Tag Archives: Politics

Energy Jobs: Automation and Numbers – 2/10/17

If members of Congress and the new President are really dedicated to wringing more jobs out the energy sector, then they should make sure they’re looking for them in the right place.

Since oil prices collapsed in 2014, Bloomberg estimates that 440,000 jobs in the U.S. have been lost as a result of the downturn. As a result, the world’s biggest oil services companies have had to spend billions on severance costs and, now, few seem ready to risk a repeat of that huge expense. Many in the oil industry are increasingly turning to automation to replace many of the lost jobs, a trend unlikely to change as technology costs continue to fall relative to wages. The UBS estimates that the US oil industry will only need about half as many workers per barrel of oil produced post-2017 versus pre-2015.

That doesn’t necessarily mean that states known for oil output are heading for high unemployment rates. For example, Texas may have suffered greatly during the 1980’s oil price downturn, but its economy has since become far less dependent on the commodity thanks to strong growth in other sectors. In fact, Texas has had net creation of new jobs recently despite the severe oil price downturn.

Only about 2.5% of Texas’ employment was related to natural resource extraction before the crisis because oil was and increasingly is not a particularly labor intensive industry. Even now Austin and Dallas are thriving with job growth rates of 4.3% and 4.2% respectively because neither city is dependent on oil prices to drive economic growth. Overall, the biggest oil producing state in the U.S. has held together just fine despite the lower-for-longer oil prices.

Meanwhile, large number of new energy jobs are coming from the wind and solar energy industries. U.S. wind-farm developers and suppliers had more than 100,000 workers at the end of the year, compared to 65,971 coal mining jobs at the start of last year, according to the U.S. Energy Department.

Perhaps surprisingly, the top 10 congressional districts for wind energy are all in Republican-dominated red states such as Iowa and Texas, according to American Wind Energy Association CEO Tom Kiernan.

“We’re hiring workers in the rust belt,” Kiernan said in an interview. “We’re helping families keep farms they’ve held for generations. The lifeblood of our industry is in rural America.”

And the extension of two key federal tax credits by the Republican-controlled Congress at the end of 2015 along with the fact that the new Energy Secretary, Rick Perry, saw Texas become the largest producer of wind power during his term as Governor gives some cause for optimism in the renewable energy companies.

Green Businesses – 1/25/17

The markets decide risk and return, not the federal government. That’s good news for businesses still interested in going green.

More than 530 companies and 100 investors signed the Low Carbon USA letter to support policies to curb climate change, invest in the low carbon economy, and continue U.S. participation in the Paris Agreement.

“All parts of society have a role to play in tackling climate change, but policy and business leadership is crucial,” said Lars Petersson, president of IKEA U.S. “The Paris Agreement was a bold step towards a cleaner, brighter future, and must be protected.”

The list of signatories to the Low Carbon USA letter has doubled since November, and includes DuPont USA, General Mills, HP Enterprises, Pacific Gas & Electric, Salesforce.com, Unilever, and more.

In recent decades, global economic development has increasingly been impacted by sustainability considerations. Be it legislation or consumer demand, companies are acting more and more with the environment in mind.

  • Investors controlling more than $5 trillion in assets have committed to dropping fossil fuel stocks from their portfolios, according to a new report on the trend.
  • Climate change criteria shape the investment of $1.42 trillion in assets under management, a more than fivefold increase since 2014.
  • Microsoft-founder Bill Gates and over two dozen other business leaders launched a $1-billion fund to finance energy innovations.
  • Google has pledged to operate on 100% renewable energy in 2017.
  • Microsoft announced a massive wind power purchase agreement in a deal to buy 237MW of capacity from projects in Wyoming and Kansas.
  • Smithfield Farms, the largest pork producer in the world, promised to reduce greenhouse gas emissions 25% by 2025.
  • Walmart has committed to removing a gigaton of emissions from its global supply chain by 2030.
  • Over 2.5 million Americans now work in the clean energy industry, making above average wages.

