• Reducing oil demand through Corporate Average Fuel Economy Standards for vehicles promoted by the Obama Administration.
• Reducing oil demand through electrification of light duty vehicles, and natural gas and alternate fuel vehicles since they argue fuel economy by itself is insufficient to break the “stronghold” that petroleum has on the transportation sector.
• Encouragement of more domestic oil production.

The report does not address the added costs of improved fuel efficiency on vehicle prices or safety or compare the costs and attributes of alternate fueled vehicles to those of the traditional petroleum-fueled vehicles.  Furthermore, it does not address the reality that if alternatively fueled vehicles were comparable, the market would have undertaken these changes on its own.  Moreover, the report does not acknowledge new information about the vast oil resources the United States has which would last 210 years at current consumption rates without any imports if American producers were allowed access to the oil resources on public lands and waters and federal policies were not inimical to more investment in oil production in the U.S.

Further energy security could be nearly achieved by using domestic, Canadian and Mexican resources if the government would allow more domestic production on federal lands, encourage rather than discourage the construction of pipelines like the Keystone XL pipeline bringing oil from Canada, and not propose policies which increase costs, taxes and regulatory burdens on the men and women who supply America’s oil resources for our use.

The SAFE Report

The panel noted that the current oil and gas boom is significant in reducing petroleum imports, spurring job creation and reducing the trade deficit. The report notes that forecasters see the trend of increased domestic production and decreased imports continuing. While the authors believe the federal government should make the most productive federal oil and gas holdings available for development, they note that environmental regulations should “hold the industry to the highest performance standards attainable.”  The authors did not stipulate what the standards should be, or whether they believe the Obama Administration’s policies of leasing fewer lands for energy exploration than any administration in history was consistent with their calls for making lands available for development for the nation’s security interests.

The report describes corporate average fuel economy standards as “the most important energy security accomplishment in decades.”  According to the panel, policymakers should focus on vehicle mileage improvements in the near term and alternate fueled vehicles (electric and natural gas-fueled) in the longer term, supporting research and development, infrastructure investments, and early adopters of the new technologies. The report calls for expanded use of electric vehicles, using electricity from the grid paired with batteries to replace gasoline fueled light duty vehicles and natural gas to replace diesel in heavy-duty tractor-trailers.  This appears to be consistent with the Obama Administration’s proposals.

The Cost and Timing of Implementation

While technologies exist to improve automobile fuel efficiency, automobile producers weigh a buyer’s interest in vehicle performance, utility, cost and safety against the cost of improved fuel efficiency when developing new model vehicles in the absence of a government-mandated standard. If there were no tradeoffs for improved efficiency and consumer preferences were solely focused on improved efficiency, automobile manufacturers would automatically make the changes without government intervention.

Further, if the costs and attributes of alternate fueled vehicles were the same as gasoline or diesel fueled vehicles, those vehicles would be flooding the market. But, alternate fueled vehicles cost more than traditional gasoline and diesel vehicles and their attributes are not the same. For example, an electric vehicle is much more expensive than a comparable gasoline vehicle, has a much shorter vehicle range, far less trunk space due to the battery storage, and infrastructure is not available for quick and easy refueling most Americans have come to expect for their transportation.[ii]

A gasoline vehicle has a range of 400 miles, while the range of an electric vehicle is about 100 miles with recharging taking 4 to 12 hours, depending on the vehicle and the charger. That compares to a 5-minute fill-up for an internal combustion engine at a gasoline station. Further, while there are 160,000 gasoline stations already constructed and paid for to obtain a fill-up[iii], the infrastructure for recharging stations does not exist and would need to be built to replace those developed for gasoline vehicles that have been amortized over a century. That means these electric vehicles will have limited use, restricting their purpose to running errands in the local area or for a short round-trip work commute.

Due to their cost, electric vehicles are likely to be purchased only by a very small niche market. GM President Dan Akerson has said the average Chevy Volt buyer has an income of $170,000 per annum.[iv] A report by the Center for Automotive Research estimates at best less than a half million electric vehicles would be on the road by 2015 based on deployment rates of hybrid vehicles. The cost of around $40,000 for an electric vehicle is double the cost of some internal combustion cars mainly due to the cost of batteries for electric vehicles, which are very expensive. According to the Department of Energy, battery costs need to come down to $350 per kilowatt-hour to make electric vehicles competitive in the market place. Such a battery breakthrough could take 10 years or more.

Vast Domestic Oil Resources

The report did not detail the extent of recoverable resources in North America.  The United States has 1,442 billion barrels of technically recoverable oil, of which about 400 billion barrels is from conventional and unconventional sources and almost 1,000 billion barrels is oil shale. [v] Unfortunately, much of our oil resources are on federal lands that are not being leased by the Obama Administration. The Administration’s draft 2012 to 2017 offshore leasing plan restricts oil and gas leasing areas to those areas open prior to 2008 when the executive ban on offshore oil exploration was removed by President Bush and prior to the expiration of the moratorium by Congress on October 1, 2008.[vi] While President Bush had taken steps to lease these areas before leaving office in January 2009, the Obama Administration put forth delay after delay, and then excluded the areas previously under moratorium from its most recent offshore leasing plan. And, oil shale, which is found mostly on federal lands in Colorado, Wyoming, and Utah, is prohibited from being leased for production by the Obama Administration.  China, Estonia and other countries are pursuing their oil shale resources, which are much smaller than the world-leading U.S. resource base.

Further limiting our future energy security is the Obama Administration’s delays in approving the permit for the Keystone XL pipeline. Canada has 175 billion barrels of proved oil reserves that can be produced now and moved to U.S. refineries via the pipeline. If the pipeline had been approved when submitted, more oil could be flowing into this country in the near future. While Canadian oil would be imported, it is a secure oil supply, as they are our friend and ally, and largest trading partner.

A recent study commissioned by the American Petroleum Institute found that the U.S. could come close to producing enough new oil and natural gas to displace all non-North American imports within 15 years. The study, by energy consultants Wood Mackenzie, assumed oil drilling would be allowed off the currently prohibited areas of the East and West Coasts, in waters off Florida’s Gulf Coast, in Alaska’s Arctic National Wildlife Refuge, and on most federal public land that is not set aside where oil and gas or any commercial activities are generally excluded, including national parks and wilderness areas. It also assumed that permits would be granted to build pipelines to accommodate a doubling of Canadian oil production and the continuation of current tax rates for U.S. industry.[vii]

The study found that if the oil industry was allowed access to the resources and the pipelines, domestic liquids production could reach 15.4 million barrels per day, close to the 19 million barrels a day that we currently consume, creating 1 million new jobs over the next seven years and 1.4 million by 2030.[viii] More than $800 billion in cumulative new government revenue could be generated by 2030 and $127 billion by 2020. Most importantly, no new taxes or increased government spending is needed to accomplish these results, just the opposite of the conditions necessary for possibly creating a breakthrough technology and infrastructure for electric vehicles.

