Subsidizing wind and solar because China and Germany are doing it

Subsidizing wind and solar because China and Germany are doing it

Here is President Obama speaking in Ohio Thursday:

We also need to keep investing in clean energy like wind power and solar power.

…  And as long as I’m President, we are going to keep on making those investments.  I am not going to cede the wind and solar and advanced battery industries to countries like China and Germany that are making those investments.  I want those technologies developed and manufactured here in Ohio, here in the Midwest, here in America.  (Applause.)  By American workers.  That’s the future we want.

The President has picked three industries and is arguing for an industrial policy to subsidize them in part because other countries are subsidizing them.

Let’s extend this logic.  Suppose China or Germany starts subsidizing the biotech industry.  Should the U.S. government subsidize American biotech firms so that “those technologies [are] developed and manufactured … here in America, by American workers?”

What if China subsidizes web development firms, Germany subsidizes auto manufacturers, France subsidizes biotech firms, Japan subsidizes advanced battery firms, Brazil subsidizes ethanol firms, and South Korea subsidizes chip manufacturers?  Should the U.S. subsidize all of those domestic industries so that we don’t cede any of them?

What if the Canadian or Mexican government were to subsidize high-tech oil production firms, or Brazil to subsidize advanced tobacco production?  Is the President’s policy to keep here in American through subsidies all industries that other governments are subsidizing, or only the “good” industries that he thinks should be kept in America?

More generally, should the U.S. government (a) subsidize particular industries and if so (b) determine those subsidies based on what other countries are doing?

If we are to subsidize particular industries over others, how do we square that with the argument, made by the President and others, that we need to remove such subsidies from the tax code?

If the rule for structuring subsidies is to make sure we don’t cede certain industries to other countries, how is that different from giving the governments of those countries control over the shape and structure of the U.S. economy?

If the President wants to subsidize wind and solar power because he wants to accelerate the development of carbon-free alternatives to coal and natural gas, he should make that argument.  If President Obama is instead going to subsidize industries either because he likes them or because other Nations’ governments are subsidizing them, then we must acknowledge that he is engaged in industrial policy, aka state-managed capitalism, with an open question about whether the managing state is based in DC, Berlin, or Beijing.

(photo credit: Maryellen McFadden)

Why is American oil production up?

Why is American oil production up?

Correction:  Silly me, I assumed that shale oil and oil shale were the same thing.  They are not.  The technology improvements in fracking refer to shale oil, which is different than oil shale.  I have modified the post below to use the unambiguous and clearer term [light] tight oil.  Thanks to a friend for setting me straight.

Here is President Obama, speaking about energy yesterday in Maryland:

First of all, we are drilling.  Under my administration, America is producing more oil today than at any time in the last eight years.  (Applause.)  Any time.  That’s a fact.  That’s a fact.  We’ve quadrupled the number of operating oil rigs to a record high.  I want everybody to listen to that — we have more oil rigs operating now than ever.  That’s a fact.

The President is right – oil production has climbed steadily and significantly since 2007.  This helpful graph from the Energy Information Administration shows us why.

eia-annual-us-oil-production

The surge comes almost entirely from a big increase in the production of light tight oil, aka shale oil.

EIA projects this positive trend in tight oil production will continue:

Production from tight oil plays is expected to continue climbing. High oil prices make tight oil development profitable in spite of the higher costs associated with the advanced production methods being used.

The two big tight oil plays are known as the Bakken formation in North Dakota and Montana and the Eagle Ford in south Texas. According to EIA these two accounted for 84 percent of tight oil production in November 2011. Bakken is bigger than Eagle Ford but Eagle Ford’s production is growing more rapidly.

The President’s rig count statement is also true, and for the same reason.  Oil rigs have surged in the past few years, again to produce light tight oil from shale.

This increased oil production is not the result of policy decisions by the Obama Administration but instead the result of recent improvements in oil exploration technology, specifically the ability to extract light tight oil using fracking.

Upon closer review it appears the Administration is well aware of this.  All of the President’s remarks and supporting White House documents frame this domestic oil production increase about something that is occurring under the Obama Administration or during the Obama Administration.  They are careful never to claim that these oil production increases are happening because of actions taken by the President or his Administration.

The only case in which they exaggerate is this graph that they use quite often.

wh-oil-production-up

The red vs. blue shading misleads you into concluding that a policy decision by President Obama resulted in an increase in U.S. oil production, while the graph title merely claims that production is rising “under Obama.”  You can be sure that if it was “because of Obama” they would have said that.

It’s also interesting that the Administration seems to be avoiding

Domestic oil production in the U.S. has increased over the past three years and should continue doing so in the near future.  That is good news.  This good news results from improvements in oil production technology, not from President Obama’s policies.

Nearly doubling renewable energy generation

Nearly doubling renewable energy generation

Today the Administration released their Blueprint for a Secure Energy Future: One-Year Progress Report.

Almost every time President Obama talks about energy he mentions wind and solar power. He used to talk about nuclear power as well. Doing so was politically courageous for a Democrat because nuclear power splits the environmental left. The President rarely mentions nuclear power these days, I presume because of the Fukushima earthquake + nuclear incident a year ago.

The White House blog post accompanying the Blueprint includes the following highlight:

Doubling Renewable Energy Generation: Thanks in part to the Obama Administration’s investment in clean energy – the largest in American history – the United States has nearly doubled renewable energy generation from wind, solar, and geothermal sources since 2008.

“Nearly doubled” in less than four years sounds pretty good but reminds me of this Dilbert cartoon.  In it Dilbert raises his hand and asks the marketing manager:

Are you asking a room full of engineers to be excited about a big percentage increase over a trivial base?