Prices are dropping, making green power sources like solar and wind competitive even without subsidiesSolar energy is already the lowest-cost option in some parts of the world and expected to offer a better global average return on investment than coal by 2025.

Risks associated with stranded assets and weak future performance are also steering investors away from fossil fuels, especially coal, and towards green investments.

Funding coal mining operations in the U.S. is only becoming harder as credit ratings for coal companies deteriorate. Credit downgrades have outnumbered upgrades among coal mining companies this year by about eight to one, Bloomberg data show.

OPEC and U.S. Energy Independence – 12/8/16

The president-elect says he will make America energy-independent. If it is successful in raising crude oil prices, OPEC may help him do just that.

The U.S. has already moved significantly closer to energy independence in recent years. Overall, the net amount of energy brought into the country fell to 11.2% of domestic need in 2015 from 30.1% in 2006, according to Gregor Macdonald, an energy analyst.

Total energy independence may be impossible for the U.S. to achieve, for now, the country is at least pretty close when it comes to oil. And most energy experts now say the biggest barrier to additional increased domestic oil production today is the low price of crude, not government regulation.

Although making it easier to drill new wells would help the industry move quicker to increase production, output from U.S. shale drillers is mostly constrained by the fact that a majority of them wouldn’t make a profit off selling oil for $50 a barrel.

While the president-elect could technically act to raise oil prices, it’s unlikely he would. To rise crude prices is to drive up prices at the pump for Americans, which has never been a popular move and couldn’t possibly pass the smell test in Congress. OPEC on the other hand… OPEC could cut output from its member nations as a way to manage the supply and demand mismatch.

An output reduction by the group would be a massive victory for U.S. oil and gas producers. U.S. firms would increase profits, as well as their market share at the expense of OPEC and any others reducing output. Of course, a U.S. revitalization would only happen if OPEC production cuts actually increase global prices.

In 2008, the U.S. produced five million barrels a day of crude oil compared to 8.7 million barrels in 2015, according to the Energy Information Administration, down from a peak of 9.6 million barrels before the price collapse. And the EIA expects that production to increase substantially through 2040.

The strength of American oil production gives more leeway in foreign policy that challenges OPEC nations.

In the West Texas’ Permian Basin, the U.S. Geological Survey recently estimated that the area’s Wolfcamp Shale alone held 20 billion barrels of oil (In 2015, the United States consumed a total of 7.08 billion barrels of petroleum products).

Today, operators in the Permian Basin produce about 2 million barrels a day. Brigham Resources LLC has suggested that production could increase to 4-6 million barrels per day within a few years since the limitations are more economic than technological.

The U.S. might not be totally energy independent anytime soon, but the threat of an OPEC oil embargo feels less ominous than ever.

Emissions Will Probably Still Fall – 12/6/16

The president-elect’s climate policy won’t be anything like the Obama administrations, but emissions could still drop to historic lows.

In a report published by the Breakthrough Institute, pointed out that real progress on reducing carbon in the atmosphere has been driven so far by specific domestic energy, industrial and innovation policies, “not emissions targets and timetables or international agreements intended to legally constrain national emissions.”

International and even national action on climate has rarely been the driver of emission declines. The Kyoto accords which committed advanced nations to reduce emissions between 1990 and 2010 did little to reduce dependency on. And even the Obama administration’s strictest bill on emissions, which was blocked in the Senate in 2009, proposed emissions limits that were higher than what emissions have turned out to be due to the recession and the power sector’s move from coal to natural gas.

Should promoting natural gas and energy security take precedence over bringing back coal jobs, the drop in carbon emissions could come sooner than expected. Burning natural gas produces functionally half the emissions of coal per unit energy produced.

