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Energy Blog

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?

Gabriel Ross

There’s a well-known joke in Israel: Isn’t it ironic that Moses walked through the Middle East for 40 years and found the only land without oil?

Fortunately for the Israelis, that joke has been overtaken by events. Since some of the largest natural gas fields in the world were discovered in the Eastern Mediterranean Basin, Israel has been sitting on a wealth of, well, wealth.

A consortium of U.S. and Israeli companies stand at the forefront of developing this resource, investing billions of dollars to bring the natural gas to market. This is an example of U.S.-Israel private collaboration at its finest, and we are just beginning to enjoy the dividends this partnership is creating.

Indeed, the estimated reserves are enough to supply Israel for the next 100 years, providing a degree of energy security that previous generations of Israeli leadership could only dream of.

But these reserves have tremendous regional implications as well. The companies developing the reserves have agreements to sell gas into the Jordanian and Palestinian markets, helping to link these economies to Israel through the creation of long-term, strategically-vital deals.

The opportunity to further regional economic integration and peaceful ties in a neighborhood that faces any number of challenges is almost too good to be true. U.S.-Israel cooperation on energy has the potential to have a dramatic impact on diplomatic relations in the Middle East for decades to come.

And yet, like all opportunities, commercial and political risks are present. While all companies face market fluctuations, geostrategic uncertainties in the Middle East add a unique twist to these deals. This is where American involvement, in the form of financing from the U.S. Export-Import Bank (Ex-Im), is essential.

Ex-Im fills gaps in trade financing that private banks are unable to meet because of political instability. The Bank’s support gives the private sector — and foreign governments — the confidence that this project has the full faith and backing of the U.S. government. In this case, Ex-Im financing can be the difference between a deal going forward and leaving the gas in the ground.

For the U.S.-Israel relationship, these gas deals represent a once-in-a-generation opportunity. This deal is good for the U.S., good for Israel, and good for her neighbors.

While Congress extended Ex-Im’s mandate through June 2015, we hope the next time Congress votes to re-authorize Ex-Im it is for a significantly longer timeframe. If not, American jobs, American investment, and American interests will all suffer.

And, in this instance, Israelis might unfortunately be forced to start telling that joke about Moses’ navigational shortcomings once again.

Sean Hackbarth President Barack Obama delivering the 2015 State of the Union AddressPhoto credit: Mandel Ngan/Pool via Bloomberg.

The State of the Union address is usually a President’s laundry list of policy ideas. Some get enacted, while others get ignored. This one was no different.

Here are some takeaways from President Obama’s 2015 address.

Let’s start with the good.

The President hoped to be productive with Republicans who now control both houses of Congress. “I will seek to work with you to make this country stronger.”

There are two areas where that can happen.

Trade

President Obama wants to have the same authority for negotiating trade deals that every President since Franklin Roosevelt has had. “I’m asking both parties to give me trade promotion authority to protect American workers, with strong new trade deals from Asia to Europe that aren’t just free, but fair,” he said.

In order to get TPA, the President will have to convince Congress, especially members of his own party, that TPA is essential. The business community will stand with him, because it knows that greater access to global markets will mean American economic growth.

Infrastructure

President Obama urged Congress to invest in infrastructure:

21st century businesses need 21st century infrastructure – modern ports, stronger bridges, faster trains and the fastest internet.  Democrats and Republicans used to agree on this…. Let’s pass a bipartisan infrastructure plan.

Such an investment would pay off for the economy. A 2014 study for the National Association of Manufacturers found that a "targeted and long-term increase in public infrastructure investments from all public and private sources over the next 15 years would increase jobs by almost 1.3 million at the onset of an initial boost, and grow real GDP 1.3% by 2020 and 2.9% by 2030."

Now the bad.

Energy

President Obama took credit for America’s energy boom saying:

We believed we could reduce our dependence on foreign oil and protect our planet.  And today, America is number one in oil and gas…. And thanks to lower gas prices and higher fuel standards, the typical family this year should save $750 at the pump.

A brief look at the facts and you’ll find that the oil and natural gas boom has occurred despite actions by the Obama administration.

Between 2009 and 2013, oil production on private and state lands increased by 61% but decreased by 6% on federal lands. As for natural gas, production on private and state lands increased by 33% but decreased by 28% on federal lands.

In addition, the Interior Department and other federal agencies are working on duplicative regulations on hydraulic fracturing, the technology that’s given us the shale energy boom.

Keystone XL Pipeline

The President downplayed the Keystone XL pipeline, calling it a “single oil pipeline.”

But it’s a project the President’s own State Department finds will create 42,000 jobs, generate $3.4 billion in economic activity, and produce $55.6 million in local property taxes annually when it’s up and running, with little environmental impact.

Then there’s the ugly.

Carbon Regulations

The President stood firm on federal carbon regulations, saying:

I am determined to make sure American leadership drives international action.  In Beijing, we made an historic announcement – the United States will double the pace at which we cut carbon pollution, and China committed, for the first time, to limiting their emissions.

First, the U.S.-China agreement the President mentioned is unenforceable. Second, India, another major carbon emitter, won’t give up coal as it grows its economy. Third, by driving coal-fired power plants into oblivion, EPA’s carbon regulations will make power outages more likely.

Bonus: Regulatory Reform Was Missing

The President didn’t mention fixing the broken federal regulatory system. As I noted yesterday, federal regulations are a high barrier for businesses. Reform should make the regulatory process be more accountable, more transparent, include more meaningful public input, and guarantee a swift permitting process.

The main problem is the President didn't lay out enough ideas on how to grow the economy. As U.S. Chamber President and CEO Tom Donohue said in a statement:

The president appears to want to divvy up the existing economic pie instead of pursuing policies that will grow it to support more jobs, spur growth, and lift incomes. This approach will consign the nation to weak growth and fewer opportunities for our workers.

For further analysis on the State of the Union Address, read J.D. Foster’s post on President Obama’s “masterstroke in chutzpah.” 

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