U.N. says that going green will cost a mere $1.7 trillion a year–or $76 trillion over the next 40 years. Where do we sign? Fox News (7/7/11) reports: Two years ago, U.N. researchers were claiming that it would cost “as much as $600 billion a year over the next decade” to go green. Now, a new U.N. report has more than tripled that number to $1.9 trillion per year for 40 years…So let’s do the math: That works out to a grand total of $76 trillion, over 40 years — or more than five times the entire Gross Domestic Product of the United States ($14.66 trillion a year). It’s all part of a “technological overhaul” “on the scale of the first industrial revolution” called for in the annual report. Except that the U.N. will apparently control this next industrial revolution…The new 251-page report with the benign sounding name of the “World Economic and Social Survey 2011” is rife with goodies calling for “a radically new economic strategy” and “global governance.”…Throw in possible national energy use caps and a massive redistribution of wealth and the survey is trying to remake the entire globe. The report has the imprimatur of the U.N., with the preface signed by U.N. Secretary-General Ban Ki-Moon – all part of the “goal of full decarbonization of the global energy system by 2050.”

Filed Under: Blog

In The Pipeline 7/5/11

July 5, 2011 by AEA Leave a Comment

Writing letters to the government can be therapeutic, especially when you’re asking the powers that be to allow more drilling in Alaska. Go on, give it a try Reuters (7/5/11) reports: The U.S. Environmental Protection Agency on Friday said it would begin collecting public comments on draft permits for Royal Dutch Shell’s (RDSa.L: Quote) planned oil exploration off Alaska’s coast…Shell has been working to revive its long-delayed Arctic oil program, submitting plans to begin drilling in the Chukchi and Beaufort Seas next year…The EPA had approved permits for Shell to drill at least one Beaufort Sea well this year, but those permits were revoked by an agency appeals boards…The public comment period on the revised permits, which set limits on air pollution from the drilling operations, will run from July 6 through Aug. 5. The EPA will issue the final permits after considering the public’s input…To address concerns raised by the appeals boards, the agency revised the permits, reducing the emissions of most key air pollutants by more than 50 percent from the levels in the earlier permits.

Just like the firework displays last night, governments have been burning money on renewable programs and the taxpayers watche their ‘investments’ go up in smoke Time (7/5/11) reports: Big solar producers should be feeling very, er, sunny. New solar power doubled last year globally, with the world adding 16 gigawatts worth of new photovoltaic energy. In the first quarter of 2011, installations of solar power increased 66% over the previous year in the U.S. Just last week the Obama Administration offered a $1.4 billion loan guarantee to help fund what will be the world’s largest rooftop solar project, which put at least 733 megawatts worth of photovoltaic panels on commercial buildings across nearly 30 states while creating 10,000 jobs. Even bad news for the industry is good: a front-page story in Monday’s Washington Post raised questions about why more than half of President Obama’s out-of-town private-business visits had been to renewable-energy companies. Considering that the renewable-energy industry had to fight for any attention from Obama’s hydrocarbon-loving predecessor, being criticized for getting too close to the White House seems like a significant step up…But there are clouds on the horizon for solar power — especially for big producers who want to build utility-scale projects, not just slap panels on rooftops. The miniboom in solar in the U.S. is being driven chiefly by U.S. Treasury grants — most funded by the 2009 stimulus — which have helped fill the gap created by the evaporation of private capital after the recession. The only problem is that stimulus funding is just about tapped out, the tax credits are set to expire in December and the mood on Capitol Hill is utterly hostile to more spending. If that government money simply vanishes and private capital fails to appear, the U.S. renewable-energy industry could be set back by years. And no one is at greater risk than those who want to build large-scale solar.