If the Clean Power Plan is dropped and the U.S. drops its commitment to the Paris accord, the nation will still be on track to reduce emissions so long as the nation’s nuclear power plants stay online, tax incentives for wind and solar energy are left alone, and the shale energy revolution continues, according the report’s authors, Ms. Lovering and Mr. Nordhaus. Meeting those conditions, they write, “the U.S. might outperform the commitments that the Obama administration made in Paris.”

So the loss of the Clean Power Plan might not even make that much of a difference since the shift from coal to gas will likely happen regardless of what action the federal government takes. A study commissioned last December by the Environmental Defense Fund concluded that most states could comply “by relying exclusively on existing generation, investments already planned within each state and implementation of respective existing state policies.” In other words, state level initiatives were already on track to make the CPP irrelevant.

As far as support for sources of clean energy, production tax credits for renewables have already been extended by a Republican-controlled Congress until 2021 and the new administration is already indicating it favors nuclear energy.

Even the federal energy program known for its part in the Solyndra debacle is likely to survive. Given that it would take new legislation from Congress to kill the program, that the program’s loan portfolio generated about $1.65 billion in interest payments to date, and that the program is loans to clean-energy projects, as well as those including coal and natural gas, it will probably survive. Still, every new loan must be approved by the Energy Secretary so whoever takes over the Energy Department could effectively suffocate the program by not signing off on new applications.

Commercial self-interest will also keep interest in clean energy high as the costs of clean energy tumble. Solar power is closing in on gas and coal as an attractively cheap source of power, according to Bloomberg New Energy Finance.

And solar costs are expected to fall about 60% over the next eight years.

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The falling cost of solar power and the 80% drop in the cost of batteries for electric vehicles and home energy storage since 2008 are expected to curb demand for coal and oil in the coming years. Opportunities those cost declines offer will be tapped so long market forces are allowed to run their course.

On the matter of energy independence, according to the 2016 edition of the International Energy Agency’s World Energy Outlook, the United States could become energy independent as soon as 2040 on current policies thanks to rising shale oil and gas production, as well as increasing fuel efficiency. The Trump administration only has to maintain existing CAFE standards and U.S. dependence on oil from the Middle East would drop like a rock.

Electric Vehicles and the President-Elect – 11/29/16

According analysis by Bloomberg New Energy Finance (BNEF), early 2020’s electric vehicles (EVs) should be cheaper than equivalent hybrid and even gas-powered models. It is likely that many of the campaign promises (cutting fuel efficiency standards, letting tax credits expire, etc.) of the president-elect would create speed bumps for EV adoption, but what impact could he really have on adoption?

The rise in EV adoption can be attributed to consumers concerned about climate change, falling EV prices, and government subsidization. Now consumers who get an EV for the sake of the environment won’t suddenly start buying gas guzzlers just because there’s a new president so this article will focus on the effect the administration could have on the other two factors.

Prices

The difference in price between electric vehicles and conventional ones comes down to how they store and use energy. Compared to most batteries, fossil fuel products like gasoline store more energy in less weight making them the cost-effective option even though electric vehicles lose weight by not needing a combustion engine. Batteries have just been too heavy and costly for electric cars to compete in essential areas like driving range and price. By 2020, that fatal flaw could be a thing of the past.

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Since 2010, the cost of EV battery packs has fallen over 50%. That trend will continue.

Tesla’s latest Lithium-ion battery already beat projections for energy density versus price by 7 years according to BNEF. Those numbers come before the company’s Gigafactory in Nevada comes online and let it really begin taking advantage of economies of scale.

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According to Tesla, battery cell production will start in 2017 with its mass production methods lowering the battery prices from $190 per kWh to an estimated $130 per kWh once complete.

Tesla’s latest car, the Model 3, currently starts at $35,000 with over a fourth of the price coming from the cost of the battery. A $190 to $130 per kWh cost change would mean a price reduction in the thousands. Since replacing battery packs also make up most of the operating costs associated with a Tesla EV, the lifetime cost of owning an EV would plummet relative to conventional vehicles.