Let’s look at my favorite energy graph, produced by Lawrence Livermore National Laboratory, a part of the Department of Energy.  It translates all energy usage into a common unit (BTUs) for comparison.  You’ll probably want to click on the graph to see a larger (and readable) version.  In particular look at the size of the solar (yellow), wind (purple), and geothermal (brown) connecting lines, especially in comparison to the lines for nuclear (red), coal (black), and natural gas (light blue).

llnl-energy-use

Wind, solar, and geothermal sources are trivially small sources of U.S. energy.  Doubling their usage is significant within those industries but when compared to the overall pattern of energy usage in the U.S., the increases are tiny.

Here are three basic facts to know about energy sources for electricity production in the U.S.:

  1. We have lots of really cheap coal.
  2. Thanks to new fracking technologies we now have lots of cheap natural gas, too.
  3. Nuclear comes in third and represents about 20% of our source of electricity production.

Don’t forget two points from yesterday’s post which you can see easily from the above graph:

  • In America there is little overlap between fuel used for transportation and electricity used to light, heat, and power our homes and businesses.
  • If you could make solar power price competitive with electricity produced from coal or natural gas you would do almost nothing to lower the price at the gas pump because there are so few electric-powered and hybrid vehicles on the road.

Let’s compare BTU totals in sources of U.S. energy excluding transportation.

energy-use-by-source-ex-transpo

From this graph you can see how small wind and solar power are relative to other energy sources in the U.S.  Even large percentage increases in the use of solar and wind power will have trivial impacts on the patterns of American energy usage.  Doubling, tripling, or quadrupling our usage of these technologies will not fundamentally change the three above basic facts about electricity production in the U.S.  Until there is a technology breakthrough, the U.S. is a land of electricity production from coal, natural gas, and nuclear, with hydro and biomass trailing and with wind, geothermal, and solar too small to matter much at all.

The value of increased solar and wind production is not the marginal short-term reductions of coal and natural gas we use in America.  These increments are too small to matter. The benefit is instead whatever we learn about producing and using these technologies that might, at some point in the future, result in innovations that so significantly reduce the cost of these technologies that it becomes less expensive to produce power from these renewable sources than it does with our abundant supplies of coal and natural gas.  If the technology ever crosses (or even approaches) those breakeven thresholds, then these energy sources will rapidly and significantly alter the shape of the U.S. energy picture.

Until then the President has a rhetorical point that sounds good but matters little to how we use and produce energy in the U.S.

(photo credit: Nedra)

In America power and fuel are separate issues

In America power and fuel are separate issues

In his weekly address President Obama said:

But you and I both know that with only 2% of the world’s oil reserves, we can’t just drill our way to lower gas prices – not when consume 20 percent of the world’s oil. We need an all-of-the-above strategy that relies less on foreign oil and more on American-made energy – solar, wind, natural gas, biofuels, and more.

Solar, wind, and natural gas have almost nothing to do with the price of gasoline.

Policies that affect oil, gasoline, ethanol and biodiesel, hybrid vehicles, battery technology, and vehicle fuel efficiency can all directly and significantly affect the price of transportation fuel (although often quite gradually).

In America there is little overlap between fuel used for transportation and electricity used to light, heat, and power our homes and businesses.  If you could magically make solar power price competitive with electricity produced from coal or natural gas you would do almost nothing to lower the price at the gas pump because there are so few electric-powered and hybrid vehicles on the road.

Similarly the development of massive shale (natural) gas resources in the U.S. will make electricity more affordable in the U.S. but will have almost no effect on the cost of our transportation fuel.

Yes, there are linkages.  There are a few hybrid vehicles on the road, and some commercial vehicle fleets use natural gas as fuel.  But these are vanishingly small when compared with the petroleum-based and bio-based fuels we put in our cars, trucks, boats, and planes.

Some American homes are heated with oil, so reducing the cost of electricity can gradually, over many years, shift home heating away from oil.

And in some countries where oil is used to produce electricity, reducing the cost of other types of power production can reduce their usage of oil, which through the wonder of global oil markets can lower the price at an American gas station.  But these effects are for now quite small.

These linkages mean that the President’s statement is qualitatively correct. But the effects are so small that the President is quantitatively misleading the listener when he suggests that expanded use of solar and wind power will lower gas prices.

If (when?) battery technology leaps forward to make hybrid or electric vehicles a significant share of the market, then electricity and its sources will begin to act as significant substitutes for gasoline and diesel fuel.  At that point R&D to reduce the cost of solar power, wind power, nuclear power, hydro power, and natural gas power could start to affect the price at the pump enough for you to notice.

But until then fuel and electric power are for all practical purposes separate issues, and when an elected official’s response to high fuel prices is more research on or subsidies for some form of electric power production, he is either confused or misleading you.

(photo credit: Jonathan Dueck)

Understanding the S&P report

Understanding the S&P report

Yesterday’s report by Standard & Poor’s on the U.S. government’s credit rating is driving headlines. You can learn a lot more from reading the primary source document than from news coverage of it.

Here is what S&P did:

On April 18, 2011, Standard & Poor’s Ratings Services affirmed its ‘AAA’ long-term and ‘A-1+’ short-term sovereign credit ratings on the United States of America and revised its outlook on the long-term rating to negative from stable.

The news is in the latter part: S&P downgraded its “outlook on the long-term [credit] rating [of the U.S. government].” This is a warning sign.

S&P told us why they downgraded their outlook:

We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.

… Despite these exceptional strengths, we note the U.S.’s fiscal profile has deteriorated steadily during the past decade and, in our view, has worsened further as a result of the recent financial crisis and ensuing recession. Moreover, more than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures.

