Monthly Archives: May, 2011

Victory for Solar Friendly PG&E Rates

By Gary L Hunt on | 1 Comment
The Pacific Gas and Electric Company logo

Image via Wikipedia

That was the headline from the cleantech blog I opened May 27, 2011 as I surveyed my email inbox, sipped my first cup of coffee and tried to wake up.  There were other stories about the decision by the California Public Utilities Commission to approve a revised rate design for electricity rates, but this ‘Victory for Solar Friendly PG&E Rates’ symbolized this morning the inherent conflicts in utility rate design—it is almost always a zero-sum game.

“The California Public Utilities Commission voted down proposals by PG&E that would have been a big step backward for solar customers. The two major victories were 1) the CPUC opted to maintain its 4 tier rate structure, wherein high usage customers are given a strong price signal to conserve electricity or invest in solar to offset the cost of high usage, and 2) PG&E will not be allowed to implement a fixed customer charge,” the blog story from Vote Solar read.

Yes but!

On the warm side of the hills where a growing share of PG&E’s customers live and try to make a living sufficient to feed their family and afford their rising utility bill, the reaction was very different.

The CPUC action in this rate design case split the differences between the parties. It did allow PG&E to reduce the rate tiers but did not permit the increase in the customer service charge. This PG&E rate re-design proposal came about because of outrage in Bakersfield over high utility bills as PG&E was installing smart meters.  This outrage has come to be known as the Bakersfield Effect because it brought customers out into the street ‘totally ticked off’ blaming their smart meter for the high bill caused by the socially engineered rate design.

PG&E’s spokesman Tom Bottorff said after the CPUC decision that PG&E customers who use large amounts of electricity will pay 17.6 percent less than they do now under the new rate design approved but will still pay nearly three times as much as the Tier 1 customers.

For years Tier 1 rates have been called “lifeline rates” designed to provide low cost rates to the first block of energy use to benefit poor, seniors and others in need.  But apartment dwellers in San Francisco and homes in the foggy Bay Area use less electricity and thus benefits from the tiered rate structure because they don’t use their air conditioners in summer. On the warm side of the hills or in the central valley portion of PG&E’s service territory it is a different story.  There the steeply progressive nature of PG&E’s residential rate structure hits hard whether you are low income or not.  PG&E had proposed to reduce the tiers even more than the CPUC approved and more evenly distribute the cost of service by moving a portion of the revenue requirement to a larger customer service charge paid by all residential customers—about $3.00 per month which would have affected the folks in the fog.

The next paragraph in the Vote Solar cleantech blog post revealed the truth about the rate design contest that the CPUC had just resolved:

“Why does this matter? Because rate design, or the process of setting electricity prices, is one of the most important factors in the financial decision for energy customers to go solar. Since much of a solar energy system’s value comes from the utility payments it is offsetting, electricity rates have a significant impact on a solar customer’s return on investment.”

“In the PG&E rate case, the utility had proposed eliminating its 4th residential tier – effectively moving its highest consumption customers into a lower tier and raising rates for others. This closely follows PG&E’s decision to eliminate Tier 5, which recently penalized existing PV owners and makes the changing price dynamics for solar even more extreme – not helpful when you’re trying to encourage investments with long-term payoffs. We modeled the impact of these proposals across a variety of consumption levels, PV system sizes and geographic locations under the two rate scenarios. The modeling showed that most PV customers would lose bill savings in a big way under PG&E’s proposed changes. The graph below illustrates the impact to a typical Tier 4 customer:

Furthermore, PG&E proposed a fixed $3.00 charge in lieu of its existing minimum charge. On policy grounds, Vote Solar opposes flat charges like these because they represent a lost opportunity to incentivize energy conservation and customer investment in PV; in other words, no amount of customer activity would be able to reduce that charge. And the net effect of the proposal would be to drive up rates for low usage customers and reduce rates for high usage customers.”

There you have it!

The reason the solar lobby in California vigorously opposed PG&E’s rate design proposal had nothing to do with the public concern about rising utility bills and EVERYTHING to do with keeping rates as high as possible on the warm side of the hills to improve the competitive position of solar energy companies.

You see solar still costs more even though its costs have been dropping—than other power generation supply options.  But PG&E and other investor owned utilities in California are required to procure 33% of the electricity consumed from renewable sources even if they cost more.  That is one factor driving up utility rates. So the best hope of solar companies to make a profit and be sustainable is to keep the 33% RPS pressure on utilities to buy the output of their projects and keep the rates high to make solar look more cost effective.

