Sunday, March 27, 2016

Energy policy and uninformed opinion

Famed economist John Kenneth Galbraith used to respond to questions about the direction of the economy and financial markets by saying: "I answer because I'm asked not because I know."

Such is also the case with poorly informed members of the public whose views pollsters seek on every conceivable topic including energy. A recent Gallup poll asked a sampling of Americans whether they believe the United States will face a critical energy shortage in the next five years.

Some 31 percent responded yes, the lowest number on record since the question was first asked in 1978 (though it was not asked again by Gallup until 2001.) In 2012, the last time the question appeared in a Gallup survey, the number was 50 percent. The highest result came, not surprisingly, in 2008 when oil was making its historic climb to an all-time high of $147 per barrel. In March of that year (five months before the oil price peak) some 62 percent of American respondents thought the United States would face a critical energy shortage in the next five years.

There is, of course, the problem of what "critical energy shortage" means to each respondent. Prices for all varieties of energy were elevated in 2008, but there weren't any critical shortages--just very high prices which made it impossible for some to afford as much energy as they would like.

Currently, in the face of gasoline prices which have fallen to $2.11 per gallon nationally and natural gas prices that recently touched lows reminiscent of the late 1990s, it is remarkable that even 31 percent still think critical energy shortages could show up within five years. That belief be may the after-effect of the highest average daily prices on record for crude oil four years running from 2011 through 2014.

That 66 percent seem unconcerned may represent those whose opinions merely follow the prevailing trend--which in energy prices for the moment seems to be down. Interestingly, 1 percent said we are already in such a shortage, the same percentage who said it in the high-energy-price year of 2008. In this year's survey, only 2 percent said they had no opinion, a rare admission among opinionated Americans.

The urgency with which the United States and the world treats energy issues has to do in part with whether the public thinks there is a problem. And, Americans don't think there is a problem with low-priced energy as is evidenced by a political past littered with such unpopular taxes as President Jimmy Carter's Windfall Profits Tax aimed at U.S. oil companies benefiting from the deregulation of oil prices; presidential candidate John Anderson's 50-cents-per-gallon gasoline tax (offset by a 50 percent reduction in Social Security taxes); President Bill Clinton's ill-fated BTU tax; and now Barak Obama's proposed oil tax.

All of these except the Windfall Profits Tax presumed that America's energy consumption was excessive and sought either to reduce it and/or to shift it to renewable energy sources.

It used to be that the public needed only to concern itself with the supply of energy--or rather the supply of affordable energy. Now, it is obliged to think along two axes, one relating to supply and another relating to climate change since the vast majority of our energy still comes from the burning of fossil fuels which emit climate-changing greenhouse gases.

To ask people their views about energy without asking about their views regarding climate change is more than just a careless oversight. It misses what is perhaps now the central issue in energy: Can we as a civilization survive the long-term side-effects of the fuels we currently use?

Put this way, the problem seems much more urgent regardless of the price. That said, informed opinion--or should I say truly informed opinion--would tell us that low energy prices endanger future energy supplies by making investment in exploration for oil and natural gas, development of alternative energy sources and investment in energy conservation measures all less attractive. Truly informed opinion would therefore poll just the opposite of mere popular opinion.

America's tradition of anti-intellectualism puts a low premium on careful thinking, allowing the substitution of slogans for analysis. The current presidential campaign should be evidence enough of how true this is.

But there is another reason for resistance to careful thinking; it can be difficult and distressing, especially if it leads to conclusions that are uncomfortable or contrary to our current beliefs. Which brings us back to John Kenneth Galbraith who once said: "The conventional view serves to protect us from the painful job of thinking."

Conventional thinking is all we are likely to get out of polls and explains why serious energy policy thinkers continue to run up against opposition to what for a long time has been sensible energy policy, namely, dramatically reducing energy use through efficiency and conservation measures and rapidly switching to renewable sources such as wind and solar--sources that do not create the triple threat of depletion, pollution and climate change posed by fossil fuels.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, March 20, 2016

Oregon says yes to coal-free electricity

The Oregon legislature has adopted a first-in-the-nation plan to phase out electricity from coal, a major source of climate-changing greenhouse gases.

The state's environmental community had been gearing up for a ballot initiative this year that would have forced the state's utilities to abandon coal as a fuel for electricity. But negotiations between the two groups resulted in a legislative compromise--dubbed the Clean Electricity and Coal Transition Plan--that will wean the state off coal-fired electricity no later than 2030 except for one out-of-state power plant that is partly owned by an Oregon-based utility. That plant will be retired no later than 2035.

