Fresh Air or Hot Air?

On the February 2 episode of the popular NPR show Fresh Air, host Terry Gross interviewed Washington Post environmental correspondent Juliet Eilperin, who had written a Wired article on the Solyndra scandal entitled “Why the Clean-Tech Boom Went Bust.” Although much of the interview was standard stuff—explaining that Solyndra’s innovative business model relied on “CIGS” cylindrical solar panels rather than traditional flat silicon panels, etc.—the listener certainly didn’t walk away with the message that the government has no business supporting “clean-tech.” Instead, the listener was treated to excuses that ignored the glaring lessons of the Solyndra episode.

Before delving into the specifics, let’s remind the reader that the Institute for Energy Research has been warning for years that massive government support for “green energy” is a disaster waiting to happen. That was the clear lesson from Spain’s renewables program, documented in this famous study. IER also publicized a study documenting the failure of the German government’s support for renewables. Therefore, the collapse of the “clean-tech boom” in the United States shouldn’t come as a shock. When an industry is artificially propped up by massive government intervention, that’s a signal that the industry is vulnerable.

U.S. Government Out-Planned by Chinese Government?

The most amusing part of the NPR interview occurs at the 5:50 mark, after Eilperin explains that Chinese output of silicon panels has led to a collapse in the price.

TERRY GROSS: So China is really dominating now when it comes to solar power cells. How did they get the edge over the U.S.?

JULIET EILPERIN: Well it was a combination of things. One is that they have a coherent industrial policy that encouraged the manufacture of solar panels. So what you’ve seen is everything from providing relatively inexpensive land, for people who are interested in solar panel manufacturing, lines of credit from the national bank, which has made it cheap for them to borrow money, and obviously they do have relatively inexpensive labor… You’ve seen an incredible reversal, where for example, in the mid-90s you had the U.S. provided roughly 40% of the world’s solar panels—that’s now down to 6%. And by contrast China at this point is providing roughly half of the world’s solar panels.

Imagine that! China’s “coherent industrial policy” relies, among other things, on below-market rate loans to encourage growth in the solar sector. I seem to recall President Obama and Vice President Biden discussing a similar policy for the U.S. solar sector.

The Chinese government’s artificial support for solar technology is just as inefficient as any other government’s. If it continues these policies, it will simply magnify the divergence between what goods and services consumers could have gotten, and what they will get in reality. People who are enamored with the “success” of China’s central planning should keep in mind that as a result of its previous “stimulus” spending China now has entire cities that are empty, because government does a very poor job of allocating resources.

Fossil Fuels Get More Government Support than Renewables?

At one point in the interview, Eilperin tries to make it clear that there isn’t a level playing field when it comes to the energy sector. Indeed, the folks at NPR liked this quote so much, they pulled it out to put in the margin of the article accompanying the interview. Eilperin said: “There is no question that when it comes to federal support, traditional fossil fuel energy gets more support than the renewable energy industry.”

Actually Ms. Eilperin, there is a question on this issue.  It depends which units and which years you are using. The Congressional Research Service reported that in 2009 energy tax provisions were four times greater for renewables than fossil fuels.

The comparison gets much worse for renewables when we make an apples-to-apples analysis based on the amount of energy produced per dollar of subsidy. The problem is that renewable energy accounts for just a tiny fraction of total output in the U.S.—that’s because at best it is a niche sector. When adjusted on a unit-of-electricity-output basis, federal support for various technologies looks like this (note: the following two graphs show the same data, but the first is not to scale because the solar subsides are so massive):

Sources: EIA July 2011 subsidy report for FY 2010 and EIA monthly generation data.

Conclusion

Free-market economists have argued since the early 20^th century that there are institutional problems with central planning. Government officials do not allocate resources as effectively as markets. We have seen massive failures in support for “clean energy” in country after country, including (now) the United States with Solyndra as the poster child. And yet the supporters of intervention look at China as the way to “do it right.”

What Harry Reid seems to be referring to is that in 2011, for the first time in 62 years, the United States was a net exporter of petroleum products[ii], exporting about 15 percent of the petroleum products the U.S. produced.  Unfortunately, his statements show that he understands little about the U.S. petroleum industry and consumer petroleum demand.

What Harry Reid is not telling the public is that the United States remains a net importer of crude oil and petroleum products. Total imports of crude oil and petroleum products in 2011 were 4 times more than the petroleum products that were exported. In fact, the United States spent more than $433 billion on crude oil and petroleum imports in 2011, over $100 billion more than the $333 billion spent in 2010 and over 4 times the value of the petroleum we exported. Nevertheless, Senator Harry Reid suggests the purpose of importing Canadian oil via the proposed Keystone Pipeline is to export it in the form of petroleum products.