It’s enough to make you green—-with envy.  You can be sure this Vote Solar bragging is not taking place in Bakersfield or elsewhere in the Central Valley—but safely in the fog of their 300 Brannon Street, San Francisco office.

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Making Sense of Mixed Economic Signals: Energy Price Fool’s Gold

By Gary L Hunt on | Leave a Comment

US EIA Domestic Oil Production Trend

While world oil prices hover around $100 per barrel, the US is using 2% less energy than its five year average.  Moreover, overall US consumption of oil has been more or less flat since 2004 and down about 10% from 2007 pre-recession highs.  There is plenty of oil in the supply pipeline but prices are volatile.

Oil Economics Reality

Our oil economics reality lesson is that oil price movement has little to do with the actual supply of oil available.  There is plenty of oil today. Oil prices are set in global markets by the actions of thousands of trades each day.  Those prices are decided based upon factors that include the swing in productive oil capacity, the value of the US dollar, global political events that may or may not create trouble, and speculation about whether the future price of oil will go up or down.

Like it or not we are tied to this global oil price phenomenon and oil prices are tied to the value of the US dollar.  The stronger our US economy, the more valuable the dollar and thus the lower the relative price of oil can be to produce the same bang for the speculative buck.

We tell ourselves that while high oil prices still hurt our economy it could be worse.  Our improved energy efficiency is saving us from an even sharper spike in energy prices. There are a few places where that logic is true.  In California, for instance, the systematic imposition of energy efficiency standards the first time Jerry Brown was governor has resulted in energy intensity that is fully one-half the national average. If the rest of the US would adopt, apply and catch up with California’s energy intensity performance we would save a fortune in energy costs.

California prides itself in being green.  We adopt environmental regulations like we mean it and apply them with an intensity that matches.  We are the first in a number of areas.  The first to ban the construction of new nuclear power plants, the first to prohibit our utilities from buying coal fired power from out of state, the first to adopt a 33% renewable portfolio standard.  We were leaders in geothermal and wind and solar before it was fashionable elsewhere.

But we import 20% of our energy from other states.  We pay some of the highest electricity rates with some of the most progressive inclining block rate designs in the nation. And we are beginning to export more jobs to other states than some states create as a result of our onerous environmental and business regulations.

We don’t consume less we just produce less and import more.  As the seventh largest economy in the world California outsources our carbon impact to other states and other nations.  We pay higher prices for many goods and services because they are shipped to us from around the world in a global economy that has become dependent upon substituting higher labor costs for higher energy and transportation costs.

By producing less closer to home are we really doing the planet any favors? Would a cleaner coal plant built in California and run according to our stiffer environmental rules have a greater impact on the planet than the coal plants built in China under must less stringent rules that produce the goods we buy?

We oppose offshore drilling along the California Coast fearful of an oil spill.  Our senators oppose more drilling in Alaska even in the area originally set aside for oil production.  The Alaska Pipeline is beginning to experience maintenance problems because the volume of oil flowing through it as a result of these restrictions causes the oil to cool too rapidly in Alaska’s cold climate and damages the pipeline.

America is accused of paying so much attention to the Middle East in order to protect our access to its oil. Yet a 2006 study by James Murphy, an economist at the University of Alaska Anchorage, and Mark Delucchi at the University of California Davis found that America’s costs to keep oil flowing in the Middle East ranged anywhere between $47 billion and $98 billion per year.  But the amount of oil coming to the United States from the region was worth less than $35 billion per year.

There is plenty America can do to reduce our dependence upon imported oil and other energy supplies.  It requires decisions to produce more energy at home.  Fortunately, America’s technological prowess in developing 3D seismic exploration, horizontal drilling techniques allowing access to more difficult to reach oil and natural gas seams in shales, and hydraulic fracturing to economically recover those resources from unconventional sources is a game changer.  Already unconventional gas production growth in the US has virtually eliminated the need to import LNG from Russia, Quatar and elsewhere.   Today higher oil prices and lower natural gas prices have E&P companies shifting focus to oil with the expectation we will see material increases in domestic oil production as well.  That is exactly what we are seeing in North Dakota, Texas and elsewhere new technologies are being used to unlock access to unconventional energy resources.

The government can help by making energy regulation more predictable. If the government would restore deep water drilling in the Gulf of Mexico and authorize drilling permits in Alaska and exploration along the Atlantic and Pacific coasts America would again be a leader in energy production.  Lower cost, reliable, affordable domestic energy supplies, reduced geopolitical risks and relief from higher transport costs for imports would encourage more domestic manufacturing and job creation.