In 2003-2008, the U.S.’s general (total) government deficit fluctuated between 2% and 5% of GDP. Already noticeably larger than that of most ‘AAA’ rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover.

The S&P analysts base their outlook downgrade on a legislative assessment that I think is accurate:

We view President Obama’s and Congressman Ryan’s proposals as the starting point of a process aimed at broader engagement, which could result in substantial and lasting U.S. government fiscal consolidation. That said, we see the path to agreement as challenging because the gap between the parties remains wide. We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible.

Standard & Poor’s takes no position on the mix of spending and revenue measures the Congress and the Administration might conclude are appropriate. But for any plan to be credible, we believe that it would need to secure support from a cross-section of leaders in both political parties.

If U.S. policymakers do agree on a fiscal consolidation strategy, we believe the experience of other countries highlights that implementation could take time. It could also generate significant political controversy, not just within Congress or between Congress and the Administration, but throughout the country. We therefore think that, assuming an agreement between Congress and the President, there is a reasonable chance that it would still take a number of years before the government reaches a fiscal position that stabilizes its debt burden. In addition, even if such measures are eventually put in place, the initiating policymakers or subsequently elected ones could decide to at least partially reverse fiscal consolidation.

Let’s tease this apart.  S&P describes three distinct but related risks:

  1. The risk of no agreement on a medium-term fiscal strategy before the 2012 election;
  2. The risk that, if there is an agreement, it will be phased in too slowly;
  3. The risk that delay plus a slow phase-in allows enough time for future policymakers to partially undo an agreement.

I think all three are valid concerns, and I share their skepticism.

They describe other short-term fiscal risks that worry them as well:

  • the risk of further financial bailouts;
  • the potential cost of “relaunching” Fannie Mae and Freddie Mac, which they estimate at “as much as 3.5% of GDP (!!!);
  • the risk of losses on federal loans (they single out student loans).

The first bullet here is scary, and they emphasize it: “Most importantly, we believe the risks from the U.S. financial sector are higher than we considered them to be before 2008.”

S&P comments on three elements of recent deficit reduction proposals: income tax rates, entitlement reform, and the President’s new trigger.

On income tax rates:

Revenue [in the President’s new proposal] would be increased via both tax reform and allowing the 2001 and 2003 income and estate tax cuts to expire in 2012 as currently scheduled—though only for high-income households. We note that the President advocated the latter proposal last year before agreeing with Republicans to extend the cuts beyond their previously scheduled 2011 expiration. The compromise agreed upon in December likely provides short-term support for the economic recovery, but we believe it also weakens the U.S.’s fiscal outlook and, in our view, reduces the likelihood that Congress will allow these tax cuts to expire in the near future.

Note that they are commenting on both the fiscal effects of the deal, and how it affects their assessment of the legislative viability of the President’s recent proposal.

On the President’s new trigger proposal:

We also note that previously enacted legislative mechanisms meant to enforce budgetary discipline on future Congresses have not always succeeded.

This is a poke at the credibility of the President’s trigger mechanism.

On entitlement reform:

Beyond the short-term and medium-term fiscal challenges, we view the U.S.’s unfunded entitlement programs (Social Security, Medicare, and Medicaid) to be the main source of fiscal pressure.

Note that they agree with Chairman Ryan (and me) that entitlement spending is “the main source of fiscal pressure.”

S&P scolds American policymakers by comparing them to their counterparts in other countries.  The U.K., France, Germany, and Canada have all begun implementing austerity programs, even while they suffered recessions comparable to or larger than what we had here in the U.S.

S&P concludes with a concrete probability assessment:

The negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years. The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.

They also tell policymakers the standard against which they will be judged:

Some compromise that achieves agreement on a comprehensive budgetary consolidation program—containing deficit reduction measured in amounts near those recently proposed, and combined with meaningful steps toward implementation by 2013—is our baseline assumption and could lead us to revise the outlook back to stable. Alternatively, the lack of such an agreement or a significant further fiscal deterioration for any reason could lead us to lower the rating.

S&P is telling Washington, that to avoid a possible downgrade, they need to do a deal “in amounts near [$3-4 trillion over the next decade]” and “with meaningful steps toward implementation by 2013.”

In yesterday’s press briefing, White House Press Secretary Jay Carney disagreed with S&P’s skepticism about a deal:

As for its political analysis, we simply believe that the prospects are better. We think the political process will outperform S&P expectations. The President is committed, as he made clear in his speech on Wednesday, to moving forward in a bipartisan way to reach common ground on this important issue of fiscal reform.  And he believes that the fact that Republicans — that he and the Republicans agree on a target — $4 trillion in deficit reduction over 10 to 12 years — is an enormously positive development.  They also agree that the problem exists.  So the third part is the hard part, which is reaching a bipartisan agreement.  But two out of three is important.  And it demonstrates progress.

My view

There is a high probability of incremental spending cuts being enacted this year and next as part of debt limit legislative struggles.  I’ll make a wild guess of $100B – $300B over 10 year range.

There is a moderate chance (1 in 3) of an incremental, slightly bigger (maybe $300B – $500B over 10 years) deficit reduction deal before the 2012 election. The President would trumpet such a deal as a good first step, but it appears this would fall far short of what S&P says is needed.

Given the President’s apparent budget strategy, there is at the moment a vanishingly small chance of a big medium-term or long-term deal like that described by S&P as necessary to avoid a possible downgrade, ($3-4 trillion over 10 years, with even bigger long-term changes to Social Security, Medicare, and Medicaid).

The greatest obstacle to constructive negotiations is the President’s attack rhetoric, in which he today accused Congressional Republicans of “doing away with health insurance for … an autistic child” and potentially causing future bridge collapses like the one in Minnesota that killed 13 people.