A permanent reduction in battery costs isn’t something the federal government can change; however, what one thing can change could still work out in at least Tesla’s favor. That thing is trade agreements.

If the president-elect throws out NAFTA or starts a trade war with Mexico, then it will be electric car maker Tesla Motors that benefits. Automakers like Ford Motor Co., GM and Fiat Chrysler have invested billions in Mexican plants that produce parts for their vehicles. By contrast, Tesla’s manufacturing and assembly are done almost entirely in California and Nevada. Any tariffs on outsourced production would only raise the prices of conventional cars relative to Tesla’s EVs.

Subsidies

Technically, the president-elect could eliminate a $7,500 federal tax break for electric cars, but that would be harder than it sounds. Since subsidies were designed to phase out after each automaker reaches its 200,000th domestic EV sale, Tesla is much closer to that threshold. Removing the tax break now would only hurt automakers hoping to develop their own competing EV models. It’s not hard to see how car makers already invested in developing EV’s, like Nissan Motor Co. or General Motors Co, would likely fight tooth and nail to keep the subsidy.

Each state also has authority over its own electric-car subsidies that the Federal government has no control over. For example, Louisiana residents can get an additional tax credit of almost $10,000 for buying a long-range electric car. In Colorado, it’s an extra $5,000. Remember the price of Tesla’s Model 3 is about $35,000 before subsidies so those tax credits are a pretty substantial chunk of the EV’s total cost.

Conclusion

Between falling battery costs, interest of traditional automakers in keeping federal subsidies, and state level subsidies, the usage of electric vehicles will rise regardless of guidance or lack thereof from the White House.

OPEC Deal: Problems for Before and After – 11/21/16

Even if a deal between OPEC members is reached, increased supply from Iraq and Iran threatens Saudi Arabia’s control over the group. Iran and Iraq both asked for exemptions from any cuts in the deal citing a need to recover from sanctions and a need to fight the Islamic State respectively.

Iraq and Iran have raised oil output to record highs. Together they produce more than 8 million barrels of oil a day, almost a quarter of the oil pumped by the group and nearly as much as Saudi Arabia, the group’s largest producer.screenshot-2016-11-25-at-7-19-54-pm

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The decision of whether or not to allow the exemptions was ultimately delayed to the meeting on Nov. 30, where OPEC ministers will work out a shared cut in production aimed at reversing a price slide that has devastated the budgets of oil-dependent nations like those in OPEC. Benchmark Brent crude fell from more than $115 a barrel in mid-2014 to less than $30 before rebounding to a still low $45-$50 range.

Both Iran and Iraq would benefit from the higher prices, but they benefit more if they were able to sell more oil while others cut back. While a special exemption might be necessary to make the deal work, it would leave Saudi Arabia to shoulder most of a collective decrease and sacrifice its market share for the sake of its two biggest OPEC competitors.

If there’s no agreement to restrict output, the International Energy Agency has said that oil prices are likely to fall in 2017. OPEC’s own estimates of supply and demand also show that even following through on the agreement would barely drain a record oil surplus without the cooperation of non-members like Russia.

No non-OPEC nations are likely to make substantial cuts to their output. Russia is producing at a post-Soviet era high and has repeatedly said it “prefers” a freeze to a cut. And participation from other major producers like the U.S. or Canada has never been realistic. The U.S., the only oil producer on par with Russia and Saudi Arabia for total output, in particular could cause trouble for the deal. It was the massive increase in U.S. shale oil production combined with lackluster global demand for oil that caused the glut in the first place. Should oil prices rise as intended, revitalized shale driller output will likely put a ceiling on how high they can actually go.

Exxon and Climate Change Risks – 11/3/16

At ExxonMobil’s annual shareholders meeting in May, Rex Tillerson, CEO and chairman, addressed climate change directly for the first time in years.

Still, it’s not as though he had much choice.

