Monday, March 19, 2012

Flashback to 2009: Administration Policies Sought to Discourage ‘Overproduction’ of Oil | RedState

Flashback to 2009: Administration Policies Sought to Discourage ‘Overproduction’ of Oil | RedState


Flashback to 2009: Administration Policies Sought to Discourage ‘Overproduction’ of Oil


Now: 'Just make up some stuff. The rubes will buy it.'
  
Posted by Steve Maley (Diary)
Sunday, March 18th at 8:30AM EDT
20 Comments
In May 2009, four months into the Obama presidency, retail gasoline prices averaged $2.32 per gallon. Rep. Charles Boustany (R-LA) wrote Treasury Secretary Tim Geithner to express concern about the impact that the Administration’s budgeted changes in tax policy would have on the oil and gas industry. Secretary Geithner clearly laid out the Administration position in his letter of response (pdf link).
That was then, this is now.
In just three years’ time, retail gasoline prices are up 68%. $4.00+ gasoline prices loom as a key reelection vulnerability for the President; in response, the Administration’s rhetoric has shifted to “energy friendly”, but its original energy-hostile policies have not changed a whit.
From Secretary Geithner’s May 2009 letter:
The Administration believes that oil and gas preferences distort markets byencouraging more investment in the oil and gas industry than would occur under a neutral system. To the extent the credit (sic) encourages overproduction of oil, it is detrimental to long-term energy security and is also inconsistent with the Administration’s policy of reducing carbon emissions and encouraging the use of renewable energy sources through acap-and-trade program. Moreover, the credit (sic) must ultimately be financed with taxes that result in underinvestment in other, potentially more productive, areas of the economy.
The President campaigned on the idea that, if we are to finally reduce our dependence on foreign oil, we need to set aside old political battles and instead make the investments in new clean energy technology that will create good jobs here at home.
So, to recap:
  • Encouraging more investment (drilling) is a bad thing, because
  • More drilling leads to too much production (!), which is
  • … detrimental to the nation’s long-term energy security (!!)
  • Cheaper hydrocarbon fuel would work against the Administration’s goal of reducing carbon emissions.
  • Carbon-based fuels were destined cost more (via taxation) under a cap-and-trade system anyway.
  • We can raise the taxes on industry by taking away the deductions (not “credits”) which have historically, and successfully, encouraged drilling, and
  • Redirect that money, and then some, to our political friends who are invested in “green” technologies (read: Solyndra, Fisker, et al).
  • As was pointed out in my blog at the time, we have a Treasury Secretary who doesn’t know the difference between a tax deduction and a tax credit. Given his difficulties with TurboTax, perhaps this should not be surprising.
Ladies and gentlemen, this remains the Obama Administration’s policy; only the rhetoric has shifted.
Nowadays, instead of worrying about “overproduction”, the Adminstration crows about success in the oil patch. Success that owes little to government initiatives.
Interior Secretary Salazar bragged this week about bringing “ ‘the sweet spot of America, and that’s the Gulf of Mexico,’ safely back to ‘robust’ production”, despite the fact that production levels in the Gulf are about 30% less than the government’s pre-Macondo forecasts.
On the White House blog, Energy Czar Deputy Assistant to the President for Energy and Climate Change Heather Zichal says: “When it comes to domestic production, the President has made clear he wants us to continue to produce more oil and natural gas. ”
Ms. Zichal cites figures from a recent report by the U.S. Energy Information Agency: crude oil production on Federal lands was up 13% for the first three years of the Obama Administration, as compared with the last three years of the Bush Administration . Drilling down (pun intended), we find that nearly all of the increase was in the deepwater offshore, and thus was a result of pre-Obama decisions. Beyond that, the peak year of production was 2010, the year of the BP spill. Offshore production actually declined an alarming 20% from 2010 to 2011; can you say moratorium?
Citing this set of facts as evidence of the success of Obama’s policies is really kind of pathetic. It shows just how sensitive the Administration is to criticism of its energy policies.
Administration rhetoric has changed in other ways. “Cap-and-trade” has been deep-sixed; “all of the above” has been co-opted from the Republicans. Out: “green energy” and “green jobs”. In: “clean energy” (i.e., renewables plus natural gas; “clean energy” was invoked ten times during the 2012 State of the Union address, green energy not at all.) Out: cellulosic ethanol. In: algae!
Along the way, the rationale for implementing punitive tax policies that single out oil and gas have changed. In May 2009, it’s clear that the intent was to curtail oil drilling. Now, in 2012 with the identical tax changes on the table: “Have you seen those oil company profits?”
The electoral heat is on because of gasoline prices. Increased oil production is now perceived (publicly) to be a good thing, but the Administration’s line has morphed into “More oil production will not bring gasoline prices down.” That logic makes sense only to people who slept through Econ 101. Imagine how high prices would be without the production surge led by the private sector. Oil prices are set in a global market, but relatively small changes in supply can have a disproportionate impact on price. As the world’s #3 crude oil producer, U.S. energy policy can certainly affect supply in increments that could move price.
In the real world, a call for higher taxes is a call for less drilling. Even discounting the impact on price, more domestic drilling would mean more American jobs. More domestic drilling also means more domestic supply, which will enhance the nation’s energy security.
Cross-posted at stevemaley.com.
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20 Comments Leave a comment