Conclusion

The United States has a vast amount of oil resources—oil producers just need access to them and policies that are not hostile to investment in the United States.  However, the SAFE report downplays this aspect of energy security, instead focusing on new vehicle technologies to displace oil consumption, which will cost consumers and taxpayers more money.  Rather than allowing market forces and consumers to determine when technology breakthroughs make it economic to replace petroleum in the transportation sector, the report supports policies entailing the entire reworking of the transportation system of the United States, with all of its attendant costs and unforeseen consequences yet to be determined, in pursuit of a hypothetical replacement for a system that has made U.S. individual transportation and consumer transportation choice the envy of the world.

Recent studies have pointed to enormous increases in domestic and North American oil production if the proper policies are adopted, including continuation of hydraulic fracturing on shale oil formations, offshore development including in the Gulf of Mexico and the Arctic and the permitting of pipelines to rationalize energy markets and attract more capital to Canada and the Bakken formation in North Dakota.

Polling and focus groups show that most Americans believe prices for gasoline can be significantly lower through increased North American production.[ix] And when they are presented with facts regarding North America’s energy wealth, their overwhelming response is to ask why the United States is not allowing those resources to be developed as other countries throughout the world are doing.

In a representative democracy, government officials are expected to leave most important choices to their free citizens, rather than order activities to be undertaken, as is necessarily and understandably the  case in the corporate and military worlds.  Policy makers should be cognizant of the different roles of institutions within our nation, and remember that citizens of the republic are also voters for whom they work.

But on closer inspection, these folk are really just riding the brakes. The accelerator is all about highly concentrated, reliable, dense energy—oil, natural gas, and coal mainly—versus the dilute, unreliable, politically correct energies of wind, solar, and biofuels. This is why fossil fuels command more than 80 percent of the global world energy market today, a market share that is forecast to not significantly decline in the next decades.

Consumers are driving the train. They naturally choose energies that offer the best value. They demand more energy, not less. And they want lower, not higher, prices. As voters, they collectively represent what is being called Obama’s energy problem, dissatisfaction with an Administration that woke up too late to the issue of gasoline (and diesel) affordability.

All the political shouting gets back to good-versus-bad-energy. Energy author Richard Fulmer explains:

When it comes to power, density is the key. Energy density. The reason that solar power, wind power, and ethanol are so expensive is that they are derived from very diffuse energy sources. It takes a lot of energy collectors such as solar cells, wind turbines, or corn stalks covering many square miles of land to produce the same amount of power that traditional coal, natural gas, or nuclear plants can on just a few acres.

Energy scholars from William Stanley Jevons to Vaclav Smil to Robert Bryce have emphasized the primacy of energy density. In the nineteenth century, Jevons explained how England’s land mass was not great enough to grow the plants and house the windmills needed to substitute for coal.

Today, Bryce fills his lectures with examples of relative densities, such as this one:

A well producing 60 Mcf a day–by definition a stripper well–has a power density of about 28 watts a square meter, 23 times the power density of a wind turbine. If you start with a source that has low power density, you have to counteract the lower power density with other inputs such as steel, transmission lines, concrete, land and manpower.

A variety of other examples comparing oil, gas, and coal to wind, solar, and biomass (baby coal) reach a similar conclusion.

Environmental Issue, Too

Dilute energy has environmental problems, not just economic ones. Indeed, the two go hand-in-hand. In a recent article in the Los Angeles Times (April 6), Julie Cart investigated the growing schism between Big Environmentalism and grassroots environmentalism. She wrote:

Big environmental organizations say they have agonized over how to approach the issue. They acknowledge that development can have irreversible effects on ecosystems. But they are reluctant to stand in the way of renewable energy projects they regard as a vital response to climate change, which they consider the nation’s most serious environmental challenge.

A number of testimonials give a face to the growing opposition of true-blue environmentalists to windpower. In My One-Time, Tacit Support of Industrial Wind: A Confessional, Walter Cudnohufsky wrote:

Just over two years ago, I held the same opinion of wind that some of my friends do now. However, investigation of industrial wind has led me to this well-considered conclusion: industrial wind is a total sham! Not only is it horrendously impactful, but it also does not work in any meaningful manner. But efficacy is a subject for another discussion.

In this piece titled Why I Turned against Windpower, Michael Morgan stated:

Sadly, once the layers of woulds, coulds and shoulds were peeled back, I found industrial wind failed to keep its environmental promises….[Thus,] I cannot abide the suggestion that we must sacrifice our environment in order to save it. This is an absurd argument enabling this energy imposter’s invasion of delicate habitat with little return. … Environmentalists must consider the possibility that industrial wind, by its failure to perform to stated goals, does not then qualify for this sacred consideration.

In his resignation letter to the Sierra Club (Canada), Jen Gilbert wrote:

I once believed in the Sierra Club, until the CLUB (an insular bunch of activists who aren’t looking at the entire picture but only at their own agendas) started fully supporting the Green Energy Act (Canada) …. [which] is placing [wind] turbines … in pristine areas, in and around fresh lakes, on mountains, on ridges, on the Niagara Escarpment, near communities…. Everything the environmentalists (including myself for 20 years) have worked so hard to protect, is now being destroyed or in jeopardy.

The Sierra Club is, indeed, conflicted. It was their Los Angeles representative who coined the term that bedevils the wind industry today, Cuisinarts of the Air.

A New Energy Environmentalism

The growing realization of the economic/environmental problems of politically correct energies is causing a sea change in political language. The very terms “clean” and “green” are losing favor with the public. Just as Obama has cooled it with the rhetoric of climate change/global warming, he may soon find himself constrained in using these idealistic terms to describe his energy favorites.

The implications of energy density for reassessing “green energy” are profound. Much of modern environmentalism must be turned on its head. Peter Huber in his book Hard Green: Saving the Environment from the Environmentalists has offered a new paradigm of thought:

The greenest fuels are the ones that contain the most energy per pound of material than must be mined, trucked, pumped, piped, and burnt. . . . [In contrast], extracting comparable amounts of energy from the surface would entail truly monstrous environmental disruption…. The greenest possible strategy is to mine and to bury, to fly and to tunnel, to search high and low, where the life mostly isn’t, and so to leave the edge, the space in the middle, living and green.[1]

Can well-intentioned “green” energy supporters get back to the drawing board? A number of grassroot environmentalists already have, turning against industrial wind turbines that have invaded their space (and wallets). Solar farms are part of this growing civil war, too.

The on-the-ground environmentalists will increasingly be heard—along with those of consumer/voters—in the elections to come.

Nordhaus Takes on Sixteen Opponents

To frame his debate with the global warming skeptics, Nordhaus picks a specific target: the January 26 Wall Street Journal op ed titled, “No Need to Panic About Global Warming.”  The op-ed was signed by sixteen scientists from various fields, including Princeton physics professor William Happer, MIT professor of atmospheric sciences Richard Lindzen, former head of climate research at the Australian Bureau of Meteorology William Kininmonth, and former director of the Royal Dutch Meteorological Service Henk Tennekes.