Source: Energy Information Administration, Monthly Energy Review, Table 3.3b, http://www.eia.gov/totalenergy/data/monthly/pdf/sec3_9.pdf

Source: Energy Information Administration, Monthly Energy Review, Table 1.5,

U.S. Petroleum Demand, Production, and Imports

U.S. petroleum demand took a nose dive beginning in 2008 primarily due to the recession. The petroleum industry has not been able to recoup that demand mainly due to a poor economy and high national unemployment. For example, one reason that gasoline demand is down is because Americans are driving less. According to a USA Today analysis of data from the Federal Highway Administration, Americans have been driving fewer miles every month since March, 2011.[iii] “With the number of Americans unemployed or underemployed, you have a reduction in disposable income, fewer commutes, fewer shopping trips and leisure trips,” says Troy Green of AAA.[iv]

The demand for gasoline in the United States dropped by almost 6 percent from a peak of 9.3 million barrels a day in 2007 to 8.8 million barrels a day in 2011.[v] While the recession is the major factor in the lower gasoline demand, other factors are the increase in vehicle fuel efficiency, higher gasoline prices, and the use of ethanol blended in gasoline.[vi]

While oil production is up in the United States, it is not enough to preclude the need for imported crude oil. In fact, in 2011, the United States imported 4.1 billion barrels of crude oil and petroleum products, four times the amount it exported. But, we now get almost half of our net crude oil and petroleum imports from the Western Hemisphere, and half of that (or more than a quarter of the total) is from Canada. In 2010, just 12 percent of our net imports came from Saudi Arabia, down from almost 19 percent in 1993.[vii]

Why is the United States exporting some of the petroleum products it is producing?  Because without those exports, the U.S. refining industry would not be able to survive the current slump in petroleum product demand and remain solvent to produce refined products in the future. In December 2011, the Energy Information Administration (EIA) calculated that a mere 5 percent of the price of a gallon of diesel went to refineries and an amazing -2 percent of the price of a gallon of gasoline. Yes, that is a minus 2 percent! Of course these are only estimates of the four cost components of gasoline and diesel. But the majority of the price of gasoline (80 percent) and diesel (68 percent) is attributed to the cost of crude oil.

Source: Energy Information Administration, http://www.eia.gov/petroleum/gasdiesel/

U.S. refineries need to be prepared in case the U.S. economy rebounds, raising the demand for petroleum products and the demand for crude oil imports. Currently, the United States has a market for its petroleum products due to the economic growth of emerging economies. If these economies were to slip, the United States could lose those markets and be forced to remain solvent based solely on U.S. demand and prices.

U.S. Refinery Closures

U.S. refiners are closing plants that have become uneconomic. These closures have dire implications for users of petroleum products in the United States.  In recent years, refineries closed in Westville, New Jersey, and Yorktown, Virginia and this past December a large refinery in southeastern Pennsylvania and one in New Jersey were shuttered.[viii] In Pennsylvania, Sunoco is trying to sell its Marcus Hook and South Philadelphia refineries, whose combined output is 500,000 barrels a day, or it will shutter the plants by July. Since 2009, those plants have lost $772 million. Conoco Phillips is also planning to shutter a refinery that produces 185,000 barrels a day in Trainer, Pennsylvania if it cannot find a buyer.[ix]

These refiners have been hit by weak demand because of slow economic growth, increased use of ethanol, and higher vehicle fuel efficiency. Between 2004 and 2011, demand for refined products in the Northeast and Mid-Atlantic states declined by 12 percent, with the largest decline in distillates, according to a study by Kevin Lindemar, a petroleum refining expert. According to Lindemar, east coast refinery closures together with one in the U.S. Virgin Islands (Hovensa) will reduce their output of refined products by about 1 million barrels a day between 2009 and 2012.[x]

The rated capacities of the refineries being closed total about 1.5 million barrels per day, but since these refineries are not running at capacity, the lost output is around 800,000 barrels per day. Besides closures of U.S. refineries, several European refineries, another source of gasoline to the United States, have recently closed or have been put on the market for sale. According to Lindemar, 11 European refineries have closed since 2009.

Replacing the lost supply of gasoline is a lesser problem than replacing distillates — diesel and heating oil. Europe, who relies more on diesel than gasoline usually has a surplus of gasoline to sell to the United States, but because diesel is in tight supply in Europe, very little is imported into the United States. Most diesel imports come to the United States from dedicated refineries in Canada. Attracting adequate supplies of diesel and heating oil to East Coast markets in the future may require a hefty price premium or shortages will result. The impact from the shuttered refineries will be felt first through increases in gas prices along the East Coast, particularly north of Washington DC.  Some forecasters are predicting prices in the $4 to $5 a gallon price range.[xi]

These refinery closures will mean higher prices and a loss of American jobs in a tough economy. Refiners must find additional markets if they are to survive.  One way to keep those refineries operating is to export petroleum products.

