Issue #29, Summer 2013

There Will Be Oil

Suddenly, the United States is energy rich. The problem is that we’re still guided by policies that assume the opposite.

Have you ever seen one of those nighttime satellite photos in which North Dakota is lit up nearly as brightly as Chicago? Those lights are a result of “flaring,” the practice—environmentally harmful and economically wasteful—of burning off natural gas that can’t be collected and put into pipelines because our pipeline system has not kept up with the boom in North American energy production.

And when you think about moving crude oil around North America, do you envision pipelines stretching thousands of miles, like the proposed Keystone XL pipeline that has attracted so much controversy? Most people do. It may then surprise folks to learn that the fastest-growing form of oil transportation in North America is a throwback to the industrial era—the locomotive. Warren Buffett’s big bet on rail is paying off, with the BNSF railroad he bought in 2012 projected to ship almost six times as much oil by the end of this year as it did in 2011.

The sharp increases in flaring and crude-by-rail shipments are just two manifestations of how the North American energy infrastructure is struggling to catch up to the transformational changes in the North American energy landscape. U.S. oil producers cannot fetch world prices because of pipeline bottlenecks. Although the United States is now a net exporter of refined petroleum, the East Coast still imports a million barrels of it per day, thanks to regulatory and logistical constraints on moving it from the Gulf Coast—where more of the refineries are—to East Coast markets. Even as oil production surges in North Dakota, drivers in New York and New Jersey last fall had to sit in line for up to ten hours to fill up because our fuel-system infrastructure was unable to withstand Hurricane Sandy’s wrath.

But it’s not just a lack of infrastructure. Indeed, the United States has a vast network of oil and gas pipelines, about 2.5 million miles—and has built enough miles of pipeline in the last eight years to travel three-quarters of the distance to the moon. It also has 2.5 billion barrels of fuel storage capacity, and many of the most sophisticated refineries in the world. The problem is that the changed energy landscape has rendered this infrastructure outdated. Our energy infrastructure was built to move oil from the Gulf Coast up into refineries in the middle of the country. But that entire infrastructure now needs to be flipped on its head to accommodate the massive growth in production from Canada, North Dakota, and other parts of the midcontinent.

Moreover, the policies and regulations that govern our energy infrastructure largely date from the 1970s, when concerns about shortage and the Middle East dominated the minds of policy-makers and the public. Today, the outlook has shifted from scarcity to abundance. Suddenly, policy-makers are being asked to consider questions that would have been hard to imagine just a few years ago. Should the United States export oil and gas? What are the safety and other implications of moving vastly larger quantities of oil by rail? How should our policy for engagement in the Middle East change if we import very little oil from the region? And there are many other questions.

Policy-makers must deal with these dilemmas while confronting not only a changed supply outlook, but also rapidly accumulating evidence that the effects of climate change are likely to be felt with increasing severity and frequency. Thus, they must consider whether committing now to large, long-term capital investments in our oil and gas infrastructure will make it harder and costlier to transition to lower carbon forms of energy in the long term.

To be clear, government does not need to build this infrastructure for the most part. The private sector will finance the build-out of our pipeline network; indeed, pipeline spending in North America is projected to increase nearly fivefold in 2013 from the prior year, and dozens of pipeline projects are planned. But federal and state governments have a key role to play. By putting in place the right policy and regulatory frameworks, they can allow economically viable infrastructure investments to happen and help rationalize individual projects that collectively must form an integrated energy transportation system. Moreover, these policy reforms also hold the promise of bringing industry to the table to support serious action on climate. Although oil and gas will remain important parts of our energy infrastructure for the foreseeable future, we must act now to avoid the worst impacts of climate change. The new energy infrastructure that the changing landscape requires can be an essential part of a compromise that seeks to advance domestic supply increases while taking meaningful action to address climate change.

The Changing Energy Landscape

We are at a transformational moment in energy history. Just a few years ago, all energy projections forecast increased imports, increased scarcity, and increased natural gas prices. Today, we’ve shifted from scarcity to abundance. U.S. oil production increased by nearly one million barrels per day (B/D) in 2012, the largest annual increase in U.S. history. In 2013, the United States is projected to be the largest producer of liquid fuels (including crude oil, natural gas, and biofuels) in the world, overtaking Saudi Arabia. U.S. oil imports are at their lowest level in 25 years and are projected to decline much more steeply as a result of surging production and reduced gasoline use due to higher prices and the Obama Administration’s increase of fuel-economy standards. And these projections may well be too conservative, as reflected in numerous private-sector forecasts.

