Friday, June 25, 2010

Is Big Oil Too Big to Fail?

According to the Financial Times, the oil industry is warning that the Obama Administration "risks derailing projects worth $7.6 billion in government revenue" if it imposes new safety requirements on offshore drilling.

Didn't we just go through this with the financial industry? Lax regulations and enforcement led to reckless behavior by financial institutions, resulting in an economic disaster. Fearing that a failure of financial institutions would cause more devastating harm to the economy, our government rescued them with a multi-billion dollar bailout.

Now the oil industry has come up with its own "too big to fail" type of argument. When our President proposes new safety regulations, the oil industry responds that they are too important to our economy. We cannot increase their costs with new safety regulations, they say, because that will decrease government revenues and increase energy prices. And that will reduce our ability to compete in the global economy because oil is essential to everything we produce.

What should President Obama do? As several readers of this blog have pointed out, President Obama ranks with Teddy Roosevelt and Jimmy Carter as one of the most pro-environment Presidents in history. I agree. But those two prior Presidents had very different approaches to solutions. Our current President would be well-advised to consider those differences and choose between them.

President Carter saw government as the solution. He authorized new regulations, enhanced environmental enforcement, and spent government money on research into new technologies such as synthetic fuels.

What was the lasting effect? Subsequent Presidents starting with Reagan and continuing through two Bushes relaxed the regulations and dismantled the synfuels corporation. Thirty-five years after the first oil crisis that inspired President Carter to act, we find ourselves even more dependent on oil and in the midst of an even greater crisis.

Now let's consider the approach of Teddy Roosevelt. President Roosevelt did spend a good deal of government money on the environment, most notably buying up land and establishing the national parks system. That investment has endured for more than a century. He also addressed the lack of competition in energy markets by commencing antitrust suits against Big Oil, ultimately resulting in the breakup of the Standard Oil Company.

President Roosevelt recognized that the lack of competition in the oil industry was causing fundamental problems in our energy markets and beyond. By breaking up Standard Oil into separate companies, his antitrust suits completely restructured energy markets across the country and throughout the world. The competition between oil companies that ensued promoted innovations and investments in new technologies that ultimately helped the US oil industry become a world leader. It also resulted in more efficiency and better prices for consumers.

The question presented to President Obama is not whether he will follow in the tradition of Presidents Teddy Roosevelt and Jimmy Carter. The question is whether he will choose between them. Will he follow the lead of President Carter and concentrate his efforts on regulations and government spending on specific technologies with possible short-term benefits but no long-term restructuring of our energy markets? Or will he follow the lead of President Teddy Roosevelt and focus his efforts on structural changes that will force oil to compete with alternative energy over the long term?

The first step is to identify the structural problem in our energy markets. Reagan advisor and Nobel Laureate Milton Friedman noted that oil has an artificially low price because the price does not include the cost of cleaning up the particulates, carbon and other forms of pollution that are emitted when oil is burned. We would not think a trash hauling company was giving us a good price if it cut its costs by dumping the trash in our public parks; nor should we think that oil is giving us a good price when it is dumping dangerous emissions into the air that we breathe.

The artificially low price distorts the market and deters innovation and competition. Alternative energy sources and technologies cannot compete because their main advantage -- less or no pollution -- is not reflected in energy prices.

By forcing the price of oil to include the cost of pollution we would see three immediate benefits. First, we would become more efficient in our use of energy. That efficiency alone could offset all or part of any increase in oil prices. Second, we would see increasing private investments in alternative energy technologies that were not burdened by the cost of pollution. Third, the oil companies would be forced to moderate price increases for fear that businesses and consumers would switch to alternatives in response to price increases. Over the longer-term, increased competition between oil and alternative energy sources would encourage continuous innovation and efficiencies to stay competitive.

We are in the current mess because oil has become too important to our economy. The only solution that will produce sustainable results is one that ensures a less important role for oil in our economy. Safety regulations and government-directed investments will not accomplish that objective. We need a game-changing restructuring of energy markets to inject more competition between different sources of energy.

