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Sean Hackbarth An oil platform off the coast of Port Fourchon, LA.An oil platform off the coast of Port Fourchon, LA. Photo credit: Derick E. Hingle/Bloomberg.

The Obama administration announced that it would open parts of the Atlantic coast to oil and natural gas development.

2017-2022-dpp-lower-48-states-program-areas_800px.jpg 2017-2022 offshore oil and gas leasing draft proposed program for lower 48 states program areas. 2017-2022 offshore oil and gas leasing draft proposed program for lower 48 states program areas.Source: Bureau of Ocean Energy Management.

At the same time, the administration closed off chunks of Alaska’s Arctic coast.

2017-2022-dpp-alaska-program-areas_800px.jpg 2017-2022 offshore oil and gas leasing draft proposed for Alaska region. 2017-2022 offshore oil and gas leasing draft proposed for Alaska region.Source: Bureau of Ocean Energy Management.

And the Pacific coast and the Eastern Gulf of Mexico remain off limits to new leases.

What’s more, this is the most the administration is willing to offer according to Amy Harder, a Wall Street Journal energy reporter [emphasis mine]:

Secretary Sally Jewell of the Interior Department stressed that this is the broadest plan that they’re going to consider. When it goes final in the next couple of years, they may whittle it down to something smaller than what they proposed today…. So I think the plan can only get narrower and given the president’s commitment to climate change, I wouldn’t be surprised if they ultimately took it out of the final plan, though at this point it’s far to early too say.

A lease sale of the Atlantic coast could easily be cancelled. The administration did it in 2010.

Combine the offshore leasing program with the President’s announcement to lock up vast areas of Alaska from energy development and you have an energy plan that “highlights the disconnect between our economy’s energy needs and the administration’s misguided attempts to meet those needs,” said Karen Harbert, president and CEO of the U.S. Chamber’s Institute for 21st Century Energy.

By 2040 nearly two-thirds of all energy consumed in the United States will be oil and natural gas. That demand will have to be met from somewhere.

“Continuing to keep billions of barrels of oil and trillions of cubic feet of gas under lock and key as the administration is proposing are not what we need to secure our energy future and release America’s energy potential,” added Harbert.

Why open Atlantic offshore drilling now?
Sean Hackbarth A section of the Trans-Alaska Pipeline near Delta Junction, AK.A section of the Trans-Alaska Pipeline near Delta Junction, AK. Photo credit: Daniel Acker/Bloomberg.

Alaska’s Congressional delegation went ballistic over President Obama’s decision to close off the Arctic National Wildlife Refuge (ANWR) to energy development.

This chart explains why Senator Lisa Murkowski (R-AK) and other Alaska leaders are upset.

oil-transported-by-the-trans-alaska-pipeline-barrels-per-day_800px.png  Oil transported by the Trans-Alaska Pipeline Chart: Oil transported by the Trans-Alaska Pipeline

Since its peak in the late 1980’s there’s been a steady decline in the volume of oil transported from Alaska’s North Slope through the Trans-Alaska Pipeline.

Today, there’s less oil moving through the pipeline than when it first went into operation in 1977.

During President Obama’s time in office, the volume of oil going through the pipeline has decreased by 20%.

The Wall Street Journal editorial board notes that the Obama administration has blocked efforts to increase Alaskan oil production [subscription required]:

The ANWR blockade also seems to be part of a larger strategy to starve the existing Trans-Alaska pipeline, the 800-mile system that carries oil south from state lands in Prudhoe Bay. ANWR occupies the land east of that pipeline. The Interior Department this week will release a five-year offshore drilling plan that puts vast parts of the Chukchi and Beaufort Seas—the area to the north of the pipeline—out of bounds for drilling. This follows an Administration move in 2010 to close down nearly half of the 23.5 million acre National Petroleum Reserve-Alaska (NPRA)—the area west of the pipeline.

Federal agencies have also been playing rope-a-dope with companies attempting to drill on the few lands that are still available. ConocoPhillips has been waiting years for permits to access a lease it purchased in NPRA—and the Administration is this week expected to make that process even harder. Shell has spent $6 billion on plans to drill in the Chukchi and Beaufort, only to be stymied by regulators.

The Arctic Outer Continental Shelf is estimated to hold at least 27 billion barrels of oil. ANWR is thought to have at least 10 billion more, while NPRA—designated in 1976 as a strategic petroleum stockpile—is considered equally rich. Yet not one drop of oil is flowing from these areas, and Mr. Obama seems intent on ensuring that none does.