The natural gas outlook is even more striking. In its recent biennial report, the Potential Gas Committee, a group that studies future U.S. natural gas supplies, raised its estimate 26 percent from just two years ago—more than a century’s supply at current demand levels. New government estimates show that the gas resources around North Dakota are three times higher than previously believed. Surging shale gas production means the United States will be a net exporter of natural gas in a few years. Multi-billion-dollar terminals proposed not long ago to import natural gas are being flipped to export instead. Moreover, the price of natural gas, which peaked at $13 per million British thermal units in 2008, dropped below $2 last year, before inching back up to $4. The U.S. Energy Information Administration projects the price will remain below $4 for most of the rest of the decade.

This transformation is not only a U.S. story. New technologies mean that what were once challenging sources of oil and gas can now be tapped economically from the oil sands in Canada, the ultra-deepwater “presalt” off the coast of Brazil, and many other parts of the world. North America is projected to be a net oil exporter by 2030. According to the Energy Information Administration, China’s shale reserves are 50 percent larger than those in the United States. Argentina has the third largest shale gas reserves in world. Venezuela has the largest oil reserves in the world, with the vast oil sands in the Orinoco Belt. Iraq is poised to potentially double oil output over the next seven years. Massive new oil and gas discoveries off the coasts of Africa mean that that continent may see sharp increases in production.

To be sure, there is uncertainty about how much oil can ultimately be recovered from these unconventional sources and how much it will cost. Initial data from the Bakken formation in North Dakota collected by PFC Energy, for example, show that the production “sweet spots” are very small compared to the overall size of the shale play. But the fact remains that the global energy landscape has undergone a historic transformation in just the last few years, and the reality in which policy-makers must now act is a world with vast amounts of oil and gas that can be produced at relatively affordable prices.

What Does the New Energy Boom Mean?

The changing North American landscape has significant economic, geopolitical, and environmental implications. On the economic front, simply put, increased oil and gas production means more economic activity and job creation. IHS CERA, the consulting firm founded by author and energy expert Daniel Yergin, estimates that unconventional oil and gas production will support more than three million jobs by the end of the decade (though it does note that these gains may be offset by declines in other industries). As the rest of the world increases unconventional oil and gas production, there will be more opportunities to export technology and services from U.S. firms, which pioneered these new techniques. Low natural gas prices are also saving consumers money on heating, electricity, and many products we consume.

Billions of dollars in manufacturing investment are returning to the United States because natural gas prices are so low here while remaining high elsewhere. Along with dry gas (which is basically methane), production is also booming for natural gas liquids, which contain ethane that can be converted into ethylene, the world’s highest-volume chemical and the foundation for many other industries; it is used to make bottles, toys, clothes, windows, pipes, carpet, tires, and many other products. Dow Chemical recently announced a plan to spend $4 billion to expand its U.S. chemicals production, including a new plant in Freeport, Texas due to open in 2017. The last such U.S. plant was built in 2001. It costs about $300 to make a ton of ethylene here in the United States, down sharply from $1,000 just a few years ago—and far lower than the $1,700 it currently costs in Asia, where producers rely on expensive oil instead of natural gas.

Also, we have seen increased manufacturing activity to support natural gas production, like steel for pipes used in hydraulic fracturing, also known as fracking. A new steel plant was announced not long ago in Youngstown, Ohio—the heart of the Rust Belt—to make pipes for fracking in the Utica and Marcellus shale formations underneath Ohio, Pennsylvania, and neighboring areas. That said, it’s important not to overstate the impact on the manufacturing sector: Low prices matter a lot for some energy-intensive industries—like petrochemicals, fertilizer, steel, and aluminum—but not much for others. And energy-intensive sectors account for only 7 percent of overall industrial production.

The changing energy landscape is having important geopolitical consequences as well. The U.S. shale boom has increased Europe’s leverage with long-time suppliers like Russia and helped reduce European natural gas prices. It has called into question the traditional burden-sharing relationships between countries to maintain global-oil market stability, as more and more Middle Eastern oil heads east to China rather than west to North America. It has raised new uncertainties about OPEC’s ability to hold together as a coalition, as more production outside OPEC puts pressure on prices. And the increase in U.S. oil production has offset the loss of oil supply from Iran, making it easier for nations to impose economic harm on Iran without harming themselves by driving up oil prices.

