Sunday, September 27, 2015

Will declines in U.S. and Canadian oil production lead to a global decline?

At the beginning of this year I noted that all of the growth in world oil production* since 2005 has come from two countries: the United States and Canada. And, I suggested that since the growth in production in those two countries came from high-cost deposits--tight oil in the United States and tar sands in Canada--that the precipitous drop in oil prices would lead to declines in production in both countries.

I concluded that unless another area of the world suddenly started growing its oil production significantly that those declines would probably result in a worldwide decline in oil production.

Well, declines in both the United States and Canada have arrived. It will be several months before we can know with any certainty whether those declines will translate into a persistent global decline. But this much we do know:

The International Energy Agency, a consortium of 29 countries tasked with tracking worldwide energy trends, said in its latest report that global oil production fell 600,000 barrels per day in July--and here's the important part--"mainly on lower non-OPEC output." That's a reference to falling U.S. and Canadian production. One month does not make a trend. But the report notes that non-OPEC supply is expected to contract in 2016.

The report said that further declines in U.S. production are expected. Weekly estimates from the U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy, bear this out. The EIA put U.S. production at 9.1 million barrels per day (mbpd) for the week ending September 18; that's down from 9.6 mbpd in early June.

Canadian production has fallen since the beginning of the year from 4 mbpd to an estimated 3.6 mbpd in June when the numbers were last updated according to the country's National Energy Board. Curiously, the board projects that production will return to above 4 mbpd by the end of the year. This seems like wishful thinking given that the vast majority of Canadian production now comes from tar sands, and new projects in those areas containing the sands have been seriously curtailed.

The last time that global oil production took a true nosedive was in the 1981-82 world recession during which production dropped 6 mbpd. There have been smaller dips in subsequent recessions. But none lasted more than a year with the largest drop coming during the 2008-2009 recession, about 1.3 mbpd.

I've suggested in a previous piece that the drop in oil prices and the decline in global oil production that I anticipate mean the world is headed toward an economic recession. I've also suggested that this may be no ordinary recession, but rather the beginning of a very long and painful adjustment to new global realities that include continuing constraints on energy supplies, growing damage and economic effects from climate change and increasing geopolitical instability.

"Prediction is very difficult, especially about the future," Danish physicist Niels Bohr is claimed to have quipped. But the future may already be with us as oil supplies start to shrink, California's climate-change-enhanced drought burns the state and geopolitical stability in the Middle East crumbles--pushing millions of unfortunate refugees toward Europe.

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*All oil production numbers in this piece refer to crude oil plus lease condensate which is the definition of oil. Many sources erroneously add so-called natural gas plant liquids to oil production and label it all oil production. This is misleading at best. Natural gas plants liquids cannot be sold as oil on any commodities exchange. Nor do they act as anything but negligible substitutes for oil.


Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, September 20, 2015

Will Washington state have the nation's first carbon tax?

Yoram Bauman is the world's only "stand-up economist." He makes his living poking fun at his own profession. But he's dead serious about fighting climate change, and he's the intellectual force behind a climate-related initiative that seems likely to appear on Washington state's November 2016 ballot, an initiative that would implement the first carbon tax in the nation.

The purpose of the measure, dubbed Initiative 732, would be to motivate households and businesses to cut down on the burning of fossil fuels, the major source of man-made emissions of carbon dioxide, the main greenhouse gas. By raising the price of fossil fuels it would encourage conservation and efficiency and the substitution of low-carbon and carbon-free sources of energy by making these energy sources more cost-competitive.

The organization pushing the initiative is Carbon Washington. The principle behind the proposal is simple: Raise taxes on what you want less of and lower taxes on what you want more of.

In this case, the proposal taxes carbon emissions at a rate of $25 per metric ton. The tax would be phased in over two years and increase each year after that by 3.5 percent plus the rate of inflation. The proposal lowers the sales tax by one full percentage point (from 6.5 percent to 5.5 percent) and provides a rebate to poor families of up to $1,500 to lessen the burden of the carbon tax on their limited incomes. Finally, it virtually wipes out the so-called business and occupation tax on manufacturers in the state. For manufacturers--which tend to be more energy-intensive than other types of businesses--that tax falls from a typical rate of 0.484 percent of gross business receipts to 0.001 percent.

