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US Energy Policy

US Energy Policy

Energy Policy

The incandescent lightbulb is now outlawed.[1]  This fact is a perfect metaphor for “energy policy.”  Should it be illegal in the United States to manufacture, sell, buy, and use a traditional incandescent light bulb?  Your informed answer to that question will provide deep insight into your views on hundreds of other energy policy questions.   (BTW, my answer is no, but I bet you guessed that.)

Energy is the lifeblood of our economy; it touches your life in a hundred ways each day.  Yet energy policy--the set of government rules and regulations that prescribe how energy is produced, delivered, and consumed--is a complex and even a chaotic subject.

Energy was an uninteresting subject for the average person prior to the OPEC Oil Embargo in 1973.  Oil prices had been stable at about $20 a barrel in real terms for nearly a century and electricity prices had declined from about 22 cents per kilowatt to about 13 cents from 1960 to 1973, even as consumption of electricity quadrupled from 1950 to 1973, as more and more homes and appliances used electricity and utilities became better at building large coal and nuclear plants.

But the OPEC Embargo changed everything about energy and energy policy.  Four points will illustrate this importance. 

  • President Jimmy Carter’s presidency (1976 to 1980) was dominated by energy issues which he characterized as the “moral equivalent of war.” 
  • A little more than two decades later a California governor was recalled because he botched an electricity crisis in California and Arnold Schwarzenegger was elected Governor. 
  • There is a widespread perception that the US has gone to war in the Middle East over oil issues.
  • The Pope of all people has recently declared war on climate change, most of which is laid at the feet of fossil energy.

Part of the complication in energy policy is that it must be addressed on many fronts; international, national, State, and local governments all have a role in stirring the pot. 

Many books and articles are written on very specific aspects of energy policy but most are written for other experts.  Surprisingly, few are written that cover the broad landscape of energy policy.  Even fewer of these writings take a strong market-oriented perspective; the vast majority take an interventionist approach largely for environmental and oil import reasons.  And none that I have found are addressed to the pro-market political activist who has a real job during the day and then tries to save the country in his or her spare time.  This discussion is for that heroic citizen, The Forgotten Man.

So what’s the bottom line on energy policy? 

  • First, we make energy policy much more difficult than it has to be.  Energy is a commodity just like wheat or cars or hamburgers.  Mostly, we rely on competitive markets in each of these other commodity industries to make sure that we have an adequate supply to meet the consumers’ needs at reasonable prices.  But we treat energy differently.  I venture to guess that there are only a few industries more affected by government intervention than energy.  Why is that?  Does that mean we benefit from that intervention?  Is there a better way?  The article explores these questions.
  • Second, right now energy policy is being driven by climate change.  Even if one is sympathetic to some of the claims made about climate change, many stupid actions are being taken in its name that has profoundly negative effects on energy markets. 
  • Third, oil issues get the most attention but we do not face any real danger in oil markets.  Oil trades in global markets and while there may be price fluctuations (as I write, oil is about $35 a barrel, having been over $100 in the recent past), we will never face a situation where we run out of oil.  Most countries with plentiful oil have built their economies on oil revenue and the recent drop in oil prices has created serious political problems for these countries.  They simply can’t afford not to produce oil.  But problems in oil markets can result in unnecessarily higher prices and thus we need to pay some attention to them in order to promote prosperity. 
  • Fourth and most important, electricity faces real problems that could result in catastrophic failure of the system, thus threatening not only prosperity but human life.  The major framework for electric policy was set in 1935.  That framework worked fine up to the OPEC Embargo.  Electricity can compete against oil and natural gas in many applications.  Thus adjustments were necessary to the historical framework after the Embargo.  But policymakers have only nibbled at the edges of electricity policy and have not fundamentally changed the 1935 framework.  Yet little more than additional tinkering is being done to promote an electricity industry for the 21st Century.  Many special interests are pushing and pulling on the antiquated framework for personal gain but few are fundamentally committed to a complete rethinking of the role of the electric system of the future, especially given the increasing digitalization of our economy.  And as noted above, unsound policies on climate change make electric issues even more difficult.


[1] This is a good place to make a point.  Some pointy headed academics will disagree with even this first sentence.  Technically, Congress did not “ban” incandescent bulbs in the Energy Independence and Security Act of 2007.  Rather, they set a standard that most, if not all, traditional incandescent bulbs could not achieve and established a schedule for light bulbs of different wattages to meet this standard.  So it is fair to say that Congress outlawed incandescent bulbs.  But since the accompanying Article is a synthesis of the broad topic of “energy policy” it would needlessly clutter and complicate the text to be “technically” accurate in every instance.  The size of the document would need to double and the reader would understand less of the essence of energy policy if I did not make some broad generalizations.  Nonetheless, I am sure I will receive some criticism that many of my statements are not “technically correct.”  I hope that making this point early in the article will allow for a better understanding of the content of the Article.

 

Future World – How Many Windmills Would We Need?

The US currently consumes approximately 97 quadrillion British Thermal Units (BTU) of energy in all forms each year (97 Quads). Since this quantity of energy and the forms of energy which constitute it vary over time, this analysis will use rounded numbers to avoid the impression of unjustified accuracy or precision.

Current US energy consumption, by fuel source, is approximately:

  Natural Gas 29 Quads
  Coal 14 Quads
  Oil 36 Quads
  Renewables 10 Quads
  Nuclear 8 Quads

 

Current US electricity consumption is approximately 12 quads.

 

 

The objective of the climate change movement is to eliminate fossil fuel consumption by the end of the century, if not before. The climate change movement is also not supportive of nuclear power generation or additional hydroelectric generation. Achieving their goal would require replacing the useful energy services provided by approximately 87 quads of current US energy consumption with renewable sources of energy. As shown above, current US energy consumption produces only approximately 31 quads of useful energy services. The balance of the energy consumed is rejected as the result of process inefficiencies. Therefore, approximately 21 quads of additional renewable energy would be required to replace the useful energy services currently provided by fossil fuels and nuclear, assuming 100% utilization efficiency. At a more realistic utilization efficiency level of 60%, approximately an additional 35 quads of renewable energy would be required.

One scenario would provide the entire 35 quads of additional renewable energy with wind generation. If we assume a mix of onshore and offshore wind generation, an average wind turbine capacity of 3 MW and an average wind turbine capacity factor of 35%, the incremental generating capacity required would be approximately:

35,000,000,000,000,000 BTU/yr

3MW/WT * 0.35 * 1,000,000 W/MW * 3.413 BTU/Whr * 8766 hours/yr. = 35,000,000,000,000,000 BTU/yr

31,000,000,000 BTU/yr = 1,200,000 wind turbines

Normal electric industry practice would provide a capacity reserve margin of approximately 20%, to allow for weather extremes and equipment outage for maintenance and repair. This would increase the number of additional wind turbines required to approximately 1,450,000.

Hourly variations in electricity demand can average approximately 60%, which would require either additional generation capacity or storage capacity equal to approximately 30% of peak demand. Seasonal demand is also higher in summer and winter than in spring and fall, requiring additional, longer term, storage.

Current US electric generating capacity is approximately 1,000 Gigawatts (GW), of which 70 GW is wind generators and 80 GW is hydroelectric generators. Replacing the remaining 850 GW with 3 MW wind turbines at a 35% capacity factor would require approximately 800,000 wind turbines.

Therefore, it would require approximately 2.3 million wind turbines to replace existing fossil and nuclear generated electricity and the current direct uses of coal, oil and natural gas. That is approximately 30 times the current installed wind generation capacity. Other scenarios might rely on a combination of wind and solar initially, with later additions of Ocean Thermal Energy Conversion and Wave Energy. Regardless, this would be a monumental task.

 

Tags: Renewable Energy, Wind Energy

Highlighted Article: Presidential Executive Order on Promoting Energy Independence and Economic Growth

  • 3/29/17 at 10:12 AM
The White House
Office of the Press Secretary
For Immediate Release

 

Presidential Executive Order on Promoting Energy Independence and Economic Growth

- - - - - - -

By the authority vested in me as President by the Constitution and the laws of the United States of America, it is hereby ordered as follows:

(b)  It is further in the national interest to ensure that the Nation's electricity is affordable, reliable, safe, secure, and clean, and that it can be produced from coal, natural gas, nuclear material, flowing water, and other domestic sources, including renewable sources. 

(d)  It further is the policy of the United States that, to the extent permitted by law, all agencies should take appropriate actions to promote clean air and clean water for the American people, while also respecting the proper roles of the Congress and the States concerning these matters in our constitutional republic.

Sec. 2.  Immediate Review of All Agency Actions that Potentially Burden the Safe, Efficient Development of Domestic Energy Resources.  (a)  The heads of agencies shall review all existing regulations, orders, guidance documents, policies, and any other similar agency actions (collectively, agency actions) that potentially burden the development or use of domestically produced energy resources, with particular attention to oil, natural gas, coal, and nuclear energy resources.  Such review shall not include agency actions that are mandated by law, necessary for the public interest, and consistent with the policy set forth in section 1 of this order. 

(c)  Within 45 days of the date of this order, the head of each agency with agency actions described in subsection (a) of this section shall develop and submit to the Director of the Office of Management and Budget (OMB Director) a plan to carry out the review required by subsection (a) of this section.  The plans shall also be sent to the Vice President, the Assistant to the President for Economic Policy, the Assistant to the President for Domestic Policy, and the Chair of the Council on Environmental Quality.  The head of any agency who determines that such agency does not have agency actions described in subsection (a) of this section shall submit to the OMB Director a written statement to that effect and, absent a determination by the OMB Director that such agency does have agency actions described in subsection (a) of this section, shall have no further responsibilities under this section.

(e)  The report shall be finalized within 180 days of the date of this order, unless the OMB Director, in consultation with the other officials who receive the draft final reports, extends that deadline.  

(g)  With respect to any agency action for which specific recommendations are made in a final report pursuant to subsection (e) of this section, the head of the relevant agency shall, as soon as practicable, suspend, revise, or rescind, or publish for notice and comment proposed rules suspending, revising, or rescinding, those actions, as appropriate and consistent with law.  Agencies shall endeavor to coordinate such regulatory reforms with their activities undertaken in compliance with Executive Order 13771 of January 30, 2017 (Reducing Regulation and Controlling Regulatory Costs).

(i)    Executive Order 13653 of November 1, 2013 (Preparing the United States for the Impacts of Climate Change); 

(iii)  The Presidential Memorandum of November 3, 2015 (Mitigating Impacts on Natural Resources from Development and Encouraging Related Private Investment); and

(b)  The following reports shall be rescinded: 

(ii)  The Report of the Executive Office of the President of March 2014 (Climate Action Plan Strategy to Reduce Methane Emissions).

(d)  The heads of all agencies shall identify existing agency actions related to or arising from the Presidential actions listed in subsection (a) of this section, the reports listed in subsection (b) of this section, or the final guidance listed in subsection (c) of this section.  Each agency shall, as soon as practicable, suspend, revise, or rescind, or publish for notice and comment proposed rules suspending, revising, or rescinding any such actions, as appropriate and consistent with law and with the policies set forth in section 1 of this order.  

(b)  This section applies to the following final or proposed rules:

(ii)   The final rule entitled "Standards of Performance for Greenhouse Gas Emissions from New, Modified, and Reconstructed Stationary Sources: Electric Utility Generating Units," 80 Fed. Reg. 64509 (October 23, 2015); and

(c)  The Administrator shall review and, if appropriate, as soon as practicable, take lawful action to suspend, revise, or rescind, as appropriate and consistent with law, the "Legal Memorandum Accompanying Clean Power Plan for Certain Issues," which was published in conjunction with the Clean Power Plan.  

Sec. 5.  Review of Estimates of the Social Cost of Carbon, Nitrous Oxide, and Methane for Regulatory Impact Analysis.  (a)  In order to ensure sound regulatory decision making, it is essential that agencies use estimates of costs and benefits in their regulatory analyses that are based on the best available science and economics.  

(i)    Technical Support Document:  Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 (February 2010); 

(iii)  Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis (November 2013); 

(v)    Addendum to the Technical Support Document for Social Cost of Carbon:  Application of the Methodology to Estimate the Social Cost of Methane and the Social Cost of Nitrous Oxide (August 2016); and

(c)  Effective immediately, when monetizing the value of changes in greenhouse gas emissions resulting from regulations, including with respect to the consideration of domestic versus international impacts and the consideration of appropriate discount rates, agencies shall ensure, to the extent permitted by law, that any such estimates are consistent with the guidance contained in OMB Circular A-4 of September 17, 2003 (Regulatory Analysis), which was issued after peer review and public comment and has been widely accepted for more than a decade as embodying the best practices for conducting regulatory cost-benefit analysis.

Sec. 7.  Review of Regulations Related to United States Oil and Gas Development.  (a)  The Administrator shall review the final rule entitled "Oil and Natural Gas Sector:  Emission Standards for New, Reconstructed, and Modified Sources," 81 Fed. Reg. 35824 (June 3, 2016), and any rules and guidance issued pursuant to it, for consistency with the policy set forth in section 1 of this order and, if appropriate, shall, as soon as practicable, suspend, revise, or rescind the guidance, or publish for notice and comment proposed rules suspending, revising, or rescinding those rules. 