Who Benefits from U.S. Petroleum Product Exports

In November 2011, Mexico and Canada imported a combined 33 percent of U.S. petroleum product exports: the United States exported 21.6 percent to Mexico and 11.5 percent to Canada. Over the past 5 years, Mexico’s net petroleum imports from the United States rose by about two-thirds. Because Mexican refineries are having a tough time keeping pace with gasoline demand, the country buys over 60 percent of the gasoline that the United States exports.[xii]

Brazil is also a major purchaser of U.S. petroleum product exports. In 2006, the United States was a net importer of petroleum products from Brazil, but last year a net 106,000 barrels a day were sent from the United States to Brazil. Argentina and Peru are also net importers of petroleum products from the United States.[xiii]

Outside of North and South America, China, Japan, Singapore, and various European countries are also buyers of U.S. petroleum products.

Conventional gasoline, low-sulfur diesel, petroleum coke, and residual fuel are the largest components of petroleum product exports from the United States. Petroleum coke is used in making steel.

Source: Energy Information Administration, http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTTEXUS2&f=M and http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTTIMUS2&f=M

U.S. Import/Export History

The United States is not new to exporting petroleum products. The United States was a net exporter of petroleum products for decades through World War II, with sales reaching a high of 126 million barrels in 1944. In 1950, the United States became a net importer with net imports peaking at about a billion barrels in 1973, the year of the Arab oil embargo. Net imports fell off in the 1980s and 1990s and spiked in the middle of the last decade.[xiv]

Conclusion

The United States has become a net exporter of petroleum products for the first time in 62 years due to lower U.S. petroleum demand and thriving markets in emerging nations, many of which are in North and   South America. The markets for petroleum products could shift at any time due to economic changes in the United States and/or in emerging economies. Regardless, U.S. refineries need to be in operation and ready to fulfill those demands. Closures of refineries due to lack of U.S. demand will only mean higher prices in the future and fewer jobs for Americans.

Some politicians want the public to believe that the Keystone pipeline is to make refiners rich from exporting petroleum products, but that is a far cry from the truth, when their price share of a gallon of gasoline, according to EIA, is in the negative. Refinery exports are currently keeping the lights on at refineries in the United States so they can survive until a time when the economy recovers and demand here increases.

The Keystone pipeline could keep some U.S. refineries in business. While those refiners might export some of the products they produce, they would be remaining solvent to supply future U.S. demand. What U.S. refineries need is access to a stable supply of oil, which Canada and Keystone can provide.

WASHINGTON DC — The Institute for Energy Research called for greater transparency at the Department of Interior in a letter yesterday to Secretary Ken Salazar, and today IER follows up with a letter to Rep. Ed Markey (D-Mass.), asking him to join efforts to promote a more accountable government through revamped data publication practices for energy resources on federal lands.

Previously, Rep. Markey cited IER in a January 26th letter to Acting Administrator Howard Gruenspecht at the Energy Information Administration. IER’s letter to Rep. Markey suggests that reporting errors at EIA are “the direct result of a more troubling pattern of bureaucratic and programmatic errors at the Department of Interior.”

“Rather than blaming the non-partisan EIA, [Rep. Markey] might want to turn [his] careful attention to the real culprit: a federal department so convoluted in its organization, inconsistent in its methodology, and incoherent in its reporting that not even experts at other federal agencies are able to decipher its data,” wrote IER President Thomas Pyle in the letter to Markey.

“I hope [Rep. Markey] will join the call for better data transparency at the Department of the Interior. Although Americans hold different views about the need to increase domestic energy production, we can agree that bureaucratic opacity serves no one.”

To read IER’s letter to Rep. Markey, click here.

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“So if somebody wants to build a coal-fired plant they can. It’s just that it will bankrupt them…”
– Barack Obama speaking to San Francisco Chronicle, January 2008

February 7, 2012—Update

More than 33 gigawatts (GW) of electrical generating capacity are now set to retire because of the Environmental Protection Agency’s (EPA) Mercury and Air Toxics Rule (colloquially called Utility MACT)[1] and the Cross State Air Pollution Rule (CSAPR)[2] regulations. Most of these retirements will come from coal-fired power plants, shuttering nearly 10 percent of the U.S.’s coal-fired generating capacity.

This report is an update of a report the Institute for Energy Research (IER) issued in October 2011.[3] In the original report, we calculated that 28 GW of generating capacity would close as a result of EPA’s regulations. At the time, we warned that “this number will grow as plant operators continue to release their EPA compliance plans.” Unfortunately, this statement has proven to be true. This update, a mere four months later, shows that over 33 GW of electrical generating capacity will close—nearly a 5 GW increase.

According to EPA, their modeling of Utility MACT and CSAPR indicates that these regulations will only shutter 14.5 GW of electricity generation capacity. But events in the real world already show that EPA’s modeling is a gross underestimate.

To calculate the impact of EPA’s rules, we first assumed that EPA’s modeling was correct. Then, we looked at statements, filings, and announcements from electrical generators where the generators were closing power plants and citing EPA’s regulations as the precipitating cause of the plant closures. We then compared EPA’s modeling outputs with the announcements and created a master list of plant closures as the result of EPA regulations (the master list is below).

