Keystone XL Needed Now More than Ever

The American people understand the benefits of the Keystone XL Pipeline. Unfortunately, the Obama administration continues to play politics with this important energy project.

On the positive side, the southern portion of the pipeline project – running from Cushing, Oklahoma, to the Gulf of Mexico (now being called the Gulf Coast Project) – finally received its final permit to move ahead.

In a statement, Russ Girling, TransCanada's president and chief executive officer, said, “Receiving this final, key Army Corps permit for the Gulf Coast Project is very positive news. TransCanada is now poised to put approximately 4,000 Americans to work constructing the $2.3-billion pipeline that will be built in three distinct 'spreads' or sections. The Gulf Coast Project will contribute millions in property taxes to counties in Oklahoma and Texas, money that can be used to build roads, schools and hospitals.”

But the real news remains that TransCanada is still waiting on the Obama administration to make another decision on the 1,179-mile part of the pipeline project that would run from Hardisty, Alberta to Steele City, Nebraska. This would bring both Canadian and North Dakota crude oil to Gulf Coast refineries.

Recall that President Obama rejected the project in January, siding with green extremists who oppose all carbon-based energy and also happen to be part of the President’s political base. At the same time, so as to not alienate another part of his base, i.e., labor unions that support the project, the White House invited TransCanada to reapply for approval with a slightly altered path. TransCanada did reapply in May.

This project should be a no-brainer. Multiple years of review by the State Department gave a thumbs up on the environmental front. The project would generate significant jobs – as noted above by the TransCanada CEO. Estimates put the boost in U.S. employment from the 80,000 jobs supported by existing oil sands projects in 2010 to 179,000 jobs in 2035, with a potential for as many as 600,000 by 2035. For good measure, this means expanded oil for U.S. refineries, and an increase in oil supplies from reliable sources.

As noted by API Refining Manager Cindy Schild, “There is no reason to further delay this critical jobs and national security project. With high unemployment and continued instability in the Middle East – approval of this pipeline will help our economy and help put our energy future back into our own hands.”

In a statement, TransCanada added: “The pipeline will transport growing supplies of U.S. crude oil to meet refinery demand in Texas. Gulf Coast refineries will be able to access lower-cost domestic production and avoid paying a premium to foreign oil producers, reducing cost and the United States' dependence on foreign crude oil.”

The American people understand the potential benefits. A Washington Post poll released on July 1 asked if the U.S. government should approve the pipeline project. Among adults in general, 59% said yes and 18% no, and among registered voters, it was 62% in the yes column and, again, 18% no.

Small business owners, perhaps more so than anyone else, understand the need for affordable, reliable energy, as they struggle in a tough economy while figuring out how to wrestle with high and uncertain energy costs.  In an April 2012 survey conducted by SBE Council, 72% of small business owners said high energy prices were impacting their firms – a shocking 43% said if gas prices remained high or shot higher the survivability of their business was at stake.

It’s time for the Obama White House to push aside the politics, and do something positive for the U.S. economy by approving the Keystone XL Pipeline project.

_______

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.

Not-So-Happy Energy Anniversary

Anniversaries can be funny things. Some carry true meaning; others not so much. And there are times when anniversaries provide a reminder of unfulfilled promise.

That last case applies to the one-year anniversary today that was noted by Mark Tapscott, editorial page editor of The Washington Examiner. Tapscott wrote:

Tuesday is the one-year anniversary of President Bush lifting the executive branch ban on oil and natural gas exploration and production from the Outer Continental Shelf (OCS) off the U.S. coastline…

Not much has happened in the year since Bush acted, thanks to the Obama administration's Interior Secretary, Ken Salazar, the President's allies in the environmental movement, and congressional Democrats like House Speaker Nancy Pelosi who appear determined to stop all energy production in the U.S. that doesn't involve windmills or solar panels…

Salazar is slow-walking the OCS process, a federal panel has put the existing OCS/western lands bidding on hold pending court challenges, and the Obama White House is pushing the Waxman-Markey cap-and-trade anti-global warming bill that will further suffocate domestic energy exploration, production and innovation.

Tapscott’s entire piece should be read. It is depressing and right on target.

