Sorry, WaPo, but the CES may be third best, but that doesn’t make it a good idea.  Senator Lisa Murkowski (R-AK), expressed it well during a hearing on the proposal last week:

 “First and foremost, we have been reminded of the importance of affordable energy.  Most of the focus is on gasoline, but electricity costs are also going up. Bringing energy prices down should be our objective – not driving them up today, or in the future, as some analyses have projected a CES would do.

“I recognize that affordability is not the only goal, and that most folks support cleaner energy. Federal mandates are just one of many tools at our disposal and, as it turns out, they can be fairly blunt instruments.  In the energy space in particular, federal mandates make it difficult to account for regional differences, consumer preferences, and international competitiveness. Hanging over all of this is our more recent experience in healthcare, which shows just how unpopular mandates are right now.

“What we should remember is that we’re not limited to one policy, or one option, for addressing our energy challenges. My preference would be to increase funding for energy innovation with the revenues we generate from increased domestic production of oil, gas, coal and other resources. If we plan ahead, we could develop a long-term policy that allows those resources to work themselves out of a job by paying for the commercialization of newer, cleaner alternatives – and we would protect families and businesses from added costs and burdens in the meantime.”

That’s exactly right.  And unfortunately during the hearing there was some serious misinformation peddled, in the category of true but misleading, that was then dutifully reported by E&E as “electricity bills will fall under a CES.”

It’s true that bills will go down under the CES — but only because consumers will choose to purchase less of now more expensive electricity.  As the EIA testified:

“Projected national average electricity prices start to rise after 2020 . . .by 2035 they are 18 percent above the Reference case level.  Increasing the dispatch of existing natural gas plants provides a quick, low-cost route for early compliance efforts, but the value of natural gas as a compliance option is significantly reduced as the clean energy target share starts to exceed the credit value for this resource.”

With abundant natural gas finally making the US a competitive manufacturing location again, now is not the time to artificially raise electricity prices with a misguided “clean energy” mandate.

The mix of fuels used to generate electricity in the United States is experiencing a seismic shift that is unlike anything that has happened in decades.  Looking across all sectors, U.S. coal-fired generation in 2011 fell to its lowest level since at least 1949, which is the earliest data available from EIA.  Moreover, according to EIA’s latest estimates, this trend will accelerate sharply in 2012, with coal-fired generation falling to just 36.2 percent of the U.S. total—far removed from its decades-long position as the source of more than half of U.S. power generation.

What’s driving this shift?  One look at the graph above tells the story pretty clearly.  The use of natural gas in power generation—which has steadily increased since about 2003—is set to soar in 2012.  While total U.S. power generation will increase by less than 1 percent between 2011 and 2013, gas-fired generation will increase by 23 percent.

In the past, natural gas was viewed as a risky option for baseload power generation, because fuel prices tended to be both high and volatile, making them unable to compete with coal. This fuel price volatility has historically outweighed the distinct advantage held by natural gas generators when it comes to capital cost. The revolution in domestic shale gas production, which has depressed natural gas prices to levels that are highly competitive with coal in numerous U.S. markets, has fundamentally changed the calculus for power generation economics.  Moreover, some recent analysis suggests that the capital cost equation has been moving even farther in favor of natural gas as air quality regulations and the complex construction requirements drive the cost of coal plants higher.

Changes in the fuels used to generate electricity could have important implications for everything from electricity prices to greenhouse gas emissions and air quality.  One area of particular interest to us is the impact a cleaner grid will have on the upstream CO2 emissions associated with plug-in electric vehicles (PEVs).  We sometimes point out that PEVs are the only vehicles that will get “cleaner” as they get older as the grid moves toward lower-carbon forms of electricity.  The experience of the past several years and expectations about the very near term demonstrate this quite well.

As the figure below shows, the amount of upstream CO2 emitted by a PEV in charge-depleting mode has been declining substantially in recent years—even when it is powered by the average U.S. grid mix.  A driver who purchased a PEV in 2005 would have seen his or her upstream emissions fall by 16 percent by 2012.  In other words, the driver’s vehicle would have continuously improved its advantage over the average light-duty vehicle for that year, which achieved an adjusted fuel-economy rating of 19.9 miles per gallon.  In fact, even when taking into account line losses, a PEV purchased in 2005 would just about be on par with the best hybrids on the road today, which tend to register fuel-economy ratings of about 50 miles per gallon. Going forward, as more U.S. electricity is generated by natural gas, nuclear power, and renewables, electric vehicles will only continue to get cleaner.