Nordhaus identified six allegedly misleading claims made by the skeptics in their WSJ article, and proceeded (in his mind) to dismantle their bogus views. In the interest of brevity, I will in this post focus on just four of the claims. As we’ll see, it is Nordhaus who is playing fast and loose with the readers. Many of the objections raised by the skeptics are indeed legitimate.

Skeptic Claim #1: Global Temperatures Have Been Flat for a Decade

Nordhaus first tackles the claims about the temperature record. He writes:

The first claim is that the planet is not warming. More precisely, “Perhaps the most inconvenient fact is the lack of global warming for well over 10 years now.”

It is easy to get lost in the tiniest details here. Most people will benefit from stepping back and looking at the record of actual temperature measurements. The figure below shows data from 1880 to 2011 on global mean temperature averaged from three different sources. We do not need any complicated statistical analysis to see that temperatures are rising, and furthermore that they are higher in the last decade than they were in earlier decades.

[FIGURE REPRODUCED FROM NORDHAUS.]

Notice the rhetorical sleight-of-hand: Nordhaus attributes the claim that “the planet is not warming” to his critics, and then at least has the courtesy to follow-up with their actual statement that “the most inconvenient fact is the lack of global warming for well over 10 years now.”

Those are different statements. Yes, it’s easy to knock down opponents when Nordhaus is allowed to change their position. The 16 signatories to the WSJ piece never claimed that “the planet is not warming,” relative to preindustrial times. No, what the 16 signatories to the WSJ piece claimed—and which is true, at least depending on which data set one uses—is that there has been no global warming in well over the last ten years. Indeed, look at Nordhaus’ own graph: It shows that the current temperature deviation (of about 0.8 degrees Celsius) is the same value as it was back in the late 1990s. And yet Nordhaus somehow thinks this chart should embarrass his opponents.

It’s also interesting that Nordhaus invites his readers to not get caught up in the tiny details, and instead to take a step back and survey the grand picture of global temperatures. I agree. In that spirit, I suggest it can be misleading to focus—as Nordhaus does—on deviations of temperatures. Instead, let’s look at a graph of actual global temperatures, using the same three standard data sets that Nordhaus used for his own graph. (All we’re doing here is adding a base of 14 degrees Celsius to the deviations that Nordhaus plots.) The graph looks like this:

SOURCE: Data sets cited by Nordhaus, with 14C base global temperature added to deviations.

Seen in this light, it’s still true that temperatures of the last decade are higher than at any point since the late 19^th century, yet this chart isn’t nearly as scary as the one Nordhaus showed.

To be clear, I’m not accusing Nordhaus of anything deceptive regarding the format of his temperature chart. There are good reasons that climate scientists tend to work with temperature deviations, rather than absolute levels.[1] Furthermore, without more information to guide our charting decisions, choosing a y-axis range of 0–20 Celsius degrees—as I’ve done in the graph above—is just as arbitrary as Nordhaus implicitly choosing a range of 14–15 degrees in the graph he used. Even so, when experts such as Nordhaus are presenting their material to the layperson, these nuances can get lost in the shuffle. Nordhaus thought his readers would “benefit from stepping back and looking at the record of actual temperature measurements,” and I agree.

Skeptic Claim #2: Actual Global Warming Has Been Smaller Than What the Models Predicted

Next Nordhaus tackles the argument that the computer simulations have thus far greatly exaggerated the impact of CO2 emissions on global temperatures. Nordhaus defends the track record of the models in this way:

What is the evidence on the performance of climate models? Do they predict the historical trend accurately? Statisticians routinely address this kind of question. The standard approach is to perform an experiment in which (case 1) modelers put the changes in CO2 concentrations and other climate influences in a climate model and estimate the resulting temperature path, and then (case 2) modelers calculate what would happen in the counterfactual situation where the only changes were due to natural sources, for example, the sun and volcanoes, with no human-induced changes. They then compare the actual temperature increases of the model predictions for all sources (case 1) with the predictions for natural sources alone (case 2).

This experiment has been performed many times using climate models. A good example is the analysis described in the Fourth Assessment Report of the Intergovernmental Panel on Climate…. Several modelers ran both cases 1 and 2 described above—one including human-induced changes and one with only natural sources. This experiment showed that the projections of climate models are consistent with recorded temperature trends over recent decades only if human impacts are included. The divergent trend is especially pronounced after 1980. By 2005, calculations using natural sources alone underpredict the actual temperature increases by about 0.7 degrees Centigrade, while the calculations including human sources track the actual temperature trend very closely.

In reviewing the results, the IPCC report concluded: “No climate model using natural forcings [i.e., natural warming factors] alone has reproduced the observed global warming trend in the second half of the twentieth century.”

The above quotation from Nordhaus is lengthy, but I wanted the reader to trust that I was capturing the context. Notice what Nordhaus has done: When faced with a skeptic challenge that the climate models predict more warming than has actually occurred, Nordhaus retreated to defending the view that the prevailing suite of climate models explains past temperature movements better when they attribute a sizable impact to human activities, than if these computer models are run with natural influences (“forcings”) alone.

These are entirely different claims. The WSJ scientists were not claiming that anthropogenic changes to the atmospheric composition have not given rise to an increase in the global average temperature, but that the increase has been less (considerably so) than that produced by the standard collection of climate models. It should come as little surprise that the climate models do not well capture the actual climate, because the climate is fiendishly complex, incompletely understood, and hence difficult to model. Consequently, it is reckless to go forth with trillion-dollar taxation schemes on the basis of our limited understanding. Until models are able to more accurately replicate the climate behavior of the observable past, it is foolish to think that they will produce reliable climate projections of an uncertain future.

To repeat, Nordhaus didn’t even attempt to show how well the standard suite of climate models can replicate observations. He instead made the weaker claim, that the climate models do a better job matching the observations if they include a role for human activities in (partially) driving global temperatures.

So we come back to the question: Just how well do the prevailing climate models describe the observations? In a January 2012 post at MasterResource, published climate scientist Chip Knappenberger discusses the 2011 paper of Dr. Benjamin Santer (and co-authors) who reviewed the predictions of major climate models, and contrasted them with observed temperatures, over the last few decades. Here is the central result, with Knappenberger’s commentary underneath:

[The figure above is a] comparison between modeled and observed trends in the average temperature of the lower atmosphere, for periods ranging from 10 to 32 years (during the period 1979 through 2010). The yellow is the 5-95 percentile range of individual model projections, the green is the model average, the red and blue are the average of the observations, as compiled by Remote Sensing Systems and University of Alabama in Huntsville respectively (adapted from Santer et al., 2011).