(i)    The final rule entitled "Oil and Gas; Hydraulic Fracturing on Federal and Indian Lands," 80 Fed. Reg. 16128 (March 26, 2015);

(iii)  The final rule entitled "Management of Non Federal Oil and Gas Rights," 81 Fed. Reg. 79948 (November 14, 2016); and

(c)  The Administrator or the Secretary of the Interior, as applicable, shall promptly notify the Attorney General of any actions taken by them related to the rules identified in subsections (a) and (b) of this section so that the Attorney General may, as appropriate, provide notice of this order and any such action to any court with jurisdiction over pending litigation related to those rules, and may, in his discretion, request that the court stay the litigation or otherwise delay further litigation, or seek other appropriate relief consistent with this order, until the completion of the administrative actions described in subsections (a) and (b) of this section.  

(i)   the authority granted by law to an executive department or agency, or the head thereof; or 

(b)  This order shall be implemented consistent with applicable law and subject to the availability of appropriations. 

DONALD J. TRUMP

Tags: Clean Power Plan, Coal, Regulation, Executive Order

Energy Efficiency as a Climate Change Reform Strategy: Are we just throwing money at the problem?

(For an introduction to this E3 blog series click here)

Put to one side for a moment whether we need to do anything about climate change.  Assume it is real and we need to do “something.”  There are a wide variety of “somethings” that we can do.  Indeed, right now we are in the “throw spaghetti on the wall and see what sticks” phase.

But let’s face it, we have many more problems than climate change (even assuming it is a real problem).  There is, if you will, strong competition for scarce public resources to solve problems.  I would think it hardly controversial to state that we should spend public tax dollars in the most cost effective way possible.  Bjorn Lomborg makes the point that we don’t want to just feel good, we want to DO good!

For example, if there are two competing proposals to reduce a certain amount of greenhouse gases, all other things being equal, the one that does it cheapest should be chosen.  Similarly, if there are two competing proposals that will save lives, we should choose the one that saves lives for lower costs.  What if one proposal is to save a life a century from now and one to save it today?  More difficult, what if one is to buy mosquito netting for developing countries to mitigate malaria and another to slow the increase in global temperature in 50 years?  These all involve difficult trade-offs on how to use scarce resources.

Nearly every discussion of remedies for climate change discusses the enormous opportunity for energy efficiency.  Based on engineering models, rather optimistic claims are made for the potential for investments in energy efficiency to cure a variety of what ails us, often called a win-win-win situation.  We would use less energy.  Our total energy bills would be reduced.  We would emit less greenhouse gases.  We would need to build fewer electric power plants.  And best of all, the return on investment would rival that of Bernie Madoff’s and it would be tax free.

To be fair, the US does have an energy efficiency problem.  If energy prices (either gasoline or electricity) are distorted, then by definition are we not using energy efficiently.  This has possible environmental, energy security, and economic implications.

Both liberal and conservative energy analysts agree that the way that electricity is priced in the US leaves lots of room for improvement.  Broadly, we set prices that are too low in the peak period and too high in the off-peak period.  Additionally, many states set electricity rates in a way that gives electric utilities incentives to build new power plants rather than to invest in electric efficiency technologies.

The key disagreement between market oriented analysts and many liberals is the technique that should be adopted to correct these problems.  Market analysts promote the use of competition and market forces and market-based regulatory approaches to achieve better pricing signals for consumers.  Once prices are “efficient,” then let the consumer choose how to make the myriad trade-offs as to how to spend their money.  Many liberals promote a much more command-and-control regulatory approach to rectify the distortions created by bad pricing.  In essence, they don’t believe the consumer will make the “right” choices and thus adopt policies that force correct choices.

In 2015, a dramatic study was released by several professors from the University of Chicago and University of California at Berkeley.   The study found that the engineering model that is most often used to project the costs and benefits of energy efficiency technologies was seriously flawed. It found that the model’s projections seriously overestimated the energy savings that would result from investing in a given technology. This is important because public monies are often used to fund investments in energy efficiency. If the study is correct many projects that are funded do not meet the standard of being cost beneficial.

The study caused quite a stir in the energy policy community. It threatened to slaughter one of the sacred cows of progressives. But the study is significant because it is the first of its kind to comprehensively study the actual after-the-fact results to compare projected energy savings to actual energy savings. If the study is correct, it severely undercuts one of the main arguments that is often used to justify significant public investment in energy efficiency.

Some who are climate skeptics will no doubt tout the study as evidence for a variety of propositions, i.e., wasteful government programs, unreliability of engineering models, the triumph of good intentions over good policy.  But even for those genuinely concerned with climate change, if the study is correct and it turns out we have a real climate change problem, energy efficiency strategies will fail to address the intended problem.  This means we are not really addressing climate change.  We are just throwing scarce public resources at the problem.

Tags: Efficiency Standards

Energy Policy and the Presidential Election

(For an introduction to this E3 blog series click here)

Professor Richard Muller of the University of California, Berkley, a PhD in physics, wrote a fascinating book in 2012, Energy for Future Presidents: The Science Behind the Headlines.  He wrote it as if it were a memo to the next president.  Though written for the 2012 presidency, bottom line, it stands the test of time and is still a good read for the next president, assuming the president also reads my critiques of some of the conclusions.

I just found the book but I wish I had found it sooner.  Several things are fascinating.

First, the book is comprehensive in its discussion of current energy policy issues.  He is remarkably lucid considering the complexity of the subject matter.  To be completely honest, I learned a lot about the underlying physics of energy that will prove helpful in making future E3  policy recommendations.

Second, four years have passed so we have more information now than Professor Muller had.  But he was remarkably prescient in his insights about many energy issues.  For example, fracking for oil shale was in its infancy, while fracking for natural gas was going gang busters.  He correctly predicted that if fracking for oil shale played out it would radically change global dynamics related to energy as well as foreign policy.  He even predicted that it could mean the end of OPEC.  I am ready to concede that he is correct on this one.

Third, he predicates much of his analysis of energy on two issues: oil security and climate change.  I call each of these issues a Golden Thread.  If his Threads are correct, his recommendations create an elegant garment.  But if you pull both of the Golden Threads from the garment, it unravels into rags. Future blog postings will discuss these Golden Threads and the attendant recommendations.  Since I disagree with the importance of the Golden Threads, much of my analysis will be critical of an otherwise very insightful book.

Fourth, I highly recommend the book because I am very impressed with Professor Muller’s intellectual integrity.  My career has been in energy policy specifically and domestic economic policy broadly.  I have been at it for almost 4 decades.  I am a lawyer by training but have mostly “practiced” economics and the implementation of free market policies in energy.  I worked in the Reagan and Bush Administrations for nearly 11 years on radically changing policy relating to natural gas.  In hindsight, we succeeded beyond our wildest imaginations, as natural gas transitioned from energy basket case in the 1970s to the sharpest arrow in the energy quiver in the 2000s.  Many predicted at the time of the reforms that this paradigm based on market reliance would result in complete failure. (The late Senator Howard Metzenbaum called the Wellhead Decontrol Act of 1989 “one of the most anti-consumer pieces of legislation we have produced in a long time.”)

Accordingly, I have had my share of arguments and disagreements about energy policy.  It is rare to find someone whose arguments do not correspond with their self-interest.  Self-interest doesn’t necessarily mean you are wrong; it just means your arguments have to be taken with a grain of salt.  I have had only a few discussions with persons with no self-interest, a deep understanding of the issues, and intellectual integrity.  Thus it was a pleasant surprise to find Professor Muller’s book.

He does not share my world view.  First, he is by his own admission a physicist and concedes that he does not have training in the many other disciplines that are required for sound energy policy.  But even I would concede that my recommendations must be consistent with sound physics; thus, his insights must be taken seriously.  Second, he has much more faith in government solutions than I do, though he is thoughtful in his consideration of policy alternatives as compared to conventional liberal wisdom.  Third, as noted above, he believes in the Golden Threads, and I disagree with him on a number of points relating to those Threads.

Despite our disagreements, I have found his ability to decimate some of the Left’s sacred cows absolutely compelling and brutally honest.  Given that he is a member of their tribe and I am not, he presumably has some credibility in his observations that a “hack” like me would lack.  Several examples follow:

  1. Nuclear power is safe.
  2. Energy accidents are overblown.
  3. A radical carbon reduction strategy is unsound.
  4. Electric cars are not a sound solution to any of our energy problems.
  5. Many assumptions made about solar, wind, geothermal, and electric storage are pie in the sky from a physics perspective and should be embraced with a grain of salt.

Thus, his book is an excellent starting point for deeper discussions of energy policy in future blog postings as we enter the cycle of re-envisioning energy policy in a new Administration.

(Truth in advertising, I was Dr. Ben Carson’s energy and environment advisor.)

Tags: Book Review

Introductory Energy Post and the Clean Power Plan

Hi.  My name is Ken Malloy and I am a Senior Scholar with the Mark H.  Berens Family Charitable Foundation, the non-profit organization that publishes this website, TheRightInsight.org.

 

My expertise is in the integration of energy, environmental, and economic (E3) for short) policy.  I hesitate to use the term “energy policy” alone to describe my expertise.  I have found that energy policy issues have come to intersect so significantly with economics and environment that the term energy policy can sometimes become too limiting.  I also found that too often experts were organized into silos of one discipline and only marginally qualified in the other disciplines to make sound energy policy decisions that have strong environmental and economic implications.  I have worked at the intersection of these three disciplines for three decades, especially in electricity and the radical restructuring of natural gas markets to promote wellhead and retail competition.

 

A good example of this type of confusion relates to oil imports.  From an energy/security policy perspective, many analysts argue that imports of oil from hostile regions are a bad thing and thus they support various policies to reduce reliance on oil, focusing on vehicle efficiency standards, ethanol requirements, petroleum reserves, etc.  An environmentalist might regard using oil as a problem because it depletes a finite resource or causes pollution and thus support policies that either reduce demand for oil, i.e., vehicle efficiency standards, or establish technology standards to reduce pollution, i.e., a catalytic converter.  Most economists, assuming reasonably competitive global markets, would not be very worried about oil imports or consuming a “finite” resource and few economists support technology standards as the most efficient means of dealing with the third-party effects of pollution.  Thus, I have concentrated my efforts on understanding the integration of policy in order to promote a sound and efficient energy industry.

 

In addition to the integrated analysis issue, I also believe that energy policy can be misleading in that I believe most people immediately think of “fuels” (such as oil, natural gas, or coal) when they hear “energy policy.”  In my view the most important “energy” policy issue is the electric system.  Yet, at least at the federal level, the electric system receives decidedly less attention than do fuel issues.  But as you will see in future blog posts, I think that the electric system presents more challenges for the future than does the “fuels” industries.

 

So, who am I?  I have been analyzing energy issues since 1978.  I was a law professor that taught several courses that had as one of their defining characteristics the line between economic activity that would ordinarily be limited only by competition and free markets and the interests of the state or the federal government in “regulating” or affecting the competitive rules related to such activity.  The period between 1978 and 1981 was a surprisingly fertile time for this focus since the Federal Government was deregulating airlines (1978), railroads (1980) and trucking (1980), but heavily regulating energy (1978).

 

In 1981, I joined the Reagan Administration at the Federal Energy Regulatory Commission and began working on the rules related to price controls of natural gas under the Natural Gas Policy Act of 1978.  I eventually continued that work at the US Department of Energy until 1992, where I picked up issues relating to oil pipeline deregulation.  The radical reforms that were adopted for natural gas in the 1980s and early 1990s and the dramatic success of those reforms informs much of my analysis of E3 policy. After 1992, I also began working on issues related to the electric industry competition.  For reasons detailed in other sections of TheRightInight.org, the reform of the electric industry has not been as successful as other connective industry reforms.

 

The work I did promoting competition and deregulation of natural gas for 11 years turned out to be very successful.  The nation increasingly relies on natural gas as an abundant energy source that is the cleanest burning fossil fuel, is plentiful, is reasonably priced and is responsive to market forces.  Not bad for an energy resource that both the Ford and Carter Administrations had declared in short supply.   Even a liberal professor at Berkley Professor Richard Muller,  with a PhD in physics concluded:

Natural-gas use will grow rapidly, not just in the United States but around the world. This fuel is going to be so important that [the President] might consider launching a nationwide program, called something like The Natural Gas Economy, that recognizes the value of the new gas source and develops a coherent policy and infrastructure to encourage its exploitation.[1]

While I don’t agree with his conclusion regarding the need for a “nationwide program,” I share his sentiment that we have experienced a remarkable transformation in natural gas markets over the last two decades and that natural gas will continue to play an increasingly significant role in the US’s energy future.

 

After leaving DOE in 1996, I worked for an international consulting firm for three years helping companies understand the significance of the transition between previously heavily regulated natural gas and electric markets and the emergence of policies relying on competition in those markets.  Then, I started a think tank on issues of competition in the electric industry from 1999-2006.  I then started another think tank in 2009 to focus more broadly on E3 policy” issues related to that enigmatic line between free markets and government policy, CRISIS & energy markets!, of which I am the Executive Director.

 

Two issues led to this broader scope for the think tank, the impact of the BP Deepwater Horizon on the resurgence of the debate about oil policy and the growing impact of global warming/climate change on E3 policy.  I realized that increasingly a “crisis” was too often used to justify interventions into energy markets that were ill-advised.  (Full disclosure, most recently I was the energy and environment advisor to the presidential campaign of Dr. Ben Carson.  You can find the document I worked on for the campaign here.)