I hear those who say that cap-and-trade or carbon taxes will never fly because the American people want cheap energy today and are not willing to go through the disruptions and higher prices that would occur in the near term. That is why timing is so critical. The sense of disgust and despair over our inability to contain the BP Deepwater Horizon catastrophe invites bold leadership. President Obama should seize the moment to push for fundamental changes in energy markets while he can.

John Howley

Orlando, Florida

Thursday, June 17, 2010

Oil Disasters and Sub-Prime Mortgages: When Risk is Taken Out of the Price

The BP Deepwater Horizon catastrophe has much in common with the implosion of the sub-prime mortgage market. In both instances, very intelligent people failed to take basic precautions with risky investments. Why? Because the risks were not fully included in the investment analysis.

In the sub-prime mortgage market, the rating agencies gave what turned out to be deceptively favorable ratings to Collateralized Mortgage Obligations (CMOs), in part because the risks were chopped up and spread around in pools. Investors did not demand a high risk premium because they could not see the full extent of the risks.

Something very similar happened with BP's investment in the Deepwater Horizon. BP's spill response plan estimated the worst case scenario at 177,400 barrels of oil, a number that we now know was absurdly low. And the bulk of the risk was assumed by the US government when it limited BP's liability for damages claims to $75 million.

If BP had to assume the full risk (potentially billions of dollars) in a gulf that has seen some of the worst hurricanes (including Katrina), the insurance premiums or reserves required to cover that risk presumably would have been much larger. Larger insurance premiums or reserves would have reduced the potential return on investment for the project.

What would BP have done if the financial projections for the Deepwater Horizon project had been lower because they included the full cost of insuring against a multi-billion dollar risk? Maybe BP would have invested in a less-risky natural gas project that would have produced fuel with 30% to 40% lower carbon emissions. Or maybe BP would have invested in some of the new Green and sustainable technologies that it was touting in its advertisements. Or maybe it would have invested in a different oil project that did not carry the risk of destroying the fishing industry in the Gulf of Mexico.

Here's the bottom line: Our best hope for a future of clean and sustainable energy is to encourage rational investments by the private sector. That is only possible if the price of oil includes the full cost of pollution and the full cost of insuring against environmental disasters. Once that happens, alternative energy sources that do not carry those costs will become very attractive investments and the smart money will flock to them. So if you want to start a shift to cleaner and more sustainable energy sources, the first step is to stop subsidizing oil with free liability insurance courtesy of the US Government.

John Howley

Orlando, Florida

Wednesday, June 16, 2010

Mr. President, Put General Petraeus in Charge of the BP Catastrophe

Mr. President, if our shores were being attacked, you would not rely on profiteers and mercenaries to defend us. You would appoint our best General to lead the defense, and you would support him with our best troops. You would not "supervise" private companies and "approve" their decisions. You would appoint one person with authority to make all decisions, and that person would have undivided loyalty to you as President.

Well, our shores are under attack. By the worst man-made environmental catastrophe in history. Eleven people have died, untold thousands are losing their livelihoods, and the damage may haunt us for generations.

The first thing you must do is appoint a battle-tested General and call up the troops. Call the oil companies and tell them that you are drafting all of their top scientists and engineers. You want them in the gulf tomorrow morning. They will no longer report to the oil companies. Until this catastrophe ends, the scientists and engineers will report solely to a chain of command headed by General Petraeus who will be advised by Energy Secretary Chu.

They will not work only on plugging the blowout. They will also do everything possible to protect the people of this nation from the devastating effects of the blowout -- even if that means doing things that will increase BP's costs or reduce its future profits.