By law if the pipeline shuts down because there’s no more oil available to be transported then it must be dismantled. And as we’ve seen with the political fight over the Keystone XL pipeline, approving another pipeline would be tenuous to say the least. If President Obama's ANWR decision were reversed by a future administration, high transportation costs would hinder North Slope energy development.

The editorial continues:

This is what environmentalists want because they know that if the pipeline shuts down, it must by law be dismantled. Since the pipeline is the only way to get large quantities of Alaskan oil south, shutting it down means closing to exploration one of the world’s greatest repositories of hydrocarbons.

Turning off the spigot to an energy infrastructure asset like the Trans-Alaska Pipeline isn’t wise strategically when future U.S. economic growth depends on access to abundant energy.

Sean Hackbarth Arctic National Wildlife Refuge map.

Pultizer Prize-winning author Daniel Yergin, wrote in the New York Times that global energy markets are at an inflection point. The role of the world’s “swing producer” has swung to the United States:

By leaving oil prices to the market, Saudi Arabia and the emirates also passed the responsibility as de facto swing producer to a country that hardly expected it — the United States. This approach is expected to continue with the accession of the new Saudi king, Salman, following the death on Friday of King Abdullah. And it means that changes in American production will now, along with that of Persian Gulf producers, also have a major influence on global oil prices.

Even though hydraulic fracturing had led this shale boom, conventional oil production is still important.

This makes the Obama administration’s request to close off a big portion of Alaska’s energy reserves to development especially disappointing:

President Barack Obama is proposing to designate the vast majority of Alaska’s Arctic National Wildlife Refuge as a wilderness area, including its potentially oil-rich coastal plain, drawing an angry response from top state elected officials who see it as a land grab by the federal government.

“They’ve decided that today was the day that they were going to declare war on Alaska. Well, we are ready to engage,” said U.S. Sen. Lisa Murkowski, R-Alaska, and chair of the Senate energy committee.

The designation would set aside an additional nearly 12.3 million acres as wilderness, including the coastal plain near Alaska’s northeast corner, giving it the highest degree of federal protection available to public lands. More than 7 million acres of the refuge currently are managed as wilderness.

The U.S. Geological Survey estimates that the area has over 10 billion barrels of recoverable oil.

The wilderness designation will require Congressional approval—not likely with this Congress. However, the Washington Post reports that the Interior Department will take action to limit energy development there [H/t Noah Rothman]:

While Congress would have to approve any new wilderness designation, Interior will immediately begin managing the iconic area under the highest level of protection the federal government can offer.

President Obama, who has not been to ANWR and ironically filmed his announcement on the fuel-guzzling Air Force One said, we must ensure “that this amazing wonder is preserved for future generations.”

In contrast Jonah Goldberg, someone who has visited ANWR, had a different description of the area where oil development would take place:

The oil is on the coastal plain at the very top of ANWR on the coast of the Arctic Ocean. And that ain't beautiful. Believe me. Winter on the coastal plain lasts for nine months. Total darkness reigns for 58 straight days. The temperatures drop to 70 degrees below zero without wind chill. This is the time of year when the oil companies would do almost all of their work; when nary a caribou nor any other creature would be dumb enough to venture out on to the frozen tundra for long. Regardless, ANWR's summer is no picnic either. The coastal plain is covered in a thick brick of ice for much of the year. When it melts, it creates, well, puddles. Lots and lots of puddles - and mud. This provides the lebensraum that mosquitoes and other flying critters need to stretch their wings.

But back to the President. In last week’s State of the Union Address he took credit for the oil and natural gas boom, but the facts tell a different story. Under his watch, oil and natural gas development has decreased on federal lands while increased on private and state lands. In fact, his administration has put up barriers to energy development. The ANWR proposal is the latest.

The administration is expected to release a draft of its offshore lease plan. That may include allowing energy development off the Atlantic coast. Such a decision will be welcome for its economic and job growth and bipartisan support, but it will further confirm how incoherent the President’s energy policy is.

Michael J. Marshall Shoppers in San Francisco, CA.Shoppers in San Francisco, CA. Photo credit: Photographer: David Paul Morris/Bloomberg.

There are storm clouds on the horizon, especially deflationary threats abroad and the prospect of lower oil prices derailing our domestic energy renaissance, along with the frightening developments of resurgent anti-Western jihadists, nuclear proliferation, and the willful decline of American influence abroad. Economically speaking, however, the U.S. rolls into 2015 with a level of cautious optimism we have not seen in years.