Good news — the Obama Administration created jobs. Bad news — each one cost the taxpayer $278,000 Weekly Standard (7/3/11) reports: When the Obama administration releases a report on the Friday before a long weekend, it’s clearly not trying to draw attention to the report’s contents. Sure enough, the “Seventh Quarterly Report” on the economic impact of the “stimulus,” released on Friday, July 1, provides further evidence that President Obama’s economic “stimulus” did very little, if anything, to stimulate the economy, and a whole lot to stimulate the debt… The report was written by the White House’s Council of Economic Advisors, a group of three economists who were all handpicked by Obama, and it chronicles the alleged success of the “stimulus” in adding or saving jobs. The council reports that, using “mainstream estimates of economic multipliers for the effects of fiscal stimulus” (which it describes as a “natural way to estimate the effects of” the legislation), the “stimulus” has added or saved just under 2.4 million jobs — whether private or public — at a cost (to date) of $666 billion. That’s a cost to taxpayers of $278,000 per job…In other words, the government could simply have cut a $100,000 check to everyone whose employment was allegedly made possible by the “stimulus,” and taxpayers would have come out $427 billion ahead…Furthermore, the council reports that, as of two quarters ago, the “stimulus” had added or saved just under 2.7 million jobs — or 288,000 more than it has now. In other words, over the past six months, the economy would have added or saved more jobs without the “stimulus” than it has with it. In comparison to how things would otherwise have been, the “stimulus” has been working in reverse over the past six months, causing the economy to shed jobs.

How good is your memory? Better yet, how much of that cheap gas can you fit in your tank before prices go back up? Wall Street Journal (7/5/11) reports: When the time comes to cast their ballot in November 2012, one may predict U.S. motorists hitting Route 66 this summer will be grateful to President Barack Obama. But will they?..By giving the nod to half of a global release of oil from emergency stockpiles decided by oil-consuming nations worldwide, Mr. Obama spoon-fed instant pain relief into the mouth of every driver north of the Rio Grande. The move knocked $5 a barrel off crude prices as drivers were preparing to take the road for the 4th of July weekend…But once the full effect of the magic pill sets in, watch out for the upset stomach…Interfering in markets might end up pushing prices up in the long run and doesn’t resolve issue number one: America’s addiction to oil runs deep into both Wall Street and Main Street…Though statistics do show an uptick in crude-oil demand in the second half of the year, the release is adding confusion at a seriously messed-up moment for the global refining industry…The drop in crude prices is depressing margins at refineries with some markets already swamped with products. Indeed, despite claims the release is to make up for lost Libyan barrels, the U.S. only depended on Mr. Gadhafi’s country for 0.5% of its crude imports…On paper, glut is good for consumers—it makes prices cheaper. But with the International Energy Agency, which oversaw the move, warning it may repeat it, refiners and oil producers will have little visibility on future supply. And, next time, they may let prices slip without further ado. For instance, if much of the U.S. crude is snatched by traders, it could go straight to build up commercial inventories…That may trigger more worries for Gulf members of the Organization of Petroleum Exporting Countries. Many of them were already taken aback by the release—they had pledged to boost output unilaterally after the group failed to act collectively on June 8.

What the author misses is that the short con sets up the long con. Isn’t that right, Mr. President? Politico (7/5/11) reports: President Barack Obama has pressed repeatedly for a long-term energy policy, devoting five weekly radio addresses to the subject in the past three months and blasting other politicians during a March press conference for pursuing short-term political fixes for high gas prices…“Every few years, gas prices go up; politicians pull out the same old political playbook and then nothing changes,” Obama said. “And when prices go back down, we slip back into a trance. And then when prices go up, suddenly we’re shocked. I think the American people are tired of that. I think they’re tired of talk.”.. But this weekend as an anticipated 39 million Americans drive 50 miles or more for the holiday, the Obama administration is preparing to release 30 million barrels of crude from the Strategic Petroleum Reserve. Meanwhile, AAA reports the price of gasoline per gallon has declined from $3.63 just before the announcement to $3.55 on Friday. Gasoline prices peaked this year at nearly $4 a gallon on May 5…Some critics say the president’s action betrayed his lofty rhetoric about energy…“This is the shortest of short-term fixes,” said Spencer Abraham, who served as President George W. Bush’s energy secretary from 2001-05. “It very much falls in the category of politically expedient actions.”