Over the full record (1979–2010) the real world has only warmed about two-thirds as much as models indicate that it should have. If this continues to the end of the century, the IPCC’s 21st century warming range of 1.1°C to 6.4°C becomes about 0.75°C to 4.25°C—with a central value of 2.5°C. But what’s worse is that a model/observation disparity could indicate that the climate models are not faithfully reproducing reality, which would mean that they are not particularly valuable as predictive tools.

My [i.e., Chip Knappenberger’s] conclusion (which, is different from that of the authors) based upon the research presented by Santer et al. [is] that the models are on the verge of failing… [Bold added.]

It may be difficult for a newcomer to interpret the graph above, but let me attempt to explain it: There are of course uncertainties in any climate model. But over several decades, these variabilities and uncertainties would be expected to largely cancel out, so that the underlying trend (if accurately captured in the model) manifests itself in the actual measurements. This is why the yellow envelope—showing the 90% confidence interval of the projections from the various models—shrinks over time. Note that the red and blue series (three different sets of observations) are consistently below the green series (an average of the models’ projections of global warming, based on global emissions of greenhouse gases and other factors). Moreover, as time progresses, the actual observations threaten to breach the lower boundary of the yellow envelope, which should only happen 5 percent of the time if the models were accurate descriptions of nature. This is why Knappenberger says that the models are “on the verge of failing.”

Skeptic Claim #3: CO2 Is Not a Pollutant / CO2 Poses No Harm to Humans

Thus far we’ve been arguing in terms of the physical science, but now Nordhaus gets into the area of human welfare:

The sixteen scientists next attack the idea of CO2 as a pollutant. They write: “The fact is that CO2 is not a pollutant.” By this they presumably mean that CO2 is not by itself toxic to humans or other organisms within the range of concentrations that we are likely to encounter, and indeed higher CO2 concentrations may be beneficial.

However, this is not the meaning of pollution under US law or in standard economics…

In economics, a pollutant is a form of negative externality—that is, a byproduct of economic activity that causes damages to innocent bystanders. The question here is whether emissions of CO2 and other greenhouse gases will cause net damages, now and in the future. This question has been studied extensively. The most recent thorough survey by the leading scholar in this field, Richard Tol, finds a wide range of damages, particularly if warming is greater than 2 degrees Centigrade. Major areas of concern are sea-level rise, more intense hurricanes, losses of species and ecosystems, acidification of the oceans, as well as threats to the natural and cultural heritage of the planet.

In short, the contention that CO2 is not a pollutant is a rhetorical device and is not supported by US law or by economic theory or studies. [Bold added.]

In the present post, I am not interested in the semantic issue of whether CO2 should be classified as a “pollutant.” Instead, I want to explore those sentences from Nordhaus that I put in bold, in the quotation above. The innocent reader could understandably infer from Nordhaus’ description that Richard Tol’s work shows that there are clearly net damages from global warming, both now and in the future, and that the literature shows a wide range of the mechanisms for such harms, including more intense hurricanes and ocean acidification.

Yet this is not at all what Tol’s paper actually shows. Nordhaus provides the citation in his footnotes, and he has conveniently placed a PDF of Tol’s 2009 Journal of Economic Perspectives paper at his (Nordhaus) own website. In the survey article, Tol looks at more than a dozen studies (published from 1994 through 2006) that used different methods and assumptions to estimate the impact of climate change on human welfare. Tol summarizes the results of his survey in the following figure:

SOURCE: Figure 1 from Tol (2009)

As Tol’s diagram quite clearly indicates, the consensus of economic studies finds that global warming would be on net beneficial to human welfare, at least through 2C degrees of warming (and this is relative to the current baseline, not to preindustrial times). This is not at all what the innocent reader would have taken away from Nordhaus’ description of Tol’s findings.

Furthermore, using the latest IPCC AR4 report’s own estimates, we can get an idea of when this tipping point would likely occur, in the absence of government policies to mitigate emissions. Here is the relevant diagram from the IPCC:

Eyeballing the chart, and without taking a stand on which emissions trajectory (B1, A1T, etc.) is most plausible, it looks like 2C of warming would most likely occur around the year 2060 or 2065. However, since the IPCC warming is calibrated against a baseline of the average 1980–1999 temperature, while the economic impact studies were calibrated against a later baseline, we can pick a nice round number and say that using Nordhaus’ own preferred studies, in conjunction with the standard IPCC simulations, the best estimates currently predict that unregulated greenhouse gas emissions will provide net benefits to human welfare for the next sixty years.[2] The reader will surely agree with me that that message doesn’t leap out of Nordhaus’ discussion.

Skeptic Claim #4 [#6]: Nordhaus’ Own Work Shows Harms of Government Intervention

In the interest of brevity, I will skip the next two claims Nordhaus addresses, and proceed to his final argument. Here he takes on the 16 WSJ contributors when they claimed:

A recent study of a wide variety of policy options by Yale economist William Nordhaus showed that nearly the highest benefit-to-cost ratio is achieved for a policy that allows 50 more years of economic growth unimpeded by greenhouse gas controls.

Now here, the WSJ contributors admittedly goofed. From skimming their bios, it doesn’t appear that any of them is trained in economics, so their mistake is understandable. Nonetheless, they did screw up here, and Nordhaus obviously pounces. He gives a simple numerical example to show that proper policy should try to maximize benefits net of costs, which is a different objective from maximizing the benefit-to-cost ratio. Nordhaus is correct when he claims that his own work in the field makes the cost-benefit case for an “optimum carbon tax” that slows greenhouse gas emissions relative to the laissez-faire baseline.

However, the instincts of the 16 scientists were right when they claimed that Nordhaus’ own work—which, to repeat, sets the orthodox standard in the field of the economics of climate change—should give policymakers serious pause before enacting carbon taxes, “cap-and-trade” permits, or other restrictions on the energy sector. In 2009 I published a journal article showing the weaknesses in Nordhaus’ case for a carbon tax. Here was one of my main points, referring to Nordhaus’ “DICE” model of the global economy and climate system:

The 2007 DICE model contains simulations not just of the baseline (no controls) and the optimal carbon tax scenarios, but of many other policies as well. These calculations show that the dangers of an overly ambitious or inefficiently structured policy can swamp the potential benefits of a perfectly calibrated and efficiently targeted one (that is, the optimal carbon tax scenario). As table 4 indicates, Nordhaus’s optimal plan yields net benefits of approximately $3 trillion (consisting of $5 trillion in reduced climatic damages and $2 trillion of abatement costs). Yet some of the other popular proposals have abatement costs that exceed their benefits. The worst is Gore’s 2007 proposal to reduce CO2 emissions 90 percent by 2050; DICE 2007 estimated that Gore’s plan would make the world more than $21 trillion poorer than it would be if there were no controls on carbon. [From Murphy 2009, bold added.]

