In a brief new paper for the Brookings Institution, David Goldwyn lays out several problems with this approach and proposes a thoughtful way to modify it.  Most simply, since the DOE appears to be planning to consider a new application every couple months, the current process provides an undeserved rent to whichever company is luckiest to have paid their fifty dollars and gotten in line earliest. At least as problematic, as Goldwyn notes, is what this approach will do to DOE analysis of the cumulative impacts of approved projects, and hence to future policy.  Imagine that the DOE approves 10 billion cubic feet a day (bcf/d) of notional export projects. It will then probably assess its next project application — including economic and volatility impacts — starting from a baseline in which it assumes 10 bcf/d of other exports. But there may be no good reason to make this assumption: it is quite possible that some of the approved projects will fail to get environmental and other approvals or to line up the contracts and financing that they need to proceed. The ultimate result of the current approach, then, may be to deny some attractive projects deep in the queue in deference to vaporware projects higher on the list.

Goldwyn’s paper proposes a simple change to help address this. Instead of handling applications on a first-come-first-served basis, companies would be assigned priority according when they’ve lined up contracts for their services and have formally filed for FERC approval (a costly step that indicates some level of environmental feasibility). This would raise the odds that those facilities that are approved would be ones that will actually be built. It would also put companies on a more level playing field in competing for overseas contracts (those high in the queue currently have an edge).

This is, to be certain, an imperfect solution. The requirement that companies have contracts for sale of the LNG is probably weaker than it appears, since companies would presumably be able to line up flimsy contracts in order to satisfy the requirement; if they later replaced those with other more solid ones, it’s hard to see DOE revoking their approval. Moreover, if the market anticipates restrictions on the amount of LNG exports that will ultimately be approved, the shift that Goldwyn proposes would transfer some of the rents currently accruing to companies high in the cue to overseas buyers. That’s because those buyers would be able to confer a benefit to a select set of potential LNG exporters (by contracting with them and thus moving them up the queue) – and would presumably be able to extract something for that.

These are poor reasons, though, not to adopt the reforms Goldwyn advocates. DOE would be wise to take a serious look at them as it moves forward.

Every major country is involved in international oil markets in two ways: through its companies’ production activities overseas and through its consumption of imported oil. Chinese companies have done well in Iraq in substantial part because they’ve been willing to invest in oil production projects without taking an equity stake (or some approximation of that) in the fields involved; Western majors, in contrast, tend to be averse to that sort of arrangement. It’s difficult to estimate how much money Chinese companies are making from that role, but you can put an upper bound on it. It’s rare to hear of companies charging Baghdad more than a couple dollars a barrel to develop Iraqi oil (and numbers are often lower, particularly once you subtract costs). Now assume that Chinese companies are producing half of Iraq’s oil, i.e. about 1.5 million barrels a day – likely a very large overestimate but still useful for setting an upper bound on Chinese profits. That would yield a profit of about a billion dollars a year.

But China and the United States also benefit from Iraqi production as consumers. Let’s say Iraqi production is a million barrels a day higher than it would otherwise have been. And assume a fairly high long-run elasticity of oil demand of -0.25. Then added Iraqi production should have reduced world oil prices by around four dollars a barrel. Now let’s cut that by three-quarters to account for countervailing moves by other producers that may have balanced off the Iraqi increase, and say that Iraqi production has lowered world prices by just one dollar a barrel. This is a modest estimate of the possible Iraqi price impact.

In 2010, China imported 4.8 million barrels of oil a day, while the United States imported 9.2 million. If oil prices were a dollar a barrel lower as a result of increased Iraqi production, the United States benefited to the tune of nearly $3.4 billion a year as a result. China, by contrast, benefited by only $1.8 billion.

Juxtapose this with the estimates for production profits and it’s pretty easy to see how the United States could well have benefited even more than China from the boom in Iraqi oil production. (And that’s ignoring profits that U.S. firms, including service companies, are realizing in Iraq.)

This carries a broader lesson: It’s critical to think separately about countries as oil producers and oil consumers. Muddling the two together typically leads to confusion.

