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 Environmental Protection Agency has dropped its claim that an energy company contaminated drinking water in Texas, the third time in recent months that the agency has backtracked on high-profile local allegations linking natural-gas drilling and water pollution.

On Friday, the agency told a federal judge it withdrew an administrative order that alleged Range Resources Corp. had polluted water wells in a rural Texas county west of Fort Worth. Under an agreement filed in U.S. court in Dallas, the EPA will also drop the lawsuit it filed in January 2011 against Range, and Range will end its appeal of the administrative order.

WSJ readers may have gloated a bit on EPA “losing” here, but the real import is that a  “growing number of industry, academic and environmental experts say that while drilling can cause water contamination, that can be avoided by proper use of cement seals and other safety measures.”  And who is better positioned to ensure such local safety measures,  EPA or the various state regulators?  

EPA itself had a reasonable perspective on the withdrawal of its claim against Range:  (I)n a statement, the agency said that settling with Range “allows EPA to shift the agency’s focus in this particular case away from litigation and toward a joint effort on the science and safety of energy extraction.” The agency said it and Range would continue to monitor water wells and share data.

And the WSJ also found a reasonable-sounding enviromentalist to spin the outcome:  “This points out why it is so critically important to get a regulatory structure in place where companies are required to do thorough, publicly available baseline testing before they get in ground.”

A regulatory structure that provides for baseline water quality conditions to be established before production begins could actually be as protective of producers as it would be informative for citizens.  And an EPA role that focuses on sicence and safety that leaves permitting and regulation to the states could be the right answer as well.

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.

We hope reporters are paying attention, particularly those who have been writing that Senate procedure “requires” 60 votes.  No, 60 votes are required to invoke cloture and shut off a filibuster.  In recent years, cloture has been used as a tool by the Senate majority to limit debate and prevent debate and voting on difficult amendments.  To be sure, the Senate minority has also often threatened filibuster to force a supermajority, but when was the last time we really saw a filibuster?  Instead, cloture has become the norm because it serves the political purposes of both parties — the minority gets to enhance its strength by forcing supermajorities, and the majority party gets to protect its vulnerable members from controversial votes.

But enough about that.  The good news is that there is now a path forward, and there will be votes and debate on a series of amendments, some directly related to the transportation bill and some less so.  In the less so category — but not so less so as might first appear — is an amendent from Senator Jim DeMint (R-SC).  Senator DeMint filed, and the leaders agreed to allow debate on, an amendment to end all energy-related subsidies.  An important issue, worthy of extended and thoughtful debate — as well as committee hearings and a full legislative process — which is among the reasons opponents will give for killing it.

What makes that amendment so interesting is that it brings energy security into the transportation debate, something that rarely happens but should always be a dominant theme.  Why?  Because our transportation sector is 95%+ dependent on oil and 2/3ds of all the oil we use in America goes to the transportation sector.  In other words, you can’t talk about energy security without talking about transportation.  Kudos to Senator DeMint for recognizing that.

And that linkage is precisely why another DeMint amendment to be debated is equally problematic.  Senator DeMint proposes to “devolve federal highway and mass transit projects and their funding sources to states, allowing each state to determine their own transportation priorities.”

That’s an interesting idea, but misguided.   States do determine their own transportation priorities today, except when Congress earmarks — DeMint and others are right in their opposition to that practice.  But in general, construction priorities aren’t dictated to the states — but national needs and priorities are given additional national funding that the states then spend in accordance with those needs.  And while Senator DeMint is correct when he says that the system “is plagued by thousands of wasteful earmarks, bureaucratic red tape, and outdated funding formulas that pick winners and losers,” that’s a good reason to reform the system, not throw up our hands and just let individual states decide our national transportation policy through 50+ disparate and uncoordinated efforts.

This is especially the case given the huge macro and microeconomic toll inflicted by our transportation-driven dependence on petroleum.  While there are others, that’s reason enough for a national transportation policy and reason enough to be wary of seductive calls for devolution.

But that’s history, and the annual two-week negotiations over addressing global climate change did end on Sunday with what the WaPo called “a last-minute deal.”  The deal?  An agreement to potentially reach an agreement that would apply something called “an agreed outcome with legal force” to developing nations.  This is arguably an advance on the Kyoto Protocol, which did not require developing nations to commit to reduce their greenhouse gas emissions.   And that’s important because some “developing nations” — namely China and India — are leading the globe in aggregate emissions.  To be fair, their per capita emissions are far lower than developed nations, but that shouldn’t give them a free pass.  The key negotiating issue since the US pointed out the fundamental unworkability of the Kyoto Protocol has been  how to account for developing nations’ exploding emissions without unfairly impeding their economic growth — after all, the developed nations built their economies on cheap fossil fuels and only subsequently has the world (well, most of it) realized that there will be highly negative consequences because of it.