Maybe the S&P report will scare the President’s team into treating the long-term problem seriously rather than using it as a campaign weapon. I’m not holding my breath.

(photo credit: Marjie Kennedy)

Serious policy differences are not petty politics

Serious policy differences are not petty politics

Here’s the President, speaking yesterday at a town hall meeting in Fairless Hills, PA. See if you can spot his new theme, as pointed out by POLITICO. It’s not too difficult.

THE PRESIDENT: It’s a plan that says we’re not going to play the usual Washington politics that have prevented progress on energy for decades.  Instead, what we’re going to do is we’re going to take every good idea out there.

Again:

THE PRESIDENT: Reducing our dependence on oil, doubling the clean energy we use, helping to grow our economy by securing our energy future — that’s going to be a big challenge. …  It’s going to require us getting past some of the petty politics that we play sometimes.

And again:

THE PRESIDENT: So we’ve agreed to a compromise, but somehow we still don’t have a deal, because some folks are trying to inject politics in what should be a simple debate about how to pay our bills.  They’re stuffing all kinds of issues in there — abortion and the environment and health care.

And again:

THE PRESIDENT: Companies don’t like uncertainty and if they start seeing that suddenly we may have a shutdown of our government, that could halt momentum right when we need to build it up — all because of politics.

And again:

THE PRESIDENT: I do not want to see Washington politics stand in the way of America’s progress.  … You want everybody to act like adults, quit playing games, realize that it’s not just “my way or the highway.”

And again:

THE PRESIDENT: I want to kick-start this industry.  I want to make sure we’ve got good customers, and I want to make sure that there’s the financing there so that we can meet that demand.  And there’s no reason why we can’t do both, but it does require us getting past some of these political arguments.

When the President says, “I do not want to see Washington politics stand in the way of America’s progress,” he always defines “progress” as his policy goals. If you favor his policies, you are for progress. If not, you are engaged in “petty politics” and “games.”

The President is arguing that those who disagree with his policies are engaged in politics. They are, he argues, motivated not by a well-intentioned difference of opinion about how to improve America, but instead by selfish motives.

This is itself destructive politics, cleverly framed as trying to rise above the fray. It cheapens serious policy debate and makes it harder to reach agreement. It contributes to voters’ cynicism. It means that those responsible elected officials on the other side of the aisle who want to work toward principled compromise must overcome both their anger at being personally attacked, and the heat generated in both parties’ wings by a President who challenges the other side’s good intent. It drives away potential negotiating partners and thereby reduces the likelihood of bipartisan compromise.

President Obama changed the direction of American politics in 2008 and again in 2010. The partisan balance of our government reflects both changes. By attacking the motives of elected officials who ran against and now oppose his policy agenda, the President in effect attacks those voters who disagreed with his policies, started a new political movement, and changed the makeup of Congress.

Of course partisan politics and individual agendas interact with and influence policy debates.

Of course there are individuals, both inside and outside government, who at times provoke conflict for their own narrow self-interest.

Yes, the American partisan political structure and the short attention span of the average voter favor political battle over serious policy debate.

Yes, many in the press and commentariat are attracted by and contribute to ongoing conflict rather than cover the lengthy and complex debate needed to understand serious policy disagreements.

Yes, cable TV, talk radio, the internet, and now social media accelerate the news cycle, shorten our attention spans, and allow Americans to self-select into ideological camps.

Yes, there are plenty of people in both parties who spend most of their time in destructive partisan warfare.

Yes, there are plenty of irresponsible and selfish people in Washington, whose behavior and childishness repulses most everyone else.

Yet except for social media, these are not new forces. There are plenty of serious policymakers on both sides of the aisle who want to make America a better place, but just have different visions of how to do that. And all these negative factors are far less important to what happens in Washington than the serious, well-considered, deep policy disagreements among elected officials and other policy makers.

Paul Ryan has just proposed a plan to change our Nation’s fiscal path to one very different from that proposed by the President. Chris Christie, Mitch Daniels, and Scott Walker are engaged in partisan battles as they try to fix New Jersey, Indiana and Wisconsin state finances. Dave Camp and Orrin Hatch are battling organized labor by working to ensure we enact free trade agreements with Korea and Colombia and Panama. They (and Democrat Max Baucus) are initiating a discussion of fundamental tax reform. Fred Upton and Lisa Murkowski are trying to stop the President’s EPA from raising costs on American farms and businesses. Countless Republicans are trying to stop the implementation of new health insurance mandates and entitlements that they believe hurt America. In each case, these are serious Republican officials engaged in policy battle because they think it’s necessary to improve policy. Their views, electoral success, and actions deserve respect from those who disagree.

If the President wants to reduce the impact of the usual petty Washington politics, the recipe is quite simple. Treat with respect those who disagree with you. Vigorously debate their ideas rather than impugning their motives. Ignore the screamers and rabble-rousers. Stick to your guns while seeking opportunities for principled compromise. And acknowledge that those who disagree with your policy agenda may not all be evil.

(photo credit: White House photo by Samantha Appleton)

Gas tax increase or budget gimmick?

Gas tax increase or budget gimmick?

On page 188 of the President’s budget, in Table S-8, we see a section titled “Reauthorize Surface Transportation.”  That section includes $235 B of spending over the next decade.  It also includes a line labeled “Bipartisan financing for Transportation Trust Fund,” and shows a ten-year total deficit effect of –$328 B.

Because of this enormous “Bipartisan financing for Transportation Trust Fund” policy proposal that would reduce the budget deficit, the President’s budget is able to show increased spending for roads, bridges, trains, and airports, yet also reduce the deficit.

What, then, is the President’s proposed “Bipartisan financing for Transportation Trust Fund” proposal?