 

TheRightInsight has asked me to write three types of documents.  The first is a comprehensive summary of “energy policy.”  Energy Policy 1.0 has been completed and can be found here.  The goal of Energy Policy 1.0 is to provide a broad, market-oriented view of the current state of E3 policy for an audience that is not expert in energy policy, a Wikipedia on E3 policy but from a free-market perspective.  I will provide two types of updates to this article.  The first type of update will be minor technical corrections or changes as the underlying facts change.  These changes will be highlighted in the document on the website so that you can see the evolution of the document (for example Energy Policy 1.1).  The second type of change will possibly be an Energy Policy 2.0 if at some point in the future it becomes necessary to publish a new edition of the article, as for example might be the case with new legislation or dramatically new policies in President Trump’s Administration.

 

The second type of document is a Commentary.  Commentaries will be 6 to 10 page  analyses of a single E3 issue that is more in-depth and analytical than is found in the more general Energy Policy article.  We anticipate publishing a Commentary about once a month.  So far we have published three Commentaries, oil markets, electricity, and the consensus on climate change.

 

The third type of document is a Blog Post.  The document you are currently reading is the first Blog Post.  Our goal is to publish a Blog Post on an energy issue once a week.  A Blog Post is typically about 600 words, though the nature of this first Blog Post exceeds that length.


-----------------------------------------------------------------------------------------------------------------

That completes my introduction to this effort now let’s get on to substance.

 

Right now, the most important E3 issue is the Clean Power Plan (CPP) issued by the US Environmental Protection Agency (EPA).  Ed Reid, another Scholar with the Mark H.  Berens Family Charitable Foundation, has written a recent blog posting on the CPP broadly focusing on the impact on coal and the fact that both industry and Congress have requested that the Supreme Court issue a stay of the EPA’s CPP.  (Mr. Reid has also published a lengthy Article on the science of climate change for TheRightInsight.)

 

President Obama announced the final version of the CPP on August 3, 2015.  The Supreme Court issued a stay of the CPP on February 9, 2016, thereby temporarily preventing it from being implemented until the Supreme Court has an opportunity to review the Plan after the courts below had completed their review.

 

This is the setup to possibly the most significant E3 decision in the history of the United States (dramatic music playing in the background).  Both the Democratic and Republican Parties had specific language in their 2016 party platforms on the CPP.  Not surprisingly, the Republican Platform advocates repeal of the CPP, while the Democratic Platform supports the CPP.

 

So in plain English what is the CPP?

There is considerable debate about the impact of carbon emissions on global warming and what should be done about it.  Energy Policy 1.0 has a broad discussion of climate change and E3 Commentary 3 is an expanded discussion of the climate change “consensus.”  This Blog Post is not the place to engage in that debate.  Rather, it merely explains the significance of the CPP’s role in the national climate change debate.

 

Electricity generated from coal and natural gas emits carbon dioxide and about 66% of the Nation’s electricity is generated from coal and natural gas.  Generating electricity with fossil fuels accounts for about 40% of manmade carbon dioxide emissions.  If one accepts that carbon emissions cause some global warming that will be catastrophic at some point in the future, then one strategy for dealing with global warming is to reduce carbon emissions from the generation of electricity.  (Recognize, however, that it is not the only possible strategy.  Even some strong believers in climate change harm recognize the limitations of this strategy.)

 

Congress has not declared a national policy on climate change.  They came pretty close in 2009 with the Waxman-Markey bill, which passed the House but not the Senate (even though the Democrats had enough votes to overcome a possible Republican filibuster).

 

Without a national policy, chaos has reigned in energy policy relating to climate change.  Even if one is an ardent believer in the likelihood that carbon emissions will inevitably have catastrophic consequences, a fair-minded person would have to admit that the current pattern of policy implementation is haphazard, dysfunctional, costly, and ineffective.

 

The CPP, if allowed to go into effect, will require each state to develop a plan for its electric utilities to meet certain carbon emissions targets set by the Environmental Protection Agency.  The CPP gives states some flexibility to meet the carbon emissions target.

 

The CPP permits a combination of three strategies to attain a state’s carbon reduction targets. The first is to improve the efficiency of existing coal plants, thus allowing the same amount of coal to produce more electricity thereby reducing carbon emissions per unit of electricity. The second is to increase the use of natural gas generation, thereby reducing carbon emissions since natural gas emits about half as much carbon dioxide as does coal. The third is to increase the use of renewable energy. In addition, states can also promote increased energy efficiency as a way of using less energy, thus reducing the demand for electric generation. If a state fails to file a plan that meets the target, the rule allows the EPA to develop and implement a federal plan for that state. (For some reason, the EPA does not encourage the use of new nuclear power plants to reduce carbon emissions.  Nuclear power does not emit any carbon.)

 

There are several key points to be made about the CPP:

  1. The CPP requires a 32% reduction in carbon emissions over 2005 levels by 2030.
  2. It  is based on the premise that climate change is a serious problem.  While few scientists disagree that carbon emissions have an impact on the greenhouse effect or that the earth’s temperature has had a small increase during the 20th Century, there is still considerable debate about whether the continuing impact of carbon emissions will be catastrophic.  For almost two decades, there has not been any significant warming as predicted by the climate models, the so-called “pause.”
  3. If climate change will not cause catastrophic consequences, then actions such as the CPP are unnecessary and impose significant costs on the economy. Given that there are scarce resources available to address society’s needs, it would be wasteful to dedicate those resources to a problem that does not exist.
  4. Even if one assumes that climate change is a serious problem, there are a variety of policy strategies that are being debated as to what to do about climate change.  Broadly, there are three competing strategies for dealing with climate change.
  • The first and most often discussed is a radical reduction in carbon emissions. The theory that supports this strategy is that by reducing carbon emissions we will be able to better control the temperature of the earth.  There are three ways to achieve such reductions: mandates such as the CPP, a permitting program such as cap-and-trade, and a carbon tax.
  • The second strategy is called geo-engineering. This strategy posits that we can develop technologies by mid-century that will address the issue of the warming of the atmosphere caused by carbon emissions if such warming continues and it becomes clearer that the consequences would be catastrophic. For example, suppose that we could develop algae that would absorb carbon in the world’s oceans or that an aerosol could be developed that could be emitted into the atmosphere that would block radiation and control the temperature of the earth.
  • The third strategy is adaptation. Weather conditions vary dramatically across the globe. Humans adjust to this variation in a wide variety of ways. For example, Amsterdam built a series of canals in the 17th Century to make the land more habitable.  Given that the projected impact of climate change will have both benefits and detriments, it may be more cost-effective to adapt to a changing climate than to try to control the climate.
  • These strategies are not mutually exclusive. Thus, a fourth strategy would be to combine pieces of all three strategies as a way of coping with the potential impact of climate change. 
  1. The CPP adopts a specific strategy of requiring dramatic reductions in carbon emissions.
  2. Few would argue that this strategy will not be expensive and require massive adjustments to the electric utility system.  For example, it is likely that no new coal plants will be able to be built under the CPP unless a technology is developed that allows the sequestration of carbon dioxide emissions. Additionally, many existing coal plants that have significant useful life remaining will have to be closed. To make up for the loss of coal, there will have to be significant actions taken to enhance energy efficiency and to develop renewable resources. While this may be beneficial, there is no question that it will be expensive and even potentially disruptive to the electric system.
  3. Supporters of the CPP argue that such dramatic measures are required to address the serious consequences of climate change. Opponents of the CPP broadly argue either that climate change is not a serious problem or that the strategy of radical carbon reduction is ill advised for a variety of reasons.

 

There is no question that the election of Donald Trump and the Supreme Court review of the CPP will have a major impact on the implementation of the CPP.



[1] Energy For Future Presidents: The Science Behind The Headlines, page 294, Muller, Richard (2012)(emphasis in original).

 

Tags: Clean Power Plan

Energy Policy: The Facts and Myths on the Consensus on Climate Change In-Depth Article

"No challenge--no challenge--poses a greater threat to future generations than climate change. 2014 was the planet’s warmest year on record.  Now, one year doesn’t make a trend, but this does: 14 of the 15 warmest years on record have all fallen in the first 15 years of this century," said President Obama in his 2015 State of the Union Address.

 

 

“I am skeptical humans are the main cause of climate change and that it will be catastrophic in the near future. There is no scientific proof of this hypothesis, yet we are told ‘the debate is over’ and ‘the science is settled’. … We have no proof increased carbon dioxide is responsible for the earth’s slight warming over the past 300 years,” said Dr. Patrick Moore, one of the founders of Greenpeace.

 

“Multiple studies published in peer-reviewed scientific journals show that 97 percent or more of actively publishing climate scientists agree: Climate-warming trends over the past century are very likely due to human activities. In addition, most of the leading scientific organizations worldwide have issued public statements endorsing this position.” NASA (the guys that put a man on the moon)(emphasis added)

 

 

The authors of the Nongovernmental International Panel on Climate Change “say the IPCC [United Nations’ Intergovernmental Panel on Climate Change] has exaggerated the amount of warming likely to occur if the concentration of atmospheric CO2 were to double, and such warming as occurs is likely to be modest and cause no net harm to the global environment or to human well-being.” NIPCC Summary for Policymakers, page 3 (2013)

 

Who could blame you if you were confused by all the conflicting claims about climate change?  The problem is almost everything you hear has some truth to it but much of it is exaggerated.  But frankly, both sides have extremists in the debate that are guilty of some fudging if not outright prevarication. As with so many things, the devil is in the details and who has time to ferret out all those details? (I have spent the last 5 years focusing on the impact of climate change on energy markets.)

But Climate Change Alarmism is now one of the main drivers of energy policy.  I call it the Golden Thread.  One’s views on energy policy are nearly completely a function of what you believe about climate change.  If the alarmists are wrong and you pull out this Golden Thread, then nearly all of current energy policy unravels or at least must be radically altered.

While I have opinions on many of the issues below, I have made a studious attempt to refrain from any pontificating and intend to simply follow Joe Friday’s advice in Dragnet “Just the facts, ma’am, just the facts.”  My main goal is to put claims that there is a “consensus” on climate change into some perspective so the debate over energy policy can be better understood. I have tried to present a range of opinions faithfully.

There does indeed seem to be a broad consensus on at least nine points:

  • First, since the dawn of time, the earth’s climate has changed, is changing, and will change in the future due to natural variability. The earth has historically been both colder and hotter than it is today. Carbon concentrations in the atmosphere have historically been both higher and lower than it is today.
  • Second, the science on the impact of releasing ever increasing carbon emissions is theoretically sound.  All other things being equal, there is a strong scientific consensus that more carbon in the atmosphere will increase the greenhouse effect. 
  • Third, man’s use of fossil fuels has increased the concentration of carbon in the atmosphere over the last century and will continue to increase it in the future under the status quo.
  • Fourth, increasing the concentration of carbon in the atmosphere has had and will “very likely” have some impact on increasing earth’s average temperature (temp).
  • Fifth, even scientists labeled as Skeptics (or more derogatorily “Deniers”) acknowledge that average temp has increased about 1 degree Centigrade between 1880 and the present.
  • Sixth, even scientists labeled Warmists (or more derogatorily “Alarmists”) acknowledge that average temp has been fairly stable (The Pause) over the last 18 or so years, i.e., it has not increased as predicted by the models despite dramatic increases in global carbon emissions.
  • Seventh, the United States acting alone cannot solve the problem, whatever that turns out to be. 
  • Eighth, US action to radically reduce carbon will have a profound effect on our economy.
  • Ninth, we don’t know what the “right” or optimal temperature for the earth should be.

So when you see a statement like “97%” of scientists agree on climate change, these facts are the strongest basis for that claim.  In fact, these claims about consensus would be largely correct if they are limited to these nine conclusions.  

So end of article, right?  Actually, this is just the beginning and the easy part.  Unfortunately, some have tortured this “consensus” into confessing more than is actually supported by the science.  

Did you happen to notice that the statement about the rise in temp followed the statements about how carbon emissions created a greenhouse effect, that using fossil fuels had increased carbon emissions, and that there was a recent increase in temp?  You probably reasonably assumed that the temp increase was caused by man’s use of fossil fuels. Therein lies the rub.

Did you notice the phrase “all other things being equal”?  Well guess what? All other things are not equal.  The earth’s climate is an exceedingly complex phenomenon.

Let’s first start with how we measure the temp of the earth.  Think of what that means the temp of the earth.  You probably call to mind how we measure our own temp.  Put a thermometer in our mouth for a minute and read the temp.  It should be obvious there is no single place or device to measure the earth’s temp.  The earth is a pretty big place.  If it is hot in the northern hemisphere it is cold in the southern hemisphere.  So measuring the earth’s temp is tricky business. 

Today, there is a consensus that the most accurate temp readings are from satellite data.  Guess what?  There were no satellites a century ago much less a millennia ago.  In addition to satellites, we use historical data from thermometers on the ground.  Not surprisingly, this yields some questionable results.  Some thermometers are affected by how the land they are located on has changed over time.  The “urban heat island effect” is one such development.  If a thermometer was located 50 years ago around vegetation and now is surrounded by parking lots and buildings, then its ability to compare today’s temp to historical data is tainted.