It remains to be seen whether this year’s climate confab really moved the ball on this point.  Host South African foreign Minister Maite Nkoana-Mashabane certainly thinks so, as the WaPo quotes him saying, “We have indeed saved tomorrow today.“  Veteran climate watcher Alden Meyer, of the Union of Concerned Scientists, had a different view, noting failure to achieve agreement on reducing the gap between expected emissions and those most scientists believe are the maximum that the climate can endure without expensive and life-threatening damage:  “There’s nothing [in the agreement] that’s going to get the world to lift its game and close that gap.”

Maybe more important news this weekend came from the Nuclear Regulatory Commission, where dysfunction apparently reigns.  Both the WaPo and the WSJ reported Saturday on four NRC Commissioners, two Democrats and two Republicans, writing to the White House accusing Chairman Greg Jaczko of  ”actions and behaviors [that] are causing serious damage to this institution.”  That quote is from the WSJ, which runs an unfortunate lead sentence (“Four of the five members . . .”) — if you didn’t already know that there are only four commissioners and a chairman, you don’t find that out until the end of the piece, so casual readers may have thought there was a hold-out.  The fact is that all four of these highly respected professionals, Democrat and Republican alike, took the trouble of airing their concerns about the NRC’s leadership to the White House.  House Oversight and Government Reform Committee Chairman Darrell Issa, not the fuming four, released the letter to the media.

The bipartisan nature of the criticism made Senator Harry Reid’s (D-NV) otherwise laudable defense of his former staffer ring a bit hollow.  As reported in the WaPo on Sunday, he called the complaints “a politically motivated witch hunt.”  We’re guessing Senator Reid meant that Chairman Issa was hunting witches, not labelling the letter such.  But since loyalty in Washington is often in short supply, we’ll give him a pass either way.  Not so the NRC as a whole, an organization too critical to our energy future to have it’s oversight confined to the weekend papers.  Oversight hearings, anyone?

• Oil production on the Outer Continental Shelf has increased from 446 million barrels in 2008 to over 600 million barrels in 2010 (an increase of over one third)
• Oil production onshore increased by 5% from 2009 to 2010, from 109 million barrels to 114 million barrels
• Oil imports have fallen 9% since 2008
• U.S. crude oil production was higher in 2010 than any year since 2003
• Lease protests have declined to 36% from 47% in 2009 (yet remain far higher than the 1% observed in 1998)

Secretary Salazar concluded his piece, “we are moving ahead with a comprehensive energy plan for the country that is enhancing our energy security, creating jobs and improving protections for the environment.”  It is refreshing to see the federal government taking these steps in the direction our country needs to ensure its energy supply, but is progress moving fast enough?  SAFE President and CEO Robbie Diamond argues more must be done to ensure our energy security.  Onshore oil production increased 5%, which is surely a positive step, but we are hoping to see that number increase dramatically in the coming years, as technology is enabling the United States to locate and extract resources previously considered unreachable.

Source: Financial Times

The evidence for this surge grows by the day.  Today, the Wall Street Journal reported that Anadarko Petroleum, which controls Colorado’s Watterberg oil field, has stated that the territory may hold over a billion barrels of recoverable oil and gas.  The company’s chairman and CEO, James Hackett, is bullish that North American production could double over the next 25 years.

He is not alone.  An analysis from consulting firm PFC energy predicts that by 2020, the United States will be the world’s top producer of well-drawn fossil fuels (Saudi Arabia would remain the number one extractor of crude, but the United States would exceed it in combined oil, natural gas, and liquid natural gas), and surpass its peak domestic production of 22 million barrels of oil equivalent, reached in the early 1970s.  In September of this year, Bentek Energy predicted that Canadian and U.S. oil production combined would reach a historical high by 2016.  As we reported earlier this month, the Financial Times is observing a pendulum swing on U.S. oil dependence, and other major news outlets have noticed the trend, as production continues to increase in Texas’s Eagle Ford and North Dakota’s Bakken Shale.

Through enhanced extraction mechanisms, and more drilling, supply and production are both increasing.  Of equal importance, so is demand.   In 2009, the flailing economy resulting in the United States reaching a 12-year low on energy consumption, but usage increased 4% in 2010 as the economy began to recover.  If economic growth is to continue, the country will need the energy resources to fuel it, and competition for global oil will increase as demand continues to surge from emerging markets.  The United States is currently the global leader in oil consumption.  It has the resources and technology to be the leader in production as well.