Last week, Michael Levi posted a critique of my forthcoming article in International Organization called “The Emperor Has No Clothes”.  My article claims that there is no good evidence to believe that OPEC is a cartel, using evidence from four quantitative tests.  The paper then explains why OPEC members have good reason to perpetuate this “rational myth” – being seen as a powerful cartel brings them international prestige and political benefits (which we can see in the data on diplomatic representation).  Levi offers a balanced review of my argument but ultimately criticizes it for going too far.

He raises some important questions. First, my article offers evidence that OPEC members generally produce as much oil as a non-OPEC state once we statistically control for things like size of reserves and a country’s investment and business climate, but Levi wonders whether the country’s investment and business climate isn’t itself shaped by a state’s OPEC membership.  He suggests that an OPEC country, “having decided to underinvest in oil production”, makes little effort to improve its investment climate.  His hypothesis about how OPEC influences investment is therefore premised on the idea that its members are intentionally underinvesting in their oil sector.  He doesn’t offer any evidence to support that premise, and I’m skeptical.  Leaders in OPEC states like Nigeria, Ecuador, Venezuela, Iraq, and elsewhere have repeatedly expressed their desire to increase oil production, not restrain it.  They might be lying, of course, but the same countries have big incentives for higher oil production to balance their deteriorating fiscal situations.  (The Gulf monarchies with huge reserves are different: they might actually be trying to under-invest, but the model accounts for that.) Still, intentions are hard to discern: do you think most OPEC states are trying to under-invest?

Second, the statistical evidence shows that we cannot reject the null hypothesis that OPEC is having no effect, which is not the same as proving that OPEC is having no effect.  We should be cautious.  Levi criticizes the article for dealing with this issue only “indirectly.” That’s a bit unfair: I consider it quite explicitly, by exploring what happens if we ignore the statistical insignificance of the OPEC coefficient in the regression model and instead treat it as a real effect.  Doing so suggests that OPEC produces 1.6 million barrels per day (mbpd) less than it would if it was acting competitively.  Levi says this is “not a trivial amount of oil” and argues that it might, in fact, indicate OPEC’s cartel behavior.  A lot of policymakers would agree, but I think that’s a mistake.  1.6 mbpd is less than 2 percent of the world oil market.  In the long-run, that amount is small: it would mean a price increase of a few percentage points at most.  Still, Levi then raises an even more interesting question: what if the coefficient is not only statistically significant but also underestimates the true effect of OPEC (within the span of the error bars)?  That is unlikely but possible, and Levi is wise to raise it as a cautionary point.

Third, Levi concludes that it would be “awfully unwise for policymakers or market participants to quickly flip to an equally over-confident belief that OPEC doesn’t matter.”  He is right to urge prudence, but not if the alternative is for policymakers to continue wasting valuable time, resources, and political capital in the belief that OPEC controls world oil markets when there is no good evidence to support that belief.  Economists have been casting doubt on the OPEC-cartel idea for thirty years.  My work adds more fuel to that fire, and shows why OPEC members have reason to perpetuate the myth – it gives them prestige and political benefits.  When US policymakers want the price of oil to change, they waste political capital by kowtowing to OPEC (not just Saudi Arabia).  Until someone produces some real evidence of cartel collusion, US leaders should stop doing that.

More broadly, journalists and pundits should stop using the assumption that OPEC’s actions are key drivers of world energy markets.  They are not.  Most of the credit or blame for rising oil prices in the last decade rests with the energy demands of new Asian customers, not diabolic moves by OPEC.  Legislation such as the various “NOPEC” bills in the US Congress may be useful for scoring political points, but they have little bearing on the reality of the global oil markets.  With the world price of oil set by market forces almost entirely outside of its control, OPEC seems to be along for the ride like everyone else.