The Bush administration certainly can be faulted for waiting so long to take this important step last year. But the Obama administration and current Congress, as Tapscott correctly noted, are explicitly hostile to fossil fuel energy exploration and development, and our economy is paying and will pay for the foreseeable future a heavy price for such blind ideology.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Oil, Gas and Waxman-Markey Legislation

The U.S. House of Representatives is scheduled to consider the Waxman-Markey energy/climate legislation – or the American Clean Energy and Security Act of 2009 – on Friday, June 26. Among the legislation’s many measures that would raise energy costs are a massive emissions cap-and-trade regulatory scheme, and renewable mandates on electricity generation.

The oil and gas industry correctly warns Congress about the ill effects of Waxman-Markey. In a June 23 letter to Congress, Jack Gerard, president and CEO for the American Petroleum Institute, makes three important points:

• “As independent analysis suggests, this legislation will drive up consumer prices for gasoline and other fuels. It also will create huge disincentives for the production of America’s abundant natural gas resources and force jobs and productive capacity overseas.”

• “An analysis of a Congressional Budget Office report indicates that it could add as much as 77 cents to the price of a gallon of gasoline over the next decade. And according to the Heritage Foundation, this legislation could cause gas prices to jump 74% by 2035. That means, at today’s prices, gasoline would be well over $4 per gallon.”

• “At a time that we can least afford it, these provisions and others have the effect of driving up energy costs, creating a competitive disadvantage for American business, and imperiling thousands, if not millions, of jobs. The oil and gas industry, alone directly and indirectly supports 6 million American jobs. These jobs and their economic productivity should not be jeopardized.”

All small businesses and their employees would suffer due to higher energy costs if Waxman-Markey becomes law, and the many small firms in the oil and gas industry would have their very existence placed in peril.

Waxman-Markey is bad economics and bad legislation.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Where Do We Get Our Energy?

As the debate over energy policy – most certainly including the consideration of a cap-and-trade regulatory scheme – proceeds, it pays to keep in mind exactly where the U.S. gets its energy. That is, from what energy sources?

According to the Energy Information Administration, primary energy use in 2007 broke down as follows:

• 39% from petroleum,

• 24% from natural gas,

• 23% from coal,

• 8% from nuclear power,

• 7% from renewables.

By the way, when looking at solar and wind within the renewables category, solar power accounted for 0.07% of U.S. energy usage in 2007, and wind for 0.35%.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Obama’s Energy Agenda

No matter how you come at it – from an environmental or energy cost/supply point of view – President Obama’s energy agenda just doesn’t add up.

That was made crystal clear in an excellent piece in the March 2 D.C. Examiner by Iain Murray, who is the Director of Projects and Analysis and Senior Fellow in Energy, Science and Technology at the Competitive Enterprise Institute.

Consider the following key points from Murray:

• “One of wind power’s biggest shortcomings is the simple fact that the wind does not blow all the time, especially on hot days when electricity is needed for air conditioning. The wind industry unspoken secret is that to make up for this inbuilt shortfall, it needs backup power generation facilities, which use fossil fuels, mostly natural gas. So the supposed benefit of wind – carbon-free electricity – is an illusion. Solar has the same problem, as the sun doesn’t shine all day.”

• “Now what about the cap-and-trade scheme? According to the Congressional Budget Office, the President’s budget includes revenues from the auctioning of carbon permits by 2012, probably reaching $300 billion by 2020. Of this, only $15 billion would be invested in alternative energy in the form of spending and tax incentives. The rest would be rebated back to consumers who have been forced to pay more for energy as a result of the program. In other words, the government will put us all on energy welfare. And as rebate schemes involve overhead costs such as employing bureaucrats to administer the schemes, the rebates will never cover the full amount of our increased costs.”

Read the entire piece, as Murray makes additional points that must be kept in mind as we wade further into the energy policy debate.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Celebrate Coal!

I love coal and love the following event being sponsored by the Competitive Enterprise Institute. Here's the group's news release:

Celebrate Coal! Rally Announced for Monday

Demonstration Will Counter Negative Propaganda of Capitol Power Plant Protesters

A rally to Celebrate Coal! and Keep Energy Affordable will be held in front of the Capitol Power Plant on Monday, March 2nd, from 1 to 3 PM, the Competitive Enterprise Institute announced today. Celebrate Coal! and Keep Energy Affordable is designed to counter the negative propaganda of Capitol Climate Protection’s protest scheduled for the same time in a park near the Longworth and Rayburn House Office Buildings.

