Obama's Energy Experts

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Genius may have its limitations, but stupidity is not thus handicapped
— Elbert Hubbard

With Americans focused on a prolonged economic downturn, problems with the oil supply don’t appear as urgent as they did in the summer of 2008. We are prone to forget, however, how little Americans and their elected representatives know about energy regardless of whether the problem is on their doorstep or not.

A new survey The Energy Learning Curve published by pollster Daniel Yankelovich’s Public Agenda reveals that many, many Americans know next to nothing about energy. Finding #4 suffices to demonstrate this unsurprising conclusion, as shown in Figure 1 below.

I’m not going to bash the hoi polloi for their lack of knowledge about energy, which is a hard subject to understand, but I will dispute this opening statement by Public Agenda—

There may be some public policy decisions that can safely be left to the professionals: experts who spend their lives examining various issues. Energy isn’t one of them.

Energy issues touch almost every part of our lives, from the economy and the national security implications of our dependence on oil to the changes proposed to prevent and slow down global warming. And energy is too intertwined in daily life to change without public input. No other public issue is so dependent on personal conduct and public attitudes – and on no other issue do we have as far to go in bringing the public into the picture.

If energy is too important to be left to the professionals, and “on no other issue do we have as far to go in bringing the public into the picture,” then we clearly have a dilemma. If we wait until the public’s knowledge about energy approaches reality, we will all be toast because both the climate and oil depletion situations get worse with each passing year. Such phenomena can not be put on hold until everybody gets up to speed on the issues. Energy policy is like foreign policy and where oil is concerned, heavily tied to it—it is a domain requiring some special expertise.

Figure 1 — About 40% of Americans can not tell you what a “fossil fuel” is (left). Most could not name a “renewable energy source.” Nearly as many Americans think “natural forces unrelated to human activity” cause global warming as think that burning coal causes it (right). Natural forcings have obviously caused enormous shifts in paleoclimates, but are not implicated in the rapid onset of Industrial Age warming resulting from human interference in the Earth’s carbon cycle (i.e. burning fossil fuels).

Yankelovich touches on the difficulties of educating people about energy.

It is hardly surprising that the public lacks important facts about the energy problem. The problem is complicated and the public is far less attentive than experts and activists. But it would be a terrible mistake to assume that if and when the knowledge gap is filled, the public will then be ready to support sound policies. People can absorb factual information much faster than they can overcome wishful thinking and denial or accept far-reaching changes in habits and lifestyles. When people are given a few facts to take into account, it doesn’t take any more time to absorb them than it does to impart them (e.g., AIG gave the employees of its Financial Products Division $168 million in bonuses). But it may take months (and even years) to accept the need for painful change. Factual information is a necessary but insufficient condition for accepting change.

That is why we have adopted the concept of the learning curve to describe the complex process whereby the public grapples with the need for change on difficult issues. The metaphor of a “learning curve” suggests that the process will take time and will not proceed in a straight line…

Even if the public was ascending the learning curve, Yankelovich rightly says that it would be “a terrible mistake” to assume that a knowledgeable public would be ready to support sound policies because there is a subtle but crucial difference between a superficial intellectual understanding of something and actually getting it so as “to accept the need for painful change.” It usually takes many years to understand a problem and fully absorb its implications.

The large majority of the public will always favor gradual, non-disruptive change. (See the last section Political Realities Are Human Realities of my column The Secretary of Synthetic Biology, March 26, 2009.) 89% of Americans worry a lot or somewhat about “increases in the cost of gas or fuel” and 83% worry that “the United States economy is too dependent on oil.” These results seem to show that Americans have grasped that the two issues—price and over-dependence—are related.

While 78% of the public is willing to cut back on leisure driving on weekends and vacations, which is a painless adaptation that can easily be accommodated, a consistent majority oppose a modest 40¢/gallon gas tax increase to be used for any purpose, including achieving so-called “energy independence” or developing “clean, renewable energy sources.” Raising gasoline taxes is potentially disruptive to many Americans’ lives, so it is not popular. Imposing such taxes may or may not be the right policy, but if the public makes that decision, we already know the outcome. And if our elected representatives are not willing to override the wishes of the public on occasion, then the outcome will be the same.