Filed Under: Blog

In The Pipeline 7/1/11

July 1, 2011 by AEA Leave a Comment

Good news for the Chevy Volt keeps on coming — Toyota is about to crush the EV game with the forthcoming Prius redesign. Thanks for playing, GM CNN Money (7/1/11) reports: Enthusiasts who are raving about the range assisted, battery-powered Chevrolet Volt are ignoring the 800-pound elephant in the room: Toyota, which in addition to its vast knowledge base and production volume in hybrid cars, has a better idea…It is the Prius Plug-in, it is already in test fleets, and it will be arriving in showrooms in less than a year from now. It will be more efficient and less expensive than the Volt, and Toyota (TM) actually stands the possibility of making a profit on it — something General Motors concedes it can’t do with the Volt… To date, the Prius Plug-in has been ignored by EV enthusiasts who are being revved up by the flood of favorable publicity coming out of Detroit, which for all its pretensions to global sophistication, remains a house of mirrors whose view of the outside world stops at Eight Mile Road…Whenever somebody congratulates Volt for winning multiple car of the year awards, they should remind themselves that those same award-giving bodies passed over the original Prius hybrid in 2001 in favor of the PT Cruiser. Toyota has gone on to sell two million Priuses, the most revolutionary car of the last 75 years; the Cruiser, a novelty car with no technological pretensions, has since gone out of production.

Sure, the oil will be sold from the Sagging Poll Reserve, but will the voters? Reuters (7/1/11) reports: Oil buyers have expressed strong interest in the crude that the United States is selling from its emergency reserves, the U.S. Energy Department said, calling the oil sale “substantially oversubscribed.”…The sale represents half of the 60 million barrels that industrialized nations are releasing jointly to fill a gap in supply caused by political strife in Libya…Analysts have said the global release has been disorganized and has the potential to backfire…The Obama administration was slammed for its decision last week to tap the Strategic Petroleum Reserve (SPR) by the oil industry lobby and other critics, who said there was already plenty of oil supplies in the United States and cast the move as a political tactic…”The oversubscription of the (U.S.) SPR auction indicates both that supply disruption is a factor and that we will be able to place all 30 million barrels into the market,” an administration official said…Almost a dozen oil companies and trading firms sought more information about the opportunity on a conference call earlier this week, and the Energy Department said it received more than 90 offers for its 30.2 million barrels of SPR crude.

What’s a few billion between friends? First Solar wins a $4.5. Billion dollar loan guarantee and you’re the guarantor Wall Street Journal (7/1/11) reports: The U.S. Energy Department said it is offering to guarantee about $4.5 billion in loans for First Solar Inc. to finance three renewable energy projects in California that the solar-panel maker is developing… The government’s conditional offer to support the projects drew funds from the stimulus-funded loan guarantee program, which expires on Sept. 30 and currently has less than 25% of its funds remaining…Once built, First Solar, of Tempe, Ariz., said that two of the projects would be the largest capacity solar-panel farms in the world…First Solar’s California plan includes two 550-megawatt plants in Riverside and San Luis Obispo counties that will be supported by $1.88 billion and $1.93 billion in loans, respectively, according to the Energy Department…Under the loan guarantee the department offered Thursday, taxpayers would cover as much as 80% of the borrower’s obligation in the event of a default…A third project, First Solar’s 230-megawatt Antelope Valley Solar Ranch, received a conditional offer for a $680 million taxpayer-backed guarantee.

Owl, it’s what’s for dinner — new government plan involves hiring snipers to shoot competing owl. What could go wrong? New York Times (7/1/11) reports: It has been two decades since the fate of a bashful bird that most people had never seen came to symbolize the bitter divide over whether to save or saw down the ancient forests of the Pacific Northwest. Yet it was not until Thursday that the federal government offered its final plan to prevent the bird, the northern spotted owl, from going extinct… After repeated revisions, constant court fights and shifting science, the Fish and Wildlife Service presented a plan that addresses a range of threats to the owl, including some that few imagined when it was listed as a threatened species in 1990…The newer threats include climate change and the arrival of a formidable feathered competitor, the barred owl, in the soaring old-growth evergreens of Washington, Oregon and California where spotted owls nest and hunt…One experiment included in the plan: shooting hundreds of barred owls to see whether that helps spotted owls recover…Even after all these years since the spotted owl became the cause célèbre of the environmental movement, it is far from clear that the plan is a solution. Advocates on both sides say it will inevitably be challenged, and both sides have expressed frustration with the Obama administration on the issue.