Combining actual announcements with EPA’s modeling shows that EPA’s modeling grossly underestimates the actual number of closures. As noted above, EPA calculated that only 14.5 GW of electrical generating capacity would close as a result of its rules. But the reality is that over 33 GW of power generating capacity will close—over twice as much as EPA’s modeling predicted. Worse, as utilities continue to assess how to comply with EPA’s finalized Utility MACT rule and CSAPR, there will likely be further plant closure announcements in the coming weeks and months.

Since Our First Report was Released in October, an Additional 5 GW of Retirements Due to EPA Regulations Have Been Announced

Operators in Georgia, Maryland, Michigan, New Mexico, Ohio, Pennsylvania, and Wisconsin   have announced new closures since we first published our closure list four months ago.  Additionally, operators in Minnesota announced they would cease plans to convert a coal plant to natural gas, letting the plant retire due to EPA regulations.[4]  In just two short months, retirements related to EPA regulations have grown by 5 GW, over one third of the total retirements predicted by EPA.

NERC is Concerned about Reliability even though It Underestimates the Amount of Closures

It should be further noted that the North American Reliability Corporation’s (NERC) modeling of the MACT rule and CSAPR estimate that under the worst case, or “strict” scenarios, 16.3 GW of electricity capacity will be closed due to the regulations, and the Department of Energy’s (DOE) “stringent” test shows that only 21 GW of generating capacity will be closed. Even though NERC’s estimate is much lower than what our analysis shows, NERC is concerned that the closures will cause electricity reliability problems.[5] How much greater will the reliability problems be, given that retirements appears to be twice as great as NERC estimates?

Announced and EPA Projected Retirements Are Significantly Higher than DOE’s Worst Case Scenarios

The Obama administration’s DOE recently released a study claiming that even under a theoretical “stringent” test, EPA regulations would only close 21 GW of generation.  EPA has since claimed this study proves regulations will not threaten reliability. Our analysis, however, shows that between EPA projections and operator announcements, over 33 GW of generation will close—almost 12 GW more than DOE’s supposedly ultra-strict test scenario.

Michigan and Ohio Hit Worst By Latest Announcements

In our updated analysis, the vast majority of new announced retirements will occur in Michigan and Ohio. Operators in Michigan have announced more than 1 GW of closures due to EPA regulations.[6] Michigan, already reeling from record high unemployment, has warned that further closures due to the regulations could threaten reliability in both the Upper and Lower Peninsulas. The situation is not better in Ohio. FirstEnergy has announced more than 2.3 GW of closures due to EPA regulations in Ohio.[7]

Updated List of Powerplant Closures

Here is our updated list of powerplants set to close according to EPA’s modeling and public announcements. The methodology is described in detail in the Appendix of the PDF.

 

WASHINGTON D.C. — Citing numerous examples of “embarrassing shortcomings” in data transparency at the Department of Interior, the Institute for Energy Research sent today a letter to Secretary Ken Salazar calling for the department to “totally revamp Interior’s data publication practices [and] publish complete, accurate, and useful data” for the American people.

“Recent problems with data about energy production on public lands is the direct result of failures at the Interior Department to provide accurate, complete, useful data on energy leases,” noted IER President Thomas Pyle in the letter to Salazar.

“Unless [the Interior Department] corrects these problems, it will continue to fall short of this Administration’s professed commitment to transparency.

IER lists the following examples of transparency failures at Interior:

• Failure to provide accessible and understandable data to the Energy Information Administration regarding energy production on public lands.
• A complex, unnavigable bureaucratic structure to compile and report data.
• Wildly inconsistent data formats among Interior Department agencies charged with providing data to the public.
• Unsearchable and impossibly opaque revenue tables presented in static text that is unable to be downloaded into spreadsheets and databases.
• A refusal to provide data for bulk download, preferring instead to protect Interior’s databases behind intentionally difficult query systems.
• An unwillingness to provide accurate data regarding leasing activity in the Gulf of Mexico, despite the intense economic hardship that the Administration’s moratorium, permitorium, and other regulatory hurdles have caused along the Gulf coast.
• A refusal to comply with President Obama’s Open Government Directive, which required all federal agencies to implement principles of transparency, collaboration, and participation.
• The inability to meet Interior’s own promise to “regularly update” its own Open Government Plan, which was last updated nineteen months ago.
• A refusal to include data on energy leases in Interior’s Open Government Plan, despite enthusiastic reports about population counts of horses and burros on federal lands and climate change.
• Unacceptable delays in implementing the Extractive Industries Transparency Initiative, as charged by President Obama, though these global standards have already been implemented by Mongolia, Ghana, Azerbaijan, the Central African Republic, and others.