CEI has applied to the U. S. Capitol Police for a permit to hold the rally in front of the Capitol Power Plant on the south side of E Street, S. E., between South Capitol Street and New Jersey Avenue, S. E. The District of Columbia Metropolitan Police have also been notified that the rally will be held on the north side of E Street if the Capitol Police deny the permit. The anti-coal protest group, Capitol Climate Protection, has apparently not applied for a permit to protest around the Capitol Power Plant.

“The goal of Celebrate Coal! is to publicize the colossal benefits of coal-fired power and the need for access to affordable energy. If the anti-coal zealots are allowed to prevail politically, electric rates will skyrocket for most Americans and many jobs will be lost in energy-intensive industries as a result of higher power prices,” said Myron Ebell, Director of Energy and Global Warming Policy at CEI and one of the event’s organizers.

CEI invites supporters of affordable energy to attend the rally to Celebrate Coal! and Keep Energy Affordable. For further information, contact Myron Ebell at mebell@cei.org or (202) 320-6685 (cell phone).

When: 1-3 PM, Monday, March 2nd.
Where: E Street, S. E., between South Capitol Street and New Jersey Avenue, S. E.
Metro: Capitol South on the Orange and Blue Lines. From the Metro Station exit at C Street and First Street, S. E., walk two blocks south on First Street (away from the House Office Buildings and Capitol), then turn right on to E Street, S. E. and walk one block west, then cross New Jersey Ave, S. E. The rally will be on the south side or the north side of the street.

Good stuff. And important for our economy.

Ramong J. Keating
Chief Economist
Small Business & Entrepreneurship Council

More on Impact of Ethanol

A study from economist Yonas Hamda at South Dakota State University served up some additional findings on the impact of corn-based ethanol.

According to the university’s research report, Hamda found:

• “Ethanol production used less than 5 percent of the nation’s corn in 1990-91, or 333 million bushels, but used as much as 24 percent — 3.1 billion bushels — by 2007-08.”

• “The increasing rate of corn for ethanol use has affected the availability of corn for feed and exports.”

• “About 60 percent of South Dakota’s corn went into ethanol production by 2007-08, the highest proportion of any state. In Iowa the figure was 50 percent; in Nebraska, 40 percent; and in Minnesota and Illinois, 30 percent.”

• The level of South Dakota’s corn production linked to ethanol “implies a heightened level of dependency and vulnerability of South Dakota’s agriculture economy to the industry.”

There are three negatives at work here. First, the unmentioned, but extensive, taxpayer subsidies received by ethanol producers, with no benefit for the environment or the economy. Second, the higher food costs resulting from corn production being diverted to or expanded for ethanol. Third, greater reliance of farms, businesses and regional economies on an industry that cannot be sustained in the open market, and must be supported by government.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

A Step Back on Energy

Well, while apparently at least willing to consider offshore drilling, Interior Secretary Ken Salazar reversed course on oil and natural gas leases in Utah.

A Bloomberg report captured three views on the matter.

The first:

Interior Secretary Ken Salazar said he is nullifying oil and natural gas drilling leases on about 130,000 acres in Utah because they are near national parks and questions have been raised about environmental reviews.

The second:

“I see this announcement as a sign that after eight long years of rapacious greed and backdoor dealings, our government is returning a sense of balance to the way it manages our lands,” actor and director Robert Redford, a trustee for the Natural Resources Defense Council, said in a statement.

The third:

“We wonder why the administration is implementing policies that will limit economic development in the West, decrease energy security and make addressing climate change even more difficult,” Kathleen Sgamma, director of government affairs for the Independent Petroleum Association of Mountain States, said in a statement.

So, who is right?

Well, given that the regions are not in and will not affect national parks, and the solid environmental record exhibited by the oil and gas industry over recent decades, it seems pretty clear that the Obama administration is pandering to groups that view expanded domestic energy production as examples of, in Mr. Redford’s words, “rapacious greed.”

Meanwhile, Ms. Sgamma is generally on the mark.

Consumers and small businesses will benefit from expanded domestic energy production. This step in Utah is not good news on that front.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

A Happy Note on Energy

OK, the economy stinks. It’s easy to get depressed. Too easy.

So, while cruising around the Internet, I found optimism in a Financial Post column by Lawrence Solomon from July 12, 2008. It’s titled “Abundant energy will power future growth.”