The U.S. economy is beginning to breath on its own after years on life support, primarily from the Federal Reserve, but aided significantly in recovery by the good fortune of strong natural resources, ingenuity, and the economic freedom of our private markets that persevere in the face of stateside attack. The economy continues to show signs of strength, however lacking in enthusiasm it may feel for families experiencing stagnant wages, and businesses the heavy hand and uncertainly of regulation by impudent executive agencies.  

The data are quite consistently indicating a sustained recovery in the labor market, unemployment moving appreciably lower, manufacturing surveys pointing to expansion, the housing market improving, and equity markets reflecting higher earnings expectations.  Business owners are expressing greater optimism for earnings in the year ahead. Consumer and business balance sheets are better positioned than they have been in years, boosting confidence. More and more people are voluntarily leaving their positions for new jobs, a sign of both optimism and flexibility in the economy, and positive for their wage growth.  For those struggling with fixed incomes and lack of mobility in employment, they are at least getting relief, an effective tax cut, through lower energy prices.

Aside from the rise of ISIS, Russian aggression, overcoming harsh weather in the first quarter, and the remarkable oil slide, 2014 was the story of the rest of the world trailing and dependent upon further U.S. growth and economic strength. We saw weakness and continued uncertainty in Europe; Japan, after two decades, still struggling to find its footing; China’s economic growth slowing as it tries to wring out past corporate and government excesses; and commodity-export-driven emerging markets challenged by world gluts. With respect to oil in particular, as demand in China slowed and U.S. supplies rose, American consumers and businesses are receiving an added shot in the arm moving into 2015.

The past year has also been the story of slowly diminishing excess economic capacity, which means the gap between what our economy could produce if workers were more fully employed or productive and what it is currently producing, is coming down.  The “output gap” has been one of the most significant factors providing the Federal Reserve comfort in keeping its foot on the accelerator without fear of inflation.  Though its move has been modest, a more marked decline in this measure will pressure the Fed to raise rates soon, but not too soon…as we’ve been told.    

The U.S. economy’s improving health relative to the rest of the world has strengthened the dollar as investors seek U.S.-denominated assets, offering Americans slightly better international purchasing power, and no doubt contributing to lower oil prices set in dollars.  Forthcoming tightening by the Fed will make U.S. assets relatively more attractive still, compelling additional capital to our shores — threatening further weakness abroad, especially in struggling emerging markets, to which we are not immune.  This has come into focus as the markets opened the new year.  Investors have demonstrated worries about negative impacts of lower oil and deflationary pressures derailing the world economy, though we could be seeing some profit-taking carried over from last year’s gains.  For now, dollar strength and lower global commodity prices are augmenting the U.S. position and pulling the rest of the world along.   

The flight to U.S. quality and coinciding demand for U.S. Treasuries has provided additional downward pressure on U.S. long rates, another factor for the Fed keeping short term rates lower for longer — or making it harder to depart from them.  The low long rates have kept mortgage rates attractive, bolstered affordability and extended a steady housing recovery, boosting the household wealth picture and their growing confidence. The positive trend should eventually lead to much-delayed new-household formation by Millennials and stronger housing market demand.  Furthermore, as low as U.S. rates have been and unattractive from an investment standpoint, they remain relatively more attractive than other advanced economies around the world, with foreign central banks of weaker economies behind our Fed’s moves, still trying to keep their teetering economies from falling off again.  That is to say, the phenomenon continues.

Americans and markets both appear to cheer divided government as it reduces the risk of bad policy outcomes. The anticipated change in the makeup of Congress and the Fed’s continued risk-on loose monetary policy — despite an end to its quantitative easing program in the U.S. — contributed to the modest lift in equity markets in 2014, after enormous run-ups in 2012 and 2013. This has left asset holders more sanguine about their circumstances and added to confidence.  

As 2015 revs up, Americans are looking for further confirmation of what equity markets have forecasted the past few years: low inflation with better growth that translates into families participating through real pay increases and improved living standards. Lower energy prices will help. Dr. David Kelly of JPMorgan has argued that in 2015 we should also expect long-delayed pent-up demand for new technology to materialize more broadly, as businesses acquiesce to the need to upgrade their systems, potentially improving the earnings story the market is now pricing. This should, over time, provide a boost to labor productivity, which as economist Bob McTeer has pointed out, will matter most in getting the US back to robust growth path coinciding with non-inflationary wage pressure, which helps millions of Americans. (Read more from Bob McTeer here.)