Filed Under: Blog

In The Pipeline 6/30/11

June 30, 2011 by AEA Leave a Comment

Obama must have shorted oil last week and then speculated prices would bounce along with his poll numbers; why else would he dump oil from the Sagging Poll Reserve? Wall Street Journal (6/30/11) reports: By the look of oil prices, last week’s announcement of a globally coordinated stockpile release is already old news…The initial decline to below $90 on the International Energy Agency’s decision to offer 60 billion barrels of oil has been all but erased. Crude-oil futures traded as high as $95.84 on Wednesday, above the price of $95.41 a barrel set before the IEA’s June 23 announcement. Oil futures on Wednesday settled $1.88, or 2%, higher at $94.77 a barrel on the New York Mercantile Exchange…To be sure, oil prices may have been higher still without the IEA move. But crude’s quick rebound has dashed hopes it would be the beginning of a sustained move down…Half of the 60 million barrels will come from the U.S., which was scheduled to close bidding for its high-quality crude on Wednesday. The U.S. Strategic Petroleum Reserves first oil auction in six years has been dogged by multiple changes to its terms, deepening uncertainty over how much new supply will make it to global crude markets. The SPR declined to comment on the status of the auction. Results are expected next week…Analysts say the release of strategic stockpiles has shifted oil’s trading range lower by several dollars but hasn’t precluded the return of triple-digit prices for the U.S. oil benchmark…”Let’s face it: Sixty million barrels is not that much,” said Kyle Cooper, managing partner at IAF Energy Advisors. “From the low $90s to $100 is probably a range that makes a lot of sense.”

Are we going to eat at the trough of public treasure or are we going to create value and produce real energy? I doubt we have 10 years to make our choice; let’s choose correctly Reuters (6/30/11) reports: The Trans Alaska Pipeline System, Alaska’s main economic artery, may only have 10 years of service left if oil flows continue to dwindle at current rates, according to a report issued on Wednesday by the system’s operator…The pipeline can operate reliably with oil flows as low as 350,000 barrels per day, but throughput below that threatens its viability, said the report by Alyeska Pipeline Service Co, which manages the pipeline for owners BP, ConocoPhillips, Exxon Mobil and other oil companies…That threshold — expected to be reached in about a decade if oil production continues to decline at current rates — is the first ever identified as a specific minimum throughput for reliable operations…The 800-mile pipeline shipped an average of about 605,000 barrels per day in May, less than a third of the 2 million barrel peak achieved in 1988. The pipeline system carries all of the crude oil produced on Alaska’s North Slope, at Prudhoe Bay and other fields, to the shipping port at Valdez. Flow has declined as production from maturing fields dwindles…Alyeska, the consortium that operates the pipeline and its Valdez marine terminal, issued the report at the conclusion of a $10 million, two-year research project…Operating safely at 350,000 barrels per day would require a series of improvements, the report said. They include enhanced insulation or introduction of heat sources to keep oil warm, better storage and shipping management to prevent interruptions, better use of corrosion inhibitor and an overhaul of the cold-restart procedures to help prevent freezing problems.

Hypothetically renewable energy could save the U.S. economy a lot of money and hypothetically I could still make the pros…I’m coming for you Peyton Manning Huffington Post (6/30/11) reports: Google made two major announcements yesterday. One was about a new Google social network, Google +, expected to compete with the likes of Facebook. The other announcement was that saving the world could also save us a lot of money. The latter revelation somehow fell unnoticed amid debate over the plus and minuses of Google +, but it is significant nonetheless…Google’s report, “The Impact of Clean Energy Innovation,” aimed to measure the potential effects of clean energy on both the energy landscape and the U.S. economy…The analysis was conducted by assuming that there were “aggressive hypothetical cost breakthroughs (BT) in clean power generation, grid-storage, electric vehicle, and natural gas technologies and compares them to Business as Usual (BAU) scenarios modeled to 2030 and 2050.”…They found that, when compared to BAU in 2030, aggressive energy innovation alone could grow the U.S. economy by over $155 billion in GDP/year, create over 1.1 million new net jobs, and save U.S. consumers $942/household/year. Not to mention the environmental and security benefits – this model could reduce U.S. oil consumption by over 1.1 billion barrels/year and cut U.S. total greenhouse gas emissions by 13%.