Some further notes from Michael Levi: Colgan makes several important points. In particular, he and I agree that unquestioning claims about massive OPEC influence are unwise. But let me emphasize a few matters of continued disagreement. First, the fact that several “peripheral” members of OPEC appear to produce as much as they can doesn’t provide evidence against the widely held belief that the OPEC “core” restrains investment. Second, regarding whether 1.6 mb/d is a trivial amount of oil underproduction: Colgan is right to say that this isn’t a big amount in the long run. But remember that this figure is obtained by averaging over a period of several decades; to really establish that OPEC under- (or over-) production isn’t important one would need to look at the pattern on shorter timescales (including with a focus only on the shorter period where observers have actually claimed that under-investment was a major OPEC tool). Third, I emphasized in my post that Colgan’s statistics do in fact suggest (though far from prove) OPEC has influence on oil production even after controlling for investment environments, just not at the 90-percent confidence level that political scientists typically require; Colgan appears to accept parts of this. It’s hard to go from that to unequivocal claims that OPEC isn’t a “key” player and that “most of the credit” for rising oil prices lies beyond the group.

Jeff Colgan has a forthcoming paper (late draft here) in International Organization (IO), the top journal in the academic international relations world, that answers the big “does OPEC matter” question with a resounding No. The paper is an impressive piece of work that mixes multiple tests of OPEC influence with a careful look into why, if OPEC doesn’t influence oil production, so many people continue to believe otherwise. It should make anyone who is utterly convinced that OPEC is the world oil market’s puppetmaster think twice.

But I think Colgan goes much too far in confidently claiming that OPEC “has little or no impact” on members’ production. This is particularly true if one asks whether policymakers and market participants, rather than only political scientists, should conclude from his paper that OPEC doesn’t matter. As a corollary, I think he ultimately goes too far in trying to explain why so many people believe in a “myth” – what they believe, at least in its subtler forms, may not actually be a myth at all.

Colgan applies four tests to his data; I find the first three largely underwhelming and the fourth far more interesting. The first question he asks is whether entry into OPEC reduces a country’s oil production (relative to trend) and whether exit from OPEC increases it; he finds that OPEC has no detectible influence. But it’s unclear that the counterfactual here is correct. It’s just as plausible that states that enter OPEC are ones that would otherwise see accelerating production (and vice-versa for exits) – after all, being an up-and-coming oil producer is presumably what makes you think about joining OPEC, and being on the decline makes you consider leaving. Colgan’s methodology is borrowed from studies of WTO entry and trade, but it’s not clear that the situations are analogous, since already-accelerating trade presumably isn’t a typical motivation for WTO entry.

The second and third tests look at OPEC quotas. One shows that OPEC countries consistently cheat; Colgan acknowledges that this is a weak test given that quotas can be set at levels that anticipate cheating. The other is more persuasive: it shows that OPEC quotas have very little predictive power when it comes to explaining month-to-month variations in OPEC countries’ production.

I should pause here for a moment to be clear about what Colgan isn’t claiming. He isn’t claiming that individual OPEC  members (notably Saudi Arabia) don’t exercise market power in ways that prop up the price of oil. What he’s claiming is that to the extent that happens, it’s about individual country decisions, and OPEC membership has nothing to do with it. That’s the right test when you’re asking whether OPEC is an effective cartel.

So back to the tests – because the fourth one is the most interesting. Colgan notes, correctly, that OPEC members may restrain production not through short-term quotas but through long-term restraint on oil production investment. This is a popular view. (Some also believe that the OPEC core restrains production through a form of price coordination, a possibility that Colgan briefly raises and then rejects, I think too readily.) And indeed Colgan shows that OPEC membership is a decent predictor of low oil depletion rates. But he then claims to show that this is an artifact: if one allows depletion rates to be influenced by fiscal strength (measured essentially by oil reserves per capita), investment risk, and several other factors along with OPEC membership, one finds that fiscal strength and investment risk help explain depletion rates, and that OPEC membership no longer matters.

This is interesting stuff and should make people think hard about whether OPEC has real influence on its members’ behavior. But I’m extremely wary of the strong conclusion for a couple big reasons. First, it’s far from clear that OPEC membership itself doesn’t influence countries’ investment climate. To be certain, leaders don’t wake up and say “I’m an OPEC member – I should have an awful investment climate!”. Attitudes toward investment are, instead, shaped by a much broader range of factors. But having decided to underinvest in oil production, a state is less likely to feel pressure to improve its investment climate, since it has less need to. To be clear, I have no idea whether OPEC membership influences decisions regarding oil production, and hence investment climates, in this way. But Colgan’s methods wouldn’t detect that even if it did.