CBO apparently figured out that the deficit reduction consisted of higher revenues, but the Administration did not provide any more detail. So CBO didn’t give them credit for the –$328 B.

CBO: However, in the case of a proposal to raise new revenues to support the reauthorization of surface transportation programs, the absence of any information about the nature of the taxes or fees that might be used to produce revenues did not allow an assessment of the potential budgetary effects. As a result, CBO did not include any revenues for that proposal, which the Administration projected would raise revenues by $328 billion over the 2012–2021 period. (p. 7)

This language from CBO shows that OMB did not provide any additional back-channel information on this proposal.  There’s no there there.

$328 B is a lot of money.  You may think you know what this line refers to: a gas tax increase.  That’s what I thought. As a rough rule of thumb, the government would raise about $1B per year for each penny per gallon increase in the tax on gasoline and diesel fuel.  If we match the numbers in the OMB table, it looks like about +20 +25 cents per gallon in 2012, growing to maybe +35-40 +34 cents by 2021. That’s roughly equivalent to a 25 cent per gallon increase, indexed to inflation.  (hat tip: Marc Goldwein of the Committee for a Reponsible Federal Budget)

A gas tax fits conceptually with increased transportation infrastructure.  There are occasional hints of bipartisan support for higher gas taxes to pay for more infrastructure spending (from Republicans who like to build highways). Higher gas taxes seem consistent with the President’s other policy goals, like reducing greenhouse gas emissions.  And the numbers match with commonly discussed proposals for a gas tax increase.

Update:  Expert friends have pointed out that other parts of the budget show a $438 B decline in “excise taxes.”  A gas tax is an excise tax.  There’s a scoring convention that if you cut gross gas tax revenues by $1, demand for gasoline will increase and recoup 25 cents of that lost revenue.  Applying a 25% “offset” to this $438 B gross revenue loss produces the $328 B net tax loss shown for the mysterious “financing for Transportation Trust Fund” proposal.  This is further evidence that the numbers represent a gas tax increase.  It also changes the back-of-the-envelope calculation I did above.  Looks like they’re starting out around +25 cents per gallon in 2012.

Yet in both their conversations with CBO (I infer from the text above), and in briefings of Congressional staff (I know from friends), Administration officials were explicit: this line does not represent higher gas taxes.

I can’t come up with any policy other than a gas tax increase that might raise that much money and be described as “Bipartisan financing for Transportation Trust Fund.”

There is only one policy that fits that description.  It fits perfectly with the text, the numbers, the political context, and makes policy sense given this President’s policy preferences.  And yet the President’s team explicitly reject that policy.

The President’s team is trying to have it both ways: spend money on infrastructure and claim deficit reduction, but don’t take the political hit for proposing a big gas tax increase.  CBO has called them on it and is not giving them credit for the $328 B of claimed deficit reduction.  That’s a big deal.

Suggested questions for White House Press Secretary Jay Carney:

  • Is the President’s “Bipartisan financing for Transportation Trust Fund” proposal a gas tax increase?
  • If not, can you describe any other “transportation financing policy,” bipartisan or not, that would raise $328 B over ten years as shown in the President’s budget?  If the President wasn’t proposing a gas tax, what else could he have meant?
  • If the President did not intend a gas tax increase, how did you come up with those specific year-by-year numbers in the budget?  Why $328 B rather than $300 B or $350 B?
  • Is this budget proposal a gas tax increase or a budget gimmick?

(photo credit: Charlie Ambler)

Intro to nuclear power and the Fukushima plant crisis

Intro to nuclear power and the Fukushima plant crisis

I’m going to start occasionally recommending other reading.  Much of it will focus on the site I run for the Hoover Institution, Advancing a Free Society.  Today, however, I want to promote two excellent things I found that help understand the ongoing problems at the Fukushima nuclear power plant.

The first is Maggie Koerth-Baker’s simple and clear post, Nuclear energy 101: Inside the “black box” of power plants.  Maggie wrote this respond to a reader who wrote “The extent of my knowledge on nuclear power plants is pretty much limited to what I’ve seen on The Simpsons.”

The second is geologist Evelyn Mervine’s phenomenal set of telephone interviews with her dad, a retired Naval and civilian nuclear engineer.  Through this you can hear near real-time expert analysis of ongoing events.

Thanks to Maggie and to Evelyn and Command Mark Mervine (ret.) for their fantastic posts.  Their work blows away anything I have so far seen in the MSM.

(photo credit: DigitalGlobe)

What is the Strategic Petroleum Reserve (SPR)?

What is the Strategic Petroleum Reserve (SPR)?

Yesterday Meet the Press host David Gregory asked White House Chief of Staff Bill Daley if the President was considering releasing oil from the Strategic Petroleum Reserve (SPR):

MR. GREGORY: But what about the shorter term? Does the president—there’s calls to tap the strategic petroleum reserve, which comes up during these spikes. Is the president considering doing something that can arrest that spike?

MR. DALEY: Well, we’re looking at the options. There’s—there—the spike—the, the issue of, of, of the reserves is one we’re considering. It is something that only is done—has been done in very rare occasions. There’s a bunch of factors that have to be looked at, and it is just not the price. Again, the uncertainty—I think there’s no one who doubts that the uncertainty in the Middle East right now has caused this tremendous increase in the last number of weeks.

MR. GREGORY: But it’s on the table, which I think is the significant development.

MR. DALEY: Well, I think all consider—all matters have to be on the table when you go through—when you see the difficulty coming out of this economic crisis we’re in and the fragility of it.

Let’s look at the Strategic Petroleum Reserve and the President’s option to release oil from it.

What is the Strategic Petroleum Reserve?

