An Act of Petulance

“All of the above” as an energy sound bite gradually morphed into actions to take coal out of the energy mix and now, on his way out the door, President Obama has issued a ban on drilling along the east coast and in the Beaufort and Chukchi seas areas of Alaska. This is an early Christmas present to environmental advocates who oppose fossil fuels simply because they exist. Based on actions and not words, President Obama only favors energy that is developed and promoted by generous subsidies.

Since almost no interest has been shown in the areas included in the Obama ban, it takes on the appearance of a poke in the eye to President-elect Trump who seems to recognize that abundant and affordable energy is an essential input to economic growth. While the provision of the OCS Lands Act has not been tested in court, it should be. No president should be able to issue a ban that persists in perpetuity without Congressional approval.

With an outlook for low to moderate crude oil prices for the foreseeable future and Shell Oil’s $7 billion experience finding no oil in the Chukchi Sea, the President’s action can only be interpreted as an act of petulance and slap in the face to the Trump Administration and petroleum industry. Self-imposed moratoria proved harmful during the period from the 1970s to the early 2000s and someday this one will also unless it is reversed. Eventually, technology and economics will make these areas appealing for exploration and production if oil and gas are found but with the ban in place, we would have to once again turn back to imports.

Claims that this action puts “environmental protection over economic uses” as the New York Times asserts is just more environmental hot air. Empirical evidence has no role when ideology drives the news. The record of offshore exploration and production over almost 50 years shows that it is possible to pursue and achieve both.

The President has received gushing praise from environmental groups like Greenpeace, which itself is telling. Although his economic achievements have been anemic at best—the slowest economic growth of any president since President Eisenhower, he goes out an environmental hero.  Quite a legacy!

Unabashed Scientific Bias

Scientific American, which is supposed to be a well respected journal, has published an open letter to President-Elect Trump on climate change. The first sentence of the introduction to the letter shows blatant editorial bias with the following, “and appointed climate deniers with ties to the fossil fuel industry to his transition team and Cabinet.”   The word “denier” is clearly pejorative and completely wrong. Scientific American also implies that the “fossil fuel industry” is a monolith that denies the existence of climate change.

No one who has been involved in first the global warming debate that morphed into climate change denies that climate change is real and is happening and always had. Scientific American is supporting a political agenda that makes its name an oxymoron. It is neither being scientific nor American.

The 800 signatories to the letter urge the President-Elect to take a set of climate related actions. In doing so, they reveal a breathtaking level of ignorance and an addiction to feeding at the federal trough.

They want to make America “ a clean energy leader” by increasing subsidies for wind and solar, ignoring the fact that these subsidies simply breed crony capitalism. EU nations that have bet heavily on wind and solar have paid a heavy economic penalty and still have to rely on coal or natural gas when the sun doesn’t shine and the wind doesn’t blow.

They want to reduce carbon pollution and dependence on fossil fuels. They are blinded by the fact that carbon intensity has been declining for decades and will continue to do so. While Americans might dream of perpetual motion automobiles, their interest in electric vehicles is tied to subsidies, which Elon Musk champions to further enrich himself. As for “pollution”, they just ignore that air quality continues to improve year in and year out.

They call for a public acknowledgement that ‘climate change is real. human caused, and urgent threat.” Human causality and urgency are artifacts of complex computer models that have been built to support a preconceived conclusion. Going back to the late 80s, Al Gore and Jim Hansen predicted a climate apocalypse caused by rapidly rising temperatures. The apocalypse keeps receding as dooms day approaches. And, the temperature increases over recent decades are not much different than those that took place early in the 2oth century. Satellite measurements continue to show that global temperatures are not rapidly rising.

In a display of bold hubris they ask for protection of “scientific integrity in policymaking.” The abuse of the scientific process over the past eight years by the Obama Administration, especially EPA makes it clear that these 800 individuals either don’t know what they are talking about or hold a perverted view of what the scientific process is.

They want to see an enhancement of “America’s climate preparedness and resilience, which clearly makes sense but their justification is the false narrative about increasing frequency and severity of extreme weather events. Improved preparedness and resilience come from investments in science and engineering that lead to innovation. Investment in basic research trumps deductive research.