Solomon puts the supply of energy resources in proper perspective, and at least on this point, there is nothing to be down about. This is a MUST read.

Solomon noted, for example:

Never before in human history has energy been accessible in greater abundance and in more regions, never before has mankind had more energy options and faced a brighter energy future.

Take oil, the scarcest of the major energy commodities. In the Americas, proven oil reserves have increased from 170 billion barrels to 180 billion barrels over the last two decades, according to the 2008 Statistical World Review from British Petroleum. In Europe and Eurasia, proven oil reserves almost doubled, from 76 billion barrels to 144. Africa's proven oil reserves did double, from 58 billion barrels to 117. Even the Asia Pacific region, where China and India are reputed to be sucking up everything in sight, has increased its proven reserves. And the Middle East, the gas tank of the world, shows no sign of slowing down -- its reserves soared by almost 200 billion barrels, from a whopping 567 billion barrels to a super-whopping 756…

Most of the oil we know about lies in the well travelled portions of the globe. But most of the world remains unexplored -- the interiors of Africa, Asia and South America have seen relatively little oil exploration. Oil exploration in the oceans, too, is in its infancy. For all practical purposes, mankind has limitless oil supplies available to it. The story is similar for natural gas and coal, the other major nonrenewable sources of energy.

Thanks, Lawrence, I needed that.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Pro-Offshore Drilling in Santa Barbara

Many argue that the 1969 oil spill off the coast of Santa Barbara, California, gave rise to the modern-day environmental movement. That spill certainly was the genesis of the current ban on energy development covering large U.S. offshore areas, as well as on many federal lands, such as ANWR.

But that spill happened four decades ago, and the oil industry obviously has changed dramatically in terms of the technology used to drill for oil. Quite simply, it’s safer and more efficient. This reality may be starting to seep into the energy debate.

Indeed, consider what happened on Tuesday, August 26, in Santa Barbara, California, as reported by the Los Angeles Times:

A divided Santa Barbara County Board of Supervisors voted Tuesday in support of offshore drilling, after an impassioned daylong hearing in which this year's record gas prices trumped the memory of a disastrous oil spill.

By a 3-2 vote that broke along geographic lines, supervisors agreed to send a letter to Gov. Arnold Schwarzenegger urging him to change state policy and "allow expanded oil exploration and extraction" off the county's coast…

"Unless you arrived here on a horse or walked or rode a bicycle, you are part of the oil industry," said Supervisor Joni Gray before voting in favor of the measure. "All we're doing is asking the state to reexamine their stand on abandoning any kind of offshore drilling."

If that can happen in Santa Barbara, perhaps Congress can wake up to the economic and technological realities of energy in the 21st century.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Forward-Looking Energy Markets

Markets are forward looking. That is, expectations about the future affect market prices, profits and investments.

Politicians who oppose opening up offshore areas and federal lands now off limits to energy exploration forget this simple fact of economic life. They assume that oil prices, for example, will not be affected until oil from these areas actually hits the market. They, of course, are incorrect.

That point is made by Don M. Chance, a professor of finance at Louisiana State University, in an August 26 op-ed in Investor’s Business Daily. The entire article warrants reading. But we’ll highlight the following here:

Certainly increased drilling will not bring an immediate increase in the supply of oil. But many people, even so-called experts, believe that the effect on the pump price would not be felt until the oil is actually at the pump, possibly years later.

In fact, the price will fall well before the first hole is drilled. Even the possibility of increased drilling will bring down the price of oil. It already has.

Almost everyone knows that supply and demand determine price in a market. But that knowledge seldom goes beyond understanding how supply and demand themselves are determined.

The belief that the current quantities demanded and supplied are the sole determinants of price misses an important point. Both current and expected future demand and supply interact to determine the quantity demanded and supplied in the current marketplace…

If intentions are not backed by actual drilling, prices will rise. The market will tolerate a period of discussion, but if the drilling naysayers win the debate, prices will head up and sharply. The rise and fall of oil prices are likely to mirror this debate.

Speaker Nancy Pelosi is arguably the most powerful woman in America. But if she wants to see her real power, she should bring the drilling issue to a vote. Only a Fed chairman could have so much impact on market prices.

Excellent points that are too often forgotten in the current energy debate.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Lessons from Alaska’s Windfall Profits Tax

Just because someone else does something stupid, doesn’t mean you should do it as well.

