Topic: Energy and Environment

New Climate Change Report Out Today

The Intergovernmental Panel on Climate Change (IPCC) released a new climate change study today at a news conference in Paris. The study reports that global warming caused by human activities is now a virtual certainty, and paints a startling picture of the effects of global climate change. Still, not everyone is in complete agreement as to the severity of the threat. “Anyone who says that the planet is warming at an increasing rate is simply dead wrong,” says Cato scholar Patrick Michaels, author of Meltdown: The Predictable Distortion of Global Warming by Scientists, Politicians, and the Media. Dr. Michaels’ full comments are available here.

A French Global Warming Tax Against the U.S.?

Al Gore has a new ally in his fight for new taxes and regulations to limit carbon emissions. The New York Times reports that, for all intents and purposes, Jacques Chirac is blackmailing the United States: 

President Jacques Chirac has demanded that the United States sign both the Kyoto climate protocol and a future agreement that will take effect when the Kyoto accord runs out in 2012.

He warned that if the United States did not sign the agreements, a carbon tax across Europe on imports from nations that have not signed the Kyoto treaty could be imposed to try to force compliance.

Trade lawyers have been divided over the legality of a carbon tax, with some saying it would run counter to international trade rules. But Mr. Chirac said other European countries would back it. “I believe we will have all of the European Union,” he said.

Hurray for Profits

Good news from the oil industry: ExxonMobil announced a record after-tax profit of $39.5 billion for 2006.

http://news.yahoo.com/s/ap/20070201/ap_on_bi_ge/earns_exxon_mobil

That is great news because it means the company will have more funds to reinvest in exploration, refinery expansion, drilling platforms, chemical plants, and all those other brilliant machines that American families benefit from every day.

The firm invested $20 billion in exploration, structures, and equipment in 2006 and $18 billion in 2005. See here and here.

High profits are a signal to ExxonMobil management, other energy companies, and Wall Street to feed this industry more capital and to continue increasing energy production. That’s good news for U.S. energy security and U.S. consumers.

The bad news with high corporate profits is that governments confiscate so much of them. In 2005, the firm paid current income taxes of $23 billion on pre-tax profits of $59 billion, for an effective income tax rate of 39%. (The firm also paid $31 billion in excise taxes to governments). Of course, Exxon simply collects these taxes on behalf of governments–the ultimate burden falls on individuals.

(In 2006, income taxes were $28 billion on pre-tax earnings of $67 billion, but I couldn’t find the breakdown of current vs. deferred tax)

Anyway, kudos to Exxon for their fine performance!

Bush’s Alternative-fuel Boondoggle

A CBSnews.com column explains how huge ethanol subsidies enrich special interests like Archer Daniels Midland:

Ironically, the president’s call echoes a more severe proposal by his 2004 campaign opponent John Kerry — a recommendation that a National Center for Policy Analysis study found would not “reduce future U.S. dependence on foreign oil.” The president’s plan also proposes an expansion of the so-called Renewable Fuels Standard (RFS), which currently mandates that refineries produce 7.5 billion gallons of ethanol per year by 2012.

But, as Heritage Foundation energy analyst Ben Lieberman points out, “if ethanol were a viable fuel, you wouldn’t have to mandate it in the first place.” Indeed, ethanol — whether made from corn or trendy cellulosic sources like switchgrass — is simply not viable as an alternative for the fundamental reason that a gallon of ethanol only goes 75 percent as far as a gallon of gas.

…For the farm lobby, the renewable mandate is easier to understand. It means money. Lots of money. To make ethanol price-competitive, the federal government subsidizes its production to the tune of 51 cents a gallon, costing U.S. taxpayers $4.1 billion a year.

Fueled by the RFS, Big Ethanol producer Archer Daniels Midland rang up record 2006 profits that would make Big Oil blush. Now Bush is proposing to increase the mandate to a fanciful 35 billion gallons by 2017 (whether consumers buy it or not). And as the federal honey pot grows, it is naturally attracting more flies.

Meanwhile, a Wall Street Journal column notes how the ethanol subsidy has a big negative impact on other users of corn, and even causes harm in other nations:

What we have here is a classic political stampede rooted more in hope and self-interest than science or logic.