Another Shoe

spinoneone Sunday, March 18th at 8:58AM EDT (link)
is dropping as well: two refineries in Pennsylvania, one in the Virgin Islands have closed this winter and another in Philadelphia is scheduled to close in late June. That cuts 360,000 bpd of gasoline supply to the East Coast. That will push prices up, especially if the Colonial pipeline from Houston is not able to cover a substantial part of the loss. The estimated gap at the moment is on the order of 160,000 bpd. Where will that come from? Well, if the price looks good, probably from Europe. Why are the refineries shutting down? Because the price of oil doe not improve their profit margin. It is the cost of their basic feed stock, and their profit is based on the difference between that price and the price of the various finished products produced from the crude. While the price of gasoline may be rising more or less in sync with the rise in crude prices, the prices of other products made by the refinery are not, so profit margins are squeezed. Add the cost of maintaining relatively old facilities and add the price of meeting additional EPA rules, most of which are designed to raise the price of all carbon fuels and not to protect the environment, and you have an obvious recepie for economic disaster, at least with respect to the refining business. With the loss of these three refineries on the East Coast, gas in the Washington, D.C., area could easily top $5/gallon before Labor Day. At that point, for purely political reasons, don’t be surprised if 0 opens the SPR and approves Keystone XL.
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A quibble, spinoneone. The other reasons ...

acat (Diary) Sunday, March 18th at 10:42AM EDT (link)
those older east coast refineries are closing include that they can only handle light sweet crude, which is a bit more per barrel than the heavy gunk the newer Texas coast refineries can crack .. and that thanks to EPA mandates, the costs to retrofit the older refineries to let ‘em crack darn near anything are too high to make back within the depreciation schedule.
On the upside, paying $5/gal for gas in D.C. may finally help get ‘em to pull their heads out and look at the problem… but I doubt it.
Mew
——
self-portrait
Caveat Suffragator
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Quality of U.S. Refinery Feedstock

spinoneone Sunday, March 18th at 1:41PM EDT (link)
is slowly declining and has been since 1985. In addition, the percent of sulfur in that crude has risen by 40%, on average, from 0.95% to 1.40%. That gives the boys and girls at EPA the shakes, On the other hand, the oil business always has been an important source for sulfur for the chemical industry. There are tables on both problems here: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRAPUS2&f=M. Remember that the higher the API number the “sweeter” and lighter weight the crude oil. Both API and percentage of crude trend lines indicate a decline in the quality of the crude oil processed in U.S. refineries.
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Looked at anoither way...