Most parents, at some point in time, have told their children something along these lines. I heard it from my mother and father, and I’ve said it to my children as well.

The same lesson applies to public policy.

The August 10 Seattle Times ran a piece – titled “Windfall tax lets Alaska rake in billions from Big Oil” by Angel Gonzalez and Hal Bernton – worth reading about the state of Alaska’s tax on oil companies. Alaska politicians love the tax – in fact, they recently hiked the levy – but does it make any sense in terms of sound energy policy?

The article explained: “Over the opposition of oil companies, Republican Gov. Sarah Palin and Alaska's Legislature last year approved a major increase in taxes on the oil industry — a step that has generated stunning new wealth for the state as oil prices soared.” This point is mistaken. Taxes do not generate wealth. Instead, by sucking resources away from the private sector, taxes discourage new wealth creation. Instead, taxes can generate more revenues for politicians to spend.

How does the tax work? The article explained: “The Alaska tax is imposed on the net profit earned on each barrel of oil pumped from state-owned land, after deducting costs for production and transportation, which are currently estimated at just under $25 a barrel. The tax is set at its highest rate in Prudhoe Bay, where the state takes 25 percent of the net profit of a barrel when its price is at or below $52. The percentage then escalates as oil prices rise over that benchmark. Alaska gets about $49 of a $120 barrel, not counting other fees. ConocoPhillips said that in total, once royalty payments and other taxes are added in, the state captures about 75 percent of the value of a barrel. An accounting benefit eases the sting for oil companies. They get a huge deduction on their state taxes when calculating their federal taxes.”

But a tax deduction is not a tax credit, for example. The companies only recapture a portion of the state tax on their federal tax returns. And since taxes paid in other states also are deductible, Alaska’s tax burden is still massive.

What’s been the impact on the Alaska budget? “Alaska collected an estimated $6 billion from the new tax during the fiscal year that ended June 30, according to the Alaska Oil and Gas Association. That helped push the state's total oil revenue — from new and existing taxes, as well as royalties — to more than $10 billion, double the amount received last year. While many other states are confronting big budget deficits because of the troubled economy, Alaska officials are in the enviable position of exploring new ways to spend the state's multibillion-dollar budget surplus. Some of that new cash will end up in the wallets of Alaska's residents. Palin's administration last week gained legislative approval for a special $1,200 payment to every Alaskan to help cope with gas prices, which are among the highest in the country. That check will come on top of the annual dividend of about $2,000 that each resident could receive this year from an oil-wealth savings account.”

Sounds great, right?

Well, as is always the case when taxes are increased, there are costs. It was reported: “The industry, however, warns new taxes are already discouraging future exploration and development in newer, more expensive projects needed to boost waning production in Alaska's oil patches. ‘Clearly, from the investor standpoint, Alaska has become a less attractive place to invest exploration and production dollars,’ said Marilyn Crockett, executive director of the Alaska Oil and Gas Association.”

Is this just talk?

Consider the following: “Still, oil-industry officials contend the tax already has affected investment decisions. BP Alaska, which runs Prudhoe Bay, said earlier this year that it had delayed the development in the western region of the North Slope as a result of the tax. ConocoPhillips cited the same reason for scrapping a $300 million refinery project. ‘What the tax has done is take away all the upside,’ said Doug Suttles, president of BP Alaska. The U.K.-based oil company paid more than $500 million in taxes to Alaska last quarter — far more than it earned in profits from Alaskan oil, according to Suttles. Investment dollars are flowing instead to places that have a better return, like the massive deep-water projects offshore in the U.S. Gulf of Mexico, where ConocoPhillips said the government take equals less than 50 percent of the barrel. In July, BP announced it would begin developing the Liberty oil field, a $1.5 billion project expected to yield 100 million barrels of oil, located on federal lands in Alaska. If the project had been located in state lands on the North Slope, ‘I don't think we'd have been able to make that investment,’ Suttles said.”

Alaska politicians can try to justify this formidable tax in all kinds of ways, but the economic realities of high taxes on energy production cannot be wished away. It’s straightforward: Higher taxes on energy production serve as a restraint on and disincentive to energy production.

Federal elected officials, as well as state lawmakers in energy rich states like Alaska, should be focused on how they can remove governmental barriers to energy production, such as reducing tax and regulatory burdens. Federal and state taxes – especially a tax as exorbitant as Alaska’s oil tax – should be targeted for reduction.