General Petraeus knows how to organize and lead people. He knows how to get things done. He will not be distracted by falling stock prices, profit and loss statements, or corporate lawyers advising on potential future liabilities. He will not increase the number of people cleaning the beach when the press is around, and then send them home without finishing the job when the press follows you back to Chicago or the White House. With General Petraeus in charge, you (and the American people) will be confidant that everything is being done with the sole objective of protecting our nation and its people.

Mr. President, you have said that we need the oil industry's superior expertise in deepwater oil drilling. That may be the case. But this is not about expertise. This is about leadership. It is not enough for you to "supervise" or "approve" everything that BP does.

We know from experience what happens when war profiteers and mercenaries like Halliburton and Blackwater make decisions subject to the "supervision" and "approval" of the US government. The profiteers make billions and the national interest is not well served.

You must relieve BP and all of its corporate officers from any authority to develop strategies or make decisions. They can provide technical support. They can serve as advisors. They can make suggestions. But you must have one person, and one person only, who is directly responsible for developing strategies and making decisions. And that person must have no loyalty other than his loyalty to you as President and to the People of the United States of America.

Mr. President, you promised us change. You promised us that we would no longer rely on war profiteers and mercenaries to defend this nation. We need you to keep that promise. Please put our best battle-tested General in charge of the situation and tell everyone else that they are reporting to him effective immediately.

John Howley

Orlando, Florida

Tuesday, June 15, 2010

$550 Billion In Welfare Payments for Dirty Energy

Governments around the world spent $550 billion on energy subsidies last year, mostly to keep down the price of dirty energy from oil and coal. The Financial Times broke the story today based on an advance copy of an International Energy Agency study.

In fact, that number represents only half the story. The $550 billion in direct government welfare payments for the oil and coal industries does not include all of the indirect government subsidies that these industries receive. It does not include the cost of soldiers protecting oil fields in Iraq; or the cost of treating respiratory illnesses caused by particulate emissions; or the cost of free liability insurance for oil and coal companies (in the form of limitations on their liability for harm to third parties); or the cost to individuals who lose their livelihoods when oil gushes uncontrollably into the Gulf of Mexico or the Niger Delta.

But let's stick with the very tangible number of $550 billion in cold, hard cash for now. What would happen if we took that $550 billion away from oil and coal, and invested that cash in clean, sustainable energy technologies instead?

Just taking the welfare payments away from the oil and coal industries would have a tremendous impact on the level of investments in clean, sustainable energy technologies. Think about it for a moment. You are considering an investment in a new technology. But the existing technology that you want to compete against receives $550 billion in direct government welfare payments every year to keep its price artificially low. So your new technology will not only have to be better than the existing technology, it will also have to be a half trillion dollars less expensive. That is a high hurdle for anyone considering an investment in new technologies.

Take away that half trillion dollars in government welfare payments, and now you have a level playing field. That alone removes a hurdle and provides an incentive to investors in new technologies.

And if you actually shift that half trillion dollars from the oil and coal companies to investments in clean, sustainable energy technologies, you can start a green revolution.

As an added benefit, the clean, sustainable energy technologies will not require these subsidies forever. Give a man a welfare payment to buy oil today and he'll be back for another welfare payment tomorrow. But give him the same payment to buy solar panels, and he'll have energy for a lifetime.

John Howley

Orlando, Florida

Monday, June 14, 2010

The Blame Is On BP, But The Solutions Are All Ours

In 1969 a blowout off the coast of California caused an 800 square mile oil slick. We kept drilling.

In 1973 members of the Organization of Arab Petroleum Exporting Countries refused to sell us oil, causing an economic crisis. We invented the SUV and the McMansion to consume even more oil.

In 1989 the Exxon Valdez spilled 10.8 million gallons of crude oil along 1,300 miles of pristine coastline. We built more and larger supertankers.

In 2001 the son of a Saudi Arabian construction magnate orchestrated the worst terrorist attack ever on US soil. We went on to buy more oil than before, sending more of our money to Saudi Arabia and other oil-producing countries where, as Thomas Friedman notes, "it ends up with mullahs who build madrasas that preach intolerance."