Over the course of this year, a great deal of attention has been given to the proliferation of fake news. The publication of this letter adds to the inventory of fake news. There is nothing in the Scientific American article or the letter from scientists that can withstand close scrutiny. It is another example of what the late historian Daniel Boorstin documented over 50 years ago in his book, The Image: A Guide to Pseudo Events in America.

The Resurrection of Peak Oil

For decades there was a widespread belief that peak oil was just around the corner. This belief was based on the work of the world reknown geologist, King Hubbert. Although, there were a large number of skeptics, “Hubbert’s Curve” carried the day in the policy world. That is until horizontal drilling and hydrological fracturing unleashed the potential of shale oil.

While peak oil production can rest in peace, peak oil has returned in the form of a growing view that peak oil demand is just around the corner. A recent article in the Wall Street Journal—November 27—focused on the coming peak in demand. In the 1970s, Saudi oil minister, Sheikh Zaki Yamani made an insightful prediction, “the stone age did not end for lack of stone and the Oil Age will end long before the world runs out of oil.” His prediction was based on economics and a long view of technology. What he did not adequately factor into his analysis was the heavy hand of government.

The Wall Street Journal article draws heavily on the views of European oil companies, Hungary’s MOL Group, BP, and Shell. Shell’s finance chief sees the peak coming in 5-15 years. The views of these companies are not surprising because the EU has been pursuing an aggressive green agenda that has contributed to its economic stagnation and high unemployment and companies in those countries dare not stray too far from government orthodoxy. A more neutral source, the International Energy Agency forecasts that consumption will continue to rise for decades unless governments become even more aggressive in mandating climate change actions, which means technology forcing.

There is little evidence that technology forcing works in the long run because commercialization is achieved at a very high cost. Look no further than the string of failures over the past 8 years in battery technology companies and the subsidies needed for electric vehicles. To illustrate this point, the chief financial officer of BMW recently gave a downbeat outlook for electric cars, according to Bloomberg. He said, “We’ve learned that people aren’t prepared to pay a higher price for an electric vehicle. I don’t see some kind of disruptive element coming from electric cars that would prompt sales to go up quickly in the next five to six years.” The problem is likely worse than that. A 2015 MIT Technology Review article candidly stated the problem with achieving EV goals is that we still don’t understand battery technology.

Economic history suggests that there are limits to how long nations can sacrifice economic growth and better standards of living in pursuit of illusory environmental objectives. Predictions of a climate apocalypse that were supposed to be evident over the last decade have not occurred and the IPCC keeps reducing the effects of doubling CO2. Where it use to give its “best” estimate, it now gives none. Doomsayers may eventually be proven right but right now the climate system is not cooperating and as a result the public is likely to become more skeptical and aware that it has been bamboozled by environmental advocates who have profited from marketing fear.

For the foreseeable future, oil will continue its dominant transportation role because it is abundant, affordable, and has superior energy density. Its competitors maintain their life support through subsidies. Those should be on the hit list of actions to take to stimulate economic growth. The reaction of the stock market since the election is one piece of evidence that consumers and business are fed up with being over governed by the Obama Administration. If the market is allowed to determine oil’s long term future its peak will be like the horizon: it recedes as we approach it.

 

 

 

 

The Bludgeoning Visible Hand

President-elect Trump’s intervention in the Carrier relocation decision and what might not be a not so subtle threat to Boeing should deeply trouble anyone or any business that believes in the benefits of market forces, small government, freedom, and who opposes crony capitalism.

In the absence of more information on both  incidents, there could be justifiable reasons for extending the benefit of the doubt. In the case of Carrier, and its parent United Technology, the decision not to move its plant to Mexico could have been based on an expectation of prompt action on corporate tax reform, a tax holiday, and regulatory relief. In Boeing’s case, $4 billion for a new Air Force1 fleet is certainly reason to publicly call for its cancellation, although it now turns out that the $4billion figure is bogus. However, it also could have been a warning to Boeing, which has an agreement to build aircraft in China. The president-elect’s use of words such as “consequences” and “retribution” make it harder to suspend disbelief however.