The American public looks to their elected representatives to hire experts who can solve our problems in domains like energy, and rightly so—the “free” market is not going to fix it. Things go badly wrong when those leaders fail to provide the right answers or offer us catastrophically wrong answers. The invasion of Iraq was an example of the latter.

The survey says that 80% of Americans worry a lot or somewhat that our dependence on foreign oil will result in wars or conflicts in the Middle East. Will result? How about did result? Even Alan Greenspan was “saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil” before he was forced to clarify his remarks. The costs of invading and occupying Iraq have been incalculable, but the war didn’t change our energy situation in the least as long as Iraqi oil production remains mired below 2.5 million barrels-per-day.

It’s a revealing but pointless exercise to ask the public what they know about energy and find out, predictably, that they don’t know much. A far more constructive exercise in 2009 is to ask what the Obama administration knows about energy because we are now depending on them to lead us to the Promised Land. What do Obama’s appointed experts know?

What Do Obama’s Energy Experts Know?

Obama’s 2010 budget plan, which Congress is still hashing out, proposes to repeal traditional tax breaks in the domestic oil & gas industry. Platts provides an overview of the proposals and the consequences should they be passed (March 30, 2009).

US exploration and production companies may find that the Obama administration’s proposed oil and gas taxes in the 2010 budget have a silver lining — higher commodity prices as domestic output is reduced, investment bank Raymond James’ energy analyst Marshall Adkins said Monday.

In fact, Adkins thinks the most controversial “tax” — the elimination of the favorable tax treatment of intangible drilling costs (wages, materials, transportation) — has only a 30% chance of making it through a budget process that he, like others, has compared to a sausage maker. Those costs won’t be completely absorbed by operators, Adkins said, they will just be capitalized and then recouped via depreciation, which takes longer than the immediate deduction of the IDC. Adkins said E&P executives have told him that repealing the IDC might result in another 25% to 30% cut in drilling budgets.

Several of the nine other gas and oil tax provisions Adkins identified also have less than a 50% chance of making it into the budget, he said, such as the repeal of the 15% deduction for depletion for oil and gas wells. This would hit companies with mature wells harder than others, stripper wells account for about 8% of US gas production and 18% of US oil production.

Eliminating the [depletion] deduction would have producers shutting in the no longer profitable marginal wells, resulting in the loss of royalty revenue from that production stream. “As a result, it is likely that the Treasury would lose tax revenue with this policy—can somebody please give these guys a calculator?” Adkins said.

The “benefit” will be higher commodity prices?  I prepared this graph to put the proposed changes in context.

Figure 2 — U.S. crude oil (+ condensate) production has exhibited an irregular but relatively steep decline since 1990 as shown on the left. (U.S. production peaked in 1970.) Active oil rigs in the U.S. are shown on the right. A doubling of active drilling rigs after 2003 did nothing to stem the decline. The number of rigs in service has dropped precipitously in 2008:H2 and 2009:Q1 due to the economic downturn (Baker Hughes, April 3, 2009).

Stripper wells (< 15 barrels-per-day) account for about 18% of U.S. oil production. What would the effect of Obama’s proposed elimination of tax breaks for depletion and intangible drilling costs be on stripper well operators in places like White County, Illinois? It would wipe many of them out. I will quote at some length this well-written report from Carmi, Illinois—this small town in Obama’s home state lies far downstate along the Little Wabash River—so you can understand exactly what is at stake here (The Carmi Times, April 1, 2009).

Now if I were to ask you to take a guess on which county produces the most oil in Illinois, what might you say? If you were to say White County, you would be correct. Yes, out of the approximate 9.42 million barrels of oil produced in Illinois during 2008, White County tops the list with a little over 1.1 million barrels or 11.8% of the total. This vital resource generated approximately $103 million of direct value to the many operators and royalty owners of our County. The total economic benefit is huge when one considers the wages earned, supplies sold and taxes collected in the county as a result of this industry.

The Illinois oil industry is considered a “stripper or marginal well” business. This means that the average well produces fewer then 15 barrels of oil per day. As a matter of fact, considering the 2008 production and the estimated 16,000 active producing wells, Illinois wells average only 1.6 barrels per day…

President Obama, in his 2010 budget request, has proposed changes to the oil & gas tax code that will serve to devastate this vital industry in White County, the State of Illinois and across the US. More specifically, the president has proposed the elimination of the Percentage Depletion Allowance for oil & gas production. This item was established in 1926 because oil and gas reserves deplete or are used-up over time as you produce a well. Percentage Depletion allows one to write-off 15% of the sales for every marginal well because the asset we have is dwindling away a little bit each and every day. When the well eventually runs dry and has to be abandoned, there is no asset remaining that has value. The allowance provides incentive to continue drilling and looking for new oil to replace it. Every royalty owner receives this deduction as well as the operator.