A political war is waging about which energy strategy will solve the nation’s unemployment blight: green energy, or fossil fuels.  There are three problems with the way this debate is framed.  First, these energy sources are not mutually exclusive.  Second, the number, type, or longevity of jobs of any given energy project can be difficult to quantify, and often change.  Third, prioritizing job creation as part of an energy strategy could come at the expense of other priorities, such as optimal utilization of fuel resources.

First is the issue of mutual exclusivity.  Increased domestic production of oil and natural gas does not preclude development of renewable energies.  True energy security comes through diversity, and the world’s largest petroleum producers—Chevron, BP and others—have been repositioning themselves as full-portfolio energy companies.  Politically, it is possible to use revenues from one energy source to fuel investment in others, as Senator Lisa Murkowski proposed in September.  “If we’re smart enough to dedicate a significant portion of those revenues for clean energy, that will finally provide the makings of a legitimate long-term energy policy — a policy where the substantial government revenues from fossil fuels are used to speed up the development of their replacements,” the Senators said. “Our best energy policy will not rely on new mandates or higher taxes — it will instead help fossil fuels work themselves out of a job.”

While the energy industry is an undeniably vital aspect of the United States economy, and it employs a significant number of people, evaluating an energy strategy entirely on its merits as a jobs program is inefficient and potentially counterproductive.    As described in The Economist,

“We want energy that is plentiful, cheap, sustainable (if not renewable), clean (relatively), safe (again, relatively), predictable, and broadly or equitably accessible. The exact balance of those concerns will be informed by contextual preferences and capabilities, but in all cases it is a balancing act and almost invariably a tricky and controversial one. So the idea of pinning our hopes for job creation on the energy sector, and goosing policy accordingly, strikes me as fundamentally misguided.”

Politicians, pundits, and strategists should maintain sight of what an energy strategy is truly designed to accomplish: it is the fuel of all sectors of the economy, but it is not an economy in and of itself.

Ms. Solomon’s lead:

“The White House has put itself squarely in the middle of a fight over a planned pipeline that promises much-needed jobs in a weak economy but upsets President Barack Obama’s environmental base.

White House Press Secretary Jay Carney said Wednesday about the Keystone XL pipeline, “You can expect that the decision that is reached will reflect [Mr. Obama's] views.

The comments signal a shift by the White House, which in the past has said the decision to approve or deny construction of the Canada-U.S. pipeline rested with the State Department.”

On one level, this shouldn’t really be news.  It is highly unlikely that any President would let his Secretary of State make an essentially domestic policy decision of this magnitude — construction of a pipeline crossing several states to transport a vital commodity  — without significant consultation throughout the Administration and ultimate sign-off by the Whtie House.

State’s Enviromental Impact Statement can — and should —  be read at http://www.keystonepipeline-xl.state.gov/clientsite/keystonexl.nsf?Open, It well describes the extent of the project:

The proposed Keystone XL Project (click here for map) consists of a 1,700-mile crude oil pipeline and related facilities that would primarily be used to transport Western Canadian Sedimentary Basin crude oil from an oil supply hub in Alberta, Canada to delivery points in Oklahoma and Texas. The proposed Project would also be capable of transporting U.S. crude oil to those delivery points. The proposed project could transport up to 830,000 barrels per day and is estimated to cost $7 billion.

Keystone is a very big deal.  And passions run high in what is becoming the poster child for the “jobs versus environment” debate.  As Ms. Solomon writes:

A decision in favor of the pipeline would risk alienating environmentalists, a core Obama constituency, ahead of the 2012 election. But the political risks on the other side might be higher: Rejection of the pipeline would likely hand a 2012 issue to Republicans, who already argue the president’s policies are hindering job creation and hurting economic growth.

It would be great if, as folks enter into this debate, they actually take a look at the EIS as prepared by the State Department.  At the end of the day, regardless of the President’s decision, it needs to be grounded in facts and not just rhetoric.

Today’s installment in the Solyndra saga is courtesy of the National Journal’s Amy Harder.  Headline:  Solyndra Was Banking on Energy Bill, E-mails Show.

Oops. 

As Ms. Harder writes: 

Solyndra could still be in business had Congress passed a comprehensive energy bill last year, recently released e-mails indicate.

A May 2010 e-mail exchange between senior Energy Department advisers . . . show Solyndra’s executives were “counting on” Congress passing an energy bill that would have included major policies promoting renewable energy nationwide.