Obama could goof up easy mac, so how do you think they are doing on energy policy? Billings Gazette (6/30/11) reports: When President Barack Obama said that America hopes to be Brazil’s best energy customer, Americans shook their head in confusion…Apparently, the White House didn’t understand or care about their concern…The administration repeated the exact same mistake last week when it irresponsibly released 30 million barrels of oil from our Strategic Petroleum Reserve…Secretary of Energy Steven Chu explained that this SPR release was “intended to complement the production increases recently announced by a number of major oil-producing countries.” He went on to say that “the United States welcomes those commitments and encourages other countries to follow suit.”…With all due respect, when will America step up and follow suit?…Instead of needlessly tapping into our emergency oil supplies and encouraging other countries to produce more energy, this administration needs to take a hard look in the mirror…The president has handcuffed American energy developers and made our dependence on foreign energy worse…Political move…First, our strategic reserve was created as a safeguard against national security emergencies and severe supply disruptions. President Obama just treated the SPR like it’s his Strategic Political Reserve. While all Americans want gas prices to be lower, tapping the SPR isn’t the answer. The only severe supply disruption today is this administration’s self-imposed shutdown of American energy.

Kill it. Cut its head off and rip out the heart. Let’s make sure ethanol subsidies never grow back to walk God’s green earth again The Hill (6/30/11) reports: Several Senate Democrats are using GOP support for killing ethanol subsidies as a political weapon against Republican leaders’ resistance to including increased tax revenues in a broad deficit-cutting deal…Thirty-four Senate Republicans — including Senate Minority Leader Mitch McConnell (R-Ky.) — this month voted to quickly end the multibillion-dollar ethanol blenders’ credit, albeit as part of economic development legislation that was subsequently derailed…Sen. Charles Schumer (D-N.Y.), a top strategist for Senate…Democrats, on Wednesday said this should open the door for ending tax breaks as part of the high-stakes deal that the White House and lawmakers are negotiating around raising the debt ceiling…l“It makes no sense for Leader McConnell to, on the one hand, say that he agrees that ethanol subsidies are wasteful but then say — just to stick to ideological, way-out-there principle that we can’t eliminate that subsidy in the debt-limit deal,” said Schumer, the chairman of the Senate Democratic Policy Committee, at a press conference in the Capitol.

We don’t have a revenue problem; we have an energy and spending problem The Hill (6/30/11) reports: President Obama pressed lawmakers Wednesday to cut a slew of oil industry tax breaks as part of a deal to raise the debt ceiling, arguing that the alternative is to slash funding for education, medical research and food safety…The repeal of certain oil industry tax breaks is one of a number of provisions Obama and Democrats in Congress want included in the debt-limit package. But Republicans have blasted the proposals…Here’s what Obama said Wednesday during a White House press conference:…“If we choose to keep those tax breaks for millionaires and billionaires, if we choose to keep a tax break for corporate jet owners, if we choose to keep tax breaks for oil and gas companies that are making hundreds of billions of dollars, then that means we’ve got to cut some kids off from getting a college scholarship, that means we’ve got to stop funding certain grants for medical research, that means that food safety may be compromised, that means that Medicare has to bear a greater part of the burden.”…Obama’s comments come as policymakers face the Treasury Department’s Aug. 2 deadline to raise the debt ceiling.

Filed Under: Blog

In The Pipeline 6/29/11

June 29, 2011 by AEA Leave a Comment

I hope Bryson gets caught with his hand in the taxpayer cookie jar! Go get ‘em, Eric Thorson! Bloomberg (6/29/11) reports: Government investigators are auditing some of President Barack Obama’s more than $7 billion in renewable energy grants to determine whether the money was awarded properly and the recipients were eligible…Examiners are reviewing 14 of the 2,600 projects that received tax dollars under the initiative to promote wind and solar power created in the 2009 stimulus bill, according to Richard Delmar, counsel to the Treasury Department’s inspector general. Under the program run by the Treasury, developers receive as much as 30 percent of the cost of a project…The audits by Eric Thorson, the Treasury’s inspector general, aim to determine whether the department has “established (and followed) appropriate procedures for awarding the grants,” and whether developers meet eligibility requirements, Delmar said in an e-mail…He declined to identify projects under review. The office expects to issue reports on five of the audits by the end of September, and the remaining nine reports in 2012, he said… The audits, which began in February 2010, involve visits to the headquarters of companies that received grants and to project sites, Delmar said. The last site visit was in February of this year.