In some cases, we actually have consistent thermometer readings going back hundreds of years, but not enough to have a high degree of confidence in their ability to accurately measure the temp of the globe.  We thus use other surrogates for estimating the past correlation between carbon concentration and temp.  Popular methods includes tree ring data, ice core data and ocean floor seashell deposits.  To make a long story short, there is actually a vigorous debate about how to accurately measure the past temp of the earth and how it correlates with the amount of carbon in the atmosphere.  While it is fair to say that there is a consensus on increases in the last century, it is also fair to say that nothing approaching 97% of scientists agree on the accuracy of different methods of measuring historic temp before satellite data and how the recent temp compares to historic temps.

Another important fact of climate history is that there are periods where warming occurred in a stable CO2 atmospheric condition and in which CO2 thereafter increased.  Did the warming increase the growth of vegetation which then emits more CO2, thus increasing CO2?

One of the biggest controversies is the attempt to explain warmer temps in the medieval period (900 to 1200 AD) and colder temps that followed (1400 to 1600).  There had been historically strong support that higher and lower temps existed during this medieval period, i.e., grapes grew where they can no longer grow; rivers froze that do not freeze today, ships could pass areas now frozen and couldn’t in areas that are now passable.  But since this was obviously before man started burning fossil fuels, it created a dilemma for the theory that fossil fuels alone were causing higher temps in recent times. 

So several scientists reassessed the temp data of the medieval period and concluded the temps were actually colder during this period, thus adding support to the role of fossil fuels in the current period as the likely cause of the temp increase.  This set off a firestorm of controversy and has largely been discredited.  As part of this controversy over some scientific conclusions, someone hacked a prominent university’s email system and released the emails to the public.  Sadly, even a generous reading of the emails indicated that there was manipulation of data and political considerations in how to interpret, treat, and release important data and conclusions. 

Given the magnitude of some of the actions that would need to be taken if the alarmist theory is right, trust in the scientific community is essential.  This email episode and many of the actions of the United Nations International Panel on Climate Change have undermined that trust and conflated science and politics.

So what caused the higher temps in the medieval period?  There is certainly no significant consensus on the temps of the medieval period and thus this period remains a difficult anomaly for those who believe that fossil fuel is a very significant cause of any recent warming.

Second, there is the question of how much man’s burning of fossil fuels has contributed to any temp increase and will contribute to any future increase.  Even the UN IPCC (the main organization that tries to develop scientific consensus) acknowledges that climate change is “a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods.” (emphasis added)

As the UN IPCC recognizes, many natural factors affect the earth’s temp.  Let’s start with the most obvious, the sun.  The sun’s rays are not static over time but ebb and flow. Sunspots can go “silent” for periods of time and be very active in other periods.  The earth has clouds that block the radiative force of the sun.  Another little understood factor is extra-galactic cosmic ray bursts which can significantly affect the earth’s cloud formation.  Then there are the oceans that absorb and release carbon.  Volcanos and aerosols affect temp by blocking the sun. The axis of the earth has an effect, and this axis is constantly changing.  Additionally, there are periodic weather patterns called El Nino and La Nina that can have a profound effect on temperature and rainfall.  Like sunspot activity, the strength and thus impact of these weather patterns are not fully predictable.  

No scientist denies that “natural variation” plays some role in the temp of the earth.  But it is a knotty problem to ferret out how much is attributable to man and how much is due to natural variation.  There is a vigorous debate about how much each of these factors, and many others, contribute to the temp of the earth.  For example, if the sun is responsible for 99% of the earth’s temp and carbon from fossil fuels for 1%, then you can see that there is probably not much advantage to reducing fossil fuel emissions since it will not have much effect.  The fact is that there is a lot we don’t know about how clouds, oceans, aerosols, and many other factors affecting temp. So while there is little debate that man has some impact, there is a vigorous debate about how significant man’s impact is to any potential future warming.

So how much carbon does man emit compared to these other factors. One scientist developed the following table to put man’s contribution into perspective with other natural factors:

Based on concentrations (ppb) adjusted for heat retention characteristics

 % of Greenhouse Effect

% Natural

% Man-made

Water vapor

95.000%

94.999%

0.001%

 Carbon Dioxide (CO2)

3.618%

3.502%

0.117%

 Methane (CH4)

0.360%

0.294%

0.066%

 Nitrous Oxide (N2O)

0.950%

0.903%

0.047%

 Misc. gases (CFC's, etc.)

0.072%

0.025%

0.047%

 Total

100.00%

99.72

0.28%

 

Table 4a. Anthropogenic (man-made) Contribution to the "Greenhouse Effect," expressed as % of Total (water vapor INCLUDED)

While it may look like man’s contribution is miniscule (about a quarter of 1%), some scientists argue that this small amount is the tipping point that will cause the dramatic rise in temp.  Other scientists disagree and believe that man’s contribution is not and will not be a major factor in climate change.  But there is nowhere near a 97% consensus here on how much warming can be attributed to man versus natural variability.

Much of the discussion of “man’s” contribution centers around burning fossil fuels.  Yet there is a vigorous debate about how much carbon is emitted by agribusiness and the consumption of meat.  Cite Cowspiracy

Related to man’s use of fossil fuel is the question of how quickly carbon dissipates once it is emitted. Some scientists believe (and historically the conventional wisdom is) that it dissipates within 5 years.  But more recently, some scientists have come to understand that the answer is much more complex since there is a constant interchange of carbon between the earth (plants and oceans) and the atmosphere.  Some now believe that carbon emissions hang around for a much longer period that previously believed. Again, there is nowhere near a 97% consensus on this issue.

One of my favorite questions is given the variability of the historical record what is the right temp for the earth?  Why do we assume that the current temperature is scientifically proven to be optimal?  We certainly have a scientific basis for knowing that 98.6 degrees is the “normal” temp of the human body.  No such scientific consensus exists on the right temp for the earth.

To sum up, there is indeed a strong consensus on some issues, but there is also strong debate on other issues.

So given that many uncertainties still exist, how do we know what the temp will be a century from now?  We develop models.

Let’s try a thought experiment.  Think of the issue of how much money you will spend in April 2019.  Suppose I gave you and several other financial experts a million dollars to each come up with the best possible calculation.  You would take a spreadsheet and start listing all the categories of expenditure (and likely sources of income since that would operate as a boundary).  You would then try to estimate how much you would spend for each category.  You would try to anticipate all the life events that would happen in just 3 years.  You might get married or divorced.  You might have a child.  An elderly parent might come to live with you.  You might get sick.  You might get fired or get a promotion.  The economy might crash.  Inflation might accelerate.  Taxes might increase.  You might have a car accident and buy a new car.

You do your best to make educated guesses about your life.  After all who knows you better than you?  You then hit the sum button and you get a number.  Is that number a “fact?”  Or is it an educated guess, indeed the best educated guess you could make after lots of effort.  But at the end of you day, you would surely realize that there are a hundred things that could happen to throw off your calculation.  Additionally, how do you think your calculations would compare to the financial experts?  How would the financial experts compare to each other?   You would not be surprised if everyone had a different estimate.  Only time will tell whose educated guesses will come closest to reality.

This is what scientists have done.  They have created incredibly sophisticated models to predict how much the earth’s temp will increase over the next century.  We don’t have just one model.  We have a lot of models.  And the scientists building the models are incredibly credentialed, hardworking, and well-funded.  And different models make hundreds of different assumptions and not surprisingly reach different conclusions.

Let’s conduct a thought experiment on change over time.  Modelers want to make an educated guess about the earth’s climate about 100 years from now.  Take half that time period (50 years) and answer this question.  If you were to predict in 1965 what life would be like in 2015 (50 years), how close to reality do you think you would be?  A century ago the most challenging environmental problem was horse poop in burgeoning urban centers.  Indeed, this calls for some humility.  It seems simply preposterous to anticipate all the technological changes that will happen over a 50-year period much less a century.  You may call it naïve but isn’t it likely that we will find an innovative technological solution to climate change if indeed carbon concentration turns out to be as serious a problem as the Alarmists believe?

Nonetheless, the models seem to generally support a projection that temp will increase with some correlation to our burning of fossil fuels, but with a significant variation as to how much temp will increase and the degree of the increase attributable to burning fossil fuels. To be fair, there are some credentialed critics (MIT, Princeton, and Harvard) that are concerned that there is a bias in the models, reflecting the need for ever increasing funding for the modelers scientific efforts.  The concern is that there is more academic success by winning large grants of funds and that demonstrating a serious problem leads to large funding.  If there is no serious climate change problem, funds will likely dry up for research.  There are also claims that scientists who are skeptical about the seriousness of climate change do not get funded on an equal basis if at all.  But this may be an unfair criticism.  Some of the scientists no doubt care about doing sound scientific research.

So how well have the models done so far?  Well, not a single model predicted that temp would remain relatively stable for almost the last two decades.  It is fair to ask if the models cannot accurately predict the easy stuff (how much will you spend next month versus 3 years from now?), how much confidence should we have in predicting the hard stuff a century from now?  This is especially true given that many of the conditions embedded in the model are the subject of substantial debate and uncertainty.  Indeed, there are some instances where scientists use “plug” numbers to make sure that the models can be reconciled with historic climate patterns.  It is not unusual for modelers even in modeling outside the arena of climate models to use a variety of techniques to accommodate uncertainties.  So track records have to matter in whether our confidence in the results of models should be increased or decreased.  And indeed it seems somewhat surprising that when “adjustments” to the data or models are made they all too often seem to be in the direction of increasing projections of warming.

The climate change literature is now replete with explanations of why the models failed to anticipate the “pause.”  One wag has actually counted 66 different explanations.  There is certainly no 97% consensus here.

In 2015, there was a good example of the difference between engineering models and their ability to accurately predict future reality.  There is an engineering model that is nearly universally used to predict the cost and benefits of making various energy efficiency investments in a given residential home.  For example, if you invest in insulation, more efficient windows, and weather stripping and it cost you $5000, the model will show how quickly that investment will save you enough in lower energy bills to pay back the investment.  The key calculation is projecting the anticipated energy savings.  A study by professors at the University of Chicago and Berkley did a very detailed analysis of the projected energy savings and compared them to the actual energy savings in 30,000 homes that were part of a federal program for funding such investments.  The study found that the model systematically overestimated savings by more than half.  Thus investments that the model predicted would be cost effective were in fact bad investments. 

Another example of the difficulty of making even much more focused computer projections is the famous bets between Ehrlich-Simon and the Simmons-Tierney (put your money where your mouth is).  In both instances, a bet was made between experts who were alarmists about the future of scarcity of natural resources and those who thought they were, well, being alarmists.  The bets consisted of predicting natural resource prices over relatively short periods (10 and 5 years respectively).  In both instances the alarmists were, indeed, alarmists, wrong in their predictions, losers in the bet (both paid off).  Yet, alarmists are much more likely to get media coverage than those who claim that the alarmists claims are overblown.

The point of discussing the personal finance thought experiment, the nearly two decade pause, the energy efficiency study, and the natural resource bets is to raise a cautionary concern about relying on computer models for making projections far into the future.  Computer models are no doubt helpful to our understanding of what may happen in the future but the results of these models are NOT FACTS.  They are best-guess estimates that are subject to a variety of flaws and biases.      

OK so there is a high degree of consensus on some issues and a lot of debate among scientists on other issues.  Where does that leave us?

Let’s assume that we magically develop a high degree of confidence that the earth’s temp will increase in the future by something like 5 degrees Fahrenheit and that man’s use of fossil fuels is a very significant reason for the increase. (Alert: There certainly is no such consensus today but for the sake of argument let’s assume there is.)

The question then is what will happen.  Surprisingly, there is no clear consensus on what the earth looks like in 2100 if temp increases by 5 degrees.  Botanists pump carbon dioxide into greenhouses to help plants and flowers grow better.  Carbon dioxide is essential to life.  We breathe in oxygen and exhale carbon dioxide.  Plants absorb carbon dioxide and release oxygen.  The earth has been hotter and colder than our predicted conclusion of a 5 degree increase and it has had higher and lower concentrations of carbon dioxide.  So will a temp increase be beneficial or catastrophic for humankind? 

On the plus side is the fact that the global area producing food crops will substantially increase.  With higher CO2 concentrations, crop production in tropical and temperate areas can be expected to increase.  Fishing catches in the oceans of the world may increase.  Based on the current models of temperature increases, Arctic and Antarctic ice and glaciers may not melt enough to inundate coastal urban areas or islands.  There will be fewer deaths from frigid temperatures, which by far outnumber deaths from high temperatures. 

But some scientists predict the end of the world as we know it.  Storms will increase.  Floods will cover Manhattan. People will suffer from pestilence and starvation. Al Gore won an Oscar for shocking us in “An Inconvenient Truth.”  The UN’s IPCC has won a Nobel Peace prize for raising concerns about the potential devastating impacts of climate change. There are clearly a lot of loud voices from both scientists and non-scientists claiming that the results will be catastrophic and that radical efforts must be undertaken to avert this outcome.

Some scientists believe just the opposite.  “The chief benefits of global warming include: fewer winter deaths; lower energy costs; better agricultural yields; probably fewer droughts; maybe richer biodiversity.”  Even some of those scientists that recognize that there will be some negative impacts from climate change believe the harms are exaggerated and that radical solutions are premature. Some Skeptics believe that changing the terminology from “global warming” to “climate change” was a deliberate attempt to claim that any weather anomaly could be attributable to man’s burning of fossil fuels.