My other big worry has to do with how the paper – following standard political science practice – handles statistical significance. Political scientists search for “truths”. When Colgan says that OPEC has “little or no impact” on members’ production levels, what he means is that he can’t be at least 90 percent certain that OPEC membership influences member countries’ production levels. (More precisely, as best I can tell, he can’t reject with 90 percent or greater confidence the hypothesis that OPEC membership doesn’t influence members’ production levels, so he accepts it.)

This may be the right threshold for political science but it’s a dangerous one for policymaking. For example, it turns out that one of Colgan’s tests (#3 in Table 2) allows one to conclude with 75 percent confidence that OPEC membership influences member countries’ production levels (again with the same caveats about double negatives as above). Another test (#4 in Table 2) shows that even if one separates out Saudi Arabia, one can still conclude with 75 percent confidence that OPEC membership influences remaining member countries’ production. And a third test (#5 in Table 2) shows that if one further separates non-Saudi OPEC members into a “core” and a “periphery” one can still conclude with 70 percent confidence that they’re all influenced by OPEC. (One note of caution here: Seventy percent confidence isn’t nothing, but it isn’t as much at one might intuitively think; fifty percent confidence would mean that we have no clue what OPEC influence is. The way one interprets these sorts of numbers should depend strongly on one’s priors, i.e. other pre-existing beliefs about OPEC.)

Should a policymaker or market participant write off OPEC because data analysis suggests that there’s only a 75 percent chance (rather than a 90 percent one) that it’s influential? (Or, put a clumsier but slightly more accurate way, should they ignore OPEC because a statistical test can’t conclude with 90 percent confidence that people who say “OPEC doesn’t matter” are wrong?) Of course not. He or she should discount the influence of OPEC in his or her assessment of the costs and benefits of any potential action, given uncertainty about whether OPEC is genuinely influential, but it would be awfully risky to proceed on the assumption that OPEC has no influence at all.

In fairness to Colgan, he addresses this indirectly, writing that “it is impossible to affirm the null hypothesis (i.e. to prove that OPEC has no impact)”, and then estimating the impact that OPEC may have had on oil production. He uses several factors (not including OPEC membership) to predict OPEC oil production and then estimates that non-Saudi members under-produced by 6.6 percent relative to that (equivalent to 1.6 million barrels per day in 2009). Colgan asserts that it is “difficult to believe that such an amount is having a major impact on world oil prices”. But there remain three issues here: 1.6 million barrels a day is not a trivial amount of oil; Colgan does his projections based on a data set extending back to 1980 even though analysts typically believe that OPEC restraint based on under-investment is a far more recent phenomenon (Colgan subdivides his data set into shorter time periods elsewhere in the paper but not here); and the estimate of a 6.6 percent percent shortfall presumably has large uncertainties that might mean that OPEC impact is considerably greater.

Bottom line? Colgan’s paper should deflate some of the hyper-confident claims that OPEC rigs the world oil market. I hope it sparks some constructive debate. It would be awfully unwise, though, for policymakers or market participants to quickly flip to an equally over-confident belief that OPEC doesn’t matter.

First things first: This is just a DOE approval. Freeport will still need to get a permit from FERC. And, more important, it will still need a solid market for its LNG. There are a lot of credible people out there who believe that U.S. LNG exports will be very small – so small, perhaps, that Freeport will never ship any fuel despite having a permit and a set of contracts (PDF) lined up.

What would be the impact, though, if Freeport ultimately did sell LNG at its full approved capacity?

Analyses have typically suggested that prices might rise by $0.10-$0.20/MMBtu for every billion cubic feet a day in export demand. That points to a rise of $0.15-$0.30/MMBtu (against a likely base price of $4-6) if the facility ultimately sells LNG at full capacity.

Analyses also have typically suggested that somewhere between 50 and 80 percent of exported LNG would come from new production, rather than displaced domestic demand. That translates to 0.7-1.1 bcf/d in additional production. That’s equivalent to between 1-2 percent additional U.S. natural gas supply. With shale gas currently contributing about 30 percent of U.S. gas production, it’s about a 4-6 percent increase in U.S. shale gas output.

This increase will be the main source of environmental hazard – the climate impact of Freeport-sized exports will be very small.