The letter was cc’d to the following: Chairman Doc Hastings (R-Wash.), Chairman Darrell Issa (R-Calif.), Chairman Barbara Boxer (D-Calif.), Chairman Joseph Lieberman (I-Conn.), Ranking Member Ed Markey (D-Mass.), Ranking Member Elijah Cummings (D-Md.), Ranking Member Jim Inhofe (R-Okla.), Ranking Member Susan Collins (R-Maine), EIA Acting Administrator Howard Gruenspecht.

To access the full letter, click here.

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WASHINGTON D.C. — The Obama administration released today a draft of new Interior Department regulations regarding hydraulic fracturing that are designed to impose yet another layer of bureaucratic obstruction to full-scale development of America’s oil and natural gas resources. Additionally, the administration released a plan to close public lands in Western states to oil shale development, effectively limiting access to a region that contain more than 1.5 trillion barrels of recoverable oil.

IER President Thomas Pyle released the following statement in response to the administration’s actions:

“The new rules appear to run counter to President Obama’s recent State of the Union address, in which he pledged to “take every possible action” to increase production on public lands. The damaging effects that these new rules will have on job creation and robust domestic energy development cannot be overstated.

On the one hand, the administration wants to take credit for increased production on state and private lands and for offshore lease sales that were scheduled five years ago. On the other hand, the administration continues an ideologically-driven quest to stifle job creation in the energy sector and to raise the cost of energy through more regulation, more mandates, and more restrictions on affordable sources. At best, this administration is suffering from acute energy schizophrenia. At worst, the administration is using brute administrative force to hurt the oil and gas industries and reward its green energy cronies.

“It is hard to believe the administration’s rhetoric about greater energy independence when its every action continues to lead America further away from that goal. And with record job creation now happening in the traditional energy sector, this latest tranche of regulations demonstrates just how willing the President is to kill the goose that’s laying the golden egg.”

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Setting the Context: Obama’s State of the Union

The Pickens Plan calls for ending America’s “addiction” to foreign oil through government incentives to encourage energy conservation, a foster a huge increase in electrical generation from wind and solar, and to convert America’s vehicles to run on natural gas. (There are many problems with the Pickens Plan, but in this post we are going to focus just on the mindset behind the man pushing it, and his casual attitude toward energy prices for consumers.)

In his State of the Union address, President Obama—though not mentioning Pickens by name—clearly endorsed a compatible energy policy:

But with only 2 percent of the world’s oil reserves, oil isn’t enough. This country needs an all-out, all-of-the-above strategy that develops every available source of American energy. (Applause.)

A strategy that’s cleaner, cheaper, and full of new jobs. We have a supply of natural gas that can last America nearly 100 years. (Applause.)

…The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between our environment and our economy. (Applause.)

…

Now, what’s true for natural gas is just as true for clean energy. In three years, our partnership with the private sector has already positioned America to be the world’s leading manufacturer of high-tech batteries. Because of federal investments, renewable energy use has nearly doubled, and thousands of Americans have jobs because of it.

…

I will not cede the wind or solar or battery industry to China or Germany because we refuse to make the same commitment here. We’ve subsidized oil companies for a century. That’s long enough. (Applause.)

It’s time to end the taxpayer giveaways to an industry that rarely has been more profitable, and double-down on a clean energy industry that never has been more promising. Pass clean energy tax credits. Create these jobs. (Applause.)

Later on, in remarks at an Air Force base in Colorado, Obama continued to push for more use of natural gas to help America make the ultimate transition to “clean” energy such as wind and solar.

Putting aside the absurdity of Obama’s proposals—for example raising taxes on efficient energies in order to subsidize inefficient ones, all in the name of economic growth and job creation—it’s easy to see why T. Boone Pickens feels that he’s finally getting some respect from important people. Now that we’ve set the stage, we can explore the implications of Pickens’ views on energy prices.

Pickens on Higher Heating Costs: Let Them Eat Wind

In the beginning of the Squawk Box interview, co-anchor Becky Quick explained to the viewers that Pickens had been vindicated by the president’s proposals to effectively implement the Pickens Plan, three and a half years after the Texas oil man first announced it. Pickens modestly accepted these accolades, and spoke matter-of-factly of the trucking fleet’s transition to natural gas, because it was currently cheaper than diesel. But then Ms. Quick raised some concerns about natural gas prices rising and upsetting this trend. Pickens’ response is quite revealing. Here’s the relevant exchange (with Quick’s slip of the tongue edited out of the transcript for brevity), starting around 1:30 in the interview:

Becky Quick: But Boone, natural gas prices are so cheap at this point, that you have talk this week about some of the companies starting to shut in [natural gas]…Prices are so cheap at this point, to be shutting in some of the natural gas, what’s that going to do if prices start to come back as a result, and come back higher?

T. Boone Pickens: Well they probably will come back higher Becky, but my gosh, the parity oil-to-gas is 6-1, it’s now 40-1. So you have plenty of room to come back, go up. See if you move back up to $6 on natural gas, you can start to do wind again.