In sum, while the Fed has been the major driving force in stimulating the economy, the energy renaissance, technology improvements, excess capacity, international sluggishness boosting the dollar, and a commodity cycle slowdown have all fortuitously, so far, handed the U.S. economy and the Fed, a Goldilocks scenario — not to hot, not too cold.  There are real risks that could disrupt the virtuous cycle. The Fed is challenged to defend against inflation should the economy heat up quickly, while trying not to disrupt a recovery by raising rates before it proves truly self-sustaining.  Many signs, nevertheless, point to an economy that is ready to operate more normally with a Fed that has room to move prudently with it.

Where we are today, at least in the U.S., is possessing an economy that’s in a pretty good place. Not surprisingly the President took credit for it in his State of the Union address last week—for the U.S. recovery’s length if not the length of time it took to get here—even as his administration seemingly combs the policy landscape for new ways to obstruct what’s working.   

The new Congress, perhaps, has arrived just in time, not necessarily to pass bills that the President won’t sign, but at least to put in check the uncertainties in the regulatory environment that have kept economic decisions by businesses at bay and give this strengthening cycle additional legs.  

Marshall is a former JPMorgan banker and former advisor to Senator Bob Dole.  He is currently advisor to OFW Law and founder of Marshall Consulting LLC. The views above are the author's alone, and don't necessarily reflect those of the U.S. Chamber.

Sean Hackbarth Power lines at the coal-fired John E. Amos Power Plant in Winfield, West Virginia.Power lines at the coal-fired John E. Amos Power Plant in Winfield, WV. Photo credit: Luke Sharrett/Bloomberg.

As EPA has developed its proposed carbon regulations, it has praised itself for how well it has worked with states.

EPA’s “Clean Power Plan” sets carbon emissions goals for each state (except Vermont) to meet by 2030. Each state has to develop its own plan to reach its goals.

To EPA Administrator Gina McCarthy this is a high level of “collaboration” between both levels of government, giving states “enormous flexibility” to comply:

“There is enormous flexibility in the definition of a state plan and our ability to look at a timeline for achieving that, for submitting the plan, and for achieving the reductions,” she said.

“It is an absolute collaboration between the federal and state government,” McCarthy said of the process. “This is a partnership if there ever was one.”

That’s spin. That's not how state officials see it.

The fact is states aren’t pleased with EPA’s proposed regulations and its take-it-or-leave-it attitude. For instance, EPA plans to impose a “model rule” on states that don’t submit plans.

A report from the U.S. Chamber’s Institute for 21st Century Energy summarizes states' displeasure with EPA’s proposed carbon regulations.  They question its legality, its fairness, and its dangers to power grid reliability, state economies, and jobs.

Here are three key numbers from the report that undercut McCarthy’s claims of federal-state kumbaya:

32 states have raised fundamental concerns with the rule’s legal foundations 28 states warned of negative economic impacts 32 cited threats to electricity reliability

As Karen Harbert, president and CEO of the Energy Institute, said:

What is truly striking is the level of concern many states have regarding EPA’s rule—whether they are blue states, red states, or purple states. Keeping the power on and keeping electricity affordable are not partisan issues, and indeed those responsible for critical functions in many states of all political stripes are telling the Obama administration that major changes must be made to this rule.

The report makes clear that, if EPA is truly committed to the collaborative spirit it claims to support, it has its work cut out for it.

Here are some of the common complaints and concerns highlighted in the report [all emphasis mine]:

1. The Carbon Regulation’s Legality

Attorneys General of AL, FL, GA, IN, KS, LA, MI, MT, NE, ND, OH, OK, SC, SD, UT, WV, and WY:

[T]he Clean Air Act generally and Section 111(d) specifically do not give EPA that breathtakingly broad authority to reorganize states’ economies. ‘Congress . . . does not, one might say, hide elephants in mouseholes.’ . . . Congress did not hide the authority to impose a national energy policy in the ’mousehole’ of this obscure, little-used provision of the Clean Air Act, which EPA has only invoked five times in 40 years. The proposed rule has numerous legal defects, each of which provides an independent basis to invalidate the rule in its entirety.

2. Its Harmful Effects on Electricity Prices, Jobs, and the Economy

Florida Public Service Commission:

[T]he Commission is confident that if EPA’s proposed BSER is not revised, the stringent emission performance requirements will require substantial compliance costs for Florida . . . Preliminary estimates from the Florida Electric Power Coordinating Group, Environmental Committee, support the conclusion that EPA may have understated the potential range in its estimated direct and indirect costs. These preliminary estimates show that average statewide retail rates could increase 25 to 50 percent by 2030 as a result of the Proposed Rule.

3. It Threatens Power Grid Reliability

North American Electricity Reliability Corporation:

The proposed timeline does not provide enough time to develop sufficient resources to ensure continued reliable operation of the electric grid by 2020. To attempt to do so would increase the use of controlled load shedding and potential for wide-scale, uncontrolled outages.