What about broader economic impacts? Scaling from a study I published a year ago, my instinct is that this is good for the U.S. economy, but ultimately adds less than a billion dollars a year to GDP, and supports perhaps on the order of 10,000 jobs (many of which would employ people who would have been employed elsewhere otherwise). Most of this job growth would be in gas production and related industries. An export plant of this scale will also likely employ a couple thousand people at the peak of construction.

How about destinations? Freeport has contracted with BP for half of its capacity and with Osaka Gas and Chubu Electric (both Japanese) for the other half. At least half the output, then, would likely be headed to Asia. It’s also quite possible that much of BP’s capacity would be used to ship LNG to Asia too. This would help Asian buyers gain a bit more leverage with their traditional suppliers, and diversify their risks, but as I argued in congressional testimony a few weeks ago, it’s highly unlikely to be revolutionary. That’s particularly true if you’re looking at just one plant.

All told, this approval is good news, with benefits to U.S. relations with other countries even if Freeport never sells a drop of LNG, and the potential for some broader gains if it does. It also reinforces the importance of getting environmental protections right as shale gas production expands.

The problem, as many readers of this blog know, is that it’s never clear what time period one should focus on. Methane may have a 20-year GWP of 72, but it also has a 100-year GWP of 25. Which one should analysts use when thinking about the dangers posed by short-lived forcers?

An EPA working paper that I wish I’d read when it was published in January 2011 (it was also published as a peer-reviewed paper in Energy Policy in 2012) suggests a useful way of thinking about this. Instead of focusing on how much heat is trapped, we should be looking at how much damage is done.

There’s a huge literature aimed at estimating the damage done by a ton of carbon dioxide, a quantity known as the social cost of carbon (SCC). The literature is highly controversial, in part because damage estimates are uncertain, but also because the results depend sensitively on how deeply you discount the future economic impact of emissions. When the U.S. government estimated the SCC in 2010, for example, it found a value of $21 per ton. But had it assumed a discount rate of 5 percent rather than 3 percent, the answer would have come out at $5, and had it assumed a discount rate of 2.5 percent, the SCC would have been $35. Moreover, had it focused on the 95^th percentile of potential damages, it would have found an SCC of $65.

Here’s the neat thing that makes looking at damages a great way to think about short-lived forcers: the estimated damages caused by short-lived forcers are a lot less sensitive to the discount rate. That’s because they’re concentrated in the near future, which makes them less sensitive to the choice of discount rate. That makes it easier to approach agreement on what the social costs of short-lived forcers are.

So what’s the upshot? According to the EPA authors’ paper, if you assume a 5 percent discount rate, methane is 39 times as damaging as carbon dioxide when integrated over time; if you assume a 3 percent discount rate, methane is only 25 times as damaging, similar to the ratio suggested by the 100-year GWP; and if you assume a 2.5 percent discount rate, that factor drops to 21. (The ratio would be even smaller for the ultra-low discount rates that some have encouraged.) A similar pattern would prevail if one modeled other short-lived forcers. Moreover, if you focus on the 95^th percentile damages, you find methane is 27 times worse that carbon dioxide.

Those who claim that climate impacts from carbon dioxide emissions are well above the $21 figure used by the U.S. government typically argue for low discount rates and high-end damages to justify their stance. In order to be self-consistent, then, they should be treating methane and other short-lived-forcers based on something closer to their 100-year (or longer) GWPs than the 20-year ones that have become popular in some quarters in recent years.

Some analysts have responded by pointing out that low prices don’t signify failure per se. They’re correct up to a point. The goal of a cap-and-trade system is supposed to be to drive emissions down to preset levels at the lowest possible cost. If achieving those goals turns out not to require much effort, then carbon prices are supposed to fall, signaling to the energy system that it ought not work too hard. That’s what’s happened in Europe: a weak economy has reduced emissions already; the cap-and-trade market is telling power producers not to push too much more. Indeed this is a great feature of cap-and-trade, because it makes the system countercyclical, lowering costs when the economy is it its weakest.

But this analysis alone shouldn’t be satisfactory. The European experience is revealing (or, depending on your previous beliefs, reinforcing) a basic problem with cap-and-trade.