Goodbye minivans, goodbye pickup trucks, goodbye SUV’s, goodbye sedans….goodbye Chevy Volt! — the Obama administration is trying to impose a fleet-wide 56 mpg mandate CNBC (6/28/11) reports: With the White House and regulators informing automakers that they intend to push for fuel economy standards in the US to rise to an average of 56.2 MPG by 2025 you can count on an industry to push back and say “slow down.”…The automakers (and not just the Big 3) are looking for a more measured increased in the CAFE standards, which currently average 30.2 MPG for new vehicles and will rise to 34.1 MPG by 2016…From the auto industry’s stand point, increasing fuel economy 5% annually between 2016 and 2025 will be too costly for automakers and for consumers. From the perspective of regulators in Washington, the cost incurred by consumers will be recouped fairly quickly with the money people save on gas…Both sides have valid arguments. But unlike 2009 when the Obama administration pushed for, and secured higher fuel economy standards, the auto industry is in a position where it can and will push back. This is one of several reasons why many believe the next CAFE standards will wind up being lower than 56.2 MPG. I can already hear people on both sides howling that anything under 50 MPG will be too little or too much.

And Goodbye to Senator Levin who didn’t realize 56.2 mpg was the plan all along! E&E News Reports: Sen. Carl Levin (D-Mich.) expressed frustration yesterday that the Obama administration had not been forthcoming about its plan to discuss a 56.2 mpg fuel economy target with automakers…Levin said he had spoken to administration officials, including White House regulatory czar Cass Sunstein, as recently as the day before the White House began talking to automakers about the proposed target. Reports of the 56.2 mpg target, which would represent an annual 5 percent increase in fuel economy, were first reported in The Detroit News…”The day before that was proposed, we were told that there had been no decision made and we, of course, were stunned to find out the next morning that they had decided to at least propose something,” Levin said. “We all took umbrage at the failure of the White House to tell us truthfully they had already made a decision to begin at that number.”

Now it’s our turn, New York Times — a collection of a few humbling facts and opinions to put the natural gas debate in perspective Energy In Depth (6/28/11) reports: Say this about The New York Times and its ongoing attack series targeting natural gas: These guys sure know how to elicit a reaction. In his latest piece, Times reporter Ian Urbina turns the page over to well-known opponents of the industry, who argue that shale is too expensive to produce and will therefore disappoint investors. Urbina targets the Barnett, Haynesville, and Fayeteville shales in particular – but forgets to mention that natural gas production from each continue to defy even the most optimistic expectations, even with fewer rigs in service and historically low natural gas prices…The first reactions to The Times’ story started rolling in about 18 seconds after it was posted. EID’s rebuttal was sent around the next day. Thirty-six hours after first contact, here’s just a brief sampling of what folks are saying about the piece: Government U.S. Energy Information Administration (EIA): Agency’s Perspective on Shale Gas “Differs Significantly” from NYT report. From the EIA press release: “EIA was contacted by a Times reporter in advance of the story, and provided a response that described the agency’s approach to developing its shale gas projections. Those interested in EIA’s views on shale gas, which differ in significant respects from those outlined in the June 27 article, may want to review the EIA response to the inquiry from the Times, the Issues in Focus discussion of shale gas included in the Annual Energy Outlook 2011, and a recent presentation on domestic and international shale gas.

Greenies are down to wishing for genie…let’s show some charity and not count that wish as part of their three New York Times (6/29/11) reports: For a moment, re-imagine Aladdin as an engineer. He finds his magic lamp in an industrial park in Silicon Valley or Boston or the Research Triangle in Raleigh-Durham, and the genie who emerges offers him three technological wishes. What should Aladdin wish for? Could any of his wishes go wrong?…On Tuesday morning, Google released a study of the potential impacts of “aggressive hypothetical cost breakthroughs” in clean energy technologies, from electricity generation and storage to electric vehicles to natural gas. The genie was not offering any energy efficiency wishes this time around, although Google acknowledges that those are crucial and says it has taken major steps to improve energy efficiency in its operations…Google used a computer model developed by McKinsey & Company to explore how energy innovations could create jobs in manufacturing and construction and how cheaper clean energy might improve the overall economy…So what should Aladdin, P.E., ask for?..At the top of Google’s list was better electric cars and gas-electric hybrids because they could create large savings by 2030. While big advances in clean energy generation could yield big benefits by 2050, in 2030 these would not show major financial benefits when compared with electricity from coal and natural gas, the study predicted.