Higher energy prices undermine higher economic growth rates—what part of this do we not understand?  Getting America’s economic mojo back includes getting back to low cost energy supply from domestic sources to facilitate a rebirth of manufacturing. Doing so is good for America. The best way to reduce emissions is to avoid shipping everything we consume from half way around the world.  The best way to return growth to America’s economy is to make more of what we need at home and keep more of our own dollars working here at home.

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Posted in: American Political Values Choices, Economic Choices: Grow or Die?, Uncategorized

‘GET OUT OF JAIL’ CARD: Brown vs Plata

By Gary L Hunt on | 1 Comment
United States criminal justice system flowchart.

American Criminal Justice System Work Flow via Wikipedia

In a 5-4 decision in Brown versus Plata the US Supreme Court upheld a lower court injunction ordering California to release about 46,000 convicted felons over the next two years to relieve overcrowding.

The decision split the court along its traditional liberal versus conservative lines with Justice Anthony Kennedy, often the swing vote between these blocks deciding in favor of the proposed sweeping release of prisoners.  The conservative justices lead by Anton Scalia were scathing in their criticism of the majority decision saying the courts had overstepped their power and put themselves into a role of supervising the California prison system that was beyond their skill and authority and having failed at that they now propose to solve California’s overcrowding problem by letting the criminals out of jail.

That California prisons are a broken institution is not at issue.  The prison system has been swamped by laws like three strikes, determinate sentencing and mandatory minimums aggressively incarcerating people in response to public outcries over violence, drugs and gangs.

But this is not just a California problem.  The Pew Center on the States reports that more than one in every 100 adults is now confined in an American jail or prison.  The Pew Public Safety Performance Project tells us what we know all to painfully that soaring costs of failed criminal justice systems are hitting the states hard when they can least afford it and worse those policies and systems are not solving the problem of crime, violence, drugs and gangs in any meaningful way.

But there is a worse demographic outcome even than these.  We are wasting a generation of people who could have been productive members of society. One in 30 men between the ages of 20 and 34 is behind bars, for black males that number is one in nine. Men statistically are 10 times more likely to be in jail, but the rate of women being jailed is rising much faster than for men with the rate for black women in their 30s now 1-in- 100. Overall, 1 in 53 people in their 20s is in jail, and 1 in 837 of those 55 and older is in jail or still in jail.

The other problem is politics.  Demand for action against crime is an easy way for politicians to pander to the voters, but the soaring costs of keeping all these people in jail longer and turning them out more hardened criminals isn’t working.   The prison guards union is very powerful in California politics and often has been an obstacle to changes in the prison system.   The problems facing California prisons today are not new but that does not make them easier to solve.

The question is whether releasing 46,000 felons over the next two years to comply with the court order will do anything to solve the fundamental problem causing this high incarceration rate as a consequence of a failed set of social policies, family relationships, and the corrosive influence of drugs, gangs and guns in our civic life.

We know the answer to that question don’t we?  We just don’t know how to solve the real problems.

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Broadband, Net Neutrality and other Telecom Politics

By Gary L Hunt on | Leave a Comment
Exhibit 3-D: Availability of 4 Mbps-Capable Br...

Broadband Access Map via Wikipedia

There was a time when communications services meant landline phone service and long distance calling.  It was a regulated monopoly and Ma Bell was the big muther of all.  Then in 1984 a judge said that after 100 years Ma Bell was an antitrust violating ‘moll’ like every other market power dominating capitalist.  The judge ordered Ma Bell broken up into a series of regional baby bells.  Ever since there has been a slow motion competition to bring all the children back under Ma Bell’s wing.  Today AT&T is once again a VERY big telecommunications company after one of the kids bought out the remnants of the old broken up and worn down AT&T to recreate a scalable national business.

What is different is wireless and broadband communications.  The traditional phone business today is a declining land-line market share business because the action is in mobile wireless and in high speed internet access.

This causes a big problem for the Federal Communications Commission (FCC) because its reason for being largely evaporated with the introduction of competition and choice in communications services.  So it fusses and pontificates over issues often so arcane that only the sacred cows of the industry being gored care much—like net neutrality and more recently high speed broadband access to rural areas of the country.

Recently, the FCC issued its seventh report issued under section 706 of the Telecommunications Act of 1996 requiring annual assessments about “availability of advanced telecommunications capability to all Americans.” To satisfy the law, the FCC must determine whether advanced telecommunications capability (“broadband”) is being deployed to all Americans in a reasonable and timely fashion.  How’s that for a ‘make work’ job for a Federal agency?

The answer the FCC arrived at is, of course, NO it isn’t because the data collected by the National Telecommunications and Information Administration (NTIA) for the National Broadband Map shows that as many as 26 million Americans live in areas unserved by broadband capable of “originating and receiving high-quality voice, data, graphics, and video telecommunications.”