The Second item proposed for elimination allows for the Expensing of Intangible Drilling Costs. This provision was also established many years ago, in 1913, for a reason. To successfully raise the capital to take the extreme risks associated with oil & gas exploration this mechanism was put in place as a way to write-off some of the investment against their income. These intangible items include labor, contract services, consumables, etc. The tangible items such as casing, tubing, pumping units, tanks, etc. are depreciated over time as the accounting rules allow. Without this provision people are less inclined to invest in this high-risk endeavor where typically a producer is found once from every seven wells drilled.

Neither one of these items have anything to do with “Big Oil” as they try to make you believe. The items are only available to companies that produce 1,000 barrels or less per day. It is however an attack aimed directly at small independents like many of your friends and neighbors.

The proposed changes would thus 1) affect mostly small independent operators, not Exxon Mobil; 2) shut-in a large share of 18% of U.S. oil production; 3) destroy many family incomes and local revenue streams; and 4) result in a loss of federal tax revenue according to Atkins’ analysis in Platts.

Obama’s Treasury Secretary defended the changes. Tim Geithner is not knowledgeable about the petroleum industry—his expertise lies in laundering the public’s money to Goldman Sachs through AIG. However, his remarks no doubt reflect the consensus of the energy mavens who wrote this part of the budget.

During a hearing of the Senate Finance Committee on March 4, Senator Kent Conrad (D-ND) asked Treasury Secretary Geithner to explain how the tax revisions would encourage more domestic production.

“Senator,” Geithner replied, “we don’t believe it makes sense to significantly subsidize the production and use of sources of energy that are dramatically going to add to our climate change imperative. We don’t think that’s good economic policy, and we think changing those incentives is good for the country.”

I’m stunned, I can’t believe it. We are going to shut down stripper well operators in White County, Illinois to fight anthropogenic climate change? Is this supposed to demonstrate that we are serious about global warming?

The problem for climate is growing world coal consumption, not oil—see Pushker Kharecha’s summary of his work with James Hansen. In absolute terms, emissions from oil in the U.S. are greater than those from coal. However, China’s carbon dioxide emissions surpassed those in the U.S. in 2006, and now make up 24% of the total globally, yet they only consume slightly more than a third as much oil as we do. (The U.S. now emits 21% of the world’s CO₂.) New emissions from coal-fired plants in China and India pose the gravest threat—

World coal-fired power plant capacity will grow from 1,759,000 MW in 2010 to 2,384,000 MW in 2020. Some 80,000 MW will be replaced.  So there will be 705,000 MW of new coal-fired boilers built. The annual new boiler sales will average 70,000 MW.  The annual investment will be $140 billion. These are the most recent forecasts in Coal-fired Boilers: World Analysis and Forecast published by the McIlvaine Company. Coal-fired power in Asia will rise to 1,464,000 MW in 2020 up from 918,000 MW this year. This will account for an increase in CO2 of 2.6 billion tons. So even if the U.S. and Europe were to cut CO2 emissions by far more than the targeted 20 percent, the total CO2 increase from Asia will offset it by a wide margin.

I fail to see how further reducing our already declining oil production is going to make any difference to global warming—the United States has a serious oil depletion problem.

Let me lay out the logic of our oil problem for “experts” like Energy Secretary Steven Chu, Interior Secretary Ken Salazar and Energy Czar Carol Browner—

1. The stated goal of the Obama administration is to return the country to economic growth.
2. Oil consumption in the United States rises or falls with growth in real GDP (or what James Hamilton calls “income” in his recent study Causes and Consequences of the Oil Shock of 2007-08).
3. The stated goal of the Obama administration is to reduce our foreign oil dependency.
4. The U.S. must import about 66% of the oil it consumes.
5. You can not possibly achieve both #1 (growth) and #3 (reduced foreign oil) if you make a large share of domestic production uneconomic, regardless of any efficiency improvements you might make.
6. Reducing domestic oil production will likely jack up oil prices so high that you will destroy any real GDP growth you do achieve.