In September 2009, when the Energy Department awarded a $535 million loan guarantee to the solar-power start-up, the administration and Democratic leaders in Congress were confident they could deliver on President Obama’s campaign promise to put a price on greenhouse gas emissions that causes climate change.

Now maybe folks are spinning this story to reporters, but this is revisionist history and has an additional problem beyond that.  First, if anybody anywhere was “counting on” Congress passing comprehensive energy legislation in either September 2009 or, worse yet, May 2010, they were in total denial about what was — or better put wasn’t — happening in Congress at the time.  The Waxman-Markey bill passed the House on a partisan vote and landed with a thud in the Senate during the summer of 2009.  A similarly uni-partisan Boxer bill was to squeek out of the Senate Enviroment and Public Works Committee in the fall — only to be quickly sunk by Senator Kerry’s announcement that he, South Carolina Republican Lindsey Graham, and Connecticut Independent Joe Lieberman were going to negotiate a new bill.  Those talks sputtered along until Senator Graham publicly walked out in February, dooming all chances for even a long-shot moderate Senate bill.

No member of the Democratic leadership was truly “confident” that they were going to pass energy and climate legislation in fall 2009.  In fact, thanks to the backlash against both the partisan health care bill and the House energy and climate bill, the main speculation was whether Democrats would lose both the House and the Senate in the 2010 elections, or just the House.  Making coal state Senate Democrats vote on a climate bill wasn’t part of the strategy for avoiding that outcome.

But let’s pretend that there was optimism about the prospects for climate legislation.  Even the most aggressive possible outcome — Senate approval of a Waxman-Markey like bill — would not have provided a new market for solar for years.  All of the modeling showed that, after a several year implementation period, some wind would have benefited from the renewable portfolio standard in the bill — but not solar.

So there’s just no way that the DOE and OMB reviewers who signed off on the Solyndra guarantee would have accepted a business plan where success was contingent on passage of some imaginary legislative solar power driver.  Maybe the email leakers think that the public image of Congress is so bad that blaming congressional inaction for the Loan Guarantee Program’s bad bet is a winner.  They should think again.

And it is a struggle to create jobs using innovative energy projects as a driver.  For good reason.  Innovative energy technologies are designed to accrue long-term benefits by enhancing our energy security and meeting environmental challenges like climate change.  Thus, it is no doubt true that, as the WaPo puts it:

A $38.6 billion loan guarantee program that the Obama administration promised would create or save 65,000 jobs has created just a few thousand jobs two years after it began, government records show.

The program — designed to jump-start the nation’s clean technology industry by giving energy companies access to low-cost, government-backed loans — has directly created 3,545 new, permanent jobs after giving out almost half the allocated amount, according to Energy Department tallies.

The Brookings Institution’s Mark Muro hits the mark with this characterization of the conflict between investing in energy innovation and pushing a jobs program, noting that various individual projects  “may have been honorable investments in technology . . . sold as short-term job creators for political reasons. . . .  Exaggerated expectations about jobs were set.”

So there are two sets of issues here.  First, lawmakers are right to raise questions about a loan guarantee that was remanded in the previous Administration and, according to OMB emails released at yesterday’s hearing, rushed in this one.  Another question is how an innovative, pre-commercial project (the criteria for the 2005-enacted loan guarantee program to which Solyndra originally applied) morphed into a shovel-ready commercial project that was just facing a recessionary credit crunch (the criteria for the 2009 stimulus-enacted amendment to the loan guarantee program throuigh which the company ultimately received funding).

While that’s the set of issues that partisan politics loves to dig its teeth into, the second set of issues is actually more important.  That is, should the government intervene in energy markets?  And if so, how? 

Many believe that government should intervene in the market because their are externalities not currently reflected by prices in that market.  These include the huge costs on the American economy of our dependence on foreign sources of petroleum and the health-related costs of our dependence on combusting fossil fuels for electricity.  (Many also add future costs of climate change, but there the consensus begins to unravel a bit.)

If one accepts those arguments, and one should if one has much facility for critical thinking, then the question is how to intervene?  The best way, according to economists, is to internalize the externalities.  We could do that through the dreaded “t-word” — by taxing fossil fuels to raise their costs to reflect true costs, and then return that money to consumers to do as they will with it.

The next best way is to subsidize innovative energy technologies, or remove barriers to their use, until their costs are lowered sufficiently so they can compete with conventional sources.  And loan guarantees, properly applied, are one of the best tools for that subsidization.

The right lesson of Solyndra is to use the tool correctly.  The wrong lesson?  Trying to do the job without the proper tool.