Eat your heart out peak oilers — new government report claims the Cook Inlet still has more to give after 50 years of development Reuters (6/29/11) reports: Alaska’s Cook Inlet basin still has potential for abundant natural gas and oil discoveries even after five decades of production, according to a federal report issued on Tuesday, signaling potential revenue for the state and more interest from developers…In the first resource assessment issued since 1995, the U.S. Geological Survey said the inlet area likely holds 19 trillion cubic feet of recoverable natural gas — nearly nine times the last estimate — and 600 million barrels of recoverable crude oil…The new report is much more optimistic about remaining natural gas in the inlet than the assessment issued 16 years ago, a difference the USGS attributed to improved data, new geologic information and better technology for recovering the oil and gas…In 1995, the USGS estimated that Cook Inlet likely had 2.14 trillion cubic feet of gas remaining to be discovered…The new report includes the first-ever estimates for unconventional natural gas in Cook Inlet, most of which is coal gas and which accounts for a quarter of total estimated undiscovered natural gas resources. That was not included in the 1995 report as it was not then considered recoverable…The Cook Inlet basin, in production since the 1950s, is older than the more prolific North Slope. Since 1958 the Cook Inlet basin has produced 1.3 billion barrels of oil and 7.8 trillion cubic feet of natural gas, according to the USGS. Oil has been mostly refined for regional markets, while natural gas has fueled regional utilities and been liquefied for export to Japan and other countries.

Filed Under: Blog

In The Pipeline 6/28/11

June 28, 2011 by AEA Leave a Comment

Put this in your pipe and smoke it with natural gas Energy In Depth (6/27/11) reports: The United States produced more natural gas in 2010 than at any point in the previous 37 years, a stunning reversal of fortune given the country’s supply picture earlier this decade, and one that could not have been possible without the massive volumes of American energy that continue to be generated from shale…So what happens from here? By now, you’ve likely heard the stories and seen the estimates: with everyone from IEA to EIA to PGC to MIT projecting a future in which shale’s production trajectory continues along an aggressive upward path, delivering literally quadrillions of cubic feet of clean-burning natural gas to generations of consumers not only in the United States, but around the world. It’s a view that’s supported by the preponderance of science and a majority of scientists, not to mention one that’s continuously reinforced by new data…Over the weekend, The New York Times sought to advance a contrarian view on the subject, and to that view The Times (and reporter Ian Urbina) is more than entitled. What it’s not entitled to, at least in our view, is to represent its piece as an original investigation; not when the story was essentially outsourced to a well-known critic of the industry whose predictions on shale’s imminent collapse grow less defensible (and more difficult to find on his website) by the day. Nor do we believe The Times is entitled to mislead its readers on the expertise of those whose “leaked” emails — many written in 2008 and 2009 – are used to form the basis of the story, especially when real-world production numbers from 2010 and 2011 directly contradict those speculative accounts…Trick #1: Suggest that the Barnett, Haynesville, and Fayetteville shales are “not performing as industry expected” without actually defining what that means – and exclude mention of the extraordinary production growth currently being witnessed across all three plays:…WSJ sets the stage: “As recently as 2000, shale gas was 1% of America’s gas supplies; today it is 25%. Prior to the shale breakthrough, U.S. natural gas reserves were in decline, prices exceeded $15 per million British thermal units, and investors were building ports to import liquid natural gas. Today, proven reserves are the highest since 1971, prices have fallen close to $4 and ports are being retrofitted for LNG exports.” (Wall Street Journal editorial, June 25, 2011)