We hope that Obama’s experts can not be this obtuse, but there it is. We must also seriously consider that #6 (much higher oil prices) is the actual, clandestine goal of the Obama administration, but that still leaves us with the unintended but catastrophic effects of another oil shock on real economic output.

Steven Chu is on the record as saying that “somehow we have to figure out how to boost the price of gasoline to the levels in Europe” (Wall Street Journal, December 12, 2009).

But Mr. Obama has dismissed the idea of boosting the federal gasoline tax, a move energy experts say could be the single most effective step to promote alternative energies and temper demand. Mr. Obama said Sunday that a heightened gas tax would be a “mistake” because it would put “additional burdens on American families right now.”

The Public Agenda survey makes it clear that Americans oppose disruptive new gasoline taxes, so Obama does too. Chu wants gasoline prices like those in Europe to discourage consumption. Reducing domestic oil production will raise oil and thus gasoline prices. Thus Obama’s experts want to raise the price at the pump without imposing new taxes—quod erat demonstrandum, at least to my satisfaction. The only “mistake” in their reasoning is the failure to take into account the consequences of disruptive higher fuel prices on economic growth in the United States, an effect that was demonstrated just last summer.

Here’s a news flash for Obama’s experts:

You’ve got to promote a multi-year/decadal transition to an economy that can be sustained without so much oil consumption. You just can’t bludgeon people into submitting to your misguided notions of how to fix climate change. Work on the coal problem both here and internationally because renewable electricity replaces coal some of the time but does not replace precious liquids fuels in the United States except by means of non-existent plug-in hybrid vehicles.

Ken Salazar recently mounted a lame defense of Obama’s war on small, independent oil producers in an address to the American Petroleum Institute’s (API) board of directors (as reported in Salazar sees role for industry in developing full U.S. energy strategy from the Oil & Gas Journal, March, 2009).

“Yes, this administration is changing how things have been done before. [It’s] restoring honesty and fiscal responsibility to the budget, making hard choices [and] seeing where we can get a better deal for the American taxpayer. But this is not, as some have suggested, a war on the oil and gas industry,” he said…

[more mush in this vein]

“This year, we will hold over 40 onshore federal oil and gas lease sales. Through the Bureau of Land Management, we have already held seven oil and gas lease sales in the last seven weeks. The 830 leases we have offered cover almost 1.2 million acres in the West. The 326 leases that sold generated $32 million in revenue for American taxpayers,” Salazar said…

[thanks so much]

But America’s oil and gas supplies are not endless, and the country consumes 25% of the world’s oil while sitting atop 3% of its reserves, he continued. “We rely on imports. And more and more, the readily recoverable oil and gas reserves of our planet are under the control of nationalized oil companies… “Our dependence on foreign oil is as much a dependence on the countries that directly supply our oil as it is a dependence on the markets and forces that can, in a six-month period, drive oil up to $147/bbl and then down to $45/bbl. It is a dependence on our military to keep oil flowing through the Strait of Hormuz. And it is a dependence on carbon that, for the sake of our planet, we cannot sustain,” Salazar said.

[more motherhood & apple pie]

Salazar made no mention of the proposed tax changes in his remarks to the API. I wonder how our dependence on foreign oil and the dangers of climate change will be fixed by shutting down stripper well operators without providing plausible fuel or transportation substitutes for that oil. I wonder if we are supposed to feel grateful that the Interior department is still selling oil & gas leases on public lands or offshore, sales that were prepared years in advance.

I should also note that the largest oil companies (like ExxonMobil, Shell, Devon, etc.) stand to benefit the most from any price increases that come at the expense of stripper well operators. Why is it politically expedient for the Obama administration to step on the little people while mostly letting the big boys off the hook?

Americans are energy illiterate, there’s no doubt about it. But energy is a very complex, hard problem, so we elect politicians we trust to appoint experts that will come up with the best possible solutions to the very deep energy hole we find ourselves in. If those experts are clueless, then we are in big trouble. The United States has always lacked a coherent energy policy. Jimmie Carter tried to get one going, but Ronald Reagan took care of that. What followed was nearly 30 years of profligate energy consumption without a thought to tomorrow’s needs. The United States still lacks a coherent energy policy as we enter the Obama Era.

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