The SPR is a bunch of holes in the ground. The Strategic Petroleum Reserve is a collection of salt caverns at four locations in Louisiana and Texas along the Gulf Coast.  Those salt caverns hold 727 million barrels of oil, managed by the Department of Energy.

The SPR is a national insurance policy. Specifically, it insures the U.S. against a severe oil supply disruption. Without this insurance, our economy could be even more sensitive to a big oil supply shock than it already is.

Created in 1975 after the Arab oil embargo, the SPR is designed to be an emergency reserve.  If Venezuela’s Hugo Chavez suddenly were to decide he is no longer going to sell oil to the U.S., we would face a short-term supply disruption while we waited for supplies to arrive from other producer nations.  President Bush (41) released oil from the SPR when Operation Desert Storm began in January 1991, in anticipation of supply disruptions in the Middle East.  When Hurricane Katrina damaged much of the Gulf of Mexico oil infrastructure, we suddenly lost about 25% of domestic production and President Bush (43) released oil from the SPR.  If terrorists were to blow up major elements of the global or domestic oil supply chain, that could cause a severe supply disruption.  The SPR is not a backup supply to be used frequently when gasoline gets expensive, it’s an emergency strategic supply to be used only in a crisis.

Releasing oil from the SPR is a Presidential decision, based principally on the advice of the Secretary of Energy.  The President’s White House economic and national security advisors are usually involved in the decision as well.

The U.S. relies more heavily on government stocks than private reserves.  The same is true for the Japanese.  The Europeans rely more on privately held commercial stocks.  Since their governments don’t own that oil, the Europeans mandate that commercial storage facilities hold a certain amount of emergency reserves.  Also, you can’t drain your stocks down to zero; you have to leave some oil in the tanks and especially the pipes to make the hydraulics work.

The U.S., Japan, and Germany have the biggest reserves.  Then there are the Chinese, who so far have not been full participants in the international coordination system run by the International Energy Agency (IEA).  Reserve withdrawals are more effective when they are coordinated among the countries with the largest reserves.

The U.S. government fills the SPR in two ways.  They buy oil on the open market, and they receive oil as payments in kind for drilling leases granted by the government (called Royalty-in-Kind).

How big is the SPR?

The Strategic Petroleum Reserve can hold 727 million barrels of oil.  At the moment it’s full, at 726.6 million barrels.

Here are some figures for comparison:

  • The global oil market is about 86 million barrels per day (bpd).
  • The U.S. consumes about 19-20 million bpd of oil and petroleum products.  We import about half that.
  • The Desert Storm SPR release totaled 21 million barrels.
  • The Katrina SPR release coincidentally also totaled 21 million barrels.
  • There are 42 gallons of oil in a barrel.
  • A barrel of oil results in about 44 gallons of products, including about 19 gallons of gasoline, 10 gallons of diesel, 4 gallons of jet fuel, and 11ish gallons of other stuff.  This means you get a gallon of gasoline from about 2.1 gallons of oil.

As the economy grows, any fixed-size SPR gets effectively smaller. Insurance is measured in “days of import protection”: take the average number of barrels per day that we import, and divide it into the oil we have, and that’s how many days of import protection we have.

The U.S. imports (net) about 10-11 million barrels of oil each day.  At the moment the SPR is full:  there are 726.6 million barrels of oil stored in these salt caverns.  Divide 726.6 M by 10-11 M and you get 66-73 days.

Since you won’t replace lost imports barrel-for-barrel, the number is more of a relative than an absolute measure of how much your insurance is worth.  A significant SPR release might be 100,000 bpd.

We don’t worry about losing all of our imports simultaneously.  Almost one-quarter of our imports come from Canada.  Our next biggest suppliers are Venezuela (11%), Saudi Arabia (10%), Mexico (9%), and Nigeria (8%).  There are risks to each of these (much less so for Canada and Mexico).

A 2005 law requires the SPR to be increased to 1 billion barrels.  President Bush (43) proposed doubling the current SPR to 1.5 billion barrels and increasing the size of our insurance policy.  Congress has not provided significant funding for either expansion.

When should the President release oil from the SPR?

The Saudis are the first line of defense when there is a disruption in global supply.  If that worries you, then figure out ways to use less oil, because the Saudis will always have the largest and lowest cost marginal supply in the world.  The Saudis often/usually have spare production capacity that they hold in reserve.  They appear to have dialed up their production in recent weeks, offsetting most of the recently lost production in Libya.

The phrase severe supply disruption is the key to the President’s decision about an SPR release.  Oil is expensive right now for four reasons:

  1. Fundamentals — The global economy is recovering and demanding more oil.  Global supply and demand are tight.
  2. Some Libyan supply has recently gone offline – maybe 850K – 1M bpd.
  3. Oil market participants are worried that events in Tunisia, Egypt, Libya, and Bahrain could spread to other oil-producing nations in the Middle East and North Africa, further disrupting supply.
  4. Nobody is quite sure how much unused capacity the Saudis have available.

It’s hard to conclusively tease out the price effects of each factor, but policymakers need to try.  High gasoline prices alone are insufficient to justify an SPR release.  You have to look at why prices are increasing.  One expert recently surmised that about $100 of the current $115/barrel world price (Brent) results from tight fundamentals, and the other $15-ish is from actual and feared supply disruptions.

If global economic growth accelerates (oh please oh please), then global demand will increase and the price of oil will continue to climb.  That’s unfortunate and a medium-term economic problem.  It’s not a reason to tap the strategic reserve.

If supplies are further disrupted, for instance by geopolitical events, then that is a viable reason for an SPR release, if the President thinks it is severe enough to justify tapping our emergency reserve.