The effect is to hold state revenues steady. The proposal's tax reductions and rebates give back to Washington state residents and businesses as much as the carbon tax collects, about $2 billion annually starting in 2018 when it would go into effect. The purpose of the tax then is strictly to change behavior and buying habits in order to lower carbon emissions rather than to raise revenue for the state. In bureaucratese the tax is "revenue neutral."

Bauman prefers the carbon tax to other forms of carbon pricing because "it's so simple and transparent, it can be explained in a haiku." Haiku, of course, is a Japanese form of poetry containing 17 syllables arranged 5-7-5. The haiku that explains the plan is this:

Fossil CO2 (pronounced: see-oh-two)
Twenty-five dollars per ton
Revenue neutral

He jokes that California's cap-and-trade plan for carbon emissions by comparison is more akin to Leo Tolstoy's War and Peace. The first edition of the novel contained 1,225 pages. The California plan is actually shorter, 430 pages. But the implementation documents are voluminous. Not exactly haiku.

The legal language for Initiative 732 is considerably shorter, about 27 pages double-spaced. An even shorter summary is available on the Carbon Washington website.

The natural opponents of this measure are those in the fossil fuel industry. But Washington state's production of fossil fuels--oil, natural gas and coal--is exactly zero according to the U.S. Energy Information Administration. Even so, the industry is unlikely to sit out the ballot campaign when, like every other state, Washington's drivers and freight haulers are dependent almost completely on gasoline and diesel refined from crude oil. In addition, the state's electric utilities generate 15.6 percent of their electricity using natural gas and 6.6 percent using coal. Some 68.5 percent of the state's electricity comes from hydropower, 8.5 percent from other renewables, and only 0.2 percent from nuclear.

While there is no sugarcoating the consequences for coal--the tax would almost double its price--liquid fuels such as gasoline and diesel might rise about 25 cents per gallon (based on a $25 per ton tax). That's not so high as to change the way Washington state residents and businesses fuel cars, trucks and other forms of transportation. The effect on the price of natural gas would be about half that of coal because natural gas, when burned, emits about half the carbon.

Also likely to oppose the measure are what economists refer to as energy-intensive, trade-exposed businesses. These are businesses that both consume a lot of energy and sell beyond the state's borders and so have to compete with businesses not subject to the carbon tax. Examples include steel producers, pulp and paper manufacturers, food processors and aluminum smelters.

Ideally, Bauman explained, the carbon tax would spread across the country and then internationally so that no energy-intensive businesses would be at a disadvantage. Until that happens nearly wiping out the business and occupation tax on such industries in Washington state should help them maintain their competitiveness.

Currently, the only visible active opposition to the initiative is coming from an unlikely source. A Washington-state-based group called the Alliance for Jobs and Clean Energy also favors reducing carbon emissions, but has been championing the cap-and-trade approach. Like California's plan, this one would cap emissions at gradually declining levels for carbon polluters. Those who emit less than their allowance could sell their excess emission rights to others who are unable to meet their limits.

A cap-and-trade proposal before the Washington state legislature this year which was supported by the Alliance failed to pass. That proposal "would have raised more than $1 billion a year from fees on carbon and directed the proceeds to the state education budget, transportation projects, affordable housing and other programs," according to the Seattle Times.

The Alliance has said that it may offer its own ballot initiative to address carbon emissions. It won't announce its intention until sometime this fall and hasn't publicly provided specifics about the approach it would take.

The two organizations temporarily had an uneasy truce after a joint statement issued earlier this year. But in July Alliance members publicly labeled Carbon Washington's proposal a nonstarter with voters based on polling.

Bauman has seen the poll and contends that it shows support in the mid-50 percent range after voters learn about the proposal.

His interest in the issue began when he was a student at Reed College in Portland, Oregon. It was there that he learned about environmental taxes as a way to change behavior. To him the idea seemed "intellectually beautiful."

When he obtained an internship at the Sightline Institute in Seattle, he met Alan Durning, the executive director. He and Durning later coauthored Tax Shift which outlines how a carbon tax would work.

The book made its way onto the shelf of Gordon Campbell, premier of British Columbia from 2001 through 2011. Campbell pushed through Canada's first carbon tax in 2008 which remains in place today and which is believed to have achieved a reduction of 4.5 percent in carbon emissions as of 2012 even as the province's economy continued to grow. A recent study suggests that the reductions attributable to the tax from 2008 to 2015 could be as high as 15 percent.