So the economic and geopolitical gains are considerable. But what about the effects of all this activity on climate and the environment? On climate, there are two effects to look out for. On the one hand, increased oil production can worsen the climate outlook by pushing down oil prices, thus increasing consumption and emissions. On the other hand, cheap natural gas has begun to displace coal in our electricity system and is poised to displace some oil in transportation, particularly trucks, trains, and ships. Roughly half as carbon intensive as coal, natural gas is a key reason—along with the weak economy and wider deployment of wind energy—that U.S. greenhouse gas (GHG) emissions in 2012 reached their lowest point in almost 20 years, and since 2005 have declined faster than Europe’s.

To be clear, natural gas alone will not allow us to meet our climate mitigation targets. But it can buy some time if it continues to displace coal—and not just here, but in coal-intensive countries like China and India as well. This is not a given, and policy will need to help drive that switch. Already in 2013, coal has recovered some of its market share as natural gas prices have risen from their historic lows of 2012. And the climate benefit from natural gas depends, in part, on the extent to which methane leaks into the atmosphere during production and distribution; recent reports from the Environmental Defense Fund and World Resources Institute confirm that cost-effective ways to reduce that leakage do exist. Climate policy—such as putting a price on carbon through cap-and-trade or a carbon tax, or using existing authorities like the Clean Air Act—will ultimately be necessary to avoid the worst impacts of climate change.

As for other environmental effects, there is a more direct benefit from the switch to natural gas from coal: The health costs to society from local pollution associated with coal-fired electricity are 17 times higher than that from natural gas-fired electricity. This is not to say that there are no environmental risks associated with unconventional oil and gas production. To mitigate these risks, wells must be properly cased and cemented; wastewater must be properly disposed of or recycled; chemicals used in fracking must be disclosed; emissions and flaring must be reduced; among other requirements. As we tap our new sources of energy, it is critically important that robust regulation and enforcement exist to ensure operators act consistently with best practices, not only to protect the environment, but also to reassure the public that energy is being produced safely.

The Energy Boom and U.S. Policy

Modernizing our nation’s energy infrastructure to meet the new energy reality is not government’s job. It doesn’t require a massive new public-works program or large amounts of government spending. The private sector has adequate incentives to make investments and build infrastructure where it makes economic sense to do so. This is already evident in the sharp increase in investment, leading Deutsche Bank to dub 2013 the “year of the pipeline.” So while the private sector will put up the capital, government needs to modernize policies that will allow America’s new energy abundance to find its way to market in the safest and most economical manner. Those policies span at least six areas: exports; the Jones Act; flaring; permitting; resilience; and rail safety.

Exports

As U.S. natural gas production soars, we will need to be able to export some of that gas. Differences in the quality of oil produced here and the quality desired by U.S. refiners (more on this below) mean that rising volumes of new oil might have to find their way to overseas markets. The problem, however, is that current U.S. law places strict limitations on the export of oil and gas.

When it comes to authorizing exports, the federal role varies for different fuels. For natural gas, applications to export to countries with which the United States has a Free Trade Agreement are automatically granted, while those to non-FTA countries are granted unless the Energy Department finds it would be contrary to the public interest to do so. The export of liquefied natural gas (LNG) is the most contentious energy export issue today. Some in industry, like Dow Chemical, and on Capitol Hill, like Senator Ron Wyden of Oregon, have expressed concerns that exports might lead to an increase in domestic natural gas prices and consequently harm U.S. manufacturing investment.

But an independent study commissioned by the Energy Department found that the economy would benefit overall from LNG exports. And most economic studies find that the price impacts would be relatively small. Furthermore, there are many reasons to support free trade in gas. Allowing natural gas exports could encourage more gas use overseas (potentially displacing oil and coal), increase our allies’ leverage against monopoly suppliers like Russia, boost domestic production and infrastructure investment, and reinforce U.S. efforts to oppose other trade restrictions, such as China’s limitation on the export of rare-earth minerals. Indeed, this seems to be the Administration’s thinking: In May, it announced that it was approving a second permit to export to non-FTA countries, two years after approving the first, and signaled that more approvals will likely be coming. It should move quickly, so that the market can decide which projects are the most economically viable, rather than give an advantage to those that happen to get in line first. Moreover, it should also continue to push for an FTA with the European Union and for the Trans-Pacific Partnership Agreement (which Japan recently joined). These accords would allow permits to many of the largest markets for LNG to be automatically granted by the Energy Department rather than be subject to a public-interest test. Congress could also achieve this outcome by passing legislation that would give NATO member nations and Japan (and potentially other countries approved by the Departments of State and Defense) the same preferential treatment as our free-trade partners with respect to natural gas exports.