skorrent1 (Diary) Sunday, March 18th at 11:02AM EDT (link)
You can see the effect of rising feedstock prices (investment) on profitability. Even if the refineries were able to raise prices enough to cover costs, the return on investment has gone down. This ROI factor follows the entire distribution chain down to the local gas station. A 4 cent/gallon markup may provide adequate profit when filling his 10,000 gallon tank cost $18k, but now that it costs $36k he’s in deep doodoo unless he can squeeze a 6 or 7 cent markup against heavy consumer resistance.
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That's exactly what I've been saying

renl57 Sunday, March 18th at 9:14AM EDT (link)
Maley: “this remains the Obama Administration’s policy; only the rhetoric has shifted.”
Exactly.
Obama’s energy policy is heavily influenced by his belief that we gotta move away from fossil fuels to fight global warming. He promised as much in his 2008 campaign speeches, and it’s what his True Believers still expect from him.
But after cap-and-trade died in Congress and gasoline prices started rising again, Obama realized he can’t sell that to most voters anymore. So he kept the policies–but doesn’t mention their rationale in public anymore.
That’s why Obama’s energy policies seem so bizarre. They’re designed around a rationale–fighting global warming–that “dare not speak its name.”
If I were debating Obama in public, I would make that point, and I would ask him what our energy policy should look like if global warming turned out to be not as bad as originally feared.
Because the latest scientific studies are showing that’s the case–it’s NOT going to be the global catastrophe that Al Gore rants about.
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We can't move away

DerKrieger (Diary) Sunday, March 18th at 9:26AM EDT (link)
…from fossil fuels overnight even if we wanted to. WTH do Obama and his fellow travelers expect us to do? Of all the vehicles that are on the road and in the air 99% run on petroleum products and no amount of alternatives will change the fact that these vehicles are designed for a single fuel. I can’t simply start using biofuels or anything else in my car. And as long as the fuels we use combust, they produce that boogeygas, CO2, so exactly why do they demand an end to the use of fossil fuels?
How about we demand a real long term, achievable, sustainable plan from them before allowing them to continue destroying the economy and disparaging an industry that employs over a million Americns.
The environmentalists have power way out of proportion to their numbers and it is the poor and middle classes, those the Dems claim to represent, that are most harmed by their hostile policies.
“In questions of power, let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution.” – Thomas Jefferson
“I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents.” – James Madison
Whenever the legislators endeavor to take away and destroy the property of the people, or to reduce them to slavery under arbitrary power, they put themselves into a state of war with the people, who are thereupon absolved from any further obedience.” — John Locke, 1690
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The enviros genuinely don't care about America

renl57 Sunday, March 18th at 11:34AM EDT (link)
Where global warming is concerned, they think they need to save the planet *from* America.
Whenever they mention America, it’s always with a condemnation in apposition:
“America, the world’s biggest polluter,….”
or
“America, the world’s biggest per capita producer of greenhouse gases,….”
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Petroleum product's feedstock price

persiflage Sunday, March 18th at 9:55AM EDT (link)
(that is, crude oil cost) would drop in the US if the US monetary and fiscal policy were changed to strengthen the dollar. Strengthening the dollar would be the opposite of the actions taken over the last four years. Note: at $105 per 42-gal barrel, the crude oil alone costs about $2.50 per gallon; at $75 per barrel, the crude oil costs about $1.79. per gallon. The petrochemical industry appears to make large net profits, but it’s made on the volume of sales. ROI is modest; the petrochemical industry is a hugely capital-intensive and long-term undertaking.
“A republic, if you can keep it…” – B. Franklin
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Yes persiflage, the weak $ is the main reason for high oil prices

carolina Sunday, March 18th at 2:16PM EDT (link)
The Saudi’s have said that they have set $100/bbl (because the $ has gotten so much weaker). The same thing happened in the 70′s. Other countries are not fools – so they do not give away their resources for less. I don’t blame them a bit.
Bernanke may get BO defeated all by his QE self.
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You overstate the 'decline' in the USD