Bauman said it's important to note that Campbell's political party, the confusingly named British Columbia Liberal Party, is considered right-of-center. This shows that a revenue-neutral approach to reducing carbon emissions can have appeal across ideological lines--whereas a cap-and-trade plan which raises taxes without offsetting reductions may only appeal to left-leaning voters.

The number of signatures gathered on petitions supporting Initiative 732 recently passed 200,000. A little over 246,000 valid signatures are required by December 31 to qualify for the ballot. Carbon Washington expects to collect 330,000 signatures well before that date in order to have a buffer in case some of the signatures are ruled invalid.

If the initiative is certified, it will be presented to the Washington state legislature for approval. Bauman still holds out some hope that the legislature might adopt the initiative as law despite the body's previous unwillingness to take up a climate bill. But if the legislature fails to pass the provisions of the initiative by March when it adjourns, the proposal automatically goes on next year's November ballot.

Carbon Washington is relying on a network of local chapters and volunteers to obtain signatures and carry the campaign forward should it get on the ballot. The organization has so far raised about $360,000.

Bauman said polling suggests that there are a large number of undecided voters. "We have reason to believe that when we explain the proposal, we will pick up most of the undecideds," he added.

If the proposal makes it to the ballot, Bauman and his colleagues will no doubt be repeating the prose equivalent of his haiku explanation countless times in order to sway those undecideds before the November 2016 election.

[UPDATED September 21, 2015]

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, September 13, 2015

Truth takes a hit in the battle over U.S. oil export ban

They say that the first casualty of war is truth. And, on both sides of the fight over lifting the ban on exports of U.S. crude oil, the truth has already fallen into a coma. The ban was instituted in 1975 in order to make America less subject to swings in international oil supply after suffering the price shock associated with the Arab oil embargo in 1973.

Last week a committee in the U.S. House of Representatives voted to end the ban after a Senate committee voted in July to do the same. A vote by the full House and Senate could be near.

The proponents are careful NOT to say that the United States is energy-independent and so has oil to spare. Such claims made in the past backfired because it is too easy to look this up. Net U.S. imports of crude oil were almost 7 million barrels per day (mbpd) in the week ending September 4. That's out of about 15.8 mbpd of petroleum-based fuels consumed domestically.*

Yet, it is this state of affairs that the proponents of lifting the export ban label as "abundance." Here's the relevant quote from the website of the Domestic Energy Producers Alliance (DEPA), a consortium of U.S. oil drillers: "Thanks to the genius of America's independent oil and natural gas producers, the world is moving from a concept of 'resource scarcity' toward 'resource abundance.'" (So, the world is not moving toward actual abundance, just the concept of abundance. But, I'm nitpicking.)

In another piece entitled "From Scarcity To Abundance: Why The Strategic Petroleum Reserve Is Unnecessary" the group is more bold, saying that the supposed "abundance" is right here in the United States:

US crude oil production has nearly doubled since 2008, rising from 5.0 million barrels per day (MMB/D) to 9.5 MMB/D today. These domestic supply gains are a direct result of technological breakthroughs in horizontal drilling and advanced well completion techniques. Over the same period, improved energy efficiency has reduced US demand growth. These combined factors have fueled a paradigm shift in our country from energy “scarcity” to energy “abundance.” (my emphasis)

The site also includes a graph deceptively labeled "U.S. Crude Oil Production Potential" showing what looks like a rise in production to 20 mbpd by 2025. DEPA can always claim that that graph just represents estimates by its backers. The graph, however, stands in stark contrast to the latest "Short-Term Energy Outlook" just released by the U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy.

Even the ever-optimistic EIA forecasts that U.S. crude oil production will fall next year by 400,000 barrels per day to 8.8 mbpd. In fact, its figures show that crude production actually already began its decline in April. Of course, this decline is partly a response to low oil prices as U.S. oil companies have dramatically reduced their drilling from 1,592 active rigs one year ago to 652 for the week ending September 11.

The central declaration on the DEPA site is as follows:

We must allow crude oil exports to develop America's resource potential. Developing America's resources decreases our dependence on foreign oil.

This comes even as we are told that U.S. oil production has nearly doubled since 2008 WITHOUT lifting the export ban. So, if sentence one has no basis, then it has no bearing on sentence two.