The other problem is that even when it is available as many as one-third of potential customers do not subscribe to the service. Telecom companies say there is no business case to offer broadband under such circumstances and some rural areas have no immediate prospect of being served, despite, according to the FCC, “the growing social costs of digital exclusion.”

OMG!  Not that—digital exclusion!

So the FCC says it must conclude that broadband is not being deployed in a reasonable and timely fashion to all Americans and fashion “remedies” to cure the disease.

The FCC assessment also says that Americans who do not subscribe to any form of high-speed Internet access service because they can’t afford it, they lack of digital literacy, and some perceive that the Internet is not relevant or useful to them. In addition, as many as 80 percent of E-rate funded schools and libraries say their broadband connections do not fully meet their needs (READ: please give us more money!). And to add insult to injury—some available international broadband data services are faster, better but not necessarily cheaper than those in the US. (READ: The United States may lag behind other developed countries.). These data also suggest, according to the FCC that broadband is not being reasonably and timely deployed and is not available to all Americans.

Never mind that more people have phone service and broadband access than ever before and new devices like iPhones, iPad, Android, Twitter, YouTube and other mobile services have radically changed the telecommunications services and mix from the days of Ma Bell.  The FCC says the telecom industry has made great strides to bring better and faster broadband to most Americans. Providers invest tens of billions of dollars annually in the networks that make broadband possible.

So what’s the problem?

Since broadband deployment in the United States is still “not reasonable and timely” says the FCC, the statute directs that the Commission “take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.”

  • Universal Service Fund (USF). In the ‘good old days’ the cost of bringing phone service to rural areas was socialized by charging a small universal service fund charge to every phone bill.  The accumulated money was used to reduce the cost of extending that rural service and is still collected today.  The FCC wants to expand the use of that USF fund to cover broadband.  Part of the current debate is the prudence of changing the terms for using the USF money.  And rural telecoms still want to get money from the fund to improve their system and service in an effort to stay competitive with the big players and reduce the attrition of land-line service as wireless becomes available.
  • Net Neutrality. The second issue causing debate is over net neutrality and whether the FCC should be able to adopt rules that allow some broadband traffic to gain priority (high occupancy lane analogy) for the internet.  Congress has periodically involved itself in this as a virtual civil rights issue but it really boils down to who will pay for the capacity expansion to serve the appetite of online users?  Will it be the biggest users?  Will that cost be socialized?  Can there be premium service that allocates more bandwidth to those willing to pay for additional capacity or speed?
  • National Broadband Plan. The FCC laid out a National Broadband Plan to address these issues and keep itself as the center of attention in the debate. The FCC said it will continue to collect data and assess progress on the issue of broadband availability.  Meanwhile, outside of Washington DC back on Main Street those responsible for providing rural communications services have a different perspective on the problem.  The Rural Broadband Cost Study they produced estimates the investment dollars needed to upgrade rural area lines in to broadband capability is about $10.9 billion and its going to take time given the relatively low return on the investment required.  They got some money from stimulus funding to support their objectives but the FCC report says that pace is too slow for policy-makers.

So there you have it, we all have a need for speed when it comes to our broadband access and we are more than willing to dump our ISP like a hot rock if we can get faster, better broadband service.  We’ll even pay more for it but competition means mostly we will not have to do so.  Mobile communications have also changed the game so radically that many of these access issues are being resolved as a byproduct of the transition to mobile, wireless communications.

It’s good for the FCC to frame the issues and hold conferences to encourage the debate, but we really don’t want them to DO ANYTHING anymore because the government imposed solutions they are likely to offer us bear little resemblance to what we want and what competition is bringing us.

The FCC held a USF reform workshop may 18 2011 to explore how the federal and state governments might split up the task of implementing Universal Service program reforms and what each entity’s long-term Universal Service responsibilities should be.  So instead of sitting through another long winded discussion of arcane telecom issues here is a summary from that workshop.

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CALIFORNIA: Broke and Broken

By Gary L Hunt on | Leave a Comment

California State Capitol, Sacramento

There is good news and bad news in California.  The good news is state tax revenues grew $6 billion more than expected in the latest report reducing the state budget deficit from $16 billion to $10 billion for the year with less than a month to go before the Constitutional deadline for approving a budget.

The bad news is there is no legislative agreement on the budget and little prospect of getting one by the deadline.  The Legislature rarely meets its deadline for budget approval.

Governor Brown proposed to close the deficit with extensions of sales and incomes tax rate increases scheduled to expire to cover half the shortfall and budget cuts to close the rest.  Democrats scream soak the rich, Republicans scream stop spending money you no longer have.