In 2010 the BP blowout is destroying the ecosystems and the economy along our Gulf coast. We . . . .

Have we learned anything at all? Or will we increase our dependence on rapacious oil companies and despotic regimes once again?

We can and should blame BP for their reckless disregard of the environment in the Gulf of Mexico, the Niger Delta, and other places around the world where they and the rest of their industry have destroyed entire ecosystems and communities.

But they will never give us the solutions. The solutions will depend entirely on our own choices.

Will we choose to continue wasting energy? Or will we require that all cars, trucks, and buildings reduce energy consumption by 20% or more?

Will we allow oil companies to sell products that pollute the air and water without including the cost of that pollution in the price of the product? Or will we level the playing field for clean and renewable alternatives by imposing the type of pollution tax (or cap and trade system) favored by well-known conservative and libertarian economists such as Nobel Laureate and Reagan advisor Milton Friedman?

In 2020 will our children thank us for making the right decisions today? Or will they suffer even worse catastrophes brought on by our selfish, thoughtless, and unnecessary addiction to oil?

The choice is ours.

John Howley
Orlando, Florida

Sunday, June 13, 2010

How Monitoring Dramatically Reduces Energy Costs

One of the most cost-effective ways to reduce energy costs is to monitor energy consumption in one minute increments and watch the trends over time. Almost every building will immediately find quick and easy ways to reduce energy costs by 5% or more. And knowledgeable professionals can often use the data to drive down energy costs by 20% or more and improve facility comfort and performance at the same time.

Let's take an actual example. Forward Energy Solutions recently subscribed to Continuous Energy Management & Optimization (CEMO) from Davies Energy Systems. The process involved two steps: (1) installing a real-time energy monitoring system from Noveda Technologies; and (2) having Davies Energy's engineers analyze the data and develop better ways to manage and optimize facility energy usage.

Here is the minute-by-minute display of electricity consumption that Foward Energy Solutions saw after just one day:

Notice the two distinct sets of spikes in energy consumption. The first occurred just before 4:00 a.m. when no one was in the building. The next set of distinct spikes started at 7:00 a.m. and continued until 5:00 p.m. Each of the spikes lasted only a minute or less and were not noticed by the people in the building. But over time they amounted to a significant increase in kwh consumption. They also may increase the peak demand charges on the company's monthly electric bill.

The culprits were quickly identified. A small refrigerator was malfunctioning and spiking the consumption at 4 a.m. An air-conditioning system in need of repair was causing the spikes during regular business hours.

Catching these types of problems generates immediate savings by reducing kwh consumption and peak demand charges. The avoided costs will continue to be realized each and every month into the future, often adding up to thousands of dollars in energy savings.

Identifying these types of problems early on also avoids the cost of more expensive repairs down the line. Without monitoring, no one would have noticed the air-conditioning problem until it stopped cooling the building -- most likely on the hottest day of the year. At that point, the company would have already wasted money on unnecessary energy costs, plus it would be facing the higher cost of repairing or replacing the air-conditioning system on an emergency basis. Not to mention the loss of employee productivity in a sweltering office until the repairs could be made.

Francis X. Lamparello, P.E., the Chief Technology Officer at Davies Energy Systems, says that he finds these types of issues in almost every building. But these problems are just the tip of the iceberg when it comes to saving energy. "Buildings are living, breathing entities that must be monitored and adjusted on a continuous basis," he says. "For example, maintaining proper air pressure inside the building can keep warm air from entering in the summer, and letting in more cool outside air on a sunny Fall day can give you 'free cooling' to offset the heat caused by the sun shining on the windows." All of these energy saving solutions, he points out, are free or inexpensive once you have real-time monitoring and expert advice on how to manage the facility.

What's next for Forward Energy Solutions? Now that they have the data, they are working with Davies Energy on a number of additional ways to drive down their energy costs. More on that in later blog posts.

John Howley

Orlando, Florida