If Mr. Trump is that aggressive in attacking any company that even thinks about relocating outside the US, before his inauguration, what is he likely to do when he can bring the full force of the federal government to bear?

When President Kennedy publicly chastised the US Steel  in 1961, his brother unleashed the power of the Justice Department against steel companies. And, we know how Richard Nixon engaged in a range of abuses against perceived enemies. Since Mr. Trump has given every indication that he intends to be an interventionist when it comes to US manufacturing abroad, what kind of actions is he willing to take to achieve his objective? Words have meaning and his are troubling.

Mr. Trump promised to “drain the swamp” but actions that make the federal government and executive branch more powerful and promote crony capitalism will have just the opposite effect. Corporations have a fiduciary duty to act in the best interest of their share-holders; not government officials or in this case the president-elect. In recent decades, laws and regulations have been written to benefit the favored and by extension to disadvantage competitors. A smaller and less intrusive government will only come about when crony capitalism and the Bootlegger and Baptist combinations are part of a real swamp draining.

If the business community and the organizations that represent it sit idly by while corporations are threatened and intimidated as Mr. Trump has done, they will encourage more such treatment and that will have wide ranging negative consequences. When the business community was considering whether to oppose President Clinton’s BTU tax early in 1992, a democrat strategist offered this advice: “ if you let them roll you early, they will roll you often”. The business community was unified in opposing the BTU tax and won. If President-elect Trump can roll corporations before he is inaugurated, he will roll them often afterwards. There is a choice to be made and the longer it is delayed, the harder it will be to do the right thing.

The Business Roundtable, Chamber of Commerce, National Association of Manufacturers, and others should take a firm stand against White House intervention in corporate decision making, especially where business investments are concerned. In doing this, they also should stress full support for actions that strengthen the economy and enhance global competitiveness.

The old adage of do the right thing and let the chips fall where they may is sound advice right now.

Charlie Brown, Lucy, and OPEC

The reaction of oil markets, the trade press, and some analysts to last week’s OPEC agreement is reminiscent of the Charlie Brown and Lucy.  Lucy keeps telling Charlie that she won’t pull the football away when he goes to kick it but does repeatedly. And. good old Charlie keeps trusting, when he at a minimum should be skeptical just as the trade press and others should be..

After OPEC agreed to reduce production by 1.2 million barrels per day, prices rose by 10% and the trade press and some analysts wrote that OPEC was reasserting its control and that reports of its demise were premature.   Oil analysts and historian, Daniel Yergin said, “The member countries were faced with a “very deep” abyss of low oil prices, and that won out over politics. …OPEC is back in business … This will rank as one of their historic decisions.”

Well, maybe. History, however, is not reassuring. Since the first oil embargo in 1973, OPEC has mainly been a price taker; not a price maker. Agreements to cap or reduce production have failed because OPEC lacks an enforcement mechanism and members have a strong incentive to cheat. That is likely to be the case with this agreement. Saudi Arabia and Iran came to an agreement, which had eluded them in the past, that allows Iran to increase production by 909,000 barrels a day as it tries to rebuild its economy after the end of Western Sanctions. Why should Iran stop at 90,000 barrels once its oil infrastructure is rebuilt? Why should Venezuela, an economic basket case, or Iraq honor the agreement’s limits? Russia, which produces about 10.32 million barrels a day has agreed to cut production 300,000 barrels. But, Russia’s economy and adventurism needs more hard currency, so if prices rise it too will have an incentive to cheat.

If prices rise above $50 a barrel, OPEC members will see their revenue increase, which is their goal, but that increase will create an incentive to try for more. Hence, more cheating.

As prices go up, more US production, especially shale, will come back on line and that will have the effect of offsetting OPEC production cuts. In 1973, OPEC produced 54% of the world’s production. Today, it is down to 42% and only Saudi Arabia and Iraq are among the top five global producers, according to Statista. If most OPEC members, especially Saudi Arabia honor this agreement, US oil producers will owe them a big thank you.