So while Sacramento dithers, out here in the real world stuff happens:

A Pox on Both Your Houses. California voters in the last election approved a ballot initiative to reduce the legislative votes needed to approve a budget from 2/3 of each House to a simple majority.  But Californians are not stupid so they also approved another measure that requires a 2/3 vote of the people to raise taxes so Governor Brown can propose tax increases and the Legislature can put them on the ballot but the people will decide.

California bad-mouthed as not being business friendly. Newly elected Lt Governor Gavin Newsom, former mayor of San Francisco, lead a delegation to Austin Texas to investigate why so many California businesses were moving out of the Golden State and end up on the Lone Star State. In one meeting covered by the media, executives of companies that quit California complained of burdensome regulation, high costs of mandates, and deteriorating business conditions.  One fast food chain executive said it takes more than 2 years to get permits to build one of his restaurants in California compared to 6 weeks on average in Texas—so his company is building 200 more restaurants in Texas and only 4 more in California and those are relocation of existing establishments to better locations.

BayWatch Salaries. Newport Beach’s 13-member full-time lifeguard crew salaries, benefits and overtime pay average over $100,000 each and the top two cost more than $200,000 each(with $400 for sun protection) as the city struggles to rein in pension costs.

Vacation Scams. Despite a policy limiting vacation carryover from year to year to 80 days (640 hours) total accrual, the State of California was forced to pay $2.75 billion for more than 75.5 million hours of excess vacation accrual because its managers failed to enforce its policy.  One prison doctor accumulated more than two and one-half years worth of vacation and was paid $594, 976 upon retirement. An audit report says 29% of state employees leaving the system were paid for excess vacation time and 400 received an amount equal to more than one year of salary.

We Pay them HOW MUCH!#@? The San Jose Mercury Newspapers have posted an online database of public official salaries creating a controversy over intrusions into employee privacy not that pales next to the controversy the facts revealed.  Public officials are well paid in California—very well paid.  Some part-time elected city council members are paying themselves nearly $100,000 per year while others get $100 per meeting for their service.  Some cities, counties and special districts pay the health insurance costs and pension contributions for part-time elected officials.  In some instances the annual cost of benefits is a multiple of the salaries paid.

Wined, Dined and Termed Out. California has more than 300 state boards and commissions many of which have turned into ‘way-stations’ for termed out legislators and others with political connections.  In the most egregious cases, these board appointments are paid $125,000 per year or more to attend a monthly meeting lasting several hours.  Governor Brown responded to the last newspaper expose by proposing to eliminate a handful of these boards which met with howls of resistance from legislative leaders and the appointed politicians.

So what?

California is careening down the freeway out of financial control with the radio blaring the song “ Do You Know the Way to San Jose” hoping desperately that Silicon Valley will take off again and refill the treasury with gold except Intel decided to build its two new chip making plants in Arizona and all those millionaires California needs changed their legal residence to Texas which has no income tax or capital gains tax.

California is broke and our state government is broken and even the Terminator failed us so we hired back Governor Moonbeam who is busy negotiating new labor agreements which do include some pay and benefit concessions from state employees but do little to change the fundamental flaws in the benefits structure that got us in trouble.

Oh, there is one more thing, The San Francisco Chronicle reported that former Speaker Nancy Pelosi’s office sought and won waivers from ObamaCare requirements for major San Francisco employers who said they could not afford the required coverage mandates under the new law and unless they received waivers they would terminate their health insurance plans.  They got them quietly until the press found out.

Have a nice day!

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Fracking Safety for Unconventional Oil & Gas Domestic Growth

By Gary L Hunt on | 4 Comments

US Shale Gas Potential to 2035

Fracking Safety Review Panel named even as new unconventional production records are set.

President Obama’s Blueprint for a Secure Energy Future seeks to reduce the U.S.’s dependence on oil and increase the use of renewable energy sources.

North Dakota is doing its part by setting another record production month in March with reports that it pumped 359, 589 barrels of oil per day in March according to the North Dakota Department of Mineral Resources.