Meanwhile, for crude oil, federal law requires that the President license its export only after finding it is in the national interest. Although the United States is likely to remain a net importer of crude oil for the foreseeable future, the Administration may still need to consider soon whether to permit increased exports because of our oil boom. The reason is that the production boom in places like North Dakota and Texas has largely been in light, sweet crude oil. But U.S. refineries, particularly on the Gulf Coast, made very large capital investments in recent years to process cheaper, heavy, sour crudes from places like Venezuela and Canada.

Although sending domestic oil abroad would surely be attacked as increasing our dependence on foreign oil, what matters for U.S. energy security is our net dependence on imports. It may well be the case that the most economically advantageous arrangement is to export some types of crude oil and import others. By allowing U.S. producers to fetch the highest possible prices overseas, exports would, on the margin, encourage U.S. oil production, thus contributing to reduced dependence on foreign oil and increasing our energy security.

The Jones Act

The Jones Act is a federal law requiring that vessels used to move goods from one U.S. port to another be U.S.-built, U.S.-flagged, U.S.-owned, and operated by a U.S. crew. Because it costs four to five times as much to build a Jones Act ship as it does to build one in places like Japan, Norway, or China, there are few such vessels. In addition, they are more expensive to operate, so moving petroleum between two U.S. ports by water is usually not economical. Partly as a consequence, the Gulf Coast exports 1.7 million B/D on net of refined petroleum to other countries, mostly in Latin America, even as the Northeast imports nearly 900,000 B/D day at higher prices from places like Europe and India. Moreover, light, sweet-crude-oil production is ideally suited to East Coast refineries, but currently the ability to move it from the Gulf Coast to the East Coast is constrained. It makes sense to find more ways to move Gulf Coast liquid fuels to the Northeast.

The Jones Act serves an important security purpose: to maintain a merchant-marine fleet and shipbuilding capability that might otherwise disappear in the face of lower-priced foreign competition. Mechanisms do exist to waive the Jones Act in “the interest of national defense.” The Obama Administration, for example, waived the Jones Act in 2011 amid the unrest in Libya and in 2012 in the wake of Hurricane Sandy. The waiver process, however, is cumbersome and politically difficult, and thus cannot be relied upon by private industry with any regularity.

There have been multiple efforts to repeal the Jones Act, most recently in 2010. The problem is only going to become more acute as U.S. oil production grows. It’s time that Congress reform the Jones Act to achieve the dual purpose of maintaining the U.S. shipping fleet while also allowing industry more flexibility to move petroleum products from one U.S. port to another.

Flaring

Those nighttime photos of lit-up North Dakota mentioned above bring into sharp relief one of the infrastructure constraints of the North American energy boom: the natural gas currently being wasted because pipelines do not exist to transport the gas to market. Oil can be loaded onto trucks and driven to a pipeline network. But natural gas usually requires a pipeline from the drilling site, and it is often uneconomical to build out the natural gas pipeline system to remote locations.

Flaring effectively makes oil production more energy intensive because so much natural gas is “used” in the process. In North Dakota, roughly one-third of natural gas production is burned off as large flares. While this is large in that it constitutes one-quarter of total flared gas nationally, it represents just one-third of 1 percent of all U.S. production. However, even that low rate is wasteful and harmful. State regulations often provide companies a grace period within which they are allowed to flare before they must find options to collect the natural gas, but those deadlines are often extended. Regulators should enforce these rules more strictly and require that industry find economical alternatives to bring gas to market, either with pipelines or innovative technologies that might find ways to use more natural gas on site, in transportation, or in other applications.