A final note: Of course, no EV is likely to be powered by the ‘average mix.’  Instead, it will be powered by the marginal power plant serving its load.  To the extent that this is a natural gas turbine, nuclear power plant, or renewable source, EVs are already the cleanest available transportation option.  Analyses like this one from Oak Ridge National Labs suggest that gas turbines are likely to play a key role in powering EVs.

Between 2009 and 2011, the United States experienced three consecutive years of crude oil production increases for the first time since the early 1980s, as well as the largest surge in output within a three year period since the late 1960s. This marks a sharp reversal from conventional wisdom of only a few years ago, suggesting U.S. crude oil production was in a decades-long state of decline. This shift has far-reaching implications for the United States, with positive benefits including substantive reduction of the trade deficit, and potential employment gains driven by petroleum industry growth. The role of policymakers is to ensure these benefits are maximized by making promising tracts of federal land available for development in environmentally responsible ways.

However, while encouraging pursuit of these advantages, the report emphasizes the importance of long-term strategies to reduce our petroleum dependence and the heavy costs associated with it. While current projections show that extractable resources could drive net liquid imports down by 21 percent by 2020, this boon to our energy supply must not be conflated with energy independence. Notably, even oil exporting nations which produce more than they consume (such as Canada and Norway) are part of the global oil market, and remain subject to the same high and volatile oil prices. Rising domestic production will not achieve a long-term domestic price advantage in oil, and a nation’s level of oil production does not necessarily improve its energy security—a goal which can be achieved through significant cuts in consumption. Furthermore, even with rising domestic production, U.S. oil dependence constrains foreign policy and military options due to our commitment to stability in oil-producing regions of the world.

Consequently, policy prescriptions must also focus on long-term abatement of our petroleum consumption. Towards this end, SAFE recommends aggressive pursuit of fuel economy standards to reduce the oil intensity of the economy, and transitions towards alternative fuel sources, such as natural gas for heavy-duty trucks, and electrification of light-duty vehicles. Only by diversifying the transportation sector can real energy security be achieved.

Click here to access The New American Oil Boom.

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Back in the old “aughts” when natural gas prices bounced wildly from single to double-digits per million British thermal units (Btus) and back again, Congress and the Bush Administration pulled out all the stops to encourage the construction of import facilities for liquified natural gas (LNG).  That was then, of course, and now we have gas hovering around $2/mmBtu and nobody in their right mind wants to try to import LNG.

The good news is that an LNG import terminal can be retrofitted to export LNG, as Dominion wishes to do with Cove Point.  Here’s the Post:

The opportunity here is obvious: The United States should export some of its bountiful stocks of natural gas to Japan and other countries with fewer supplies and high demand. That is why Dominion Resources wants to retrofit its Cove Point facility to service exports as well as imports. It’s no surprise that Sumitomo Corp., a Japanese energy outfit, is already in contract talks to use the retrofitted terminal, pending regulatory approval of exports to Japan.

Since no good deed goes unpunished, of course, the litigation-happy folks at the Sierra Club are trying to block this action because they are afraid of the environmental consequences of natural gas production, specifically water contamination (so far unfounded) and leakage of emissions into the air (so far insignificant).

The WaPo is strong on this front:

Though environmental groups worry about hydraulic fracturing, the process drillers use to extract unconventional gas, the right response is to push for proper oversight for all energy firms, not to punish one company for trying to provide a reasonable service that others will succeed in furnishing in  coming years.

And the Post is equally good on the benefits of natural gas exporting, while acknowledging the fears of some:

Though it’s possible that allowing exports might raise natural gas prices somewhat in America, doing so would also improve the country’s trade deficit, produce returns on domestic energy projects, increase state and federal tax revenue, support construction and maintenance jobs, reduce the leverage of gas-rich international bullies such as Russia, provide nations such as Japan a lower-emissions alternative to burning lots more coal and oil, and, as Japanese Prime Minister Yoshihiko Noda indicated at the White House last week, tighten trade ties with America’s leading Asian ally.