The lesson from Alaska is not that the federal government can impose a windfall profits tax with impunity. Instead, the lesson is, like mom and dad said, when others do something stupid, don’t do the same thing.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Prices at the Pump

The Hoover Institution in California serves up interesting “Facts on Policy.” The latest deals with the price of gasoline.

The piece serves up data showing that the increase in the price of gasoline from 2000 to 2008 is overwhelmingly due to the rising price of crude oil.

In addition, it shows where current gas prices fit historically:

• Gasoline prices are currently at both nominal and real highs since 1920. Before 2008, the real price of gas was highest in 1980, when it cost $1.25 per gallon in nominal dollars ($3.29 in 2008 dollars). The previous peak was in 1922, when it cost $3.22 per gallon in 2008 dollars ($.25 in nominal dollars).

• The real price of gasoline hit rock-bottom prices in 1998 and 1999, when a gallon of gasoline cost $1.10 and $1.19 (2007 dollars) per gallon. This is the lowest gasoline prices have been since 1920.

What also needs to be kept in mind are the various factors that go into the price of crude oil, including expanding demand in developing nations; the fall in the value of the dollar; inflation and inflation expectations; political uncertainties at home and in other oil producing regions; war; and governmental regulation (current and threatened), taxes and restrictions on energy exploration and production.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Energy, Climate Change, Politics and Economic Reality

Peter Huber, senior fellow at the Manhattan Institute, serves up an interesting column in the August 11 issue of Forbes titled “The Carbon Curtain.”

In essence, the piece contrasts the politics of global warming with the economic reality of people’s energy needs. Huber is working from analysis done by Vinod K. Dar, who runs Dar & Company, an energy industry consultant.

A key point in Huber’s column is the following:

To judge by actions, not words, the carbon-warming view hasn't come close to persuading a political majority even in nations considered far more environmentally enlightened than China and India. Europe's coal consumption is rising, not falling, and the Continent won't come close to meeting the Kyoto targets for carbon reduction. Australia is selling coal to all comers.

On the far side of the environmental curtain China already mines and burns more coal than any other country. Together, China and India control more than one-fifth of the planet's vast coal reserves. Dar predicts--very plausibly, in my view--that the two countries may fire up a new coal plant as often as once a week for the next 25 years, adding about twice as much coal-fired generating capacity as the U.S. has today. Persian Gulf states are planning significant coal imports, because coal generates much cheaper electricity than oil or gas.

In developing countries the political survival of the people at the top depends on providing affordable fuel for kitchens, farms, fertilizer plants, steel mills, highways and power plants. Oil and coal are the only practical fuels at hand.

Huber concludes by asking: “So does the climate computer have a real audience, or is it really just another bag lady muttering away to herself in a lonely corner of the intellectual park?” Good question.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Offshore Drilling, the States and the Environment

The need to boost energy exploration and development should be pretty obvious to all given the run up in energy prices in recent years. Yet, many politicians still oppose lifting the congressional ban on energy development in most U.S. offshore areas.

Much of that opposition comes from coastal state politicians and environmentalists. Given that, it’s well worth reading a July 29 report from Stateline.org titled “Louisiana touts its offshore drilling.”

At one point, the article states the following about offshore oil drilling and the state of Louisiana:

The $70 billion industry employs more than 320,000 people in the state. Unemployment rates in some coastal parishes hover around 3.5 percent, compared to 5.5 percent nationally. And the oil industry supports both the only deep-sea oil port in the United States and a Gulf of Mexico port that handles more vessels than even the Mississippi River. While states on the east and west coasts debate whether to drill for offshore oil and natural gas, Louisiana and three other Gulf Coast states hold up their offshore drilling operations as proof that they can produce oil and gas without hurting the environment.

And later, the piece concludes:

But Chris John, president of Louisiana Mid-Continent Oil and Gas Association, a trade group, said the industry’s track record during the 2005 hurricane season that brought Katrina and Rita, two Category 5 hurricanes, to the off-shore sites proved that the industry could protect the environment. The hurricanes destroyed 113 offshore platforms and damaged 447 pipelines, according to the Minerals Management Service, the federal agency overseeing offshore drilling. With those two systems coming within two weeks of each other there were no — zero — no significant oil spills on the Outer Continental Shelf. I think that in and of itself proves that the industry can go out and drill, produce and explore in an environmentally sensitive area,” he said.