Permitting

According to Deutsche Bank, more than 20 large or medium-sized macro pipelines will likely be going into service in the United States and Canada in 2013, and around 60 pipeline projects are planned or in process. The natural gas pipeline system, too, will require a rapid build-out, and much is already underway. The National Petroleum Council estimates 30,000 miles of new long-distance natural gas pipelines will be needed to manage the new sources of supply.

Bringing this new oil and gas pipeline capacity online is necessary to avoid the bottlenecks we have seen in the past several years. Public policy should encourage the market to respond efficiently to infrastructure needs for new, expanded, or reversed pipelines. For natural gas, the General Accountability Office recently found it takes the Federal Energy Regulatory Commission (FERC) an average of 18 months to permit an interstate natural gas pipeline—which is relatively quick compared to some other pieces of large infrastructure. By contrast, petroleum pipelines are permitted at the state level, rather than the federal level. Because a single federal entity like FERC does not grant permits for petroleum pipelines, developers must navigate multiple jurisdictions to construct some longer-distance pipelines, increasing costs and risks. To speed the permitting process, Congress should consider the National Petroleum Council’s recommendation for a streamlined federal-level permitting process for oil pipelines.

Resilience

Hurricane Sandy was the latest reminder of our energy infrastructure’s vulnerability to severe natural disasters. Even accidents can have a surprisingly large impact on pump prices, such as an October 2012 California refinery fire that (along with a blackout at another refinery) drove statewide prices up to near all-time highs. And recent changes to our nation’s energy infrastructure may be exacerbating our vulnerabilities: Industry has shifted toward more of a “just-in-time” delivery system for petroleum products, with tight markets reducing the incentive to hold inventories. Moreover, a shift from integrated to independent companies makes it more challenging to respond to disruptions. The system works smoothly for the most part, but these changes leave less of a buffer in the event of unexpected disruptions. We need policies that will allow us to bounce back more quickly from such shocks.

Policy-makers should take a number of steps to harden our fuel infrastructure and reduce the economic toll of potential disruptions. These include: swapping out some crude oil in the Strategic Petroleum Reserve in exchange for refined petroleum stocks stored in key locations around the country, like the Southeast and Northeast, where they are most likely to be accessible and effective in mitigating potential fuel shortages; improving real-time information about fuel availability and storage levels among industry; instituting a clearer and simpler process to request necessary waivers for regulations such as clean-fuel rules, vehicle weight limits, or hours-of-service restrictions; including fuel-industry representatives in government emergency operations centers; designating fuel-system restoration crews as first responders with emergency access to affected areas; requiring installation of hook-ups to enable easy connection of power generators; and creating mutual assistance agreements that encourage other regions to ship needed equipment and supplies to the affected area.

Rail Safety

As noted at the beginning of this essay, we’ve seen a sharp increase in rail transportation of crude oil—the same way oil first moved at the dawn of the Industrial Revolution. In North Dakota’s Bakken formation, for example, rail shipments of crude oil increased from 50,000 B/D in 2010 to 500,000 B/D at the start of 2013, and may reach 800,000 by the end of the year.

For a host of reasons, rail oil transportation is going to remain prevalent for quite some time. It does not require large new capital investments, as pipelines often do, and it provides more flexibility to change shipping routes as the supply-and-demand outlook changes. And putting new rail cars on existing tracks does not require an environmental review, unlike building a new pipeline—which is ironic given that the risk of an accident or spill is higher for rail than for pipelines. Given how rapidly the pace of oil transportation by rail is growing, the federal government should undertake a study of rail safety issues involving crude-oil transportation, and make recommendations to ensure communities and the environment are protected against potential risks.

What about Climate Change?

Balanced against the potential benefits of the oil and gas boom is the need to act with urgency to address climate change. Just as every additional piece of oil and gas data leads experts to think U.S. production will be much higher than previously thought, every additional piece of climate data leads experts to think the social costs of carbon emissions are likely much higher than previously believed. To avoid the worst impacts of climate change, world leaders have agreed that a temperature rise should be limited to two degrees Celsius. Stabilizing atmospheric concentrations of GHG at 450 parts per million (ppm) would give us a 50 percent chance of meeting that target. We are already at just over 400 ppm, and rising at roughly two ppm per year. The energy sector accounts for roughly two-thirds of GHG emissions, and thus plays a key role in climate change.