Now, if 1) the United States doesn't produce more oil than it needs, but rather remains the world's largest importer next to China and 2) the export ban didn't prevent domestic production from doubling, then what is the push to end the export ban all about? In a word, money.

There is not enough U.S. refining capacity for all the so-called light tight oil produced from U.S. deep shale formations which have been the mainstay for domestic oil production growth. That means that refineries that can use this type of oil are paying less (because of the excess supply) than they would if foreign refineries could also bid on the oil--which, of course, they can't because of the export ban.

Lifting the export ban would allow domestic oil producers of light tight oil to sell their output to foreign refineries at a higher price than they currently get from domestic refineries. But given the now ongoing decline in U.S. oil production, selling that oil to foreign refineries would mean that the United States would have to import more of other heavier oils (for which we have adequate refinery capacity) to make up for the light oil that is exiting the country. Thus, the United States would become MORE dependent on foreign oil if we lift the export ban.

The oil companies make the case that their product is discriminated against. Agricultural products, manufactured goods and even coal face no export restrictions. Why should oil be singled out?

There is debate about whether allowing essentially a "swap" of U.S. light oil for heavier foreign oil would raise the price of petroleum products such as gasoline, diesel fuel, heating oil and jet fuel in the United States.

What this move would surely do is force more U.S. refiners to pay higher prices for their oil inputs since they would have to compete against bidders across the globe.

The opponents of lifting the ban, not surprisingly, include U.S. refiners. Also included are consumer groups and petrochemical firms, firms which use oil as their feedstock.

These poorly funded opponents claim that lifting the ban would squander America's chance to be energy-independent. But given the yawning gap between the petroleum products it consumes and the oil the country is able to produce, it is highly unlikely that the United States will ever become energy-independent.

(It is important to note that the United States has long been self-sufficient in coal, and so far this year has imported only about 10 percent of its natural gas needs, almost all of it from Canada, our longtime major supplier. So, energy independence is really a codeword for oil independence. No mention is generally made of trying to become energy-independent by actually REDUCING energy use through conservation and efficiency--though there is occasional lip service given to the idea of reducing the GROWTH in energy demand.)

Whether the U.S. Congress will vote to lift the export ban just as members are about to go into an election year is an open question. But even if the Republican-controlled Congress does vote to lift the ban, the Obama administration has signaled it will likely veto such a measure. This is despite the fact that last year the administration widened the definition of what is permissible to export beyond refined products which have long been legal to export. The administration moved to include condensate which is essentially ultra-light oil that starts as a gas under the tremendous pressures inside oil reservoirs and then condenses to a liquid once it reaches the wellhead.

Politically, however, it makes sense for President Obama to oppose any bill lifting the ban in order to rally traditional Democratic groups such as labor and environmentalists for next year's elections.

But, if the ban were to be lifted and that resulted in higher fuel prices for Americans, it might be a good thing in the eyes of those who want Americans to use less oil and to adopt renewable alternatives. Those renewables would, of course, become more competitive as a result of higher oil prices.

Still, until the country figures out how to get along without the millions of barrels of oil it imports each day, oil exports will only increase our dependence on foreign oil--which will have to be shipped in to replace the oil that would now be exported. This might lead to increased efficiencies in the oil industry as each type of crude would more easily reach the refineries best suited to refine it. But it's hard to see how oil exports would make the United States more energy secure. And, that was the reason behind banning those exports in the first place.

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*U.S. refineries actually produce close to 21.5 mbpd of liquid fuels, some one-quarter of which is exported as gasoline, diesel and other fuels and chemical feedstocks. We have far more refining capacity than we currently need for domestic consumption and so turn some of our imported and domestic crude oil into refined products bound for other countries. My calculation subtracts natural gas plant liquids which are not oil and cannot be sold as oil on any exchange where oil in traded.

[UPDATED on September 15 to reflect a late breaking announcement by the Obama Administration of its opposition to lifting the oil export ban.]

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, September 06, 2015

Stock market confessions, chaos, complexity and the illusion of control

In the old days of the Chinese Cultural Revolution those who said or did something perceived by the Chinese authorities to be counter-revolutionary were forced into public confessions--and then humiliated, imprisoned or even put to death.

It seems that old ways die hard. Last week the new China--the one that had thrown off the yoke of the Cultural Revolution--televised forced confessions by people who had dared to say that the Chinese stock market may not be a great place to put your money these days.