…[F]ederal and state subsidies for ethanol ran to about $6 billion last year, equivalent to roughly half its wholesale market price. Ethanol gets a 51-cent a gallon domestic subsidy, and there’s another 54-cent a gallon tariff applied at the border against imported ethanol. Without those subsidies, hardly anyone would make the stuff, much less buy it — despite recent high oil prices.

That’s also why the percentage of the U.S. corn crop devoted to ethanol has risen to 20% from 3% in just five years, or about 8.6 million acres of farmland. Reaching the President’s target of 35 billion gallons of renewable and alternative fuels by 2017 would, at present corn yields, require the entire U.S. corn harvest.

No wonder, then, that the price of corn rose nearly 80% in 2006 alone. Corn growers and their Congressmen love this, and naturally they are planting as much as they can.

…[F]or those of us who like our corn flakes in the morning, the higher price isn’t such good news. It’s even worse for cattle, poultry and hog farmers trying to adjust to suddenly exorbitant prices for feed corn — to pick just one industry example.

The price of corn is making America’s meat-packing industries, which are major exporters, less competitive. In Mexico, the price of corn tortillas — the dietary staple of the country’s poorest — has risen by about 30% in recent months, leading to widespread protests and price controls. …Thus is a Beltway fad translated into Third World woes.

…The scientific literature is also divided about whether the energy inputs required to produce ethanol actually exceed its energy output. It takes fertilizer to grow the corn, and fuel to ship and process it, and so forth. Even the most optimistic estimate says ethanol’s net energy output is a marginal improvement of only 1.3 to one. For purposes of comparison, energy outputs from gasoline exceed inputs by an estimated 10 to one.

And because corn-based ethanol is less efficient than ordinary gasoline, using it to fuel cars means you need more [fuel] to drive the same number of miles. This is not exactly a route to “independence” from Mideast, Venezuelan or any other tainted source of oil.

…If cellulose is going to be an energy miracle — an agricultural cold fusion — far better to let the market figure that out. Not that any of these facts are likely to make much difference in the current Washington debate. The corn and sugar lobbies have their roots deep in both parties, and now they have the mantra of “energy independence” to invoke, however illusory it is. If anything, Congress may add to Mr. Bush’s ethanol mandate requests.

Taylor vs. Woolsey this Sunday on Foreign Oil

This Sunday, I’ll be debating former CIA chief James Woolsey at a “conservative summit” in Washington, D.C., sponsored by the National Review. The topic: “Resolved: That the federal government should act to reduce America’s dependence on foreign oil.” James Woolsey, of course, will take the affirmative. 

Unfortunately, it seems as if there’s no room for new attendees, so if you’re not already registered for this weekend confab, you probably can’t get in. There is a good chance, however, that the debate will air live on C-SPAN (either I or II). So if you’ve got nothing better to do at 10:30 am EST Sunday, you might want to tune in.

The last time I tangled with Woolsey directly, it was during a hearing of the House Armed Services Committee in July 2005. Both he and I were part of a four-member panel to testify about the Chinese National Oil Company (CNOOC) bid to buy a controlling interest in UNOCAL. Woolsey argued that the merger was the first shot of WWIII. I argued that it’s no business of ours whether UNOCAL stockholders sell their shares to CNOOC and that it’s no skin off America’s nose one way or the other. For those who missed the resulting fireworks, let me just say that I tore him apart and did so in grand style. I fully expect to do so again this weekend.

Each of us will have five minutes at the NR event to state our case. That’s a tall order. There is a lot that can be said — and has been said — about the alleged evils of foreign oil. Rather than get too deep into the policy weeds (that can wait until the Q&A), I think I’ll use the few minutes I have at the start to say something like the following:

The case for importing oil is the same as the case for importing, say, computer chips. If it’s cheaper to buy something from abroad than to produce it here at home, then the economy in general — and consumers in particular — are made wealthier by imports. Governmental interventions to discourage energy imports are, by definition, government interventions to discourage the use of cheap energy.

Mr. Woolsey contends that the government must act because foreign oil supplies are increasingly subject to disruption. True enough. But that’s why market actors are busily stockpiling oil in private inventories. They are saving oil for a rainy day in the hopes of making a profit if and when that disruption occurs. Private investors are also sinking increasingly large sums of money into oil futures in order to hedge against other investment bets and to diversify equity-heavy portfolios. This has further increased the stock of oil held off the market for future use. 