The problem underlying the European predicament is that politicians apparently don’t want to do all that much about climate change, at least not if they’re going to pay a price with voters. Alas cap-and-trade makes climate-change curbing effort highly visible: the more you’re trying, the higher the price of permits is, and the higher electricity prices rise as a result. Roger Pielke has pointed out repeatedly that consumers really don’t like this sort of thing. And as David Victor has argued, that makes politicians inclined to pursue policies whose costs are hidden rather than clear. The current experience with the ETS gives both of their arguments some reinforcement. The fundamental problem in Europe right now isn’t that cap-and-trade is a technically flawed mechanism; it’s that politicians don’t want to act strongly on climate change. And the fact that acting strongly through cap-and-trade is likely to inflame political opposition means that the centrality of the ETS to European policy doesn’t help if implementing an ambitious policy is your goal.

Would the same thing that’s happening in Europe have happened had cap-and-trade been implemented in the United States? The Waxman-Markey bill mandated a 3 percent emissions cut from 2005 levels by 2012; that would have been met with a zero carbon price. And it is extremely unlikely that U.S. policymakers would have stepped into push up carbon prices. In principle, though, this would have been mitigated by two features of the U.S. system: a long time horizon (targets were set through 2050) and permit banking that should have created an incentive to hoard permits today for use later, pushing up near-term carbon prices and driving near-term investments. Whether that dynamic would have actually happened the way I’ve described would have depended strongly on how credible people thought that system was; any threat that it would be weakened or scrapped would have reduced the incentive to hoard and kept carbon prices low.

What should all this teach us? One thing it should do is reinforce that a serious and transparent carbon price may be much tougher to pursue that clumsy and less cost-effective carbon policies. It also suggests, though, that in crafting a carbon policy, it may make sense to make lots of the tough decisions at once — a la Waxman-Markey with its targets through 2050 — rather than forcing politicians to repeatedly do things that voters dislike (e.g. tighten or extend emissions targets, as the European scheme ultimately requires). Alas these two lessons work against each other, since forcing larger numbers of difficult decisions to be made up front makes a policy less likely to be adopted in the first place. All of this suggests that, if we’re going to get serious about climate change, it will likely take considerably more than just carbon pricing in order to succeed.

Clean energy trade. The United States has adopted a strong stance against others’ restrictions against clean energy trade and investment. Most recently, it challenged local content requirements in India’s solar program. Several colleagues and I wrote a couple years ago about the pitfalls of taking too hard a line here: there’s a delicate balancing act to be played between capturing the benefits of open trade and letting countries create the political conditions required to boost clean energy use.

Natural gas exports. This is Department of Energy territory: a host of companies have applied for permission to freely export natural gas, and DOE will say yes or no. But if permit applications start being rejected, there’s a real potential for WTO lawsuits against the United States, which would land the issue over at USTR. In any case, one can only hope that USTR will be involved up front, since a decision against exports would have broader reverberations for U.S. trade relationships.

Carbon tariffs and U.S.-EU trade talks. Americans who have only focused on climate change in the last few years might be forgiven for believing that carbon tariffs are something that Congress considered using in conjunction with a cap-and-trade scheme to make sure that China wouldn’t get an unfair competitive advantage. But the idea originated more prominently in Brussels and Paris around 2008 as a way to protect Europe against the United States, and to prod Washington to impose its own carbon pricing. I wouldn’t be surprised to see this come back, perhaps in the context of ongoing U.S.-EU trade talks, which will undoubtedly see some in Europe ask for measures to make sure the United States doesn’t get an unfair edge.

More natural gas exports – and the TPP. Japan is set to join talks on the Trans-Pacific Partnership (TPP) trade agreement. If you’ve visited Tokyo recently, there’s a decent chance you’ve been asked whether joining TPP would give Japan special access to U.S. exports of LNG. While decisions on applications to export LNG to countries with which the United States doesn’t have special free trade agreements is housed at the DOE, a decision on whether to give Japan special access as part of a trade deal will need to run through USTR.

Europe’s aviation scheme. European efforts to expansively include foreign airlines in its Emissions Trading Scheme didn’t go down well in most of the world. Ongoing negotiations are aiming to find an alternative approach agreeable to all the major players. Froman and Todd Stern (at State) have been leading this for the United States. I have a tough time believing that a move to USTR will leave him less involved.