To understand the significance of Pickens’ nonchalant remarks, note that he is casually discussing practically a doubling of natural gas prices from current levels:

US Natural Gas Wellhead Price (nominal $/1000 cubic feet, monthly)

Source: Energy Information Administration

T. Boone Pickens is personally not afraid of such a massive jump in natural gas prices, since the country could then “start to do wind again.” But in reality, a roughly $3 increase in natural gas prices would be devastating to the U.S. economy, particularly in its current condition.

According to the EIA’s most recent data [.pdf], as of November the US in the previous 12 months had consumed 24.6 trillion cubic feet of natural gas. Using back-of-the-envelope calculations, we can see that a $3 increase in prices (per thousand cubic feet) would raise energy expenses by about $74 billion for consumers and businesses, with the major components as follows:

• 20% of the total—about $15 billion—would fall on households who use natural gas for heating.
• 13% of the total—$10 billion—would fall on commercial consumers of natural gas for heating.
• 28%, or $20 billion, would fall on industrial consumers, such as manufacturing plants.
• 31%, or $23 billion, would hit the utilities that generate electricity using natural gas.

The above numbers come from simply multiplying the latest 12-month consumption patterns of natural gas, by the hypothetical increase in prices that T. Boone Pickens discussed in his CNBC interview. In reality, with rising prices households and businesses might switch to other fuels and thus mitigate the blow. Furthermore, economists know very well that we can’t naively assume that the ultimate burden of a price hike will fall on the immediate party in question. For example, electric utilities using natural gas would surely pass on a big spike in operating costs to their customers in the form of rate increases.

Despite these caveats, it is clear that natural gas prices of $6 would severely constrain the nation’s consumers of the fuel, whether households or businesses. However, Pickens needn’t worry about the overall economic blow coming from the transportation sector: In November 2011, only 0.13% of the nation’s natural gas consumption came from vehicles running on the fuel. This fact shows just how far the market currently is from Boone’s vision for the future.

Conclusion

If a particular energy price, whether for a barrel of crude oil or a cubic foot of natural gas, is a true free market price, then it is neither good nor bad. It is simply information that expresses the underlying conditions of available supply, technological know-how, and consumer demand.

In his CNBC interview, T. Boone Pickens acts as if he is a disinterested observer, predicting the inevitable development of the energy sector following market forces. Yet this isn’t true at all. Pickens for years has been telling the government to use its powers to change the market outcome, in favor of natural gas, wind, and solar power—and lately the Obama Administration seems to be heeding his advice.

Market forces will steer the energy sector in the efficient direction that best satisfies consumers. If it truly makes sense to convert the trucking fleet to run on natural gas, then price signals will lead—as if by an Invisible Hand—the owners of shipping companies to do just that. Yet Pickens, Obama, and other interventionists don’t want to rely on the decentralized market process. Instead they want to use the quite visible and heavy hand of the federal government to pick energy winners and losers, and to raise prices for consumers in the process.

As we have noted numerous times, the federal government leases a mere 3 percent of federal lands for energy production.[i] The United States is already the world’s third largest oil producer, but we could produce a lot more oil if the federal government would let the American people explore for oil on more federal lands.

The 1002 Area is the North Slope of the Arctic National Wildlife Refuge (ANWR) and is approximately 70 miles from the Trans-Alaska Pipeline System (TAPS – known colloquially as “the Alaska Pipeline”).  In 1980, Congress and President Jimmy Carter set aside 1.5 million acres of ANWR’s 19 million acres for future study of its energy resource potential.[ii] These 1.5 million acres, known as the 1002 Area, have no trees, deepwater lakes, or mountain peaks, but contain immense energy resources.[iii]

The U.S. Geological Survey has estimated that the 1002 Area has an expected value of 10.4 billion barrels of recoverable oil that could be produced at a rate of about one million barrels of oil per day.[iv] This potential resource could make the North Slope of ANWR the largest oil-producing field in the United States. The area’s oil and natural gas resources could be developed using merely 2,000 acres of the surface area, or less than 0.01 percent of ANWR’s total area.[v]

Despite ANWR’s great energy potential, Congress has not allowed the development of these resources for over 30 years. One of the many reasons used by the opponents of energy production there is that it might adversely impact caribou populations.  Yet, since energy production began in nearby Prudhoe Bay in 1977, the size of the Central Arctic Herd has grown more than 1,015 percent, from about 6,000 animals in 1978 to record levels of an estimated 67,000 caribou in 2009.[vi]

Meanwhile, TAPS—once capable of delivering over 2 million barrels per day to the West Coast—is running at less than one-third of its capacity.  The underutilized capacity of TAPS is more than the total amount of oil removed from the market in early 2011 by the Libyan civil war which sent world prices skyrocketing.  The consequences of the decline in TAPS oil supplies for the West Coast have been enormous; the West Coast has gone from being a region of the country that exported oil to the rest of the country to the region of the country most dependent on OPEC imports.