Some Warmists seem to argue that any harm caused by weather is attributable to carbon. Indeed, many even argue that many harms that are not directly attributable to weather are caused by climate change.  One blogger has even compiled a web page of hundreds of horrific things that have been claimed as a result of climate change.  (My favorite is an increase in major league baseball home runs.) 

Additionally, there is the problem of how one would disprove climate change by looking at weather anomalies.  If everything proves climate change, nothing can disprove climate change.  It seems that every weather event is blamed on climate change.

The Oxford Dictionary defines the scientific method as: “A method of procedure that has characterized natural science since the 17th century, consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses.”

If the scientific method is the ability to test the truth or falsity of a hypothesis, what evidence would you want to see that proved that carbon emissions had at best a de minimus effect on temp or weather conditions? If drought or rain, storms or lack of storms, snow or no snow, cold or hot, temp increase or no such increase, all prove the existence of climate change, then what would disprove it? Suppose that we would still have storms in 2100 but they would be only 2% more severe?  Not even the most ardent Warmist claims there will never again be weather events even if we completely weaned ourselves off carbon.

Additionally, it harms the credibility of those genuinely concerned with the scientific analysis of climate change that many of the most ardent advocates of radical carbon reduction are also harsh critics of capitalism. Is it at least possible that some are overstating the problem to further a more nefarious/hidden agenda?  Similarly, some of the most ardent Warmists have made predictions before that have turned out to be abysmally incorrect:

In 1971, John Holdren edited and contributed an essay to a book entitled Global Ecology: Readings Toward a Rational Strategy for Man. He wrote …the book’s sixth chapter, called “Overpopulation and the Potential for Ecocide.”  … In their chapter, Holdren and Ehrlich speculate about various environmental catastrophes, and on pages 76 and 77 Holdren the climate scientist speaks about the probable likelihood of a “new ice age” caused by human activity (air pollution, dust from farming, jet exhaust, desertification, etc).

John Holdren is now not only the “Science Czar” for the United States, but he’s also one of the original leaders of the “alarmist” wing of the Global Warming debate and he now promotes the notion that the current climate data points to a looming planetary overheating catastrophe of unimaginable dimensions (he helped make the charts and graphs for Al Gore’s film An Inconvenient Truth, for example).

As of July 2016, “Dr. John P. Holdren is Assistant to the President for Science and Technology, Director of the White House Office of Science and Technology Policy, and Co-Chair of the President's Council of Advisors on Science and Technology (PCAST).”  Dr. Holdren was one of the alarmist participants in the Ehrlich-Simon bet.  Apparently, being consistently wrong in making alarming projections does not harm one’s career.

Ok, but let’s assume that we become convinced that more bad things than good things will result from a significant increase in temp over the next century.  Then the big question is what is the right policy to address that situation?  Now the question is one of policy, not science. Broadly, there are three strategies: radically reduce carbon emissions, develop new technologies that will mitigate carbon concentration in the atmosphere, or adapt to a new reality, and there are lots of combinations in between.

What should we do?  What actions should we take?

Let me draw on an analogy from the past.  In 1949, polio was an epidemic in the US.  The consensus treatment for some polio victims was called an iron lung, which is a bulky contraption that helped polio victims breathe. (Illustration on the left.)  Scientists projected a lot more cases of polio.  The consensus policy solution might have been that we should order millions of iron lung machines for all the potential victims that would develop polio.  But then Drs. Salk and Sabin in the next several years developed a vaccine for polio.  Today, polio is nearly extinct around the globe, with less than 300 cases reported globally in 2012.  All in about 60 years...  So, what are we going to do with all those iron lungs we ordered?

Another example of how quickly things can change.  The Wright Brothers first flew about 200 feet in 1903.  Air power dominated World War II in the 1940s.  And we put a man on the moon in 1969.  All in 66 years!  Keeping in mind the pace of change in computer technology and communication, how wise is it to make policy now on uncertain predictions of what will happen a century from now?

Still, some people believe that climate change is the single most important issue facing the world and must be addressed by dramatically reducing our reliance on fossil fuels and transitioning to renewables and more efficient use of energy as soon as possible, irrespective of costs or quality of life.   

Such Warmists have not been successful in convincing the Congress of their position.  Even when President Obama had a filibuster proof Democratic Senate and a majority Democratic House, they did not agree on legislation on climate change.  Needless to say, legislation that will satisfy Warmists is not likely to pass a Republican House and Senate. 

Even the American people seem skeptical.  Poll after poll ranks climate change or global warming near the bottom of the priorities that should be addressed.  Even a United Nations poll of seven million people worldwide ranked “action taken on climate change” dead last in a list of proposed priorities.

Warmists have been more successful in Departments of the Executive Branch, some States, and courts, including the Supreme Court.  Most Warmists’ preferred solution to the “problem” of climate change is radical reduction of carbon emissions.  They have been successful in convincing President Obama and the Environmental Protection Agency to issue two rules that would have a dramatic effect on reducing the use of coal for electric generation.  To say these rules are controversial is an understatement.  You will see these rules referred to as the Clean Power Plan.  (The Supreme Court upheld an injunction against the Clean Power Plan pending a full review.)

Skeptics obviously oppose the Warmists’ agenda.  There are lots of criticisms made but they boil down to the belief that there is not enough evidence to support policies that would have a profoundly negative impact on our economy and quality of life for very little real impact on future temperatures.  Additionally, some are concerned that the developing countries will never achieve a higher standard of living without using fossil fuels for electricity and growth.

The Copenhagen Consensus Center has run a very interesting experiment several times over the last decade.  Every couple of years, they bring together experts, some with Nobel Prizes to their credit, who are asked to allocate $75 billion to the projects that would result in the greatest benefit to mankind (most benefits for least costs).  As the Center states:

The Expert Panel was presented with nearly 40 investment proposals designed by experts to reduce the challenges of Armed Conflict, Biodiversity Destruction, Chronic Disease, Climate Change, Education Shortages, Hunger and Malnutrition, Infectious Disease, Natural Disasters, Population Growth, and Water and Sanitation Shortages. They found that fighting malnourishment should be the top priority for policy-makers and philanthropists.

Given the budget constraints, they found 16 investments worthy of investment (in descending order of desirability):

  1. Bundled micronutrient interventions to fight hunger and improve education
  2. Expanding the Subsidy for Malaria Combination Treatment
  3. Expanded Childhood Immunization Coverage
  4. Deworming of Schoolchildren, to improve educational and health outcomes
  5. Expanding Tuberculosis Treatment
  6. R&D to Increase Yield Enhancements, to decrease hunger, fight biodiversity destruction, and lessen the effects of climate change
  7. Investing in Effective Early Warning Systems to protect populations against natural disaster
  8. Strengthening Surgical Capacity
  9. Hepatitis B Immunization
  10. Using Low Cost Drugs in the case of Acute Heart Attacks in poorer nations (these are already available in developed countries)
  11. Salt Reduction Campaign to reduce chronic disease
  12. Geo Engineering R&D into the feasibility of solar radiation management
  13. Conditional Cash Transfers for School Attendance
  14. Accelerated HIV Vaccine R&D
  15. Extended Field Trial of Information Campaigns on the Benefits From Schooling
  16. Borehole and Public Hand Pump Intervention

(emphasis added).

It turns out that the panel of experts believed the costs of trying to reduce fossil fuel use does not result in enough benefits to merit immediate attention.  (One estimate is that there is only 10 cents of benefit for each dollar spent reducing a ton of carbon.  But others have found much higher benefit to cost ratios.)  Like the polio example, if we continue to study the problem and improve our understanding of climate, fossil fuel use, mitigation, and adaptation, it is likely that we will find a solution that is far more cost effective in the future and aimed at the real magnitude of the problem.  As noted in the quote at the beginning of the Commentary, even one of the founders of Greenpeace is skeptical that radical reductions in carbon emissions will be beneficial to the earth and the economy. The concept of Geoengineering (bolded in the list above) posits that we will discover a mechanism for neutralizing carbon in the atmosphere if indeed it turns out to be as serious a problem as some believe, a “vaccine” if you will.

The solution advocated most aggressively by Warmists is to dramatically reduce carbon emissions from using fossil fuels for our energy needs.  They advocate replacing fossil fuels with renewables and more efficient use of energy (light bulbs, more miles per gallon, better windows etc.) and some (but not many) advocate greater use of nuclear energy.  Many energy experts believe this strategy is not only costly (the US average for electricity is about 11 cents per kWh and Germany’s is 33 cents), but dangerous.  Renewable energy is simply not as reliable as fossil energy.  The challenge is something called intermittency.  Sometimes the wind doesn’t blow or the sun doesn’t shine.  Regrettably, there is not yet a cost effective means for storing electricity for this intermittency problem.  Additionally, major changes to the electric grid would be necessary to accommodate renewable energy on the scale that would be required to substitute it for fossil fuels.  There is no doubt room for debate about what the right mix of renewable and fossil energy should be but the main point is that there is nothing close to a consensus on this point.

Regarding the impacts of radical carbon emission reduction, some economists make the point that a prosperous economy is the best defense against the potential challenge of climate change.  It is simply a fact that richer countries are more environmentally sensitive than poorer countries.  Given that there will always be natural disasters even if carbon is reduced, some advocate that scarce resources are better spent more broadly on contingency planning and adaptation.  Venice and Amsterdam built canals to adapt to water levels in order to improve the quality of life in those cities.  Warmists often point out that recent hurricanes have caused much more property damage than previous storms.  But this is true because more people now live and build near water than in the past.  Adaptation would ensure that buildings would be constructed to withstand the inevitable tests of natural disasters.

Lastly, we have the problem of efficacy.  If nothing I do solves the problem, then I am wasting my time and money by focusing on my response to that problem.  Flushing money down the toilet as the saying goes.  Even assuming all the worst case uncertainties, the United States would not even make a dent in the problem by zeroing out its carbon emissions.  To be efficacious, the entire world would have to cooperate by reducing carbon emissions.  To be sure, the US could “lead the way.”  But at what cost?  Surely China and Russia would be giddy to strike such a blow to the US economy, while China builds a coal plant a week to fuel competition with the US.   

Finally, let’s deal with another aspect of the issue of climate change: public discourse. There are issues on which scientists have reached a “consensus.”  But as you can see above there are many important issues on which they disagree. 

At one time there was a consensus that the earth was the center of the universe.  If your best response is that I don’t need to look and discuss new evidence because there is a consensus on the current view, then I think that undermines the essence of not only the scientific method, but critical thinking capacity.  Many consensuses have turned out to be mistaken.  (We no longer have a consensus on whether eggs and the FDA’s Food Pyramid are healthy!)  And the nub of it is that there is NOT a consensus on many of the critically important issues on climate change.  In 1949, there was a consensus that polio was caused by a virus and that it was likely to infect millions in the future.  But that consensus did not and should not dictate what the public policy response should be.

As described above, a lot of issues remain uncertain relating to climate change.  One would think that so consequential a matter should result in a vigorous, civil discussion of how to reconcile climate change actions with other priorities in society.  For example, is it a better use of funds to lower our standard of living to try and ameliorate climate change or better educate the next generation of scientists that will find a “vaccine” for carbon, if it turns out that the carbon problem is serious?  I don’t know the answer to all these questions but I certainly think we need to discuss them in a serious and civil manner.

Rather than debate the issues on which there is disagreement, some Warmists shout down debate by stating that the “argument is over,” “the science is in,” and there is a “consensus of 97% of scientists.”   Unfortunately, one side stands ready willing and able to debate the climate change issue in all its dimensions.  But many on the other side have adopted a most unscientific position, indeed an antediluvian and Luddite position, of refusing to discuss the issue, indeed trying to shut down debate.  “The debate is over.”  “All responsible scientists agree so there is nothing left to debate.”  Indeed, climate Skeptics have been begging for an open debate for years now.  But the Warmists seem to have adopted a strategy of refusing to debate. 

The “public debate” issue has recently taken an even more odious turn.  On March 13, 2015, Al Gore publically called for skeptics to be “punished.”  There has been a growing drumbeat that anyone who disagrees with the Warmists’ position should suffer dire consequences for such heresy (a very small minority have even called for the death penalty, but one would hope this is merely hyperbolic rhetoric).  Recently, there has been a particularly nasty and vindictive campaign against Dr. Willie Soon, a Harvard University solar physicist, for a study which he co-authored.  Lastly, in 2016, the US Department of Justice indicated that it was looking at the issue of whether climate change denial violated the law, as were various state attorneys general. 

Why is that?  

So there it is.  I don’t have all the answers.  I hope that this provides a reasonable explanation for why the climate debate is so contentious and confusing.  The areas of a lack of consensus do not necessarily suggest that climate change is not an important issue that merits ongoing attention and additional scientific research.  One hopes that we can return to a day and time when we can openly debate the scientific basis for projections of what climate will likely be a century from now and fashion public policies appropriate to the scientific facts.

Tags: Consensus

Prosperity and Electricity In-Depth Article

The United States faces a prosperity crisis.  Increased prosperity will make it somewhat easier to resolve many of the problems that the next generation must face head-on.  Reviving prosperity in the United States poses some difficult challenges over the next decade.  Many articles explain the myriad issues that will need to be addressed to restore prosperity after 16 years of focus on other priorities, resulting in at best tepid regard for economic growth.  I believe one such subject is not fully appreciated for its potential to thwart prosperity if left on its projected course or to be a catalyst for prosperity if we include it as part of the dialogue for restoring prosperity: ELECTRICITY.