With Exxon under investigation by New York’s attorney general for allegedly misleading the public on climate change and the ratification of the Paris agreement on climate change, shareholders wanted answers. With governments in all major economies committed to reducing carbon emissions, institutional investors are asking what the oil industry plans to do.

Of the 11 proxy items Exxon shareholders put forth for a vote this year, six dealt with climate risks. None passed, but the votes they attracted demand attention. A proxy asking that Exxon assess and report on the potential impact that climate-change policies on its business reached a surprisingly high 38%.

Big oil companies are often seen as solid investments. Oil products fuel most transportation and transportation is the backbone of the economy, not to mention there seemed to be an inexhaustible amount of oil to find. Those facts haven’t changed, but there are important issues that get glossed over: Greater fuel efficiency (or electric cars depending how far ahead you look) mean less oil demand, extracting oil is getting more expensive as exhausted sources of crude oil in accessible areas force exploration of the Arctic and beneath the oceans, and environmental regulations are adding even more of a burden. If you toss in shale oil and low oil prices, then existing business models look shakier than ever.

exxon-profits

The combination of the myriad of problems facing them raises the question of how major oil companies will respond as the ground shifts underneath them. Few companies have more to lose than Exxon and investors pushing it to take better account of those risks.

To achieve the goals of the Paris accord, it is likely that a large amount of known hydrocarbon reserves must stay in the ground, barring some miraculous new carbon capture technology. Not extracting (see: not selling) that oil translates to trillions in losses for Exxon and others as their holdings become worthless. Unlike most companies, Exxon has refused to write down the value of their reserves in light of cheap oil in line with its 2014 report denying that any of its reserves were at risk of being stranded. Many are skeptical of that particular quirk of accounting, not the least of which being the SEC.

Nervous that their concerns are not getting through, Exxon’s biggest shareholders are pushing for more power over the board of directors. The one proxy that passed at May’s meeting would allow shareholders that have owned at least 3% of Exxon’s outstanding shares for at least three years nominate their own candidates for the board. In addition, Blackrock, the world’s biggest asset manager and Exxon’s second-biggest shareholder, voted against two of Exxon’s directors this year, possibly in retaliation for their reluctance to engage in a private session about climate risks.

Even if it comes grudgingly, Exxon is being forced to acknowledge that climate risks pose a very real threat to its business model. How much progress shareholder’s make between now and the next annual meeting will certainly be interesting.

Washington Voters Consider Carbon Tax – 10/12/16

While the rest of the country is deciding who will become the next president, Washington state will also be voting on the country’s first revenue-neutral carbon tax.

Long held in esteem by economists, a carbon tax is seen by many as the most efficient means of embedding the environmental cost of carbon dioxide emissions into the price consumers and businesses pay for energy. By making emissions more expensive the tax is intended to be a market-based solution that lets businesses decide the best approach to reductions. And because the revenue is used to cut other taxes, the market distortions caused by government intervention are minimized.

And yet, the carbon tax is finding middling support. A poll of support for Initiative 732, as the Washington initiative is known, has found voters roughly split on the issue with resistance coming from both the right and left. Besides the usual opposition to any emissions regulation, some environmentalists believe the measure doesn’t go far enough.

After Democratic Governor Jay Inslee’s proposed a cap-and-trade plan modeled on California’s failed the Democratic-controlled state House or the Republican-controlled Senate, I-732 was supposed to be a compromise to satisfy both sides.

The measure would impose a $15 tax per ton of CO2 in the first year, rising to $25 in the second, and by 3.5% after inflation annually to $100 in current dollars. It would also add 25 cents to the price of a gallon of gasoline.

The measure is projected to add about $8 to the average monthly electric bill. The revenue from the tax would be returned to taxpayers via a cut in the state sales tax, elimination of a business tax, and a tax rebate of up to $1,500 a year to 460,000 low-income workers.