But no good deed goes unpunished as the old saying goes so back in Washington DC:

  • On April 16, 2011 House Democrats Henry A. Waxman, Edward J. Markey and Dina DeGette released a report they said was “the first comprehensive national inventory of chemicals used by hydraulic fracturing companies during the drilling process.” used by the 14 leading oil and gas service companies in the U.S.  They want the industry to disclose all the chemicals used in fracking and want EPA to regulate their use in hydraulic fracturing to prevent groundwater contamination.
  • On May 9, 2011 U.S. Department of Energy Secretary Steven Chu formed a subcommittee of his Energy Advisory Board of industry, environmental and state regulatory experts to make recommendations to improve the safety and environmental performance of hydraulic fracturing from shale formations in response to fears that use of fracking chemicals can cause groundwater contamination.
  • Frankly, the oil and gas industry has not helped allay concerns about groundwater contamination by its reluctance or refusal to release the ingredients used in fracking fluids.  This has fed fears that the chemicals are dangerous and given opponents of horizontal drilling using hydraulic fracturing more ammunition for their NIMBY cause.

The steady increase in domestic oil and natural gas production from unconventional sources is a genuine American energy success story.  US DOE’s Energy information Administration says recoverable unconventional natural gas deposits may represent more than 100 years of average domestic supply and oil recovery from unconventional sources is offsetting the foot dragging on drilling in the Gulf and deep water along the coasts needed to replace rapidly depleting conventional vertical drilling resources.

So let’s get on with this health and safety review and set some best practices to assure that hydraulic fracturing is the safe, reliable, effective E&P strategy we think it is for putting America back into the energy production big leagues.

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Obama plays the Energy Shot Clock

By Gary L Hunt on | 2 Comments
Trans-Alaska Pipeline System (PS: pump station...

Image via Wikipedia

After months of vilifying oil and gas companies for being—well—oil and gas companies by suspending drilling after the Gulf oil spill, imposing new regulations that raise costs and undermine America’s competitiveness without much change in safety or environmental protection, and then abusing administrative discretion with the slowness of regulatory review—suddenly domestic energy production to bring down high gasoline prices in time for the 2012 campaign is a high priority.

Do I sound cynical?

High energy prices are what the president’s base has always wanted.  It is easier to use the regulatory apparatus of government to create uncertainty and thus raise prices than it is to argue for the legislative changes necessary to keep prices high.  High energy prices are seen as inducing more energy conservation and efficiency.  High energy prices make renewable energy options more attractive.  High energy prices are the sine non qua for the transition to a clean energy economy.

Yes, but. . .!

High energy prices hurt the president’s reelection campaign.  High energy prices hurt economic recovery and slow American jobs creation just when he needs it most.  But high energy prices also, perversely, keep that bull’s-eye on the heart of big oil making them a perfect ongoing target for politicians—-except now it is Republican politicians tarring President Obama with the cynical sin of ‘protesting too much’ while Americans suffer.

That is the reason President Obama said in his weekly radio address that his Administration will extend existing leases in Gulf of Mexico, off Alaska Coast, hold more frequent lease sales in an attempt to bring down high gasoline prices.

But the timing of the President’s announcement was also not accidental.  It coincides with action in the Us House of Representatives on three bills sponsored by the Republican majority to expand and speed up offshore oil and gas drilling. The Republicans understand the President’s strategy and thus seek to take the energy issue away from him by forcing his hand.  So they adopted the president’s own words saying the goal of the bills is to ease gasoline prices, but they also acknowledged it won’t happen right away.  Reflexively, the White House opposed all three bills knowing even if they pass the House they are unlikely to pass the Democratic-controlled Senate.  Administration spokesmen said the Republican measures would undercut safety reviews and open environmentally sensitive areas to new drilling. But President Obama also adopted some of the bills’ provisions to suck more oxygen out of the Republican attempts to box him into action.

  • Obama said that he would extend all Gulf leases affected by his temporary moratorium on drilling imposed after last year’s BP oil spill by one year. That would give companies additional time to begin drilling.  But the Administration needed to take this action because the drill rig are expensive and companies can’t afford to let them sit idle so a growing number of Gulf of Mexico rigs were being pulled out and moved to Brazil and elsewhere so they can make money.  Obama did not want to get hammered in the heat of the campaign by allegations that he gave away America’s domestic production opportunities by dithering and thus is the cause of high oil prices.
  • New safety requirements put in place since the BP spill also have delayed drilling in Alaska, so President Obama also administratively extended lease terms there for a year. An oil lease typically runs 10 years.  The problem here is the Alaska Pipeline is facing increasing operating problems due to reduced oil flows.  When the pipeline is full oil travels faster and retains heat, lower flows slow the speed of the oil subjecting it to cold Alaska temperatures reducing pipeline efficiency, increase costs of maintenance and risking leaks.  Shell Oil plans to drill off the Alaska coast for more oil have been delayed by an air pollution permit, but now a concerned President Obama is forming an’ interagency task force to coordinate the necessary approvals’. He also will hold annual lease sales in the vast National Petroleum Reserve on Alaska’s North Slope to get oil flowing again through the Alaska Pipeline. Republicans bills proposed exempting drilling off Alaska from air pollution permit required the Administration has used to avoid action. Allowing additional drilling in Alaska is a prudent, safe and economic decision to keep the energy infrastructure already in place working to meet America’s energy needs.  Why delay?  Well the Administration was loathe to help Alaska while Sarah Palin was on his back.  But high oil prices also became higher risk in the President’s calculus since he could not afford the blame for shutdown of the Alaska Pipeline during a period of high prices because his Administration would not let the oil companies put more oil in the pipe.
  • Lease sales in the Gulf of Mexico postponed last year will be held by mid-2012, coincidentally the same time required by the House Republican bills. The President said he would direct the Interior Department to speed up environmental reviews and seismic studies needed to assess how much oil and gas is recoverable along the Atlantic Coast.
  • The president repeated his call to eliminate taxpayer subsidies to oil and gas companies. The problem with the action he proposes is those “taxpayer subsidies” are the same ones applicable to every other business in America and cutting them for all risks increasing uncertainty thus slowing job creation.  Cutting them just for oil and gas companies will be seen for what it is—politics.