You also shouldn’t expect an SPR release to have a huge effect on the pump price of gasoline.    With oil around $100/barrel, if the President were to release 100,000 b/d from the SPR, that would probably lower the price of oil by about $2/barrel initially.  That’s about ten cents per gallon of gasoline, maybe a bit more if the release were coordinated with other nations and reduced the fear premium in global oil markets.  The effect would wear off over time as markets adjust to the increased supply.

Should President Obama release oil from the SPR now?

Mr. Gregory asked Chief of Staff Daley if the President is considering releasing the SPR because the price of gasoline has spiked.  He further asked if the President is “considering doing something to arrest that spike.”

The President should consider a release only if he determines there’s a severe supply disruption, not just because the price of gasoline has increased.  And if he does approve a release, it will not “arrest” the price increase at the pump.

The U.S. imports almost no oil directly from Libya – they supply about 0.6% of all our imports.  Most Libyan oil goes to Europe, and some to China.  Still, it’s best to think of oil as if it were a single big global pool.  If more Libyan production were to go offline, prices in Europe would jump.  Oil tankers in the Atlantic headed west for the U.S. might turn around and head east seeking out those higher prices, causing prices to rise in the U.S.  (The reverse happened after Hurricane Katrina – tankers headed for Europe turned around and headed for the Southeastern U.S. after prices jumped from lost Gulf of Mexico supply.)

So far it appears the Saudis are mitigating much of the lost Libyan production.  Based on public information, I think it’s hard to justify an SPR release now.  If a lot more supply goes offline (in Libya or elsewhere), and if the Saudis lack the spare capacity to offset that additional loss, then the President will have a tough call to make.

(photo credit: Department of Energy, Office of Fossil Energy)

The 10 most important American economic policy issues of 2010

Here is my view of the 10 most important American economic policy issues of 2010.

1.  The weak U.S. macroeconomy

In 2010 a weak macroeconomy once again swamped in importance all other economic policy issues.  Forecasters had predicted a tough year — the 9.7% average unemployment rate for the first 11 months of the year is not far above the Administration’s 9.3% forecast for the year.

In 2011 the most important metric will once again be the unemployment rate.  Economically as well as politically the focus will once again be almost entirely on job creation.  We need the economy to be generating hundreds of thousands of net new jobs each month.  That is unlikely but not impossible.

Most forecasters project a stronger U.S. economic growth path in 2011 than 2010, but few are projecting that growth will be robust enough to bring the unemployment rate down rapidly.  While this week’s unemployment claims took a turn for the better, that’s a volatile data set, and the labor picture over the past few months has been weak.  If the forecasts hold up, things will be bad but improving throughout 2011.  You decide whether the politics and press will focus on the bad or the improving part.

Please remember not to lean too heavily on economic projections.  My rule of thumb is that the best macroeconomic forecasts get unreliable six months out and are not much more than guesses beyond a year.

2.  The failure of fiscal stimulus

This trend began in 2009 and solidified in 2010.  The fiscal stimulus debate camps and arguments are well established, and because the debate relies on comparison to a counterfactual it may never be provably resolved, allowing economists to argue ad nauseam.

Whatever your view on the policy question, as a political matter the stimulus failed miserably.  There are a few easily identifiable errors.

  • The President repeatedly took too optimistic of a tone relative to what his experts projected on something that was largely beyond his control.
  • Team Obama gambled and lost by creating an unverifiable “jobs saved or lost” metric.  Sometimes the unverifiability worked for them, but ultimately it broke against them because a job saved by policy is neither provable nor visible.
  • The policy path the President chose in early 2009 (more accurately, the path to which he acquiesced when Congress chose it) set up countless “waste, fraud, and inefficiency” stories throughout 2010.
  • After February 2009, every time the President signed another bill “to create jobs,” he reinforced the message that his first stimulus law was failing or at best insufficient.

3.  The stimulus vs. austerity debate

The U.S. is now left of Germany and the U.K. on fiscal policy in rhetoric if not result.  That is both weird and disturbing.

4.  (Temporary?) enactment of the health care laws

The President and his allies had a huge policy victory here.  I think these laws are an unmitigated disaster, the largest economic policy mistake in a long time.  The President and his allies created a massive new entitlement, spent budget offsets needed to address our long-term spending problem and therefore made future middle class tax increases a near certainty, and turned health insurance into a regulated utility.

The ongoing pushback from Republicans, even after enactment, was a wonderful surprise from a party that had for too long been afraid to debate health policy.  Democrats had to delay implementation of the most expensive provisions for a few years, allowing Republicans time to mount a repeal campaign that continues to build steam.  My first big blog mistake of the year was prematurely declaring the legislation dead after Scott Brown’s surprise victory in Massachusetts.  My second (unpublished) mistake was assuming that the President’s signature was the endgame.  It appears the 2012 Presidential election will be in part a referendum on these laws.

5.  Enactment of financial services reform (Dodd-Frank)

This is another big policy win from the Administration’s perspective.  I have mixed feelings on the law.  Some parts (like creating resolution authority for regulators to shut down too-big-to-fail firms) are essential, others (like the Consumer Financial Protection Bureau) are harmful, and still others (like the long-term resolution of Fannie Mae and Freddie Mac) are unresolved.

Many policymakers appear to have convinced themselves that new policies and structures are (or, in a few years when the regs are complete, will be) in place to prevent large institutions from failing.  I worry that we still don’t have a good solution for the next Black Swan event when (not if) one or more of those huge institutions do fail in spite of the new, better informed, and more powerful regulators.