In energy policy discussions, oil receives a disproportionate amount of attention, especially as regards the threat to quality of life and prosperity.  I have thought long and hard as to why oil receives more attention than electricity and I can only conclude that oil issues are easy to understand and electricity issues are not.  (The ease of understanding oil has not, however, led to sound policy as is discussed in our earlier Commentary “In Praise of Global Oil Markets: Will the Idiocy End?”.)  In this Commentary I will lay out the case for paying more attention to electricity.

First, an important observation.  I have carefully perused the websites of prominent national think tanks and I have not found one such organization that dedicates a full time person to electricity industry structural issues. 

  • There are environmental people who will dabble in the overlap of electricity and environment. 
  • There are energy people who will pay lip service every once and a while to an electric issue.  
  • There are national security people who will worry about the electricity infrastructure exposure to terrorism. 
  • There are regulatory reform people who every once and awhile make a glancing blow at some electricity issue. 

But I have not found any broad-based think tank organization with a single person who on a full time basis and with the proper credentials concentrates on electricity issues as their exclusive focus.  The organizations that have full time people addressing electricity issues are all trade associations or environmental organizations, dripping with self-interest in their analysis and recommendations, or relatively small specialized organizations like the Institute for Energy Research.  This concerns me.  Either I am woefully misguided about the threat (as demonstrated in this article) or there is something missing in the think tank community.  If the latter, then I believe a grave risk exists that we will be caught with our pants down when the electric system begins to freeze up.

Why are think tanks asleep at the switch?  Part of my theory is that electric utilities are part of the corporate donor base of many of these think tanks and are part of the coalition on taxes, labor, health, environment, etc.  I perceive (but I could be wrong) that there is some reluctance to dedicate resources to electricity policy because it would offend the donor base of electric utilities, which if done right almost certainly would.

A second preliminary point.  There is a rich history of reforming industries that have similar network characteristics to the electric industry.  Ironically, there is no consensus name in economics about these types of industries and that may be part of the problem. 

Since the mid-1970s, the US has massively and successfully restructured a series of industries that have several similar characteristics, though many would fail to see the commonality.  First, they are network or grid type industries, i.e., industries that move people, goods, or digits from point A to point B without fundamentally changing the physical properties of the “transported” item.  Second, the reforms transitioned the industry from heavy-handed governmental control to a more competitive, market based policy.  Third, all required preemption of some traditional State authorities that became anachronistic as the maturation of the industry increasingly implicated more interstate commerce.  The industries include airlines (1978), trucks (1978), railroads (1980), telecommunications (1982-84), natural gas (1985-92), cable (1984), internet (1986), GPS (1996), Microsoft Windows (2001), and oil pipelines (1994).  Interestingly, the Supreme Court adopted a similar analytical framework for the movie theatre industry in 1948.  Most recently, Google has become a target of European regulators on much the same theory as these other industries (using monopoly assets to advantage affiliated competitive assets of their company and disadvantage independent competitors).

For lack of a commonly understood term for these types of industries (and because “network” industries would be confused with computer networks), I have coined the term “plexus” industries.  The dictionary definition of plexus is “an intricate network or web-like formation.”  Plexus industries are the connective technology that allows a person, good, or digit to be moved from a lower value condition to a higher value condition but without changing its fundamental characteristics.  This is not the place to explore the technical arguments for plexus but a couple of examples will help understand the point.

The easiest plexus industry to understand is a gas pipeline.  Gas goes into a pipe in Texas and comes out in Boston.  The chemical properties of the molecule of gas are unchanged.  It has just been moved from Texas to Boston.  The process of such movement is well understood within the gas industry but if you asked someone to compare that “process” to Windows operating system they would look at you confused.  At a certain level of abstraction, pipelines and Windows perform the same function.  Windows has a point at which something is put into the system.  We call it an application, e.g., Chrome, Firefox, Adobe Acrobat, AOL etc.  The application is then “delivered” to a user who then creates value by using the combination of the application and the operating system.  The Department of Justice used the same basic rationale for suing Microsoft for using their “monopoly” facility (Windows operating system) to impede competition in those products that need the monopoly facility to compete with other Microsoft products.  Microsoft still operates under a consent decree with the Department of Justice.  At a certain level of abstraction, this is identical to the reforms in the natural gas industry separating pipeline functions from commodity functions.

The key insights to all these largely successful policy reforms is that the “plexus” facility was recognized as having monopoly characteristics that would distort markets if left unchecked, the goods being moved through the plexus facility were capable of being subjected to market principles even if the plexus facility was not.  Rather the plexus facility had to be “regulated” in such a way as to promote efficient input and output markets.  This all sounds rather abstract but the concepts apply to a wide array of goods and services and a widely varying terminology is used by different plexus industries.     

My point is that pro-market reforms of fundamentally interstate plexus industries has been done before, we have a template for reform that has been enormously supportive of prosperity policies.  

Now onto the main stage of how this applies to electricity, but starting with a bit of boring history.

Electricity was originally introduced to the US on a city by city basis, indeed sometimes neighborhood by neighborhood.  Thomas Edison’s first foray into electricity was the famous Pearl Street Station.  The Wiki entry gives a sense as to how local was its’ introduction:

Pearl Street Station was the first central power plant in the United States. It was located at 255-257 Pearl Street in Manhattan on a site measuring 50 by 100 feet (15 by 30 m), just south of Fulton Street and fired by coal. It began with one direct current generator, and it started generating electricity on September 4, 1882, serving an initial load of 400 lamps at 85 customers. By 1884, Pearl Street Station was serving 508 customers with 10,164 lamps. The station was built by the Edison Illuminating Company, which was headed by Thomas Edison.

Without recounting the tortured history of electricity regulation, we arrived at the current allocation of jurisdiction of regulatory authority by 1935.  The States had regulatory authority over generation, constructing transmission and distribution grids, sales to the consumer by the distribution company, billing, and metering -- in essence, the whole system from generation to consumption.  The feds had a very limited role in transmission and wholesale sales in interstate commerce.[1]  But in 1935, there was precious little interstate commerce in electricity, especially compared to today.

That simple framework has been under nearly constant assault since 1978.  Today, the electricity system[2] is a mess, bordering at times on chaos and calamity. 

Much like the AT&T phone monopoly came under scrutiny for the extent to which it had developed into a very broad monopoly, electric utilities were put under a microscope to examine the continuing vibrancy of the assumption that they should be permitted as a comprehensive monopoly.

The first crack in the dam came in 1978 when utilities were required by Federal law to purchase electricity from third parties who used certain technologies.  The Federal law required that the State commissions set the price at which the purchase would take place.  In 1992, Congress broadened who could sell electricity to the utility.  Over the next decade, the Federal Energy Regulatory Commission enacted rules to encourage even more competition in generation.  At the same time a number of states began to experiment with programs to allow customers to purchase electricity from competitive marketers.  But then the Enron scandal and the catastrophic California electricity crisis created a more hostile climate for competitive electricity and progress slowed.  Today the US finds itself in a situation where there is a confusing mixture of models of electricity competition and traditional regulation.    

Does the current situation create risk of failure of the system?  By what standard should we judge adequacy of the existing system?  When the basic jurisdictional allocation was solidified, electricity was virtually a luxury.  Many homes did not have electricity and we certainly didn’t have ubiquitous air conditioning, labor saving appliances, electric cars, and the magical world of digital technology.  I suggest that our test should be how well the US electric system serves the world we envision in 2050.  Luckily, the US is not the only country asking this question.  Indeed, we are laggards compared to how aggressively some other countries are addressing the electric system of the future.  Maybe not so surprisingly, China, for example, has been far more thoughtful and aggressive than the US in addressing electric system structural issues.  Australia has also grappled with some of the challenging issues of electric market reform.

So what is wrong with the US electric system today?

Climate Change:  Far and away, the most confounding variable in the electric system today is the issue of carbon emissions.  Let’s put to one side the degree to which carbon emissions are problematic and just take a look at the current situation.  The US Congress has steadfastly refused to pass comprehensive legislation regulating carbon.  Environmentalists have thus turned their attention to the States and the Federal executive branch.  Accordingly, there are literally hundreds of different approaches being taken to deal with carbon, mostly by discouraging coal and nuclear generation (in a variety of ways and forums) and encouraging renewable energy and efficiency (in a variety of ways and forums).  Whatever may be said of this approach, one thing is certain.  There is absolutely no reason to believe that this chaotic approach will achieve cost effective carbon emissions reductions.  Yet billions are being spent debating, analyzing, and executing these programs, many of which are cosmetic.      

Jurisdictional Allocation: As noted above, the allocation of jurisdiction over the electric industry is an historical accident that has not been formally reconsidered since its inception in 1935.  Rather there has been a nipping at the heels over the years to address the absurdities that result from the current allocation of jurisdiction between the states and the feds.  In ALL the plexus industry reforms, one key, indeed essential, element was the reconsideration of the allocation of jurisdiction between the feds and the States.  Railroads, air travel, trucking, natural gas, and telecommunications all shifted the allocation of jurisdiction from the states to the feds as these industries became more entwined in interstate commerce.  Just as importantly, when the feds exercised control under all of these reallocations it did so by adopting more competitive, market based policies.  Some will no doubt resist the feds taking a stronger role in the electric industry on historical, ideological, policy, economic, or constitutional grounds. But these arguments are weak given the historical success of the reforms to other plexus industries, the inherent impact of electricity on prosperity, and the increasing impact on interstate commerce.

Regulatory Chaos: While overlapping with the issue of jurisdictional allocation, it is necessary to analyze the regulatory chaos that exists when literally hundreds of governmental organizations have control over different pieces of the electric system.  FERC has done yeoman’s work in trying to work around this chaos with its establishment of Regional Transmission Organizations (RTOs) but there is substantial opinion that these organizations have become bureaucratic, expensive, political, and inefficient (though admittedly more efficient than the status quo ante).  Moreover, having each State make a utility by utility decision on each and every issue is expensive, confusing, and inefficient.  Indeed, even in some States policies are very different depending on which utility service territory one lives in.  Not only is this costly, it has the added disadvantage of making the electric system more fragile than would be the case with more coherent integration.

Technological Innovation: There is a joke told at electric meetings.  If Thomas Edison came back he would recognize the electric industry.  Nothing’s changed!  LOL (not).  But it’s true that both digital technology and just plain old innovation have created a situation where there is a possibility that many new technologies exist that might (?) improve the operation of the electric system.  The reason I say “might” is that I take Hayek’s admonition about Fatal Conceit seriously.  I don’t pretend to know what new technologies make sense and which don’t.  But I also know that most State regulators know less than I do about which technologies make sense, and they are in the driver’s seat. 

One of the more general critiques of regulation is that it impedes innovation.  But that is true in spades in the electric industry, given the dispersed regulatory authority.    

Aging Infrastructure: The electric system is victim to the same malady as much of America’s infrastructure.  It is simply a fact that no matter which part of the industry you look at there are issues of the need for modernization of infrastructure.  Putting new infrastructure in place to satisfy increasing demand is relatively easy.  Investments will result in more customers and greater revenue.  But that is not what we are talking about.  The investment in replacing aging electric system infrastructure only results in higher costs but not necessarily increased demand for service.  Thus commissions and consumers can be quite beggarly when they are asked to support higher rates needed for modernization. Compounding this issue is the disaggregated nature of decisions to require renewable energy in the grid.  Arguably, dollars are being wasted on this endeavor that would do more good in promoting modernization.

Reliability: Some of the aforementioned drivers already hint at the issue of reliability.  Reliable electricity is essential for a prosperous Nation.  While reliability was always an important concern, digitalization makes reliability more imperative.  Food will not spoil if electricity goes out for an hour.  But if electricity ceases for even the blink of an eye it can cause damage to some electronic equipment.  Measuring the risk of reliability is difficult.  We have had two major reliability failures in the US, in 1965 and 2003.  Additionally, California suffered debilitating blackouts in 2001-02.  While it is stating the obvious, a catastrophic failure of the US electric system would result in catastrophic property loss and sometimes lives.  Congress has formalized the issue of electric reliability in legislation; it has not taken steps to put in place a regulatory model that will stand the test of 2050.

Reliability is threatened in ways too numerous and technical to list here but several can be highlighted.  First, I doubt there is anyone who has not heard there is a “war on coal.”  The Environmental Protection Agency (EPA) has proposed regulations that would make it difficult bordering on the impossible to build new coal plants and would also force the closure of some existing plants.  Less familiar is the “war on nuclear.”  A new nuclear plant has not been built in the US since the late 1970s because of Three Mile Island, Chernobyl, and unanticipated cost overruns due to safety regulations.  Just as the US was on track for a small nuclear renaissance, an earthquake and typhoon hit the Fukushima nuclear plants in Japan, causing immediate devastation and long term harm.  Fukushima was undoubtedly a setback for nuclear power in the US.  Environmentalists a few years ago were very positive on natural gas to replace coal and nuclear in the generation mix as a short term strategy to transition to renewables.  But as it became clear in recent years that natural gas would be more plentiful (measured in centuries), environmentalists soured on natural gas and now anti-fracking has become part of the extremist mantra.  So where will the base of generation come from to supply our electric needs.  Some believe that renewables and policies encouraging less need for electric will fill the gap.  But this is a pipedream (pun intended).  This leads to the second point about reliability.  Renewables are an intermittent source electricity.  If the sun don’t shine and the wind don’t blow, you don’t have reliable renewable energy.  The technology for storage of electricity (to smooth out intermittency) is still not there, although it has been “10 years away” for the last 30 years.   