The fact is that a little upward pressure on prices would be a good thing.  Natural gas production in shale fields is currently uneconomic; there’s plenty of room for price growth to ensure stable supplies while maintaining affordability for consumers.  A new export path for the US sector is in the national interest on multiple levels.

“Oil and foreign policy wonks should be celebrating their success in cutting oil exports. Instead, I hear consternation. The goal in Washington and Brussels was always to cut Iran oil exports to the minimum, “but”, as a senior US diplomat told a recent gathering, “not too fast” to avoid unsettling the market. So far, the cut is too fast and too wide.

Iran oil exports dropped last month by around 300,000 barrels per day, with production falling to a 10-year low. The country’s oil production falls seasonally in the spring as refiners undertake maintenance, but the drop in 2012 is much larger than usual. JPMorgan believes that by the summer Tehran’s oil exports will have fallen another 700,000 barrels per day. Oil traders and Gulf-based oil officials talk in private about similar export losses.”

The poor execution of sanctions, combined with Iran spitefully cutting off supplies to many EU nations in January, has helped drive up the price of crude in recent months, to the detriment of our economic recovery.

The Islamic Republic’s President, Mahmoud Ahmadinejad, has remained defiant against sanctions, stating “We have as much hard currency as we need and the country will manage well, even if we don’t sell a single barrel of oil for two or three years.” Iran’s recent actions don’t reflect this reality. Blas reported on Wednesday that the nation is attempting to tempt its customers to continue buying oil by offering “discounts” through easy credit. Numerous EU nations as well as Turkey, Japan, South Korea, and China, have all announced sharp cutbacks in their purchases of Iranian crude, (with the exception of Greece, whose sovereign debt crisis has left it suffering a shortage of willing oil suppliers, and has dramatically increased its purchases—the topic of which was the subject of a recent SAFE intelligence report). The fact that Iran is now offering discounts on its oil through relaxed credit terms is a testament to its current desperation. NPR reports that Iran will officially enter into talks about its nuclear program with member nations of the U.N. Security Council in Istanbul this weekend.

It is unclear how productive these talks will be. It is possible that, as has been observed in the past, Iran will simply complain about how the West is treating it. Needless to say, although the sanctions are clearly having the desired effect, there’s virtually no way to cut off a major oil supplier without threatening the global economy. This is not a matter of enacting sanctions in the perfect way (probably an impossible task) but a matter of taking real steps to sever our oil dependence once and for all.

A Tuesday OpEd in the Wall Street Journal, “The End of the Saudi Oil Reserve Margin,” by Cambridge professor and author Jim Krane illustrates how Saudi Arabia’s space capacity has frequently enabled U.S. military interventions in the Middle East, as the Saudis have always been capable of compensating for disruptions. As Krane writes, “the idea is to have your cake and eat it-to meet U.S. foreign policy goals without disrupting oil markets and antagonizing the American motorist.” The Saudi safety net, which the United States has relied on in the past, simply cannot exist indefinitely, and the article highlights some truly frightening facts. Saudi energy demands are increasing, and disproportionate. Domestic electricity demand is rising 10% per year in the kingdom, which now consumes one quarter of its oil production. Saudi Arabia now consumes more oil than Germany, which has triple the population and an economy almost five times as large. London’s Chatham House estimates Saudi Arabia will be a net importer of petroleum as early as 2038.

Saudi Arabia’s current crude oil production rates are currently at a three decade high (10mbd), and the IEA estimates that the kingdom’s crude capacity currently stands at 11.88 million barrels per day. This means Saudi spare capacity is a mere 1.88mbd, still over half of OPEC’s total spare capacity, estimated to be 2.75mbd. Meanwhile, American and European oil demand is down, American production is up, American crude oil imports are down, and yet there’s no respite in oil prices, with Brent crude remaining above $120 this week. Indeed, the Wall Street Journal reported that the ballooning price of Brent crude futures have reached over $30 above the cost of contracts for delivery in 2018. Democrats are critical of “speculators,” who are perceived to have driven the gulf in oil prices, arguing the current crude oil market currently resembles the housing market before the 2008 crash. Another major factor driving the high prices is the “risk premium” stemming from instability in the Middle East, as well as growing demand from emerging markets. We are not expecting this trend of high prices and increasing volatility to change in the near future. The International Energy Agency estimates that global oil demand will reach a record 91.1 million barrels per day in Q4 2012, a 1.4% increase from the same period in 2011.