The interested reader should read my paper for the full story, but in a nutshell: When Nordhaus claims in his New York Review of Books article that his work shows the benefits of a carbon tax, the reader must realize that he means an optimally calibrated tax that is simultaneously implemented by all governments around the world, and is maintained at the (time-varying) optimal level through the year 2100. Nordhaus is saying that the best science tells us that that outcome would be better than governments doing nothing to restrict the market’s emissions of greenhouse gases.

Obviously, this standard of a textbook-optimal, decades-long, world-comprehensive carbon tax is quite an unrealistic benchmark to contrast with the real-world market outcome. Using Nordhaus’ own model, we can test the robustness of his result by looking at what happens when (say) only half the world participates in a carbon-limitation program, or when (say) governments penalize carbon emissions at more than the economically efficient rate. These tweaks can significantly reduce the “net benefits” flowing from a carbon tax. As the quotation from my 2009 paper above illustrates, Nordhaus’ own model shows that Al Gore’s proposal would inflict seven times as much net damage on the world (relative to the laissez-faire baseline), as the textbook optimum approach would yield in net benefits.

Conclusion

Although leading climate economist William Nordhaus tries to cast himself as the messenger of objective science, his attempt to rebut the “global warming skeptics” is itself filled with misleading arguments. The actual situation is that the physical climate models have indeed predicted more warming than has actually occurred, while the economics literature casts serious doubts on the case for immediate government mitigation efforts.

The Clean Energy Standard (CES) of 2012

Senator Bingaman’s proposal requires 24 percent of electricity generation in 2015 to be from qualified “clean” sources of energy increasing to 84 percent in 2035 and remaining constant thereafter. The bill uses a byzantine description of what is “clean” energy. For example, all existing and new wind, solar, geothermal, municipal solid waste, and landfill gas electric generating plants get full credit. Also, all hydroelectric and nuclear plants or additions to existing plants placed in service after 1991 get full credit (apparently plants placed in service before 1991 are not considered “clean”).

Generation from hydroelectric and nuclear units operating before 1992, while not receiving any credit are also not required to purchase credits to cover the generation they produce as non-qualifying fossil fuel plants must do. Coal and natural gas plants receive partial credits based on their carbon intensity, that is, the amount of carbon dioxide emitted per unit of generation.

Biomass generators are assumed in the EIA study to be carbon-neutral and receive full credit. However, the bill specifies that the carbon intensity of biomass will be based on a required study undertaken by the National Academy of Sciences. Also qualifying for credits based on their carbon intensity are combined heat and power units that have a system efficiency greater than 50 percent.

Small electricity sellers with sales of 2,000,000 megawatt-hours or less in 2015 are exempt, but that ceiling declines linearly to 1,000,000 megawatt-hours by 2025 and later. Electricity retailers may comply by paying 3 cents per kilowatt-hour in 2015, increasing by 5 percent per year, inflation-adjusted. Clean energy credits can be traded among electricity retailers.

The Impact of the Standard

Generation. As expected, EIA estimates that under Senator Bingaman’s CES, coal-fired generation decreases significantly compared to a reference case without the clean energy standard. Under the CES, coal-fired generation is replaced by nuclear, natural gas, and non-hydroelectric renewable technologies. EIA estimates that the CES reduces coal-fired generation 25 percent below the reference case level in 2025 and 54 percent below in 2035. Natural gas-fired generation is 13 percent above reference case levels in 2020 but is only 8 percent higher by 2035 because EIA estimates that new renewable and nuclear capacity will coming on line. Nuclear generation is 16 percent above reference case levels in 2025 and 62 percent higher in 2035, with about 80 new plants being built, 70 more than in the reference case.  Nuclear capacity is needed to satisfy base-load demand for electricity to replace 97 gigawatts of retired coal-fired capacity, 33 gigawatts more than in the reference case.

Non-hydroelectric renewable generation increases by 42 percent over reference case levels in 2025 and by 34 percent in 2035. Wind and biomass technology show the largest increases. Solar generation under the clean energy standard increases in the residential and commercial sectors by 71 percent over the reference case in 2035, but there is a corresponding drop of solar photovoltaics in the electric generating sector of 68 percent compared to the reference case in 2035, with the shift taking place mostly in California due to timing and market dynamics.

 Note: BCES 12 denotes the results under the Clean Energy Standard

Electricity Prices. Average national electricity prices are 18 percent higher in 2035 than in the reference case with the difference in prices increasing over time as compliance moves from using more natural gas and biomass at existing facilities and towards requiring investment in new combined cycle, renewable, and nuclear capacity. Prices vary regionally by exempt versus non-exempt electricity providers, the state regulatory structure, and regulator discretion, which determines how credit revenues and expenditures are implemented in retail electricity prices. By 2030, depending on the region, providers covered by the Clean Energy Standard pay from 3 percent to 30 percent more than providers exempt from the Standard in the same region.

Electricity Price Comparison between EIA’s Reference Case and Clean Energy Standard Case

 Source: Energy Information Administration, Analysis of Clean Energy Act 2012, May 2, 2012, http://www.eia.gov/analysis/requests/bces12/

Carbon Dioxide Emissions. Carbon dioxide emissions from electric generating plants are 20 percent lower than the reference case in 2025 and 44 percent lower in 2035, resulting in total carbon dioxide emissions from energy being 8 percent lower than the reference case in 2025 and 18 percent lower in 2035.Total energy-related carbon dioxide emissions in 2035 are about 20 percent lower than those in 2005.

Uncertainty in Nuclear Generation. There is much uncertainty associated with the amount of nuclear generation required under the bill. If nuclear generation were excluded from the suite of potential technologies, more natural gas-fired generation and more non-hydroelectric renewable generation would be required. The additional natural-gas fired generation results in more carbon dioxide emissions than if nuclear generation were used to comply. Electricity prices and compliance costs are also higher.

Conclusion

Any time policy deviates from what the market intends, prices are higher for consumers. It is no different for a Clean Energy Standard than for any other policy in this regard.  The United States has vast coal resources, more than any other country in the world. A Clean Energy standard would have those resources remain in the ground and ask other sources to pick up the 20 percent of U.S. energy currently supplied by coal.