Wildcards? Oil exports (again, not a USTR decision, but with consequences for trade relationships), potential NAFTA fallout from a Keystone XL decision, border adjustment measures accompanying a (highly unlikely) U.S. carbon tax, and I’m sure much more.

May 2, Washington, DC: “The Power Surge”. I’ll be in conversation with Steve LeVine at the New America Foundation. This is the first event squarely about the book.

May 9, New York, NY: “In Print featuring Michael Levi – The Power Surge”. I’ll speak with former Foreign Affairs editor (and great reader) Jim Hoge about the book.

May 29, Calgary, AB: “Is Canada Becoming an Energy Superpower?”. A debate (I mostly say no) involving Ed Morse, myself, and a couple others. Not quite about the book, but I’m sure we’ll get into some closely related issues.

June 18, Dallas, TX: Details to come.

June 19, Houston, TX: “The Power Surge: Energy, Opportunity, and the Battle for America’s Future”.

June 20, San Francisco, CA: Details to come.

More cities and dates are in the works. I’ll also be doing some less-public speaking, at the Milken Global Conference, Aspen Ideas Festival, and the Council on Foreign Relations in New York, DC, and elsewhere. I hope to see some blog readers at these events!

Which view is right? Exploring a set of simulations just released as part of the Annual Energy Outlook published by the Energy Information Administration (EIA) provides some neat insight. For the first time, the EIA simulates not only the impact of low natural gas prices and the impact of carbon pricing but also what happens when you combine the two. The results are really interesting.

The plot below shows the two natural gas price assumptions that the EIA looks at. (I made all the plots using the EIA’s awesome AEO Table Browser.) The high natural gas price scenario is based on what analysts currently believe the natural gas resource looks like. The low price scenario results from assuming that each gas (and oil) well yields twice as much fuel as currently believed; well spacing declines so that more wells can be packed into a given area; and undiscovered oil and gas resources are 50 percent higher than currently assumed, among other tweaks. Expected prices, you’ll notice, diverge pretty sharply over time.

If you assume no price on carbon, you end up with the emissions in the figure below. Super-cheap natural gas cuts emissions (though barely) for the next couple decades. After that it actually begins to make things (barely) worse.

The next figure shows what happens when you put a modest price on carbon. Here the assumed carbon price is ten dollars a ton starting in 2013 and rising 5 percent annually through 2040. Now what you find is that cheap gas consistently helps. The carbon price cuts emissions relative to business as usual – but the carbon price combined with cheap gas does even more.

Things get even more interesting, though, when you step the carbon price up a bit. The next figure assumes that a carbon price starts at fifteen dollars in 2013. (The other details remain the same.) Now we’re back to a pattern that’s a bit more like the reference case: Cheap gas helps for the next couple decades before becoming a climate liability later.

Perhaps the most interesting chart, though, is the final one, displayed below. It shows what happens when you’ve got a carbon price that starts at twenty-five dollars in 2013. Now low natural gas prices help, though almost imperceptibly, for the next decade. After that, though, they actually hurt, and by the time you get out to 2030 and 2040, the penalty imposed by cheap gas becomes pretty large.

There are, as usual, caveats galore here. This is one model, and one set of technology and market assumptions, so its results should be treated with great care. It says nothing about the costs of emissions reductions — and abundant natural gas can make hitting the same emissions trajectory cost less. Moreover different people will interpret these figures in differing ways. Some will say the results they show that natural gas is bad news (at least in the long run) for climate change. Other will argue that they offer a series of misleading comparisons: in a world with cheap natural gas, it may be more politically feasible to impose a higher carbon price, and if that’s true, cheap gas could still mean considerably lower long-run emissions. A third camp (undoubtedly dominated by economists) might argue that these projections simply show that cheap natural gas might make a rational carbon policy consistent with higher emissions than it otherwise would be.

Who’s right? That’s a tough question. There’s a lot more to be analyzed here, and even more that’s probably not amenable to neat and clean analysis. What’s for certain, though, is that the consequences of natural gas for U.S. emissions are more complex and intriguing than most people have assumed.