6.  Carbon pricing implosion

In less than four years carbon pricing has gone from front burner to burnt toast.  The Climategate data fudging scandal undermined a previously strong positive public perception of climate scientists and their advocacy.  In Copenhagen the global negotiations imploded after confronting the problem of the China-India hole in the U.S./green strategy.  A Democratic House and Senate could not agree to carbon pricing legislation, demonstrating that regional economic perspectives are at least as important as policy philosophy.  The President walked a tightrope between demonstrating to greens that he was with them and allowing himself an exit strategy when legislation inevitably failed.  West Virginia Governor (and now Senator) Joe Manchin erased any doubt by literally shooting the Waxman-Markey bill in a campaign ad.

We now appear headed down the worst possible policy path.  Congress will not enact legislation but the Environmental Protection Agency will start regulating greenhouse gas emissions and allowing/encouraging States to do so.  This is the most economically burdensome way to regulate carbon emissions.  It will be large enough to impose significant constraints on domestic power production and heavy manufacturing now, and maybe on other sectors later.  Yet any reductions in U.S. emissions will be small relative to uncapped increases from China and India.  EPA’s rules and Congressional efforts to block them will create policy uncertainty, deterring needed investment in the expansion of U.S. power production and slowing long-term economic growth.  EPA’s regulatory authority always served two purposes to those who want to price carbon:  as a threat to try to force legislative action, and as a costly fallback if legislation failed.  The fallback option never made sense.  It should but probably won’t be abandoned.

7.  The Democratic Congress’ budget failures

From the perspective of Congressional Democrats, the health care and financial services victories counterbalance their two fiscal policy failures in 2010.  Tax rates on income and capital will not increase during President Obama’s first/only term.  They failed to enact full-year appropriations bills to fund the government, resorting instead to short-term continuing resolutions.  The new Congress will have to complete the leftover appropriations work in early 2011.  Many of the President’s spending goals will be unmet as he wrestles with a Republican House majority with very different priorities.  I am pleased with both outcomes, which exceeded my initial expectations.

Both results can be traced directly to decisions by Speaker Pelosi, Senate Majority Leader Reid, and their respective Budget, Tax, and Appropriations Chairmen.  They failed because they didn’t even try to govern.  They never tried to pass a budget resolution, they delayed action on taxes until the last possible minute when Republicans were strongest, and they never tried to pass appropriations bills in the Senate.  They missed an opportunity to create a reconciliation bill that would have allowed them (and the President) to win the tax extension debate.  In each case these were unforced errors by Democratic Congressional leaders that significantly affected the fiscal policy outcomes of 2010.

8.  Rise of the Tea Party

I have not much to add here other than to recognize that the small government impetus began with the early 2009 Santelli rant and exploded into summer 2009 Town Hall opposition to Obamacare.  I now think of it not as a political party, but instead as a strong and deep anti-TARP-autos-bailout-stimulus-Obamacare-cap-and-trade-government-spending-earmarks-deficits sentiment.  In simpler terms it’s a powerful populist pushback against the expansion of government.  Over the next two years Republicans can succeed to the extent they respect this sentiment and push for smaller government and a bigger private sector.

9.  Increasing awareness of medium-term fiscal problems

The bad news is America’s long-term fiscal problems are now medium-term fiscal problems.  The good news is that Americans are increasingly aware of those problems, and pressure is building on elected officials to solve them.  While nothing transformative on this front happened in 2010, several trends are important to note.

  • The shift from long-term to medium-term is a result of two factors: (1) inaction on entitlement spending over time by both parties; (2) enormous short-term deficits that are wiping out a projected temporary deficit trough before the Baby Boom spending wave hits.  Those enormous short-term deficits result from (1) the weak economy; (2) actions taken to recover from the weak economy; and (3) a generic expansion of government spending unrelated to economic stimulus.
  • In February the President’s budget launched this round of fiscal debate by intentionally leaving a large deficit hole to be plugged by recommendations from a new Presidential fiscal commission.  The President’s goals for that commission were too focused on the short run, and it’s unclear whether he intended the commission to solve the problem, provide him with cover for a proposal in early 2011, or just to buy him time through a mid-term election year.  Nevertheless, the commission reported in December with a bipartisan package of spending reforms and tax increases, teeing the issue up nicely for 2011.
  • Enormous 2009 and 2010 deficits and massive spending increases in those years raised the prominence of both the size of government and fiscal imbalance as important policy issues.
  • Fiscal crises in Europe and looming fiscal crises in various U.S. States focus attention on the U.S. federal fiscal problem.

It’s always safe to bet against a big painful fiscal policy change, but if it’s ever going to happen, 2011 seems like as good a year as any.  The 1997 budget deal was done by President Clinton, Speaker Gingrich, and Majority Leader Lott, a D-R-R alignment.  This time we have a D-R-D alignment.

10.  Round 2 of the Obama economic team

Three of the four key Obama economic advisor slots will be manned by different personnel in 2011 than a year earlier.

Out (voluntarily):  Larry Summers (NEC), Peter Orszag (Budget), and Christina Romer (CEA)

In:  Jack Lew (Budget), Austan Goolsbee (CEA), ??? (NEC)

  • The departure of WH COS Rahm Emanuel and upcoming departure of Senior Advisor David Axelrod will also have a big effect on economic (as well as other) policy.  My sources say they were heavily involved in almost all major economic decisions, sometimes operating as a separate decision-making layer between the economic team and the President.
  • Treasury Secretary Geithner and NEC Deputy Jason Furman are now the institutional memory of the Obama economic team.
  • Both Lew and Goolsbee are insiders who were promoted.
  • The President should have filled (or at least announced) Summers’ successor at NEC weeks ago.  The fall is policy development time in the White House, and the President hurt himself by not having in place a successor to his top White House economic advisor.

Have a Happy New Year.

(photo credit: Takras)

 

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