According to the International Energy Agency (IEA), staying below the two degrees Celsius target requires that upward global carbon-emissions trends need to halt and begin to reverse within the current decade. Still, even in a scenario where nations adopt robust climate policies and emissions stay below 450 ppm, the IEA projects fossil fuels are going to be the primary means of powering the global economy for a long time, comprising 77 percent of energy demand in 2020 and 63 percent in 2035. On our current trajectory, even though renewable energy will be the fastest growing form of energy, fossil fuels in 2035 will still make up 80 percent of the global energy mix, down a whopping 1 percent from today.

The reality is that hydrocarbons are going to continue powering a significant share of the global economy for decades to come. That reality must be acknowledged when developing climate change policies. In April, the IEA released a report finding that, after more than $2 trillion of investments in clean energy over the last 20 years, the carbon content of the world’s energy supply has not changed at all, because coal use in places like China and India is growing so fast it offsets any gains from renewables and efficiency. An honest conversation about an economically viable pathway to reducing carbon emissions must include not just renewables and efficiency, but also increased use of natural gas and technology to capture and store carbon underground or reuse carbon emissions. A range of economic analyses shows that an increased supply of inexpensive natural gas can help lower the cost of implementing climate policies like cap-and-trade. In the near term, the alternative to low-cost natural gas is more coal. Under a gradually escalating carbon price and with supportive policies to tackle technological barriers, carbon-capture technology—which exists but is quite costly today—could begin large-scale deployment around the year 2020, according to the IEA. That technology is important because there is simply too much cheap coal around the world to expect that it will remain in the ground.

Opponents of fossil-fuel infrastructure are concerned that large-scale, long-term investments will delay any move away from those fuels. It’s a legitimate concern. That’s why even as the infrastructure is built out to realize the North American energy renaissance, policy-makers need to provide a long-term, credible price signal or some other policy to induce private actors to make investments consistent with a gradual reduction in carbon emissions. Moreover, if we expand North America’s energy supply while putting in place the right demand-side climate policies, the biggest losers will be international energy producers, not the global climate, as the primary impact will be to displace foreign supply rather than to expand overall global energy demand.

Casting a shadow on this discussion is the issue of the Keystone XL pipeline. While the Administration has been tight-lipped about whether it will ultimately approve the project, there is a growing expectation among observers that it will—particularly after the State Department’s draft environmental review found limited environmental harm associated with it. Whatever the eventual decision, a single pipeline is unlikely to make a meaningful difference in curtailing global warming. The State Department’s review found that there are numerous other options (such as rail) to bring the Canadian oil sands to market regardless of whether the pipeline is built. This finding was confirmed by the administrator of the U.S. Energy Information Administration in a January 4 memorandum. While these options would be more expensive and thus discourage production on the margin, the State Department found that production would be reduced by only 0.4 to 0.6 percent by 2030.

Even in an extreme case in which no other transportation option was viable and the oil sands stayed in the ground, global oil demand will still remain close to what it is because world oil prices will not be meaningfully affected, and thus production will just come from other sources around the world. While those sources may have lower GHG emissions than the oil sands, oil-sands production is only 2 to 19 percent more carbon-intensive than other forms of crude oil on a lifecycle basis—worse, but hardly decisive from a global climate perspective. Moreover, those other sources are likely to include Venezuela and the Middle East, rather than a close ally like Canada. Finally, even in the highly unlikely case in which it proves impossible to find any other way to bring Canadian oil sands to market, and other producers do not compensate for a Keystone denial by hiking their own production, global GHG emissions would be cut by only 0.5 percent annually—a modest factor in our fight against climate change.

A Path to Compromise?

Even as we build out this new energy infrastructure, we must move rapidly to facilitate a transition toward lower carbon forms of energy. That means a gradually rising price on carbon or, absent congressional action, administrative actions to reduce emissions. By far, the most significant tool at the Administration’s disposal is the use of the Clean Air Act to regulate emissions from existing coal-fired power plants. Even if it may not be the optimally cost-effective approach to mitigating climate change, the cost of inaction is higher.

The energy grand bargain we need is simple: Government must take steps that help the oil and gas industry develop America’s newfound abundance even more quickly—on permitting, exports, the Jones Act, clear and sensible fracking safety regulations, and other issues—while industry works with government on longer-term actions to meaningfully reduce carbon emissions.