Terrorism: Few targets would cause as much disruption as would a major terrorist attack on the electric system.  And yet few targets are as exposed as the electric system.  By definition, the electric system must be spread out all across the Nation and has been called the largest machine in the history of the world. 

Indeed, one has to wonder why there has not been a comprehensive attack on the US electric system.  Recently, there was an event that put a scare into those that worry about this type of attack.  In 2013, there was a small arms attack on an electric switching station in San Jose, California.  As of the writing of this Commentary, the FBI has not made any arrests. 

Utilities and State, and Federal authorities are working behind the scenes to prepare for such an attack and, like many terrorist attacks; we may never know what attacks were prevented by these actions.  Nonetheless, two points must be made.  First, protecting the electric system from attack is no doubt expensive. Unfortunately, these efforts must compete with many of the other priorities being placed (many indeed misplaced) on the electric system.  Second, our protections have to be successful 100% of the time, while the terrorist only has to be successful once.  The magnitude of the potential harm to the Nation is unimaginable yet must be understood and dealt with within an atrophied regulatory framework.     

Electromagnetic Disruption:

Saving the best for last, the end is near!!  It has become widely recognized in the esoteric world of electricity and has started to spill over into popular culture that an electromagnetic pulse could bring down all or part of the electric system.  Literally, we are talking end of the world type catastrophe, with millions dying in months.  Such shocks can result in three ways: nuclear bomb detonated above the earth, solar geomagnetic disturbance, and a ground based weapon.  There is currently an active debate in the US Congress about how to deal with this vulnerability and FERC has begun to issue rules for electric utilities on developing contingency plans for solar threats.  As with all the other issues, this will cost money to address and there are competing priorities for dollars to be spent on the electric system.

Conclusions and Recommendation

Scared yet?  I hope so because I am. 

I usually rail against many left wing arguments as “alarmism.” I might be accused of alarmism in this Commentary.  The difference between “alarmism” and “alarm” is evidence and sound analysis.  My goal in this Commentary was to convince you that there was a sleeping giant of a threat to economic prosperity.  I am trying to think of any other system in our economy that would wreak as much havoc as a major break of the electric system.  I honestly cannot think of a major failure of any other system that would cause as much harm to prosperity as a major failure of the electric system. 

Significantly, you are probably thinking of a “catastrophic” failure of the system as a unique, obvious, one-time event.  That might happen; a 9-11 type event.  But it will probably be more insidious than that.  Think of it like a deteriorating highway.  There is no major, obvious failure.  But every day there is a bit of damage to cars and trucks.  There is less efficient travel.  There is more political tension caused by consumer complaints and the need for more resources.  Some people, likely people with options and money, move away to avoid poor public services.  The tax base erodes and now everything is more difficult.  It is more like a cancer than a fractured skull.  That is an equally frightening scenario for electricity.  There is no singular measure of where our collective national electric system is on a spectrum from third-world to best in class.  Everyone will have a different opinion on how significant the threat of widespread interruption is.  I myself am not sure what the particular scenario is that will cause us to wake up and say “why didn’t we see this coming?”   

So, what to do?

There are two dimensions to fixing the electric system: a policy and a plan to implement the policy. 

The policy is actually pretty simple to identify but very difficult to implement. 

First, we need to embrace a policy of reliance on market competition for ALL services that are capable of sustaining competition.  This was done in other plexus industries and it worked out either reasonably well or spectacularly well.  Thus all generation should be operate in competitive markets and for reasons below should not be owned by either transmission or distribution companies.  But recognize this will affect a lot of economic interests so there will be wailing and gnashing of teeth. 

Second, transmission (not a function easily capable of competition) must be reconceptualized.  Today, hundreds of business entities own electric transmission facilities and some of those facilities are operated by Regional Transmission Organizations.  The reason that RTOs operate the facilities owned by many other business organizations is that there is an inherent conflict of interest when the same business organization owns generation (competitive), transmission (monopoly), distribution (monopoly), and retail services.  We can agree on the principle that the business organization should not be permitted to advantage its potentially competitive operations by abusing their monopoly power over certain facilities by linking the competitive good to the monopoly good.  In antitrust law this is called a tying arrangement.  An easy way to understand the problem is to envision an umpire in a Little League game.  His daughter is the pitcher for one of the teams.  Could you really blame the opposing coach objecting to his being the umpire, no matter how solid his reputation for honesty?  Similarly, would it surprise you to find out that consumers believed they would get better service from the marketing affiliate of the utility than from an independent marketer?  Attempts to regulate this type of abuse are next to impossible, though FERC and many State commissions have tried.  It is burdensome, ineffective, and not trusted by potential independent competitors.  I once was hired to testify against a gas pipeline who had abused their monopoly by advantaging their storage facilities in such a way as to drive an independent storage facility into bankruptcy.  The smoking gun is that the monopolist applied more favorable requirements to its affiliate than it did to independents.  It argued that this was reasonable because it made good business sense.  Many of the independents were poorly financed, unreliable, and untrustworthy; whereas their affiliate was none of these. RTOs are not a natural business construct.  They were imposed because of the limitations caused by jurisdictional allocation and existing authorities.  In theory, a single company owning and operating transmission and only transmission over large regions, regulated by a Federal authority would promote more efficiency and have incentives for technological innovation and more efficient decision-making.

Third, distribution companies should be regulated by States under a Federal policy that promotes competition.  Retail services should be competitive and not performed by the distribution company, again avoiding conflict of interest complications.  There should be strong encouragement for massive consolidation of distribution companies since that would dramatically simplify both the regulation of such companies and easier for competitive independent marketers to do business across larger regions.

Fourth, all retail customers should be served by a competitive entity that is independent of the regulated entities.  I don’t have a clue what the aggregation model would be.  Would Google or Apple or Walmart end up as the aggregators of many of our electric services?  Maybe it will be Visa or MasterCard?  Maybe it will be tied to a bundle of cable, internet, telecommunications, gas, water, and other in-home services?  The beauty of the competitive market is that we don’t know what will develop by 2050.  The key is to put the right institutions in place with the right incentives and then let the market innovate.  When I was working on reforming natural gas policies, I could scarcely have imagined the role that natural gas and oil would play 30 years later.  I can guarantee you that none of us thought that we would cripple OPEC and create headaches for Russia.  It may sound naïve but it is nonetheless true.  Markets can be magnificent tools for progress if they are not distorted by policies that inhibit price signals to consumers.

So that’s the big picture.  I could write a book on the many tedious and technical economic, legal, regulatory, political changes that need to be made to prepare the US electric system for 2050.  But there are several such books already on the market and few get the attention they deserve. 

So how do we get there?  We need a game changer.

Frankly, I wish I had a bold, exciting, innovative recommendation on accomplishing a radical restructuring of the electric system that would cause you to sit back in your chair and say “WOW!”  But I don’t.  There are hundreds of reports but it has not resulted in anything more than tinkering at the periphery, often for the benefit of special interests.

Maybe one you reading this will email me such a recommendation.  But for now all I can come up with is the recommendation that we take this issue more seriously than we have done.  While we don’t need another Congressional hearing, or DOE Report, or Industry Association Sponsored Strategy, we do need to develop a compelling plan and build the consensus to execute it iby people that have the gravitas to make it a game changer.  Unless I missed it, such an effort is not underway and nowhere in sight.


[1] It is a bit different when it comes to the environment.  The feds have taken a stronger role in environment than in industrial organization issues.

[2] I struggle to find the right words to describe the whole of the problem.  If I said “electric industry” some would construe that to mean electric utilities, clearly too limited a concept.  If I use the term “electric policy” it might be perceived as being limited to the world of “wonks.”  So I use the term “electric system” to include the widest possible look at the challenge of delivering reasonably priced, reliable, environmentally responsible electricity.

 

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In Praise of Global Oil Markets: Will the Idiocy End? In-Depth Article

Two days in October 1973 (16th and 17th) marked the most important turning point for US energy policy.  That is when energy policy idiocy began and despite all evidence to the contrary continues to this day.  When will it end?

In October 1973, the Organization of Petroleum Exporting Countries or OPEC doubled the price of a barrel of oil and imposed an embargo on deliveries to several countries, including the US, for supporting a military operation by Israel.

Since that embargo, literally every president, even the normally economically literate Ronald Reagan, has chanted the mantra of “energy independence.”  In pursuit of that silly goal, the US has embraced a number of bad policies.

All sound analysis of oil markets proceeds from an understanding of global oil markets and the oil resource base.  Because there has been such a profound misunderstanding of these basic concepts, there has been much mischief enacted into policy.

 

Understanding Global Oil Markets

Dr. William Nordhaus of Yale University proposed the best metaphor for the global oil market.  Think of a bathtub with many faucets and many drains.  It doesn’t matter where you put oil into the tub or take oil out of the tub; the only thing that matters is how much oil is in the tub at a given moment.[1]  More oil in the tub will lower world oil prices and vice versa. 

This simple bathtub metaphor has profound implications for how we think about energy policies relating to oil. The first significant implication is that “energy independence” is an economically nonsensical concept.

Today, as world oil prices hover at around $50 a barrel, Japan with no oil resources pays the same on the global market for a barrel of oil as does Great Britain with plentiful North Sea resources.  So the amount of oil a country imports (a measure of supposed “energy independence”) is irrelevant to the availability of oil and its price.  If magically the US discovered oil that it could produce for $10 a barrel in Iowa, what would the price of oil be in the US?  Absent some form of governmental price control, it would NOT be $10.  It would be whatever the global price of oil was at any given moment.  Iowa would gladly export oil to any country willing to pay more than $10 rather than sell it in the US for $10.  Thus the world price of oil, no matter where produced will achieve some price that balances supply and demand (or a price based on how much oil is in the bathtub).[2]

So maybe “energy independence” arguments are not based on either the availability or price of oil.  Maybe there is some other reason we would want to produce all the oil we consume. 

As for being held hostage by hostile foreign producers, as we will see later in this commentary, they are actually more dependent on us then we are on them.  Their economies are built on an expectation of oil over $100 a barrel and they (Russia, Venezuela, and OPEC) are now scrambling.

The recent dramatic drop in world oil prices provides an excellent example demonstrating the fallacy of energy independence. A major factor in the dramatic drop in oil prices is the increase in supply in the United States made possible by new production technologies such as fracking, horizontal drilling, and 3D seismic. The increase in supply in the United States not only resulted in lower prices for oil in the US but indeed was critical to a worldwide drop, nay collapse, in oil prices. Oil prices on the global market have dropped based on a myriad of factors. But the reality is that the price will be set for oil purchased in the United States on a global market. It makes absolutely no difference in our energy policy if we buy more or less oil on the global market. Certainly oil prices will have a profound impact on the economy at large not only in the United States but in many other countries as well.  But we have no control over oil prices.

 

Understanding the Oil Resource Base

Sound energy policy requires an understanding of the oil resource base.  Let’s start with a profound and startling insight: The World Will Never Run Out of Oil

But wait, surely you must be mistaken, you say.  Oil is a finite resource and we are consuming it at extraordinarily high rates.  Surely the bathtub will run dry someday. 

Such a view belies a fundamental misunderstanding of natural resource economics.  Whale oil used to be the staple for lighting and other purposes.  Did we run out of whales?  No.  Demand for whale oil increased and the supply of whales decreased with increased harvesting of whales for their oil.  Did we wait for the last whale to be captured before we started to consider substitutes?  No. Innovators and entrepreneurs driven by the pursuit of profit explored new ways to satisfy consumer demands for the things that whale oil could provide.  Circa the 1850s, innovators on both sides of the Atlantic began to realize the potential for large scale use of crude oil in its refined state.  Circa 1890, major breakthroughs in electricity were being made worldwide, and Thomas Edison built the first power plant on Pearl Street in 1882.

Thomas Malthus and more recently Malthusians such as the Club of Rome and Dr. John Holdren base their worldviews on doom and gloom projections of future lack of availability of resources.  A view widely reflected in the media and even common sense suggests that surely population growth and resource limitations will inevitably result in disaster for the earth.  Thankfully, many Malthusians have made predictions as to how long current resources would last unless draconian steps were taken to address issues raised by their worldview.  Remarkably, these “doomsters,” as they are called have never been right.  Their track record is disastrously wrong every time.  Yet these consistent failures have seemingly not diminished their reputations or the media/public’s willingness to be persuaded that disaster is just around the corner.

Dr. Julian Simon spoke most persuasively rebutting the doomsters.  His view is that human ingenuity is the “ultimate resource,” as he titled two of his books.  He stated that:

Our supplies of natural resources are not finite in any economic sense. Nor does past experience give reason to expect natural resources to become more scarce. Rather, if history is any guide, natural resources will progressively become less costly, hence less scarce, and will constitute a smaller proportion of our expenses in future years.

He specifically applied this view to energy:

Energy is the master resource, because energy enables us to convert one material into another. As natural scientists continue to learn more about the transformation of materials from one form to another with the aid of energy, energy will be even more important. . . .