The plan also calls for an increase in the percentage of energy that electric utilities must get from renewable sources such as wind and solar from 25 percent by 2025 to 50 percent by 2040.

Coal currently provides almost 34 percent of the state's electricity. Hydroelectric generation provides almost 43 percent. Natural gas and wind account for 13.5 percent and 5.6 percent, respectively. Regarding Oregon's renewable energy targets, for context California and New York have mandated the same percentage as Oregon but by 2030. Vermont has targeted 75 percent by 2032, and Hawaii has mandated 100 percent renewable energy for electricity by 2045.

Ontario became the first province in Canada to become coal-free in electricity generation as of 2014, a year earlier than anticipated when Ontario's premier pledged in 2002 to end all coal-fired power in the province. It was the first jurisdiction in North America to declare such a goal. Ontario's hydropower, the growth of renewable energy and the province's access to natural gas and nuclear power helped to make the transition from 25 percent coal-fired electricity to zero possible.

Oregon's Clean Electricity and Coal Transition Plan targets the state's two large investor-owned utilities, Pacific Power and Portland General Electric, which together provided 65 percent of all electricity to the state as of 2014 according to the Oregon Department of Energy.

Municipal utilities, cooperatives and public utility districts are not covered by the plan. These entities currently get a large portion of their electricity from the Bonneville Power Administration (BPA). BPA derives 83 percent of its power from federally-owned hydroelectric dams dotting the Northwest and 10 percent from nuclear power stations. BPA does not generate coal-fired electricity though a small portion of its purchased electricity may come from coal-fired plants.

The western power grid is too interconnected to keep every electron generated by coal out of Oregon. Occasional purchases of out-of-state electricity after 2035 may include some that is generated by coal, especially purchases made by those providers not covered by the plan. But Oregon ratepayers will no longer be on the hook for the financing of upgrades or new construction of coal-fired plants. That will make it harder for those generators serving western states to justify new investments in coal-fired facilities. In addition, rising requirements for renewable energy will shift demand away from coal, reducing investment in this source of electricity.

The opponents of the plan believe it will raise utility rates while failing to reduce carbon emissions. Supporters admit that rates will rise, but they believe rates will actually rise less if coal-fired electricity is eliminated from Oregon's energy mix. Greenhouse gas emissions will almost certainly be regulated ever more stringently over time, the supporters argue. Therefore, it is prudent to move away from carbon-intensive energy sources that are bound to become more expensive because of increasingly costly regulations.

Just in case, however, the plan allows for a temporary suspension of renewable energy targets if the cost of compliance exceeds a certain threshold for any one year or when other narrow conditions apply. Under the previous renewable energy targets, utilities never came close to exceeding the threshold.

As for reducing carbon emissions, it is possible that some out-of-state coal-fired generating plants that currently supply electricity to Oregon may continue to operate after 2035 by rerouting their electricity elsewhere. (Oregon has only one coal-fired power station within its borders, and that one is scheduled to close in 2020.)

But, Oregon's adoption of an aggressive target for renewable electricity generation necessarily implies a reduction in greenhouse gas emissions from what would otherwise have been the case. The Oregon Global Warming Commission estimates that emissions would be cut by nearly half for the Oregon customers of the state's two large investor-owned utilities covered by the plan. That assumes coal is replaced by a mix of 50 percent renewables and 50 percent natural-gas-fired electricity.

Moreover, the rest of the country will not simply stand still between now and 2030. It is likely that over time other states will adopt higher renewable energy targets. Some utilities may even choose to close coal-fired plants for economic reasons. That's because the cost of renewable energy has plummeted and in many cases is competitive with fossil fuel- and nuclear-generated electricity. The expectation is that renewable sources will continue to get cheaper to install and operate becoming ever more competitive. And, of course, renewable sources such as wind and solar do not face uncertainties over the cost of fuel. The wind and the sun are free.

As a result one long-standing criticism of renewable energy may no longer apply, namely that mandating increased use of renewable energy for electricity generation will be more costly in the long run than sticking with fossil fuel energy. What used to be labeled a competitive disadvantage may quickly be turning into a competitive advantage for those who move first to deploy low-carbon sources of electricity generation.