So what’s it going to be, Congress? We’ve been dancing since 2007 and they are about to turn on the lights Financial Times (6/28/11) reports: The Arctic seas north of Alaska are one of the three great remaining oil and gas prospects in the US, along with the onshore shales and the deep waters of the Gulf of Mexico. They are the least known and hence the most intriguing. They are also the most controversial…The prospect of oil drilling in the as-yet barely touched Arctic, with its unique ecosystem and wildlife, has outraged environmentalists…The fact that exploration has been facilitated by the shrinking Arctic ice, thought to be a consequence of global warming caused by burning fossil fuels, is an irony that has made the protests even fiercer…Royal Dutch Shell, Europe’s largest oil company, which hopes to be a pioneer in developing the US Arctic, has been repeatedly frustrated in its plans, first launched in 2007, to explore the Beaufort and Chukchi seas off Alaska…Yet in spite of opposition and delays, it is likely that sooner or later the resources of the region will be developed…US political opinion, which was encouraged to be suspicious of drilling by BP’s Deepwater Horizon disaster in the Gulf of Mexico in April 2010, has been swinging back in favour, driven by persistently high unemployment and petrol prices that have come close to $4 a gallon…Victories of the generally more pro-oil Republican party in the midterm elections last November have given fresh impetus to the campaign by the oil companies to be allowed to drill in more parts of the US, including the Arctic…The administration of President Barack Obama has been unenthusiastic about Arctic drilling, but the strength of its scepticism has wavered…In March 2010, while proposing to open up other areas of the US coast, it was cautious about allowing more exploration in the Arctic, although companies that bought licences in sales under George W. Bush, the preceding president were still allowed to drill.

You’ve got to be kidding me — ‘small’ wind is complaining about the permit process and zoning laws USA Today (6/28/11) reports: Nearly 10,000 units were sold nationally in 2009, the latest available data, according to the American Wind Energy Association. In 2001, only 2,100 units were sold…Advocates of small wind turbines say they can be an important source of clean energy in windy parts of the country. Key hurdles to widespread use rest with local governments, their zoning ordinances and public acceptance…”Zoning and permitting is a big issue in small wind,” says Larry Flowers, the deputy director for distributed and community wind for the American Wind Energy Association…”There’s progress being made in some places and struggles in others,” he says… In Brandon, S.D., resident Charlie Cross wants to add a small, 200-watt turbine to supplement his solar power system. Before that can happen, Cross needs to convince the city to issue permits for residential turbines…Robert Westall, the owner of Cleaner, Greener Energies in Sioux Falls, S.D., says one of the biggest problems is that communities don’t have zoning rules for small wind turbines.

Why tap the SPR when we could be tapping our natural resources of the coast of Gulf of Mexico, Alaska, California, Virginia, etc. Forbes (6/27/11) reports: Last week, President Barack Obama announced that, in response to the loss of Libyan crude to the global market, he was ordering the largest release of crude oil from the federally owned Strategic Petroleum Reserve (SPR) in U.S. history; 30 million barrels over the course of the next 30 days, to be supplemented by another 30 million barrels from various other reserves controlled by other oil consuming nations. Republican politicians and corporate oil executives cried foul. We certainly oppose the political management of oil inventories, which this is. But unlike Republicans, we oppose the existence of the SPR…Although critics charged that the release was merely a political gesture that would not reduce oil prices given how small it is in relation to the global market (about two-thirds of one day’s worth of global oil consumption), investors thought otherwise. The day the release was announced, the price of West Texas Intermediate crude oil for July delivery dropped $4.39 per barrel and the price of Brent Sea crude for July delivery fell even further on the London exchange. Goldman Sachs ( GS – news – people ) did some quick math and reported that the release could reduce oil prices by $10 to $12 per barrel over the next three months and by $5 to $7 per barrel in 2012… If anything, the market may be underestimating the price drop that is to come. One of the nation’s top oil economists– Timothy Considine from the University of Wyoming–recently constructed a model of the global oil market and simulated the impact of a 30 million barrel release of crude from the SPR. He concluded that oil prices would likely drop about 3.5%, so a 60 million barrel release would suggest a 7% price drop, which in today’s market translates into a $6.68 decrease in crude oil prices (off the pre-release announcement price of $95.41) which, in turn, translates into a 16 cent decline in the price of a gallon of gasoline.

Filed Under: Blog