Due to Greece’s ongoing debt crisis, many of its former suppliers of crude oil—particularly Russia—are no longer willing to risk trading with a country struggling to pay its bills. Consequently, Greece has grown increasingly desperate to secure its energy needs. Iran, increasingly desperate for customers to buy its crude oil as it faces sanctions from the European Union and United States, has increased its share of Greek petroleum supplies from 14 percent in 2010 to 53 percent in Q3 2011. Additionally, Greece has been depleting its strategic petroleum reserves—a move which violates the conditions of its membership in the International Energy Agency and the European Union. Both organizations stipulate member states must maintain strategic oil stocks to compensate for up to 90 days of imports or consumption in the event of emergency supply disruptions.

The situation severely complicates international efforts to deter Iran’s nuclear program. Greece’s desperation undermines transatlantic solidarity on Iranian sanctions, and weakens the case for other nations such as Spain and Italy, which import substantial quantities of Iranian oil (16 percent and 13 percent respectively in Q3 2011), to continue pursuing alternative petroleum supplies. These three nations could initiate a concerted lobbying effort to weaken the EU’s sanctions. Furthermore, the combination of Greece’s fragile economic state and heavy dependence on Iranian oil leaves it an open point of vulnerability. On February 25, it was reported by Iran’s Fars news agency that Iran had refused to load a Greek oil tanker, sending it back empty. Although this report is unsubstantiated, it underscores Iran’s ability to exploit Greece’s position and retaliate against Western sanctions on Iran.

The complete analysis of the situation, as well as SAFE’s recommendations to mitigate the situation, can be found here in the latest intelligence report, “Greece’s Debt Woes: Deepening their Reliance on Iranian Oil.”

Gold writes:  A couple of years ago, natural gas was touted as a bridge fuel to a renewable-energy future. But the bridge is looking longer and longer, spanning decades into the future. Is gas still a bridge, or a detour? Will it keep renewables from reaching viability that much longer?

Gold quotes venture capitalist Vinod Khosla, who has bet heavy on alternative energy sources and spent years lobbying for supportive state and federal policies, as calling shale gas “a black swan.”  Now, black swans can be good, but high-impact surprises usually aren’t.  In this case, if you are long on renewables, you are feeling pain with low natural gas prices.

If you are a consumer, or somebody who is elected by them however, you’re liking low energy bills:

California Gov. Jerry Brown said gas could help his state meet aggressive goals for generating a third of its power from renewables. The low cost of natural gas is helping offset the higher cost of wind and solar. It’s helping prevent “sticker shock,” he said.

That is close to a traditional role for natural gas in the electricity system — providing load-smoothing electrons that fill the gap when its cloudy and the wind isn’t blowing.  But what about abundant natural gas as baseload power?  What if it crowds out renewables altogether, rather than supplementing them?  Here’s Bill Gates on that prospect:

Having so much natural gas is “phenomenal,” he said, “if you put aside climate change.”

The idea that natural gas use is bad for the climate has been a recent, ahem, discovery.  Back when natural gas was thought of as a substitute for coal — and that being only the coal needed after aggressive efficiency and conservation measures were adopted — we always heard that burning natural gas for power emitted half the greenhouse gases that burning coal releases.  Which is true.

But now that natural gas production and usage is far more robust, enviros are concerned about two things:  1) displacing truly clean fuels like renewables — who emit negligible GHGs on a life-cycle basis (counting wind turbine or solar cell production activities) — and, in a more recently expressed worry, 2) how much methane “leaks” during the production and transport of the gas to the combustion facility.  Since methane is such a powerful GHG — 25 times more potent than CO2 — even a small leakage rate will have a big climate impact.

So, is focusing our electricity generation on natural gas a good thing?  Depends on your metric.

The kingdom’s oil minister insisted this week that oil markets are amply supplied and that it stands ready to boost output. Its council of ministers asserted that excessively high petroleum prices threaten the global economy and that a downturn would lead to an abrupt pullback in prices, hurting the interests of oil exporters and consumers.

 Last week, the transport arm of state-owned Saudi Aramco booked at least nine supertankers — far more than usual — for shipments to the United States, according to traders and Lloyd’s List. Each tanker can carry 2 million barrels of oil.