But, not only does the plan revert backward in time to limit offshore areas for lease, it also calls for a decrease in the number of offshore lease sales.  In the past, lease plans for outer continental shelf development averaged five lease sales a year. The 2012 to2017 plan cuts those lease sale offerings in half.[ii] And, it contains higher minimum bids and shorter lease periods. Bonus bids are likely to go up by a factor of two for some deepwater tracts and lease terms are reduced to 5 or 7 years. Because developing offshore leases takes a long time, additional costs can make marginal properties subeconomic.[iii]

History of Leasing Events

In 1953, the federal government enacted the Outer Continental Shelf Lands Act to enable the Interior Secretary to administer mineral exploration and development off our nation’s coastline. The Act empowers the Interior Secretary to provide oil and gas leases to the highest qualified bidder and establishes guidelines for implementing an oil and gas exploration and development program in the outer continental shelf. According to the Bureau of Ocean Energy Management, “a 5-year program consists of a schedule of oil and gas lease sales (auctions) indicating the size, timing, and location of proposed leasing activity the Secretary determines will best meet national energy needs for the 5-year period following its approval.”[iv]

Beginning in 1981 and until they removed it on October 1, 2008, Congress annually passed a moratorium on oil and gas drilling in new areas offshore, which was made into an Executive Moratorium by President George H.W. Bush in 1990. In July 2008, spurred by high oil and gasoline prices, President George W. Bush lifted the ban and announced the beginning of a new “five-year plan” to provide a blueprint for leasing in the outer continental shelf for the 2010 to 2015 period, replacing the five-year plan for the 2007 to 2012 period, which did not provide for any lease sales in the areas covered by the moratorium. In January 2009, before leaving office, President George W. Bush issued a draft proposed oil and gas leasing plan for the outer continental shelf that included 4 areas off Alaska, 2 areas off the Pacific coast, and 3 areas off the Atlanta coast.[v]

In February 2009, shortly after taking office, President Obama’s Department of Interior announced that it was delaying the Bush plan for 6 months. Secretary Salazar began a public tour soliciting opinion which had already been done when President Bush announced the plan. In November 2009 and again in March 2010, Secretary Salazar announced that a new lease plan for the outer continental shelf would not occur until 2012. If not for the delay imposed by the Obama Administration, new areas in the continental shelf would have been opened for drilling in July 2010.

On November 8, 2011, the Obama Administration announced its new lease plan for 2012 to 2017 that closes the majority of the outer continental shelf to new energy production only allowing lease sales in areas that were already open to drilling. It includes lease sales in the Western Gulf of Mexico, and leaves out the entire Atlantic and Pacific coasts. It increases the minimum bid and shortens lease periods. And it cuts the number of lease offerings in half compared to the average of past lease sales.

Delays and Other Offshore Leasing Issues

Virginia was poised to become the first state on the East Coast permitted to produce oil and natural gas offshore based on the 2010 to 2015 lease plan that President Bush put in place before leaving office. This plan to drill off Virginia’s coast was supported by Virginia’s Republican Governor and Virginia’s Democratic Senators. The proposed Virginia lease area is estimated to hold 130 million barrels of oil and 1.14 trillion cubic feet of natural gas.[vi] However, in January 2010, the Department of Interior announced that it was delaying the Virginia offshore lease sale that was scheduled for November 2011. Virginia then thought it would be included in the 2012 to 2017 plan, but that also did not happen when the Obama Administration removed the Pacific and Atlantic coasts from that plan. Instead, the Obama Administration announced federal approval of leasing plans for wind-power development off the coast of Virginia. Unfortunately, wind power does not help lower gas prices for the American public, nor does it help in limiting oil imports from overseas.

Other delays and cost increases are also prevalent in the Administration’s actions regarding oil and gas development. For example, Shell has been forced to spend $4 billion over five years on plan - development costs and other expenses dealing with repeated permitting delays to drill in the Beaufort and Chukchi Seas off Alaska. The increased costs were due to challenges and legal actions by environmental groups to invalidate the proposed permits that the Obama Administration did little to oppose.[vii]

Conclusion

Due to President Obama’s “all-the-above” energy policy, many thought that the lease plan would contain the areas that were opened to new drilling in 2008. But the Administration’s new plan for 2012 to 2017 goes backwards in time to leasing only those areas that were already open before the 2008 gas price spikes, thereby prohibiting new off shore drilling off the Atlantic and Pacific coasts.

The plan is bad for the nation’s long-term energy needs. Earlier this year, the Administration announced its commitment to reduce oil imports by one-third by 2025; but its outer continental shelf plan restricting access and limiting lease offerings does little to aspire to the goal. Worldwide, nations are taking steps to increase energy production and increase their offshore reserves. China, Brazil, Columbia, Cuba, the Middle East, and other countries understand the economic importance of offshore drilling and increasing domestic oil supplies.

By this 5-year plan, no new drilling or new lease sales will occur during President Obama’s term in office despite the overwhelming support of the American public for new offshore energy production. The President’s plan puts new energy production and American jobs created by new offshore drilling off-limits. His plan provides for jobs overseas that could be here in the United States, forfeits new revenue from lease sales, and denies access to American energy that would lessen our dependence on OPEC oil. Developing the United States’ offshore resources would create over a million jobs, generate billions in revenue and significantly reduce foreign oil imports.

Compare this to ethanol, wind power, and (on-grid) solar power, all of which depend on special government favor. Their boom is artificial, unsustainable. Expect a bust as the political winds shift. The lesson: energy users want dense, reliable energy, not dilute, intermittent, false substitutes.

The Offshore Technology Conference (OTC) in Houston last week was host to more than two thousand companies and nearly 80,000 engineers, geologists, and business executives. More than 100 countries were present. With single exhibit models costing hundreds of thousands of dollars, OTC is tomorrow’s energy on display.

Offshore energy is still a frontier industry. Today’s small cities at sea, with a technological web beneath them, were unimagined just a few decades ago. Next-generation offshore platforms will continue to amaze. But more than size and reach, the theme of this year’s conference—two years removed from the Deepwater Horizon explosion and spill—is safety and the environment.

Malthusian Non-Imagination

Such progress confounds the “Peak Oil,” limits-to-growth crowd. In their 1977 textbook, Ecoscience: Population, Resources, Environment, authors Paul and Anne Ehrlich and John Holdren (yes, Obama’s science guru) described offshore drilling as a reason to not expect much more oil and gas.

Their example was a state-of-the-art 200-square-foot rig drilling in 300 feet of water. The caption below the full-page diagram (p. 412) read: “The complexity of this operation suggest one reason why the price of oil increases as society is forced to get it from less convenient locations.” And in the text (p. 413): “The complexity, the expense, and the environmental impact of exploratory drilling increase greatly as depletion of the most accessible deposits pushes the search for oil and gas into more remote and more hostile environments.”

Compare this to Shell’s Perdido offshore platform, which has been producing in the Gulf of Mexico for two years without incident. It produces hydrocarbons at 8,000 feet (40 times deeper than the Ehrlich/Holdren example) from a multi-layer platform. And deeper projects are on Shell’s drawing board.

Loren Steffy, author of Drowning in Oil: BP & the Reckless Pursuit of Profit, and business editorialist at the Houston Chronicle, described OTC as “the world’s pre-eminent gala of oilfield geek chic.” He highlighted:

The TeleCoil Downhole Communications System, Baker Hughes’ device for improving the flow of real-time data from deep inside a well; and Tesco’s Directional Liner Drilling System, which improves the process of angling the direction of a well miles below the surface.

And then, there’s The Claw… a floating leviathan that can reach into the depths and pull out a damaged or sunken piece of offshore equipment – even an entire platform – like a child playing with a toy crane.

Ten stories high, The Claw was too big to exhibit at the trade show—but still the talk of the town.