Dave_A (Diary) Sunday, March 18th at 6:07PM EDT (link)
If we look at prices across the board, there is no ‘common’ trend or equivalent rise among commodities prices…
Some things go up, some down, the trends for gold and oil (less so for oil) are both way, way out of line with the rest of the economy.
The problem with the price of oil isn’t a dollar-value issue. If it was, then you’d see equivalent-rate price-rises economy wide.
It’s a supply-shortage issue – an artificial supply-shortage created by the idiotic policies of US & European governments, beholden to the radical environmental movement.
People crowed about ‘inflation’ being to blame for the 07-08 gas spike, however the Crash of 08 proved them ALL WRONG – gas prices fell 50% in a few weeks, the price of oil went from $150/bbl to 60/bbl, but [b]there was no corresponding-percentage increase in USD value[/b].
It’s not inflation. It wasn’t last time, it isn’t this time, and it won’t be next time…
It’s an increase in consumption due to people perceiving ‘recovery’ in the industrialized world, combined with anti-oil government policies. 100% supply & demand, with a little bit of pessimism in the futures markets…
Get a pro-drilling president in, leave the monetary policy as it is (where it needs to be – eg, inflationary), and watch everything turn around, with no change in the dollar…
Formerly known as dcacklam – they finally fixed my access to the ‘profile’ page
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A 'strong dollar' would destroy the rest of the economy, so that's not an option...

Dave_A (Diary) Sunday, March 18th at 5:52PM EDT (link)
Monetary distortion of oil prices doesn’t happen in a vacuum…
If we intentionally deflate the dollar to ‘lower the price of oil’, we also lower the price of everything else except dollars.
That is very, very bad for the majority of Americans who own lots of ‘everything else’ and almost no dollars. ‘Sure, gas will be cheaper – but your house will devalue more, your labor will be worth less, and your debts will all stay the same as they were before’… Great plan… NOT!
You cannot have a ‘King Dollar’ policy in a Savings-Free-Zone economy like ours.
They are mutually incompatible.
Formerly known as dcacklam – they finally fixed my access to the ‘profile’ page
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Britian 60% tax on gas/US 11% tax on gas

buster93 Sunday, March 18th at 11:29AM EDT (link)
That equals to 10.00 /gal in Britian in 5.00/gal in the US. The Energy Secretary in the US likes the Brits tax. TIME OUT time to vote OBAMA OUT.The British Gov’t is so used to this higher tax and use it for other areas of Gov’t they wouldn’t know what to do without it.
YIKES . I don’t think Americans are drinking the koolaid yet . How many electric cars have they sold.? The US is filled with fossil fuels.
Time for a change and get a Republican back in the White House!!!!
God Bless the US!!!
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60% tax on Gas Would Kill US Economy

quill67 (Diary) Sunday, March 18th at 11:52AM EDT (link)
Europe can get away with a higher tax on gasoline given the smaller distances and the heavy use of waterways to move goods. The US moves a large amount of its goods via truck using gasoline. If we taxed at europe’s levels, our ability to produce would be killed.
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Trade Imbalance affects prices too

ithos Sunday, March 18th at 11:38AM EDT (link)
Not that the Obama gives a darn but the less oil we import the lower the trade imbalance which results in a stronger currency. Obviously a stronger dollar results puts downward pressure on the price of gasoline. The dollar has declined 20% over the last ten years.
But the other big point that is not discussed often enough IMO is that being energy self sufficient is far more important to economic and national security than the price of gasoline. In the case of a major dislocation of the world’s oil supplies, some citizens may not be able to purchase fuel at any price.
If the American people re-elect Obama then they will know what real pain at the pump feels like.
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How much can Obama do in the next few months to drive down gas prices?

bk (Diary) Sunday, March 18th at 12:22PM EDT (link)
Even if it’s temporary or artificial, they’ll do whatever they can to fake out the average voter.
On the other hand, people from refining states won’t mind if people in the northeast are paying through the nose for heating oil this winter.
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He can't do much at all...