 And the Saudi oil minister, Ali al-Naimi,told reporters in Doha, Qatar, on Tuesday that the kingdom was producing 9.9 million barrels a day, about three-quarters of which is exported.

 Yet oil markets remain unimpressed. On Wednesday, the price of the West Texas Intermediate grade of crude oil for May delivery rose $1.20 to $107.27 a barrel — about where it was a week earlier. Expensive crude is driving up gasoline prices — a fact the Obama team worries will hurt the president’s reelection prospects.

 “What the Saudis are trying to do is to change the psychology of the market and demonstrate that the market is well supplied,” said Robin West, chairman of PFC Energy, a consulting firm.

In a free market, the laws of supply and demand combine with open competition to produce prices that rise and fall.  Crude prices have been steadily rising — or have been stuck on near-historic highs — because of growing demand.  In a normal market that demand would be pulling new supply into the market until the demand was met and exceeded, at which point prices would begin to fall.  Then either supply drops or demand grows, and prices rise again.  A macroeconomic circle of life, as it were.

Only not for oil:

Naimi said that Saudi Arabia could boost output to 12.5 million barrels a day to meet demand but that customers are not interested in buying more than they are now.

 “We ask the customers, ‘Do you need more?’ And invariably the answer is, ‘No, thank you,’ ” he said, according to Reuters.

 Really?  How could that be?  Here’s the answer:

One major oil trader, who requested anonymity to protect business relationships, said that if Saudi Arabia really wanted to tamp down prices it could lower its asking prices and then customers might buy more. Saudi prices are adjusted monthly, but the trader said Saudi Aramco is “extraordinarily inflexible” in the terms it offers buyers.

In a free market, other competitors would undercut the Saudi price and that would force more flexibility for Saudi Aramco.  But, as some politicians can’t seem to grasp, there is no free market in oil.  That’s why folks who are normally libertarian-leaning on economic matters advocate policy interventions when it comes to energy security.

He then suggests that this disparity will widen:

In the United States, a combination of infrastructure constraints and legal impediments makes it very likely that regional price disparities will widen in coming weeks. This is probable even if the government decides to tap the Strategic Petroleum Reserve to bring down overall prices, interviews with industry experts suggest.

Sommers walks us through the global factors tightening supply and keeping prices of fuel pegged to Brent much higher than fuel pegged to West Texas that has resulted in a global benchmark of $126 a barrel on Friday, in contrast to the “American benchmark” of  about $107. :

Factors tightening supplies include harsh weather in Europe, a cutback in exports from producers like Syria, Yemen and South Sudan, growing demand from India and China, and, increasingly, international measures imposed on Iran. Because of concern about Iran’s nuclear program, the United States is restricting bank transactions with Tehran, the European Union has set an embargo on Iranian oil for July 1 and many international insurers have stopped covering tanker pickups of Iranian oil.

Then he does a nice job of explaining the market and regulatory policy drivers that account for the regional disparities, which essentially come down to this:  where North American crude can be efficiently transported and refined into gasoline, it’s cheaper than areas of the US that must rely on imported crude.

First the good news:  Crude oil production has increased sharply in Canada and in the central United States in recent years — including initial production from the Bakken Shale, an oil-rich deposit in North Dakota.

The bad news:  a bottleneck in Cushing, Okla., the midcontinent storage hub.

The bottleneck also creates a glut:  North American oil “is trading at a discount to world prices, because it is landlocked and can’t easily be transported to world markets” — or to refiners in the Northeast or the West Coast, said Andrew J. Black , president of the Association of Oil Pipe Lines. And East Coast gasoline prices reflect the higher Brent crude price, said Tom Kloza, chief oil analyst for the private Oil Price Information Service.

Why is it landlocked?  Partly it’s the directional flows in pipelines (something the Keystone project is intended to help correct).  But what about oil from the Gulf?  Why can’t we just move it around via tanker?  Well, that’s limited in part by an early 20th century law called the Jones Act.  Kind of a precursor to “Buy American” protectionist requirements.

The 1920 Jones Act requires purely domestic cargo to move on ships built in the United States, carrying the American flag and using American crews. Large tankers meeting these requirements are in service on the Alaska-California route, but few are available for additional shipping, according to government reports.

The moral of this tale?  More domestic production does make a difference in prices at the pump.  And well meaning, albeit antiquated, laws do too, but in the wrong direction.