So like it or not energy is shaping up to be a big issue in the 2012 campaign.

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Energy Subsidies and other Boondoggles

By Gary L Hunt on | 1 Comment

President Obama responded to higher oil prices by calling for repeal of tax subsidies on oil companies.

Never mind that oil prices are set by global commodity markets and keep supply and demand in balance using price movement to restore equilibrium—a process as old as time. The more it costs the less we use and price comes down to clear the market demand.

Investigations were announced and months from now when commodity prices fall again the panel investigating will report they found no basis for market price manipulation.

But in today’s economic climate any call for subsidy cuts sends a panic rushing along K Street where lobbyists turn their meter on and go press the political flesh to count votes and and protect their clients from irrational political behavior.  But the Daily Caller’s Chris Moody ran a story about a new Federal subsidy being proposed:

“The House is expected to consider a bill soon that would offer $5 billion in tax credits to the natural gas industry, a proposal that is causing a split among conservative members and groups.

The bill, called The New Alternative Transportation to Give Americans Solutions, or NAT GAS Act, would provide a generous tax credit to transportation companies that buy a vehicle that runs on natural gas. The measure has 180 bipartisan co-sponsors, including many of the chamber’s most conservative Republican members.

But some are crying foul over the special treatment that the government would be providing to the natural gas industry, arguing that it is not Washington’s role to “choose winners and losers” by offering tax credits to promote one energy industry over another. The bill’s proponents, however, say promoting natural gas — a plentiful resource in the United States — will help wean the country off foreign oil, provide resources to alternative energy sources and increase the nation’s energy security. A coalition of nearly two dozen free-market and conservative groups sent a letter to members of Congress in March urging them to avoid new subsidies and tax credits, and they plan to blast anyone — especially Republicans — who do.”

What are they thinking?

There is an energy revolution going on in the United States right now and it is being led by the amazing success of unconventional oil and natural gas exploration and development.  Even the US Energy information Administration called unconventional oil and gas a “game changer”.  US domestic supply of oil and gas is actually going UP despite the best efforts of the Administration to stall or kill-off deep water drilling in the Gulf of Mexico and anywhere else in the country.  Meanwhile, President Obama goes to Brazil and announces the US wants to be a ‘customer’ of new Brazilian deep water oil output. DUH!

The oil and gas industry does not need a new Federal subsidy—it needs for the government to get out of the way and let the revolution happen!

I could almost turn into a Ron Paul supporter over issues like this.  Let’s hope nothing comes of this.

America’s failed “industrial policy” of picking winners and losers among fuels, technology and companies is undermining our national security making us weaker and more vulnerable to unreliable but politically correct choices.  It is driving up our costs and weakening our competitive advantage.

Once upon a time we had markets for the purpose of forcing business to actually compete for customers, compete to reduce costs and increase quality.  Today the core competency of many firms is the hiring and managing of K Street lobbyists.

For the record, I favor the elimination of the subsidies for oil and gas companies.  I also favor eliminating those for ethanol, for wind, for solar and coal and nuclear all replaced by a level playing field where ‘least cost, best fit’ is the Darwinian industrial policy and the role of government is to create a level playing field where all can compete.

If our environmental strategy would strike a reasonable balance between protecting our environment with clean air and water, reasonable habitat protections and mitigation of damage while simultaneously balancing those environmental interests with our compelling national interest in economic growth and development and a thriving industrial base creating jobs—my forecast is we’d see the clean energy economy take off.