There is good reason to be skeptical about the prospects for such a deal. There was a real push to win industry support for cap-and-trade, efforts that in the end did not yield much—and in that case it was the prospect of using the Clean Air Act that was held out as a threat to industry. Moreover, the notion of passing anything as remotely ambitious as a grand bargain on climate and energy seems almost quaint in today’s Washington.

But there are key differences between the push for cap-and-trade and our current situation that make the idea of compromise at least plausible. First of all, the production outlook today is vastly different than it was in 2009 and 2010. Back then, the most significant pro-production incentive to industry was expanded offshore drilling. The fundamental shift in the U.S. energy landscape from scarcity to abundance was not yet fully in focus; the stakes may be higher today for the oil and gas industries to get the infrastructure and other regulatory support they need to fully realize this new opportunity.

In addition, unlike with economy-wide cap-and-trade legislation, the consequences of using the Clean Air Act to regulate existing power plants fall more squarely on the coal industry. That may make it easier for the Administration to obtain support from the oil and gas industry, which will benefit from new infrastructure to increase domestic production, and, in the case of gas, will benefit from the switch away from coal. Even for coal, however, the impact of reduced U.S. demand will be partly offset by a liberal approach to energy trade that allows for increased coal exports. (While coal exports are generating controversy because they are seen to increase global GHG emissions, more research is needed to understand whether they increase coal use in countries like China or if they only substitute for coal that would otherwise have been imported from other nations like Australia.)

The United States has a truly historic opportunity in its energy sector right now. After decades of increasing scarcity and import dependence, the prospect of being fully self-sufficient is now a realistic goal. To realize the benefits of this changed energy landscape, our energy infrastructure and regulatory structure need to be updated to reflect the new reality. Yet while hydrocarbons are going to remain a central part of our energy mix for decades, the prospect of displacing them with alternatives—in our power plants, our cars, our industries, and elsewhere—has never been a more viable option and, indeed, a more urgent necessity. A compromise that recognizes this reality—and builds support for long-term policies to gradually reduce greenhouse gas emissions while also taking near-term steps to fully realize the potential of the American energy boom—has the best chance of achieving the multiple, and often competing, policy priorities of economic growth, national security, and environmental protection.

 

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Issue #29, Summer 2013
 
Post a Comment

Archibald Tuttle:

Your uncritical acceptance that the social costs of carbon should be a driving force in energy policy seems to lurk as the 'peak oil' moment in an otherwise cogent recognition that carbon is pulling America out of recession.

Jun 12, 2013, 8:02 AM
Evil Overlord:

At last, an honest article about energy policy. I appreciate that, despite pressing for more fossil fuel use, the author recognizes that it does have substantial financial and environmental costs, and that climate change is an actual problem.

@Archibald Tuttle - I come at this from the opposite perspective. I find the author's critical acceptance of carbon use to be the weak point in an otherwise cogent discussion of the flaws in current energy policy.

Jun 18, 2013, 11:14 AM
Monk:

The U.S. is actually not energy-rich. At best, production for North America will reach 12 Mb/d in a decade, but current U.S. consumption alone is 19 Mb/d.

In addition, non-conventional production has problems with decline curves and energy returns.

Jul 17, 2013, 1:09 PM
monk:

The U.S. is actually not energy-rich. At best, production for North America will reach 12 Mb/d in a decade, but current U.S. consumption alone is 19 Mb/d.

In addition, non-conventional production has problems with decline curves and energy returns.

Jul 17, 2013, 1:09 PM
Irvin Dawid:

I've just begun reading this comprehensive piece - but from reading the comments, it seems that they miss Jason Bordoff's key point: this article is about the lack of infrastructure - not about energy. Consequently, natural gas is simply burned in the Bakkens - how does that help the environment - to those whose concerns lie there?

Jul 19, 2013, 12:50 PM
Anne Mackin:

We are not oil-rich. We have developed extremely costly and environmentally-destructive technologies for extracting oil from sands and shales. Alternative energies are still the future. Please see the prescient 1976 article by Wm. Baumol & Wallace Oates ("Conservation of Resources and the Price System," in Economics of Resources).

Jul 31, 2013, 11:24 AM
Andrew Helms:

A very well thought out and cogent piece that examines energy and energy infrastructure from a holistic perspective incorporating transportation, regulations, infrastructure requirements, politics and global energy trends.

Would enjoy reading more from you in the future

Aug 6, 2013, 2:48 AM

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