President Obama lately has been calling for more domestic energy production, but his continued opposition to energy production on the North Slope of ANWR deprives Americans of the benefits of the $1 trillion of oil locked in the frozen tundra there.  ANWR stands as a symbol that his actions do not yet match his words.  If President Obama announced his support for legislation to open ANWR, America would have more domestic energy, more jobs and much more needed revenue, and the Alaska Pipeline could once again approach its full capacity.

The President Is a Fair Guy

Here are some excerpts from the president’s address to show his general vision for the country:

Think about the America within our reach: a country that leads the world in educating its people; an America that attracts a new generation of high-tech manufacturing and high-paying jobs; a future where we’re in control of our own energy; and our security and prosperity aren’t so tied to unstable parts of the world. An economy built to last, where hard work pays off and responsibility is rewarded.

…

The defining issue of our time is how to keep that promise alive. No challenge is more urgent. No debate is more important. We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules.

…

Tonight, I want to speak about how we move forward and lay out a blueprint for an economy that’s built to last, an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values. [Bold added.]

For those who have been following IER and other energy watchdog groups, the president’s statements above are simply astounding. It is amazing that such claims made it through the vetting process; the fact that they did, shows how disconnected political talk is from reality.

Everyone Plays By the Same Set of Rules?

The biggest scandal over energy policy of course has been the Solyndra debacle.  Besides the famous last words of Vice President Biden and President Obama himself touting the long-term “jobs of the future” that Solyndra would provide, the episode is rife with charges of serious wrongdoing.

For those who never dug into the details of the story, here’s the quick version: Although Solyndra had applied for federal loan guarantees during the Bush Administration, they had not been formally approved before he left office. The incoming Obama Administration, however, was keen on using Solyndra as Exhibit A in its commitment to a job-creating stimulus package that would simultaneously accelerate the development of renewable energy. In fact, the White House planned to have Obama give a speech on March 19, 2009—just a few months after his inauguration—at the Solyndra plant announcing the bold package.

A week before the planned announcement, government budget analysts sent worried emails back and forth, including the infamous, “This deal is NOT ready for prime time” that has received press coverage. Because of these warnings, the White House backed off, but continued to press for approval of the loan guarantees. For example, a Department of Energy stimulus adviser, Steve Spinner—whose wife happened to work at the law firm representing Solyndra in its application for the loan guarantee—was very eager to get the relevant parties to sign off on the guarantee in time for Biden’s planned speech at Solyndra in September 2009. That’s why, a few days earlier on August 28, Spinner sent an email to an OMB staffer demanding, “How [expletive] hard is this? What is he waiting for? Will we have it by the end of the day?”

Fast forward to December 2010, about 15 months after Solyndra first received the half a billion dollars in loan guarantees. At this point Solyndra was clearly in trouble, and approached the Department of Energy for another loan. The government didn’t itself provide more funding, but it allowed a restructuring of the original package, so that outside investors (including big Obama fundraiser George Kaiser and his venture capital firm) would pump in another $75 million, in exchange for being placed at the head of the line for its assets in case Solyndra went bankrupt.

The only problem with this move was that it was arguably illegal, since it placed taxpayers in a disadvantageous position, as they were now subordinate creditors. That’s what Assistant Treasury Secretary Mary Miller wrote to Jeffrey D. Zients, deputy OMB director, before the restructuring occurred. She advised the DOE to consult with the Justice Department before approving the plan. “To our knowledge that never happened,” Miller wrote to the OMB in August 2011.

Incidentally, we note with irony that even compared to other “green” companies, Solyndra got a sweetheart deal, with interest rates far below those available to other firms that presumably should have been playing on the level field that the president touts.

It’s Not Just the Scandal, It’s the Program Itself

Besides the corruption and inefficiency involved with the specific example of Solyndra—as well as other notorious beneficiaries of US taxpayer support such as Abengoa and Beacon Power—is the fact that the Obama Administration’s sweeping array of incentives and mandates for renewable energy is the opposite of his rhetoric on the American ideal. Here we have the federal government quite consciously picking specific technologies that will be helped, and others that will be actively penalized.

To see just how biased the rules are, consider: When calculating the implicit total federal “subsidies” (via the tax code) in terms of dollars per unit of energy delivered, in fiscal year 2007 they were $23.37 per megawatt hour for wind, compared with $0.44 for conventional coal and $0.25 for natural gas and petroleum liquids. In fiscal year 2010, wind’s subsidies amounted to $56.29 per megawatt hour, while the figures for coal, and natural gas and petroleum liquids, were tied at a mere $0.64.

If that’s not a rigged game, what is?

Job Creation? Developing American Energy? Is This a Joke?

Since it’s more recent in the news cycle, we don’t need to belabor the irony of Obama stressing his desire to wean Americans off of energy from dangerous regions of the world, and to create good jobs at home…when he just scuttled the Keystone XL Pipeline. Despite the Administration’s attempt to portray itself as a champion of domestic drilling, the facts speak otherwise.

