Friday, November 13, 2009

Lessons From the History and Economics of Oil

My first assignment as a young lawyer -- and my introduction to the history and economics of the oil industry -- was on a behemoth antitrust case against the major oil companies.  In re Petroleum Products Antitrust Litigation involved allegations that the major oil companies conspired to fix prices by "signaling" price changes to one another and by manipulating supplies and refinery operations during the 1970's.

In between days of reviewing thousands of documents, my fellow young lawyers and I had the pleasure of working with Daniel Yergin, who was retained as one of our expert witnesses and who had just written The Prize: The Epic Quest for Oil, Money and Power, for which he would win the Pulitzer Prize.  His book is a comprehensive and fascinating account of the history and economics of the oil industry.  It is still about the best book you can find on the subject, and anyone interested in any aspect of the green energy movement must read it.

Recently, I came across a short video of Daniel Yergin reflecting on lessons that can be learned from previous shifts in energy usage as we try to move towards a more sustainable energy future.  He describes the environmental concerns of the 1950's that forced a shift from coal to oil, followed by a shift back to coal as the principal fuel for electricity generation due to coal's cost advantages and emerging technologies that ameliorated some of the environmental harms.  He also talks about the sunk costs in our existing energy infrastructure and how that creates inertia and limits our willingness and ability to change.

Click here to view the video.  Short and to the point . . . . . and definitely worth watching.

Sunday, November 8, 2009

Wind Energy and Political Grandstanding

Plans to build a $1.5 Billion wind energy project in Texas got some unwanted publicity this week when grandstanding politicians issued press releases and open letters urging the Department of Energy to reject any applications for clean energy tax credits “unless the project relies on US-built turbines and other components.”

Now, this project will create 300 construction jobs in the USA and 30 permanent maintenance jobs, also in the USA.  It will provide a clean, renewable source of electricity for Americans.  And it will reduce our dependence on foreign oil.  Just the type of thing that deserves tax credits.

But some politicians are dead set against allowing any tax credits for this project because the turbines will be made in China, thereby creating jobs in China as well.  Senator Schumer of New York objects, arguing that, "American taxpayer dollars should not be used to finance those Chinese jobs."

Let’s consider the implications of this political posturing.

First, the US just convinced China to repeal a law that required 70% of technology used in Chinese wind projects to be made in China.  Now I agree that if China were keeping us out of its markets, then fairness, good trade policy and practical diplomacy might dictate that we keep them out of our markets until they agreed to free and open trade policies.  But having convinced them to eliminate their local content rules, it is hypocritical for us to use local content rules to keep them out of our markets.

Second, if we prohibit foreign turbine makers from competing for any wind projects that get tax credits, then we effectively bar them from any wind projects at all.  All renewable energy projects today require tax credits or some other form of subsidy to be economically viable.  (This is because coal and oil get to impose the cost of pollution on our environment at no cost, thereby eliminating a major competitive advantage of non-polluting renewables – but that is a subject for another time).  Barring foreign turbine makers from renewable energy projects receiving tax credits effectively bars them from all renewable energy projects in the USA.

Third, local content rules make no economic sense and will force projects (and jobs) outside the USA.  Any developer who can put together a $1.5 Billion project in Texas has the ability to put that project together someplace else – such as in a foreign country that does not impose local content rules.  If politicians insist that only higher-cost domestic content be used in a wind project, then some developers will decide to put their $1.5 Billion at risk elsewhere.  Like in China.  Which will then get ALL the jobs, including the 300 construction jobs and 30 permanent maintenance jobs that this project will generate in the good ol’ USA.

Fourth, and finally for now, if we are going to refuse tax credits and subsidies to any energy company that creates jobs outside the US, then why don’t we start with the oil companies?  How about eliminating all tax benefits for any oil company that creates jobs outside the US?  Obviously that would be a stupid policy and would put most of the oil companies out of business.  It is just as stupid when it is applied to wind projects.  And it would have the same absurd result.

John Howley

Orlando, Florida