These are important points to keep in mind as policymakers wrestle with this critical issue for our economy.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Arctic Energy

We could all use some good news on the energy front. Therefore, the Interior Department’s U.S. Geological survey released on July 23 was most welcome.

The quick findings:

• “The area north of the Arctic Circle has an estimated 90 billion barrels of undiscovered, technically recoverable oil, 1,670 trillion cubic feet of technically recoverable natural gas, and 44 billion barrels of technically recoverable natural gas liquids in 25 geologically defined areas thought to have potential for petroleum.”

• “These resources account for about 22 percent of the undiscovered, technically recoverable resources in the world.”

• “Exploration for petroleum has already resulted in the discovery of more than 400 oil and gas fields north of the Arctic Circle. These fields account for approximately 40 billion barrels of oil, more than 1,100 trillion cubic feet of gas, and 8.5 billion barrels of natural gas liquids. Nevertheless, the Arctic, especially offshore, is essentially unexplored with respect to petroleum.”

The point made by USGS Director Mark Myers is worth highlighting: “Before we can make decisions about our future use of oil and gas and related decisions about protecting endangered species, native communities and the health of our planet, we need to know what's out there. With this assessment, we’re providing the same information to everyone in the world so that the global community can make those difficult decisions.”

The U.S. and the rest of the world clearly need to increase energy production wherever possible. The best way to do that is not through politicians deciding to pick energy winners and losers through the subsidies game, but instead, by removing governmental obstacles and letting the market work.

Taxation Without Representation … Again!

Think it’s costly to fly on a plane or run an airline today? Well, new reports late last week made clear that it could get even pricier when flying to or from Europe.

On June 27, a New York Times report noted that the European Union reached an agreement to force airlines – including U.S. airlines – using European Union airports “to buy pollution credits beginning in 2012,” joining other industries in Europe’s emissions regulatory scheme. Here’s a particularly scary line from the report: “Including airlines in the system is the boldest move yet by Europe to stamp its environmental policies on the rest of the world.”

Airlines, of course, already are struggling under high fuel prices, and are passing along surcharges on consumers. This measure would only raise costs further.

The Times article noted that the European Parliament and individual nations must still approve the measure, but these are expected to be mere formalities. More substantively:

American officials warned that the requirements probably would be illegal under the convention governing international civil aviation. “The mandatory application of the European Emissions Trading System to U.S. airlines and airlines of other non-European countries is, we think, both contrary to international law and ultimately unworkable,” said Robert Gianfranceschi, a spokesman at the United States Mission to the European Union in Brussels.

One estimate put the cost of this plan at $4 billion. That’s a massive tax on consumers and airlines, including U.S.-based companies.

Hey, wait a minute. July Fourth provides a reminder. Haven’t we been down this path before with Europe? Yes, it was called “taxation without representation.”

Let’s hope Mr. Gianfranceschi is correct, and that these taxes never become reality. Let’s also hope that tax friendly politicians in America don’t try to do something similar in their zealous crusade against carbon emissions.

Offshore Oil and the Environment

The big reason that most members of Congress cite for opposing offshore energy exploration is the environment. They bring up a spill that occurred nearly forty years ago in California, and of course, the nearly 20-year-old Exxon Valdez accident in Alaska.

But as the experiences with Hurricanes Katrina and Rita in 2005 and the improvements made in tankers show, technology, safety and protections have improved dramatically. This is nicely reported in a June 30 cover story in Investor’s Business Daily.

The article opened:

When Hurricanes Katrina and Rita ripped through the Gulf of Mexico in 2005, they tore into the Gulf fleet and crippled or destroyed 113 production platforms and 18 drilling rigs. Wave-tossed rigs dragged moorings across the seafloor and ripped up hundreds of miles of pipelines.

But the actual subsea wells tied to the wrecked platforms suffered no significant leaks. The biggest spills were from onshore storage and a barge accident after the storms.

"Not only did we not have any significant environmental spills associated with wells from those two hurricanes," said Tim Sampson, manager of exploration and production with the American Petroleum Institute. "But we also had no accidents or injuries associated with the evacuation of all the offshore personnel."