The main reason some environmentalists oppose the measure is its being revenue-neutral. Those people want the revenue I-732 collects to go towards other programs even if it means cutting its appeal and chances of succeeding.

Since more businesses are seeing carbon taxes as the least harmful means of accomplishing emissions reductions, it will be interesting to see how the vote in Washington will go and whether other states will follow its example.

Clean Power: Slow 2016 Obscures Strong Potential – 10/11/16

Following the surprise extension of tax credits for wind and solar last December, growth in the clean power industry appears to be stalling… until you look past the surface.

In 2015, the number of long-term power-purchase agreements (PPAs) signed by corporations reached a record high for wind and solar.

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Now prices agreed on in such agreements have fallen to all-time lows, according to Bloomberg New Energy Finance (BNEF).

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But the clean power being slightly cheaper in 2015 than in 2013 doesn’t explain why the number of agreements spikes so violently in 2015. For that explanation we return to the tax credits and way that companies and developers handle such incentives.

First and foremost, the extension of the tax credits was unexpected. Without action by a Congress known for partisan deadlock, the tax credits were set to expire. Yet, a strong lobbying effort and support from red states benefiting from clean power like Texas made it possible. Developers and their clients had no idea that would happen; they treated 2015 as their last chance to get in at the full subsidy level.

“Many companies that signed those deals in 2015 were afraid that there wouldn’t be a tax credit again,” said Jacob Susman, vice president at EDF Renewable Energy. “That’s a big reason why 2015 was so big.”

It is not unusual for people to act at the last minute when it comes to spending money. Sometimes its procrastination, sometimes they want to hold onto their money as long as possible, and sometimes they just want to see if maybe prices will go down further.

Whatever the reason, the tax credit expiration date created a dam where demand could build up at the expense of later years. Without that blockage, the flow of orders would have spread out more evenly over time instead of coming out in force during 2015 and, to a lesser extent, 2014. Now the more sustainable flow looks slow in comparison as developers and customers pace themselves again.

“There was such a flurry that people may be taking a breather,” said Pete Dignan, CEO of Renewable Choice Energy. “But there’s significant activity ahead.”

Mr. Dignan was referring the fact that, even with the slowdown, demand for clean power is still relatively high. That demand is reflected in the scheduled electric generating capacity additions for 2016, illustrated by the EIA graph below that shows new wind and solar capacity will rival or surpass that of natural gas this year.

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And, as the chart from BNEF suggests, the trend towards favoring renewables is expected to continue.

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So the clean power industry will continue to grow based on strong fundamentals though likely not at the frenzied rate of 2015. Of course, with the tax credits extended another 5 years, a repeat of the current situation may be not be too far off.

Paris Climate Agreement On Track for Final Ratification – 10/10/16

With a greenlight from the EU, a global climate deal struck last year in Paris among 195 countries aimed at limiting climate change is set to go into effect.

The condition for the climate deal going into force was having 55 countries representing 55% of the world’s greenhouse gas emissions have ratify it. After the US and China accepted the deal, 60 countries representing 47.7% of global greenhouse gas emissions had signed on. Since the EU represents about 12% of global emissions their entry will undoubtedly push the deal into effect.

India, which is responsible for 4.1% of emissions, also formally adopted the Paris agreement on Oct. 2.

The deal will be enacted 30 days after its ratification requirements have been met. The first meeting of the parties to the agreement, the CMA, will take place during the next annual United Nations climate conference, scheduled November 7, 2016.

Under the agreement, countries will be expected to act individually to keep average global temperatures from rising more than 2 degrees Celsius above preindustrial levels. Since a legally binding resolution would have required ratification by the Senate, which the Obama administration acknowledged was unlikely, no country can be forced to adhere to the deal. However, it does require countries to release targets and report emissions as a means to shame nations into compliance.

Once the agreement enters into force this year, the U.S. is prevented from pulling out for 4 years.

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