Many petroleum analysts, such as Philip Verleger and William Brown, think that private inventory buildup and the surge of dollars into oil futures markets is responsible for a large part of today’s price. How large is unclear, but Brown thinks that oil would sell for around $27 a barrel today were this not going on. Think of this as an oil tax — imposed by the market itself — to account, in part, for the possibility of future supply disruptions. In short, what makes James Woolsey think that the market isn’t already hedging sufficiently against the possibility of import disruptions?

And let’s not forget that a supply disruption anywhere in the world will increase the price of crude oil everywhere in the world. Accordingly, even if we imported zero oil, we would still be just as economically vulnerable to a terrorist attack on Saudi oil-producing facilities as we are at present.

Mr. Woolsey’s argument that dollars spent on oil imports funds Islamic extremism is only partially true. Oil revenues in the Middle East are established by global supply and demand, so even if the U.S. spent no money on Persian Gulf oil, producers would see the same revenue coming in the door — all things being equal. 

Regardless, there is no correlation between oil profits and Islamic terrorism. A thorough examination of oil prices from 1983 to present compared with data concerning Islamic terrorist attacks (both in frequency and in body counts) reveals no relationship between the two whatsoever. We’ll soon be publishing the regression analysis to prove it.

In sum, foreign oil is cheap oil. Market actors have every incentive to take the risks of supply disruption into account when they buy products from abroad. Consumers can hedge against these risks, if they are so interested, in any number of ways. Government has no business doing for us what we can do for ourselves. Conservatives have no business embracing government dictates about what oil companies can buy and sell absent Mr. Woolsey’s consent.

I probably can’t pack all that into a five-minute opening statement, but we’ll see.

The Ethanol Con

The pitch to reduce American gasoline consumption by 20 percent over the next 10 years was one of the highlights (or, make that, lowlights) of the president’s State of the Union Address last Tuesday night. The president hopes that three quarters of that goal will be met by that old political standby — corn.

Yesterday, the Orange County Register ran an op-ed I wrote that debunks the claims that:

  • ethanol will lead to energy independence;
  • ethanol is economically competitive now;
  • ethanol reduces gasoline prices;
  • ethanol is a renewable fuel;
  • ethanol reduces air pollution;
  • ethanol reduces greenhouse gas emissions;
  • ethanol subsidies are necessary to “level the playing field”; and
  • cellulosic ethanol is a promising economic bet.

Since I wrote that, however, even more devastating research has come to light. On the issue of global warming, a PhD student at MIT just issued a paper through MIT’s Laboratory for Energy and the Environment demonstrating that, on a life-cycle basis, ethanol and gasoline emit about the same amount of greenhouse gases. Increasing ethanol production, however, will tilt the greenhouse gas balance against ethanol because the only way to get more corn production is to seed more land with corn. That new cropland will be, on balance, less productive than the land already being used for corn, so land harnessed at the margin would require more fertilizer and/or irrigation (read, more energy inputs) to produce commercially optimal yields. The increased energy inputs required for the new cropland will be so great that the author believes that the president’s plan for wildly expanding ethanol production would actually make greenhouse gas emissions higher than they are at present.

For a more robust discussion of this automotive snake oil, see the cover story I co-authored — titled, “The Ethanol Illusion” — in the most recent issue of the Milken Review. An even more comprehensive beating, in the form of a full Policy Analysis, will soon be published by Cato.

By the way, I live to debate this topic. If anyone wants to sponsor an event featuring me and the ethanol shyster of your choice, just drop me a line. Any time, any place, any where.

Bush’s Energy Pablum

Last night, President Bush unveiled what he calls his “20-by-10” plan, a program that he claims would reduce America’s gasoline consumption by 20 percent within 10 years. You can find my critique of the alternative fuels madness that he proposed last night here, a more thorough critique of ethanol subsidies in general here, my complaint with his $60 billion plan to massively expand the Strategic Petroleum Reserve here and here, and a call to dismantle – not revise – federal automobile fuel efficiency standards here.

By the way, you know that a plan was dreamed up by politicians and pollsters – and not by, oh, anyone who knows what they are talking about – when the numbers are nice and round with a catchy ring to them when put together.