Despite fears that new offshore drilling risks an environmental disaster, the U.S. industry has had a strong record for decades.

The entire article is well worth reading, as it does a solid job at putting things in perspective.

The U.S. desperately needs to open up offshore areas and federal lands to energy exploration, and forty-year-old arguments from radical environmentalists that hold no water should not guide policymaking.

Open Up the Waters and the Lands

Some degree of common sense seems to be creeping into the energy policy debate.

President George W. Bush has renewed his call to lift the 27-year-old ban on energy exploration and development in U.S. coastal waters. More than 80 percent of the Outer Continental Shelf is currently off limits.

U.S. Senator John McCain, the presumptive Republican presidential nominee, has reversed an earlier position, and now supports lifting the federal ban and allowing the states to decide.

Florida Governor Charlie Crist also has reversed his position, and now supports drilling off the state’s shores.

There’s nothing wrong with changing one’s mind on the policy front when it’s from a position that’s bad for the economy to one that’s good for the economy. That’s the direction McCain and Crist have moved.

Given the vast improvements in technology and operations, expanding energy development to offshore areas and federal lands currently off limits poses no environmental threats, and makes sense for struggling U.S. entrepreneurs, businesses and consumers trying to deal with skyrocketing energy costs.

Unfortunately, McCain apparently still opposes drilling in ANWR.

And much of Congress appears more interested in imposing a so-called windfall profits tax on oil companies, which will only serve to further jack up energy costs.

Similarly, U.S. Senator Barack Obama, the presumptive Democratic nominee for president, seems intent on turning his back on economic common sense by supporting higher taxes and opposing energy exploration offshore and in ANWR.

More work remains to be done in advancing economic common sense on the energy front.

Oil on the Way Down?

It’s easy to become fatalistic as the price of oil climbs ever higher. Many people assume that the price will never come back down and drivers are destined to pay at least four or five bucks for a gallon of gas, or more, far into the future.

But the price of oil is not destined to go in any particular direction, and a case can be made that it could drop in the near future.

For example, the June 4 Wall Street Journal ran a story titled “Is Oil the Next ‘Bubble’ to Pop?’” That piece noted:

Is there an oil bubble that is about to burst? Some big voices on Wall Street think so, predicting the oil market could tilt sharply south soon if the U.S. dollar strengthens and demand for crude oil weakens in some key consuming countries. Tightness on the supply side could also ease, they say, as some big refineries and new oil fields come onstream over the next few months and the outlook for the Chinese economy clouds over.

Or, consider what economist Alan Reynolds wrote in an op-ed that ran in the June 6 New York Post. He makes the case for a coming fall in the price of oil:

Two-thirds of petroleum in the United States is used for transportation - but half of the transportation sector's fuel flows into commercial trucks, trains, buses, airplanes and ships. As a result, only 44 percent of each barrel of oil is used to produce gasoline in this country, and some of that gasoline fuels business - delivery vans, landscapers' trucks, fishing boats, industrial and farm machinery, etc.

Most crude oil is used to produce diesel fuel for trucks, ships and trains, heavy fuel oil for industry, aviation fuel, asphalt, home heating oil, propane, wax, and innumerable petrochemical products ranging from detergents and drugs to synthetic fabrics and plastic.

In short, a huge share of crude oil is used to produce and distribute industrial products. That explains why the price of oil is extremely cyclical - that is, it tends to rise during economic booms and fall during contractions. It dropped 44 percent in the last recession (from November 2000 to November 2001), 48 percent from October 1990 to January 1992 - and 71 percent from July 1980 to July 1986.

Oil prices have a huge impact on producers' cost of production - profits and losses - not just on consumers' cost of living. Firms that can't raise prices will find profit margins squeezed - and will have to cut back on production and jobs. Even if some producers of energy-intensive products can raise prices enough to cover higher energy costs, they'll nonetheless sell fewer of their products because of those higher prices. So they too will have to cut back on production and jobs. Nine out of 10 previous postwar recessions began shortly after a big spike in the price of oil. Yet those recessions always slashed oil prices dramatically. People who have been predicting both a nasty US recession and $200 oil prices are contradicting themselves.

Unfortunately, the Reynolds’ scenario isn’t exactly cheery on the economy in general, but it is a realistic assessment of what happens to the price of oil as the economy grows and slows.

And the Journal’s point on the dollar is critical to keep in mind.