For example, low energy costs would enable people to create enormous quantities of useful land. The cost of energy is the prime reason that water desalination now is too expensive for general use; reduction in energy cost would make water desalination feasible, and irrigated farming would follow in many areas that are now deserts. And if energy were much cheaper, it would be feasible to transport sweet water from areas of surplus to arid areas far away.

Another example: If energy costs were low enough, all kinds of raw materials could be mined from the sea.

But he viewed that the “ultimate resource is people—especially skilled, spirited, and hopeful young people endowed with liberty—who will exert their wills and imaginations for their own benefits, and so inevitably they will benefit the rest of us as well.”

So, the “amount of energy” is not the issue; human ingenuity, the ultimate resource, is the issue.  We will never run out of oil because as the resource base is depleted, oil will become more expensive.  As it becomes more expensive, craven, heartless, greedy entrepreneurs will find currently unknown but clever ways to find more oil, invent oil substitutes, or develop other technology that uses an increasingly expensive resource more efficiently. 

And the shock of it all is that no one person or government will have to develop a plan or a strategy to make sure that chaos is avoided.  Rather, as Dr. Friedrich Hayek pioneered, the concept of “spontaneous order,” i.e., “the emergence of various kinds of social orders from a combination of self-interested individuals who are not intentionally trying to create order through planning.” The information contained in prices drives producers, consumers, and innovators to make myriad and sometimes microscopic adjustments that over time ensure that we will have the supplies we need when we need them.  When dislocation does seemingly exist in a market, you can be virtually assured that it is because some government action or policy has prevented the clear dissemination of price signals.  Hence, it is crucial to closely examine government policy to ensure that impediments to clear price signals are either not imposed or are removed.  Again, Julian Simon pierces the balloon of ignorance:

Not understanding the process of a spontaneously-ordered economy goes hand-in-hand with not understanding the creation of resources and wealth. And when a person does not understand the creation of resources and wealth, the only intellectual alternative is to believe that increasing wealth must be at the cost of someone else. This belief that our good fortune must be an exploitation of others may be the taproot of false prophecy about doom that our evil ways must bring upon us.

But it is understandable that some are concerned with how much oil is in the ground.  An understanding of this requires a foray into some technical distinctions regarding an energy resource that is buried deep in the earth.  Here, the distinction between reserves and resources is important.  In essence, reserves are oil that we are highly certain is in the ground and capable of being produced commercially.  Typically this means that wells have been drilled and testing has been done to increase the probability that the estimates of the amount of oil are highly reliable.  Even this category breaks down further into proved and unproved, with unproved being further broken down into probable and possible, going from the most certain to less certain.  Resources, on the other hand, are even less certain.  We know there is oil but we are taking a guess as to how much is there and how much it will cost to produce.  Typically banks will only lend money on reserves.

This brings us to the controversial question of “peak oil.”  The concept of peak oil was pioneered by a geophysist named Dr. M. King Hubbert.  Peak oil is a somewhat logical concept that means that we have reached the halfway point in available oil resources after which there is a downward trajectory in exploitation and production of the resource base.  Whatever value this concept may have to geologists, it has virtually NO importance to economists, as noted above.  Peak oil alarmism is often used by special interests to scare policymakers into embracing whatever stupid idea that will feather the nest of the advocate.

There are two refutations of peak oil; one based on experience the other on economics.  There seemed to be a consensus that the world had reached peak oil circa 1970 and that governments had to enact policies to ensure an orderly transition to some other fuel, usually renewables. Many doubted the insight that peak oil supposedly provided even before the easy refutation of peak oil by the fracking/horizontal drilling/enhanced oil recovery technological innovations.  But certainly reality brought peak oil theory to a screeching halt with the dramatic increase in our ability to access the resource base made possible by technology. 

So how much oil do we have?  I hope by now you realize this is almost a silly question to which the answer is “enough.”  The US Energy Information Administration has a somewhat technical explanation for this.  Julian Simon also has a more comprehensive answer to the question:  When Will We Run Out Of Oil?  Never!

But for the skeptics or those who can’t be comfortable without a number, here is the best information there is.

BP does an annual statistical review of world energy resources every year, and it is highly regarded. According to BP’s most recent review “Total world proved oil reserves reached 1687.9 billion barrels at the end of 2013, sufficient to meet 53.3 years of global production.”

Just remember that every prediction of when we would run out of oil or how much oil we have left has ALWAYS turned out to be wrong.  We always find ways to find more plentiful, cheaper, and more environmentally benign ways of finding more natural resources.

The recent boom in oil supplies and collapse of oil prices should teach us something about projections. We are constantly looking for new technologies to access energy supplies.  Let’s use an example of an energy resource you probably have never even heard of: methane hydrates.  The US DOE states:

While global estimates vary considerably, the energy content of methane occurring in hydrate form is immense, possibly exceeding the combined energy content of all other known fossil fuels. However, future production volumes are speculative because methane production from hydrate has not been documented beyond small-scale field experiments. 

There are three things important about the future of energy resources: technology, technology, and technology.

Just look at the role of technology in our current (March 2015) oil markets.  Currently, the most controversial issue regarding oil and natural gas is the issue of hydraulic fracturing or “fracking.”  The development of this technology allows oil to be produced in quantities and geologic formations that were historically thought to be impossible.  Essentially, various chemicals are deposited in a deep hole and put under intense pressure.  This pressure “breaks” up the rock-like formation and allows oil and gas to become available for production.  Part of this technology advance is also the ability to drill at angles and horizontally to more efficiently drain a reservoir of oil. And our insight on where to drill is informed with “4D Seismic Technology” that allows us to “see” the geophysical characteristics of formations like never before. 

Yet another technological development is enhanced oil recovery.  Here is what the US DOE has to say about enhance oil recovery:

Crude oil development and production in U.S. oil reservoirs can include up to three distinct phases: primary, secondary, and tertiary (or enhanced) recovery. During primary recovery, the natural pressure of the reservoir or gravity drive oil into the wellbore, combined with artificial lift techniques (such as pumps) which bring the oil to the surface. But only about 10 percent of a reservoir's original oil in place is typically produced during primary recovery. Secondary recovery techniques extend a field's productive life generally by injecting water or gas to displace oil and drive it to a production wellbore, resulting in the recovery of 20 to 40 percent of the original oil in place.

However, with much of the easy-to-produce oil already recovered from U.S. oil fields, producers have attempted several tertiary, or enhanced oil recovery (EOR), techniques that offer prospects for ultimately producing 30 to 60 percent, or more, of the reservoir's original oil in place.

While no one questions the ability of fracking to make many more years of oil available, some have raised environmental concerns about whether the chemicals used in fracking will spoil the water supply and whether fracking will cause earthquakes.  New York for example has banned the use of fracking because of these concerns.

The US Environmental Protection Agency (EPA) has undertaken a study of fracking that was to be completed in 2014 but has been delayed to 2016.  The preliminary results and statements of the top official indicate that there is "only an upside to hydraulic fracturing."  Despite the fact that the Obama Administration has been very responsive to environmental concerns, e.g., Keystone Pipelines and War on Coal, environmentalists continue to attack fracking on environmental grounds. http://cfpub.epa.gov/ncea/hfstudy/recordisplay.cfm?deid=244651

The fracking issue is important for another reason.  It illustrates the folly of government directed research and development (R&D).  The Department of Energy (DOE) has spent literally billions on R&D since its founding in 1978.  Billions have gone to nuclear, renewables, efficiency, and coal research.  Fracking has NEVER been a major priority of DOE’s research agenda and very little has been spent by DOE on fracking research.  A similar case could be made regarding natural gas combined cycle turbines.  These turbines are today the backbone of the electric generation industry.  Yet DOE research support played literally no role in perfecting this technology for electric generation.  These two technologies alone—fracking (including horizontal drilling, 4D seismic, and enhanced oil recovery) and combined cycle turbines—are the two most important energy technological breakthroughs in the last three decades.  And DOE had virtually no role in their development.  The lesson is a cautionary one.  Government is not good at picking winners and losers regarding commercial technologies.  Additionally, government funding of R&D can have what is called a “crowding out” effect.  The private sector will be reluctant to do research that competes with government for fear that they will not realize the full profits for their innovation and invention. 

The simple fact that oil is a fungible commodity and trades in a global market has seemingly eluded US policymakers since 1973. Believing that imports of oil from the Middle East exposes the US to jeopardy has been used by both political parties to spearhead distortions in energy markets that are with us still today.

If one makes the assumptions that oil is finite in the sense that we will run out of it and that importing oil threatens some aspect of America’s security (funding terrorism, national security due to supplies coming from hostile nations, balance of trade, etc.), then the following policies make some sense:

  • CAFE:  Government should mandate that car companies increase the mile-per-gallon of cars sold in the US (otherwise known as Corporate Average Fuel Economy or CAFE) so that less fuel is needed to run cars.
  • SPR: Government should store reserves of crude oil and refined products in the ground in case of emergency shortages in supply (Strategic Petroleum Reserves or SPR).
  • Biofuel: Government should require that gasoline substitutes be produced from biological products such as ethanol as a way to increase supply of fuel for cars (ethanol). 
  • Synthetic Fuels:  Government should establish very expensive processes for converting abundant fuel (coal) into gasoline to increase the supply (Synthetic Fuels Corporation). 
  • Export Bans: Government should mandate that all oil produced in the US be consumed in the US and not exported in order to ensure security of supply.

Now make the assumption that markets work and that supply and demand will be driven to equilibrium by price. 

  • CAFE:  Because there is an assurance of supply in the bathtub there is only a need to worry about price.  Consumers will demand cars that have the features that best serve their needs, of which tradeoffs between price, safety and fuel efficiency will be several of such needs.  Thus CAFE is an unnecessary policy.
  • SPR: Because there is an assurance of supply in the bathtub there is no need to worry about supply shortages.  Let the private sector decide to diversify price risk by holding inventories.  SPR has turned out to be very expensive inventories of oil owned by the government funded by the taxpayer.
  • Biofuel: Ethanol is more expensive than gasoline and less efficient.  Since there is no risk of shortages of oil supply this is wasteful.  Additionally, there is the unintended consequence that using corn for producing ethanol increases food prices, which is an added burden on the poor.  The use of corn (the dominant feedstock in the US) for production of ethanol from field to gas pump uses nearly as much energy than the ethanol produces as a gasoline additive.  This net loss does not include the destruction of CO2- absorbing trees to increase the size of cornfields.       
  • Synthetic Fuels:  Because there is an assurance of supply there is no reason for the government to be in the synthetic fuel business.  Mercifully, the Reagan Administration put an end to this dream.
  • Export Bans:  In a world of guaranteed adequate supply, it makes no economic sense to ban oil exports.

 

Implications and Conclusion

Most oil producing countries depend on oil revenues to meet the needs of their people.  In some sense they need us more than we need them.

Look at how the recent collapse in oil prices has scrambled global politics.  Many oil producing countries based their budgets on expectations of oil at more than $100 a barrel.  Today (March 2015), it is hovering under $50 a barrel.  Time Magazine’s January 22, 2015, edition had an excellent analysis of the ramifications of the radical change in world oil prices.

Somewhat serendipitously, it is countries hostile to US interests who are most severely affected by the drop in oil prices.  Oilprice.com identified the “Top 5 Countries at Risk” listing: Venezuela, Nigeria (Boko Haram), Iraq (ISIS), Iran (intensifying the impact of the embargo), and Russia (limiting Putin’s use of energy as a weapon).  No one could have dreamt up a policy that would be more harmful to our adversaries and more beneficial to our friends than sustained low oil prices.

One needs to be careful, however, about being completely gleeful about this situation.  The fracking revolution benefited from higher oil prices and much less exploration and development in the US will result from low oil prices.  That sector is already feeling the pain and will continue to contract as prices remain low.  But other sectors of the economy will undeniably benefit from lower oil prices, so enhanced economic growth will be the net result.

More sinisterly, many of the countries that will suffer will become more desperate and thus potentially more dangerous.  They will also be able to use rhetoric that “blames” the US for low oil prices and thus the need to impose harsh measures on the populaces of these countries.  Venezuela’s President Maduro is already using the US as a punching bag to blame the US for the failure of his and the late President Chavez’s socialist policies.

Even when we had to rely on imports of oil for 60% of our consumption, our oil policies made no economic sense.  We will always have oil available in global markets simply because it is dispersed throughout the world.  But with the advent of the production technology revolution, the unreality of these policies has become even more manifest.  But entrenched interests have grown up around all these dysfunctional and market distorting policies. 

As President Reagan said, “A government bureau is the nearest thing to eternal life we’ll ever see on this earth.”  It is not too far an extension to conclude the same about a subsidy or a mandate.  The great news is that removing all these distortions will have a positive effect on prosperity, though there will certainly be some losers.  But we are running out of time to keep putting off the myriad actions that must be taken to ensure that we have the ability to deal with the challenges we face and leave our children and grandchildren a better, energy efficient world.



[1] Actually this is a simplistic but useful metaphor. Though we often talk about crude oil as if it were a completely homogenous commodity, there are several grades of crude that have slightly different characteristics.  So there are actually several different global bathtubs, each with a slightly different grade of crude.

[2] There are two components to the price of oil: the resource cost and the transportation cost.  The delivered price of oil to Japan might be more due to longer transportation distances than for Great Britain.  But the barrel of crude transported would be priced the same for both countries.   

 

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