In addition, Chinese government officials are cracking down on short sellers--those who borrow stock to sell, hoping to buy it back at a lower price. Officials are prohibiting large holders of stock from selling for six months, and they are flooding brokerages with easy credit to encourage those brokerages and their clients to buy stocks with borrowed money. Who would have guessed that still nominally communist China would go to such great lengths to protect the most prominent symbol of out-of-control capitalism, a stock market bubble?

It seems that the government has forgotten the essence of a marketplace of stocks, namely, that for every buyer there must a seller. When those wishing to sell shares are denied the opportunity, they are likely to become increasingly doubtful that the denial is for their own good. The whole point of a stock market is to lessen the risk of investing in a company by making it possible to sell one's shares at a moment's notice when the need for cash or the opportunity for a better investment arises.

Marketplaces for investments are inherently unstable. The participants react to constantly changing conditions and perceptions. If markets were entirely predictable and transparent, there would be very little money to be made since everyone's perception of the risks they were taking and the rewards they might reap would be identical.

But it is precisely the differences in perceptions (and personal or institutional needs) that create the desire to buy and sell. Unsophisticated individual investors (who make up the bulk of investors in China) were propagandized by the Chinese government to put their savings into the stock market. The government hoped the market would provide a cheap form of finance for Chinese industry.

Elsewhere in the world, we have the brokerage industry to propagandize individual investors with a message designed to convince them that despite its dips and troughs, stock market investing is a one-way street to prosperity. Those who keep buying--the story and the stocks--forget that those who are selling think that the stocks they are selling will go down.

With another swoon in stock prices mercifully interrupted in the United States by the Labor Day weekend, it is a supreme irony that many Americans will be spending their idle time worrying about the kind of wealth that does not come from their own labor. I have no doubt that many of them will be on their computers checking to see how the Shanghai Stock Exchange trades while they are forced to sit helplessly on Monday (a market holiday in the United States) and merely watch.

My father's been asking me why what is happening in the Chinese stock market is of any importance to those outside the country. When the Chinese market started to plummet earlier in the summer, the move seemed to have little effect on markets in the United States and Europe (though attentive investors noticed that emerging stock market shares were also plunging.)

But we learned in the last stock market crash (and in recent weeks) that--to paraphrase the Coca-Cola jingle--the world's financial system sings in perfect harmony. It is a complex, tightly networked system through which signals both benign and malign travel literally at the speed of light through wires and satellites. Those signals come from a world economy more closely connected into one great global system than ever before.

No one can really comprehend this system, and so no one can truly fix it when things go wrong. What is telling is that in the post-Communist age, we are supposed to be celebrating the triumph of the free market as an efficient, self-correcting mechanism that requires minimal oversight. But when that system corrects in ways that we don't like, governments and regulators rush to prevent the correction without really knowing what they are doing.

The complex system of financial markets we've created and then tied all together electronically has become subject to increasingly frequent bouts of chaos that our financial models tell us cannot happen. It now ought to be clear that the mathematical models by which major banks and other financial institutions manage their risks are badly flawed. We get this declaration from none other than the world's most prominent banker, Jamie Dimon, CEO of banking colossus JPMorgan Chase & Co., who told the world that his models showed that an unusual move in U.S. Treasury bond rates last fall should only occur once every 3 billion years.

Dimon thought he was warning the U.S. government that its new banking regulations were setting the bond market up for a crisis in the future. Maybe so. But he was also unwittingly admitting that those managing our financial system don't have a clue about the risks they are taking (usually with other people's money).

If those who run the financial system don't understand the risks they are taking, why should we listen to their advice concerning our own financial affairs?

As the worldwide stock market bubble deflates, people will increasingly take matters into their own hands. Buy-and-hold strategies will crumble in the face of stinging losses. Investors will come to realize that there is no inherent value in the paper claims on businesses that we call stocks--only the price that other people are willing to pay. It turns out that investing in the stock market is really a financial game of chicken.

Financial analysts and advisors will defend themselves by saying, "No one could have seen it coming." And according to their models, financial crashes of the type we experienced in 2008 are so rare that they are unlikely to occur anytime during the life of the planet.

The illusion that we can control the world financial system is just one more illusion we share in an increasingly unstable world. Once that illusion is shattered, we will have to rethink carefully our assumptions about our lives, financial and otherwise.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.