And if we would change the tax code to make repatriating earnings and investing in America more attractive than keeping investment, manufacturing and earnings off shore our economy would keep growing here at home rather than in China or Far-off-istan!

There ends the rant.

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Posted in: Economic Choices: Grow or Die? | Tagged: , , , , , , ,

Is China a Bubble about to Burst?

By Gary L Hunt on | Leave a Comment

“All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor. We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”-– Harold L. Sirkin, a BCG senior partner

That is the conclusion of none other than The Boston Consulting Group after a recent comparative study of China and American relative competitive positions.  It’s good news for America since a combination of forces have virtually stripped our country of its strategic manufacturing capacity while demographics drain our craft and mechanical skills as a generation of workers retire with few replacements being trained.

My wife is a high school teacher.  At her school there has been a steady series of budget cuts over the past few years with nothing left of arts or music or any “industrial arts” as shop and woodworking were called when I went to high school.  Gone!  We only seem to want college prep classes and every kid is expected to go to college.

But there is a place in our country and every country for electricians, plumbers, welders, mechanics and a hundred other skilled craft careers. We are losing our sense of pride in such craftsmanship even though we need those skills more than ever.

One of the great fears of my utility clients is the tsunami of retirements washing over them over the next five years where as many as 40% of skilled craftsman will retire.

What does this have to do with China and its bubble?

China is not immune from demographic change.  In fact, it has a worse problem than we do in the US because its one child policy is setting up a profound change in China’s productive work force for the future.  But before that crisis hits China faces a bigger economic threat in the erosion of its export base as rising costs and rising expectations reduce its competitive position.  That is the basis for BCG thinking and it seems right on the money.

Will American manufacturing prowess roar back to life?

Hey, Happy Days was cancelled and Richie Cunningham went off to college too.  This isn’t the 1950’s all over again, but America’s competitive advantage future is to produce more of the products from our own advanced technology R&D here at home rather than risk a bleeding of intellectual property and risk of piracy offshore.

China has built its export powerhouse out of low cost manufacturing of products invented elsewhere.  Commoditizing old technology to drive down the cost is good for business, but China must now focus on R&D and domestic consumption of the goods it produces in order to offset the drain of its manufacturing cost advantage as China takes its place in the Darwinian cycle of having market share taken off-shore by lower cost producers.

Producing more of our own products at home is a good thing.  That it can again be done competitively with offshore competitors like China is delicious irony.

Posted in: China Choices: Theirs & Ours | Tagged: , , ,

California AG Denies Voters Standing in Court

By Gary L Hunt on | Leave a Comment
Official "Vote NO on Prop 8" logo

Image via Wikipedia

I didn’t vote for Proposition 8 but it passed anyway. The battle over California’s Proposition 8 banning same sex marriage is working its way through the courts.  The 9th U.S. Circuit Court of Appeals accepted the case but now are wondering who will represent California in the matter after proponents of Prop 8 filed a petition for standing.  The 9th Circuit asked the California Supreme Court to decide whether voters who favor the ballot proposition have standing in the case.

So what’s the big deal?

It may sound logical that voters would be able to be heard in the matter, but in her amicus brief to the California Supreme Court, Attorney General Kamala Harris said that only public officials exercising the executive power of government have authority to represent the state when laws passed by voters or the Legislature are challenged.

This case is messy because former Gov. Arnold Schwarzenegger and now current Governor Jerry Brown refused to appeal Federal District Court judge Vaughn Walker’s decision to overturn Proposition 8 as a violation of civil rights. Unless an appeal is made in the case, Judge Walker’s decision will stand by default despite the fact that a majority of California voters approved the ballot measure.

Proponents of Proposition 8 cry foul!  They accuse the state’s elected leaders of failing in their duty to defend the laws of the state.  They say that failure by the State officers to act in this case should give them standing to defend the law themselves.

So the big deal is that California’s elected officials have decided to sit on their hands and not file an appeal of Judge Walker’s decision because they don’t support Prop 8 notwithstanding the inconvenient truth that it was approved by the voters.  By sending the matter back to the California courts, the US Court of Appeals is effectively saying California needs to be represented by SOMEONE so who will it be, folks?

The Supreme Court should allow citizen standing in the case because of failure to act by state executive officials.  To do otherwise makes a mockery of the initiative and referendum process and undermines the rule of law.

Both the proponents and opponents of Proposition 8 deserve an expeditious resolution in this case.  To taint that decision by allowing elected officials to selectively support the laws they like and ignore the ones they do not like would be a miscarriage of justice on top of the malfeasance in office they already have committed by playing games of political correctness instead of doing their job.

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Posted in: American Political Values Choices | Tagged: , , , , , , ,
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