Julian Simon Lives!

What would have Julian Simon (1932–98) thought had he walked the exhibit halls in Houston this week? He might have uttered something like, “I am a realist/optimist, but I could not have imagined …”

But two of his major themes are proudly on display. One is the ultimate resource of human ingenuity, which is not a depleting resource but an expanding one. And two, his adage that our problems make us better is evident with much of the new technical equipment designed for safety and redundancy.

Public Policy

And then there is public policy. “A common refrain in [OTC] panels … was that offshore drilling regulators are spending too much time processing and vetting drilling permit applications,” the Chronicle reported. In fact, the post-spill moratorium (April–October 2010) was followed by a de facto ‘permatorium’ until approximately February 2011.

But now the Gulf of Mexico is getting back to normal (or a new-normal). Permit processing time between applicants and the Department of Interior’s Bureau of Safety and Environmental Enforcement has fallen from of 125 days to 50 days on average in the last year. With the applications in the pipeline, the number of floating deep-water rigs is expected to surge some 20 percent by year-end 2013, according to above article.

To eliminate all risk is to stop industrial innovation and progress. But there can be learning and improvement. The technology boom on display in Houston, Texas last week was about deeper, more, and safer.

The Institute for Energy Research released the following statement about new regulations for hydraulic fracturing proposed today by the Department of Interior:

“With fossil fuel production on federal lands at a nine-year low, the last thing President Obama should be doing is imposing more red tape on domestic energy producers. Today’s announced regulations for hydraulic fracturing are but the latest component of the Administration’s war on fossil fuels. Despite President Obama’s misleading rhetoric about his energy record, his policies continue to threaten development of the domestic energy sources we need to power our economy and our future.

“America has more than 200 years of oil supply under our feet — without needing a single drop of imported oil. And we have enough natural gas to provide 175 years at current consumption levels. But the federal government only leases 3 percent of public lands for energy development, and what is available for leasing is so fraught with regulatory red tape that energy producers look instead to private and state lands for production potential. It is no surprise that 96 percent of the production increases since 2007 have taken place on non-federal lands, according to a recent report from the Congressional Research Service. Meanwhile, the federal share of U.S. production continues to fall.

“If President Obama is serious about his ‘all of the above’ energy plan, he would tell Ken Salazar to spend more time figuring out how to open access to America’s vast fossil fuel resources and expand hydraulic fracturing to secure our energy future — and less time contriving new ways to crucify America’s conventional energy producers with burdensome regulations, punitive taxes, and discriminatory enforcement.”

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WASHINGTON D.C. — Thomas Pyle, president of the Institute for Energy Research, released the following statement on today’s re-filing of a supplemental Keystone XL pipeline permit application by TransCanada:

“President Obama has single-handedly stopped the creation of thousands of American jobs and increased our reliance on overseas oil imports by denying the Keystone XL pipeline permit. Today, TransCanada will try again by filing a supplemental application to get approval for this much-needed oil pipeline. Regrettably, anti-conventional energy extremists have the president’s backing in their war on fossil fuels, to the harm America’s economic future. Already, the president’s policy on Keystone XL has made Americans send more than $11 billion overseas to purchase oil from unstable overseas regimes rather than our closest trade partner, Canada.

“A recent survey commissioned by the American Energy Alliance reveals that 79 percent of the Americans support construction of the Keystone XL pipeline. It’s time for action from the White House to approve the Keystone XL permit in the national interest.”

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Regulations Affecting Refinery Operations

The Clean Air Act of 1970 was the first regulation to significantly change the refinery industry by prohibiting lead additives in gasoline. Later amendments were added that created oxygenated and reformulated gasoline bringing about the “boutique fuel” issue. Each of these fuels are available in 3 grades (regular, mid, and super) and are adjusted for winter/summer and northern/southern driving conditions.[ii] When refineries must switch over from winter grade to summer grade gasoline in the spring, motorists have historically seen gasoline prices rise.

Reformulated gasoline was the result of Amendments to the Clean Air Act in 1990 and mandated gasoline that burned more cleanly than conventional gasoline. Areas of the country that did not meet the EPA’s ozone regulations were required to use reformulated gasoline. Reformulated gasoline burns cleaner by reducing smog-forming and toxic pollutants, is less prone to evaporation, and uses an oxygenate to improve combustion.

There are currently 15 distinct boutique fuels required in portions of 12 states by federal regulation.  But, in addition to the federal standards for reformulated gasoline, State Implementation Plans (SIPs) require low-Reid Pressure conventional gasoline. California, whose gasoline prices are higher than the rest of the nation, requires a cleaner fuel than the federal reformulated gasoline and the Midwestern states require an ethanol-blended reformulated gasoline.

The Energy Policy Act of 2005 amended the Clean Air Act and limited the number of boutique fuels to those existing as of September 1, 2004. The Boutique Fuel Reduction Act of 2009 further amended the Clean Air Act to provide temporary waivers for unexpected problems that would not allow delivery of the additives and to allow the EPA Administrator to reduce the number of boutique fuels if any became identical with a federally approved fuel or was no longer included in a SIP.

Between 1992 and 2005, oxygenated fuel blends were required by EPA to reduce ground-level ozone and smog. At that time, methyl tertiary-butyl ether (MTBE) was used as the oxygenate for states other than the Midwest and ethanol was used as the oxygenate in the Midwest. MTBE and ethanol served as an octane booster, a volume extender in gasoline, and as the oxygenate for reformulated gasoline. Later, MTBE was banned in many states because of ground water concerns, leaving ethanol as the most cost-effective oxygenate. While MTBE could be blended at the refinery, ethanol, because of its corrosive nature, has to be blended at the storage facility where the fuel is dispensed to the fuel truck.

The Energy Policy Act of 2005 created the Renewable Fuel Program that mandated the use of renewable fuels in gasoline. That act required the production of 7.5 billion gallons of renewable fuels for 2012. The Energy Independence and Security Act of 2007 increased the target volume to 36 billion gallons by 2022, mandating that 15 billion gallons could be from corn-based ethanol and the remainder had to come from advanced biofuels, namely cellulosic ethanol. EPA administers the program and can lower the targets for cellulosic ethanol if not commercially available. However, the lowered EPA targets are still difficult for refineries to achieve since cellulosic ethanol does not exist commercially. As a result, refiners have had to purchase waivers, needlessly increasing the cost of gasoline. The penalties are estimated to be $6.8 million in 2011 and higher for 2012 since EPA is mandating that 30 percent more of the nonexistent fuel be purchased by refiners.[iii] EPA has also determined that vehicles of model year 2001 or newer can use a blend of 15 percent ethanol and 85 percent gasoline without hurting those engines. Currently, the maximum blend is 10 percent ethanol and 90 percent gasoline.