Dave_A (Diary) Sunday, March 18th at 5:55PM EDT (link)
Which is why he’ll try to spin it by further raising vehicle fuel standards & trumpeting ‘conservation’…
Lowering gas prices requires a believable energy policy that presents a ‘future picture’ of more stable supplies & higher global production to the futures traders who’s actions in the market set the price of gasoline…
Formerly known as dcacklam – they finally fixed my access to the ‘profile’ page
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tax credit or tax deduction or ...

bk (Diary) Sunday, March 18th at 12:23PM EDT (link)
as people like Rachel Maddow have taken to calling it, a “subsidy”.
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Steve Maley, please clarify

rsgp (Diary) Sunday, March 18th at 4:05PM EDT (link)
You make the (valid) point that, other things equal, increased oil supply means lower oil prices (and in turn, gasoline prices), and that increased domestic production (other things equal) means increased (global) oil supply, thus increased domestic production (i.e., more drilling, essentially) means lower prices, other things equal.
The left (and oil analysts, apparently) respond that, yes, the above is true, but that the SIZE of the impact on oil and gas prices would be negligible (just pennies per gallon, even in the long-term) even if a president opened up domestic drilling as much as those calling for it wish. And many mainstream media reports (and organizations on the left) refer to that EIA study that said (I think) that the impact would be only 3 cents per gallon even by 2030.
What you are saying and what they are saying are not technically inconsistent. You’re saying more drilling would lower oil and gas prices, other things equal. They are agreeing, but saying the impact would be negligible.
Are you disagreeing with them? In other words, are you saying a president opening up drilling would make a big difference in the price of gasoline (say, $1 or more per gallon, or even 50 cents, which I would consider substantial) over some time horizon you have in mind? What ballpark are we talking about in terms of impact on price per gallon of gas for the expansion of domestic drilling that you want a president to allow?
And what’s up with that EIA study? Is it’s conclusion being misinterpreted by the media (and by me, since I’ve read the conclusion), or is the analysis bogus in some way?
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There's no easy answer to this question.

Steve Maley (Diary) Sunday, March 18th at 5:27PM EDT (link)
I would bet the experts who said 3 cents by 2030 can’t guess the retail price within 3 cents on July 1, 2012.
To me, supply is the #1 issue. We have been wringing our hands about energy independence/energy security since 1973. We are closer to a solution now than we’ve ever been but our political leaders have no resolve.
If I were king, we’d have a short/intermediate goal of building 2 million barrels/day of liquid hydrocarbon supply over the next 5-7 years. We’d get it from ANWR, from the deepwater GoM and from unconventional sources which are only beginning to be delineated.
How much will that bring prices down? I have no way to know, except 1) I feel certain that the demonstration that we have the national will to do something beyond wringing our hands would be worth something, 2) we’ll be better off, price-wise, than if we don’t do it, and 3) there’s no way to do it without some pretty innovative technology.
All of the cheap, easy oil is gone. We are in an economic frontier, where price spikes can drive innovation, which lead to booms like the one going on now in North Dakota. We are also pretty good at exporting that technology. The techniques that work here are likely to work elsewhere in the world.
The blogger formerly known as ‘Vladimir’.
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Thanks Steve, but...