Conclusion

Every political leader claims to be in favor of fairness and equal treatment under the law. Yet when it comes to Obama’s energy policies, the opposite is true. The federal government currently places enormous obstacles in the path of oil, natural gas, and coal, while lavishing massive sums on dreamy technologies that can’t get funding on their own merits. This is hardly a sensible strategy for a president who also claims to care about economic growth and creating stable jobs.

In 2011, the United States spent more on renewable energy than China, beating China’s “clean energy” investment for the first time since 2008. In 2011, the United States spent a total of $55.9 billion of government and private funds on “clean energy” projects, a 33 percent increase from 2010, compared to China’s $47.4 billion, 1 percent higher than in 2010.

The higher U.S. “clean energy” investment was due to federal government support that included the Treasury Department’s 1603 cash grant program that expired at the end of December 2011, paying as much as 30 percent of the project’s development and construction cost, and the Production Tax Credit offering 2.2 cents a kilowatt-hour for wind production over the next ten years for wind power operational by the end of this year.

The Federal Financing Bank completed 13 loans worth $10.1 billion for “clean energy” projects, according to a study of the industry’s top 20 lenders by Bloomberg New Energy Finance.[i] And, budget experts estimate that the production tax credit cost taxpayers about $1 billion a year.

There is no guarantee these subsidies will pan out. Last year, three U.S. solar companies, including Solyndra, benefiting from U.S. government loans, went bankrupt, in part due to increasing competition from Chinese manufacturers. Besides these solar companies, Ener1, a battery maker that had received a $118 million government grant went bankrupt as well.

Global Investment

Globally, renewable energy investment rose 5 percent to a record $260 billion in 2011 driven by a surge in solar developments and the increased spending in the United States. New spending on solar energy increased 36 percent to $136.6 billion in 2011, almost twice what was spent on wind power ($74.9 billion).[ii]

Clean energy investment in Europe rose 3 percent to $100.2 billion, driven by solar installations in Germany and Italy and offshore wind in the North Sea. The largest renewable investment growth was in India, whose investment rose 52 percent to $10.3 billion. Brazil increased its renewable investment by 15 percent to $8.2 billion.

In 2009, the financial crisis curbed lending and global renewable energy investment increased by only 1 percent. In 2010, however, global renewable energy investment increased 31 percent, reaching $247 billion. The slower growth in 2011 was in part due to European countries reducing their guaranteed rates for electricity produced from renewable technologies so that electricity prices would not continue to surge due to their renewable pricing policies.

China’s Non-Fossil Fuel Expectations

China plans to obtain 11.4 percent of its electricity from non-fossil fuels by 2015, up from 8.4 percent in 2010. This plan is part of China’s goal to reduce carbon intensity (carbon dioxide emissions per unit of gross domestic product) by 17 percent in 2015. While some countries are dubious regarding nuclear power, China sees it as a safe, reliable, and mature source of energy and is including nuclear production in its 2015 goal.[iii]

Chinese manufacturers are undercutting European and U.S. manufacturers in solar and wind technology markets. Supposedly, China is not just manufacturing wind turbines for export to U.S. and European markets, but it is also building the units to generate electricity in China. Let’s see how much those wind units are contributing to China’s electricity needs.

China’s Wind Energy Market

As of the end of 2010, China led the world in installed wind capacity, with the United States a fairly close second. By the end of 2010, China had installed 44,773 megawatts of wind turbines, compared to 40,267 megawatts installed in the United States. The irony is that with 11 percent more wind capacity than the United States had in 2010, China produced only about half the amount of electricity from wind that the United States produced.

In 2010, China produced 50.1 billion kilowatt hours of wind powered electricity while the United States produced 94.65 billion kilowatt hours from wind energy.[iv]  That lower amount of wind generated electricity for China is due to its transmission system not being able to handle the growth in wind capacity. Past statistics have shown that only about 30 percent of China’s wind units are connected to the grid. While China may have improved on this low number of wind units integrated with its electricity grid, the country clearly has still not solved the problem.

Source: International Energy Agency, IEA Wind 2010 Annual Report, July 2011

Conclusion

Globally, renewable investment in 2011 was at its highest level; with investment in solar energy almost double that of wind. The United States led the world in renewable investments due to government incentives including the Treasury’s 1603 grant program that expired at the end of 2011, costing taxpayers over $10 billion.

China’s renewable investment in 2011 was lower than that of the United States (by 15 percent) for the first time since 2008.  While China’s renewable investments have been higher in the past than that of the United States and while China had more installed wind capacity at the end of 2010 than the United States, it is having trouble reaping their benefits. China generated about half the amount of electricity from wind in 2010 that the United States generated because it has not been able to fully integrate its wind units with its electricity grid. The “clean energy” race that many administration officials and Congressmen feel the United States is losing with China may just be a “tug of war”.