In 2007, the Supreme Court ruled that the EPA had the authority to regulate carbon dioxide emissions under the Clean Air Act. In response to the FY 2008 Consolidated Appropriations Act, EPA required suppliers of fossil fuels, manufacturers of vehicles and engines, and facilities that emit 25,000 metric tons or more of greenhouse gas emissions annually to submit reports to EPA (the Mandatory Reporting of Greenhouse Gases Rule). The rule provides the basis for future legislation or regulation to limit greenhouse emissions from refineries and other industrial users.

While a ‘cap and trade’ program to limit greenhouse gases did not pass in Congress as the Obama Administration had wanted, because of the Supreme Court’s ruling allowing the EPA to regulate carbon dioxide emissions, additional regulations are being levied upon industries.

Among the upcoming regulations for refineries are Tier III and emission standards for refineries and U.S. smog and particulate matter air-quality standards. Since 2004, when EPA’s Tier II standards were implemented, refiners cut sulfur levels in gasoline by 90 percent, from an average of 300 parts per million in 2004 to an average of 30 ppm today, at a cost of $10 billion.[iv]  EPA’s Tier III rules would cut the sulfur content of gasoline more from 30 to 10 parts per million.  A report conducted by Baker and O’Brien for the American Petroleum Institute (API)[v] found that the rule would add $2.4 billion in annual compliance costs, resulting in an increase of  6 to 9 cents per gallon of gasoline.[vi] Achieving the incremental sulfur reduction would require large capital investments in equipment that would emit more carbon dioxide and could lead to as many as seven additional refinery closures.[vii]

Refinery Closings and Purchases

U.S. refiners are closing plants that have become uneconomic. 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]

Two refineries in Pennsylvania with a joint capacity of 363,000 barrels per day owned by Sunoco and Conoco Phillips were recently idled due to losses resulting from increased regulatory requirements and lower demand for petroleum products.  Sunoco estimates that environmental regulatory costs represent about 15 percent of its operating budget. The two idled Pennsylvania refineries along with a third Sunoco refinery still operating in the Philadelphia area employ 1,200 workers and almost as many salaried and contract workers, manufacturing 50 percent of the petroleum fuels produced on the East Coast of the United States.[ix]   However, while these refineries are experiencing losses and two are idled, there seems to be some recent interest.

Energy Transfer Partners and Sunoco have entered into a merger agreement where Energy Transfer Partners will acquire Sunoco for $5.3 billion, creating one of the largest and most diversified energy partnerships in the country. According to Sunoco, its Marcus Hook plant, which it idled in December, will remain closed under the merger.  Its Philadelphia refinery, which is the largest on the East Coast, is still operating, employing about 850 workers.[x]

The Conoco Phillips refinery in Trainer, Pennsylvania produces 185,000 barrels a day.[xi]   Over the last 10 years Conoco Phillips invested 100 percent or more of its profit into its Trainer refinery to meet regulatory requirements and has lost money in each of the previous three years.[xii]  Delta Airlines just purchased the Conoco Philips facility as a hedge against increasing jet fuel prices for $150 million. Delta plans to invest $100 million in maximizing the refinery’s jet fuel output, cutting the airline’s fuel bill by $300 million a year.[xiii]

A major Caribbean export refinery supplying the East Coast (Hovensa’s U.S. Virgin Islands refinery) has closed.  The Hovensa refinery in the U.S. Virgin Islands was located in a region that was in attainment with the Clean Air Act.   However, EPA required the company to spend an additional $700 million replacing turbines.  After losing $1.3 billion in last three years, the refinery could not afford the additional regulatory compliance costs.[xiv]

According to a March 2011 Department of Energy report, in the past 20 years, federal regulations were a significant factor in the closing of 66 U.S. refineries. (See chart below.) Refinery closures and the recession have led to a loss of over 3,000 direct jobs and 506,000 barrels per day decrease in capacity.

 Source:  U.S.  Department of Energy, Office of Policy and International Affairs, Small Refinery Exemption Study – An Investigation Into Disproportionate Economic Hardship, p.  28-30, found at:  http://www.epa.gov/otaq/fuels/renewablefuels/compliancehelp/small-refinery-exempt-study.pdf

According to the Energy Information Administration, the recent refinery idlings and closures have not affected markets so far because the loss of fuel from the Sunoco and ConocoPhillips refineries has been partially offset by the start up of a refinery in Delaware City, Delaware, that opened in October 2011. The refinery had been shut down for two years by Valero and was recently purchased by PBF Energy, which is attempting to make a profit from it.[xv] However, according to PBF Energy chairman, Tom O’Malley, under Tier III, the sulfur removed from PBF’s total gasoline production at its three refineries, which produce about 4.5 billion gallons, would be less than one-eighth of what a 500 megawatt coal plant emits in a year, questioning the benefits of the EPA’s latest refinery rule.[xvi]

The closures and potential closures mark a change taking place in the refinery business, due to the differences in the prices of different crude oil grades from different global producing areas. U.S. east coast refiners pay a higher price for imported crude than other U.S. refiners using Canadian or domestic crude. Other problems affecting the refinery industry are lower demand for gasoline, increasing volumes of ethanol, improvements in vehicle fuel efficiency, permitting delays, and policies to encourage the purchase of electric and other alternate fuel vehicles. Some researchers believe that the United States and other developed nations have reached “peak travel,” and that the number of miles driven per year is not expected to increase as it has in the past.

Conclusion

The U.S. refinery industry has spent $128 billion since 1990 to comply with federal environmental regulations[xvii], which adds significantly to the costs of manufacturing refined products.  Historically, refiners have supported regulations that were clearly beneficial to the environment.  However, as environmental standards are tightened, the cost to meet those standards increases exponentially, threatening the competitiveness of American refineries in the global marketplace.  

According to Bill Klesse, former Chairman of the National Petroleum and Refiners Association, overregulation is not only likely to cause expansion of existing plants to slow down if not stop altogether, it could curtail improvements to those facilities. That was a warning he made 2 years ago. But the warning is not being heeded by the Obama Administration and his Environmental Protection Agency. According to Environmental Protection Agency (EPA) official, Region VI Administrator Al Armendariz, EPA’s “general philosophy” is to “crucify” and “make examples” of oil and gas companies.[xviii]

Bob Greco, API downstream and industry operations director, well-stated what the regulatory situation should be:

“We must be sure that new regulatory proposals are necessary, properly crafted, practical and fair to allow US refiners to remain competitive, preserve good paying refinery jobs and ensure our energy security.”

That should be true of all regulations.

“We can control our own destiny. We have 200 years of oil available to us right now at today’s prices and today’s technology. We can get that oil if we had an administration that let us.  And we’re not talking about drilling next to the Washington Monument or on the West Lawn of the White House. We’re only leasing on 3 percent of the federal land, including offshore. The federal government is the largest land owner in the United States.”

To read Thomas Pyle’s op-ed, “Iowa: Welcome to the $4 Gallon of Gas Club,” click here.

To listen to Thomas Pyle’s recent interview on Mickelson in the Morning, click here.

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