rsgp (Diary) Sunday, March 18th at 6:46PM EDT (link)
Regarding your remark that “I would bet the experts who said 3 cents by 2030 can’t guess the retail price within 3 cents on July 1, 2012″, even assuming that’s true (and I don’t have any reason to dispute it), it’s almost completely irrelevant. Predicting what the price will be at some point (any point) in the future is something completely different from estimating the EFFECT on price some factor would have. The former would involve all sorts of variables, and is often (as in this case) very complex, with both the values (magnitudes, or presence/absence) for all those variables very hard to predict and the total effects of all of them together hard to predict. The latter assumes all other variables equal either way and seeks to estimate how DIFFERENT price would be with the one variable in question (some policy change) vs. without it (or vs. an alternative). You see what I mean when I say your remark is irrelevant, right?
Do you have or have you seen any critique that refutes that EIA analysis. I’ve searched and haven’t found any faulting of the analysis or explicit disagreement with it’s conclusion that the impact of opening up drilling would not be more than pennies per gallon even by 2030.
I suppose one could argue that we don’t really know how much oil is out there, but I assume that the EIA analysts (and private sector oil industry analysts quoted in the mainstream media) would take that factor of the “unknown” into account and that they are making educated guesses (and I suppose conducting and considering sensitivity analysis around their assumptions), assuming their is no bias involved in the selection or work of such analysts (which is always possible with anything, but not something I’m comfortable just assuming when I don’t see refutation from other analysts that don’t seem to have an ax to grind).
You say (to your credit, for candor) that you “have no way to know” how much prices would go down if your desired presidential policy re: domestic production were adopted and maintained. So does that mean that Gingrich’s claim that he can get gas down to $2.50 (or lower) within two years — which combines both prediction of a price point and an implicit claim that his policies would have a huge impact (at least about $1.30 per gallon, apparently) — is based on nothing, kinda just pulled out of his butt, or as The Economist said this week that “Mr Gingrich is pushing a cockamamie claim that unbridled drilling could swiftly cut the price to $2.50″ ?
http://www.economist.com/node/21550265
And the Gingrich thing related to the short-term, but you and I (and that EIA study) address the long-term as well (all the way to 2030), so I’m turning back to that now. I assume when you (as someone with particular insight into this topic) say that you have no way to know how much of an impact on prices your desired policy would have (vs. Obama’s policies, I assume), you are making the broader statement that nobody (at least nobody speaking publicly) has any way to know, based on publicly available information, So speaking more generally, it seems you’re saying that it’s wrong for folks to assert that Obama’s policies limiting drilling are (or would, over time) cause significantly higher prices than we’d have under expanded drilling, because if we have no idea, we have no idea. Is that what you’re saying?
Lastly, I’m still left wondering about the discrepancy between the view that we can’t really have any idea vs. that EIA study and oil analysts quoted by the mainstream media who claim they do know (or at least claim they know what is likely or unlikely) and who say the impact of expanded drilling would be negligible over the short, medium, or even long-term. It seems even the oil industry spokespeople, who have a vested interest in debunking such claims and claiming there would be a significant impact on prices, don’t really do so. For example, this from CNN, in which an economist with the American Petroleum Institute just says essentially what you’ve said — “we just don’t know” :
Rayola Dougher, senior economic advisor for the American Petroleum Institute. The industry now employs over 9 million Americans.
These are well-paying jobs. People can earn $15 to $20 an hour right out of high school. With a just a few years experience, $60,000 a year is possible. Petroleum engineers and others with advanced degrees easily clear six figures.
It’s also been good for oil companies. Thanks to lower taxes, companies generally make much more money on a barrel of oil produced in the United States than they do from North Sea or Middle East crude.
Dougher said that if all federal land was open to oil drilling — not just offshore but Alaska’s wildlife refuge and all federal land in the West that isn’t a national park — the country could produce an extra 2.8 million barrels of oil a day by 2025.
Being that she represents the oil industry, Dougher gave the idea a hard sell.
She said it would create another 500,000 jobs, add $150 billion each year to government coffers and shave a significant chunk off the country’s foreign trade deficit.
But one argument she didn’t make was lower prices.
“How would that play out in the market, what impact would that have on prices,” she said, “we just don’t know.” 
http://money.cnn.com/2011/04/25/news/economy/oil_drilling_gas_prices/index.htm
So the bottom line for me, as a non-expert just trying to get a sense of what is probably valid, is that all the (apparently) non-partisan experts whose views I’m seeing (and I’ve Googled around searching for whatever views are out there) are saying more domestic drilling just won’t have a significant impact on prices (over either short or long term), and the oil industry folks are only going as far as to say we just don’t know if the impact would be significant or not. That leads me to think it’s not likely there would be a significant impact on prices.
And if it isn’t true that drilling could have a significant impact on prices, shouldn’t we focus on valid argument for more drilling — jobs, balance of trade, and revenues to reduce the deficit (or lower taxes), and perhaps the possibility that we’ll find so much more than anyone currently expects that it would make more than a negligible difference in prices. I realize that it’s possible to win with bogus assertions, but if this assertion that it’s likely that there is a significant price impact involved here is a bogus assertion, I’d feel better winning clean than winning by fostering and exploiting gross misconceptions among the public.
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