4. It Isn’t Technological Achievability

Nebraska Department of Environmental Quality:

[T]he Building Blocks contain inaccurate assumptions and unrealistic expectations that informed EPA's goal for Nebraska. The EPA has said the Building Blocks included in the proposal are guidelines, not mandatory requirements, and that states are free to use any emission reduction strategies they wish, so long as their final emission reduction goals are met. However, a goal that has been established with flawed assumptions results in a rule that is inflexible and overly burdensome.

5. The Regulations are Based on Mistakes and Errors

Wyoming Department of Environmental Quality:

EPA proposes state goals based on a state-specific analysis of available efficiency gains from each of the four building blocks. Wyoming's state goal as proposed by EPA is based upon clear errors and irrational assumptions….  If EPA does not use reliable data, then it is acting in an arbitrary and capricious manner.

6. There are Unrealistic Timelines to Implement the Regulations

Wisconsin Department of Natural Resources and Public Service Commission of Wisconsin:

Given the amount of attention this proposal has received, it is unrealistic to expect the state to submit a complete plan within EPA’s proposed timeframes. EPA must provide more time, or, at a minimum, provide guidance on what EPA will accept at the plan due date short of a complete and final plan.

7. There are Unrealistic Timelines to Meet Interim Targets

Iowa Department of Natural Resources, Iowa Utilities Board, and Iowa Economic Development Authority:

As proposed, there is very little difference between the interim goal and the final goal.... Effectively, the EPA has set a 2020 compliance deadline with no appreciable phase-in. The option offered by EPA to over-comply in later years to make up for lack of compliance in the early years is not realistic and may impose unnecessary costs and adverse effects on reliability.

8. It Gives Little Credit for Previous Carbon Reductions

New Jersey Department of Environmental Protection:

New Jersey’s enormous progress in cutting CO2 emissions should be recognized by the federal government. Instead, this Proposed Rule would punish our state—and others who have been leaders—for its success. By failing to provide credit for past emission reduction measures, the Proposed Rule would provide a clear and enduring disincentive against early action in the future, absent a federal mandate. It would convey exactly the opposite message that the federal government should be sending to the states and the private sector. Rather than encouraging progress, it would hinder it, as parties would hesitate to act knowing that their progress might be penalized in the future.

9. It Doesn’t Treat Nuclear Power Adequately

South Carolina Department of Health and Environmental Control:

It is important for the EPA to understand that, to date, less than one half of the costs of the new nuclear units in South Carolina have been incurred, so a significant cost remains to support the completion of these units. Further, only the financing costs are currently being paid and the principal will be paid off over the estimated 60 year lifetime of the new nuclear units. There is clearly an incremental cost for these new units that will be added to customer bills to pay for the zero carbon emitting units once they come online.

10. There is Little Consideration for Stranded Costs

Kansas Corporation Commission:

The state of Kansas has spent in excess of $3 billion on environmental compliance projects for our coal-fired generation fleet, and these projects were approved by the EPA under state implementation plan(s). For the EPA to now assert, under its Clean Power Plan, that the generation from Kansas’s coal-fired fleet must be significantly reduced or eliminated results in significant stranded costs to Kansas ratepayers.

11. Standards for Existing Power Plants are Tougher than for New Power Plants

Virginia Department of Environmental Quality:

EPA’s proposal “compound[s] the problem created by establishing inequitable state carbon emissions goals by setting those goals for some states, including Virginia, at a level well below that which EPA has proposed for new fossil-fired electric generating units as NSPS under §111(b) of the Act. The second paragraph of EPA’s ‘The CAA in a Nutshell: How it Works’ for 2013 says, ‘The law calls for new stationary sources to be built with the best technology, and allows less stringent standards for existing stationary sources.’”

12. It Doesn't Properly Estimate Power Plant Generation Capacity

North Carolina Public Utility Commission

EPA’s methodology for calculating a unit’s capacity value is completely foreign to the electric utility industry. North Carolina electric utilities develop their resource plans to secure capacity to meet the single coincident peak demand modeled over the planning horizon. In North Carolina, this is typically the summer seasonal peak. However, from time-to-time, North Carolina utilities have observed all-time system peak demands during the winter months. While utilities are obligated to meet the peak demand regardless of when it occurs, they typically must plan for more generation in the summer than winter periods. This is due to the physical conditions that reduce the amount of available capacity from a generation facility in summer months.

State officials have spoken. Will EPA listen?

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