Major wind and solar companies already have operations in renewables-friendly Oregon. The rising requirement for electricity from renewables will only cement Oregon's reputation as a leader in renewable energy. That will make the state more likely to attract additional investment including investment in manufacturing that could increase the state's exports of wind and solar equipment to countries and states that are laggards.

The passage of the Clean Electricity and Coal Transition Plan may mark just the first step toward a more comprehensive approach to regulating carbon emissions in Oregon. In its recently ended one-month session, the state legislature considered but did not vote on a so-called cap-and-trade bill which would create a system similar to California's.

The Oregon bill would set a gradually declining limit on total carbon emissions in the state from large emitters and auction emissions permits to affected entities. Those entities which subsequently can reduce their emissions easily and cheaply would be free to sell their excess permits to those who have more difficulty. The bill or one similar to it is likely to be introduced in next year's full legislative session.

It is a sign of the times that the public debate among major players over Oregon's coal-free future saw little contention regarding the reality of climate change and focused mostly on the best way to address it. Given the rancor which has previously marked public exchanges about climate change in the United States, that's remarkable progress all by itself.

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P. S. Vermont and Rhode Island already enjoy coal-free electricity according the U.S. Energy Information Administration, but not because of any legal restraint. This has happened in part because much of the Northeast relies on readily available hydropower from Canada and rapidly expanding natural-gas-fired electricity generation made possible by cheap natural gas from newly exploited shale deposits in Pennsylvania.

UPDATED March 21, 2016

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, March 13, 2016

Taking a short break--no post this week

I'm taking a short break and expect to post again on Sunday, March 20.

Sunday, March 06, 2016

Ready for more punishment: Investors load up on oil share offerings

The $9.2 billion investors paid to snap up new equity offerings from U.S. oil companies in 2016 proves those investors are indeed ready for more punishment.

The amount is in line with the pace of such equity offerings in 2015 even as the mood in the oil markets has grown more dour. In June of last year I wrote:

New investors in U.S. oil company shares must believe they are catching the bottom and will have a very profitable ride up from here. This demonstrates that OPEC's work is not done and accounts in part for the decision to leave production quotas unchanged. OPEC's next task is to convince those making new investments in oil that rather than catching a bottom in oil prices, they have caught a falling knife.

A lot of investors did end up catching a falling knife as oil careened downward from about $60 a barrel last summer to Friday's close of about $36. Investors this year may still find that the knife is falling, though it admittedly doesn't have as far to fall this time around. Still, it seems they misunderstand OPEC's strategy or believe that that strategy will fail. As I said in the same piece:

The cartel must dampen enthusiasm for investment for the long term if the organization's members are going to benefit. A crippled U.S. oil industry without friends in the investment world is the only way to assure that rising prices won't simply lead to a stampede back into U.S. shale deposits.

It seems that the oil industry still has friends in the investment world and that OPEC's work is therefore not yet done. The big question then is: Will OPEC stay the course or relent with a production cut this year to raise prices?

I doubt that OPEC will relent. As bad as the OPEC countries including Saudi Arabia are hurting, to give up at this point would make all the previous suffering pointless. Saudi Arabia is really the linchpin in OPEC. No member can resist the will of the Saudis because they control such huge and flexible oil flows.

I have posited a speculative, but nevertheless plausible reason for why Saudi Arabia may not give up on its strategy any time soon: The kingdom may be at or near its all-time maximum rate of production, a rate it may only be able to maintain for the next decade or so. Naturally, the Saudis want to maximize their revenues during this period of peak production. They can't do that if U.S. oil companies keep overproducing.

If the Saudis can neutralize those companies by bankrupting them or forcing widespread lease sales, this will allow major international oil companies to buy up much of these distressed assets. The majors will develop these properties more slowly than the independents did because 1) the majors do not have to worry about their ability to meet debt payments and 2) the majors do not want to crater the price of oil which would only undermine the value of their newly acquired leases.

It is hard to imagine that the Saudis launched their low-price strategy on a wing and a prayer without thinking through how long it would take to force other producers to stop overproducing. But, investors keep hoping that the Saudis don't really know what they are doing. So far the Saudis appear to have the upper hand, and I'm guessing that those buying newly issued oil company shares these days are miscalculating once again. After all, the funding derived from these share offerings will only serve to encourage continued overproduction by making it possible for producers to hang on that much longer in hopes of an upturn.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.