Weathervane: A Climate Policy Blog from Resources for the Future

Jun14

Lessons from Oil Spills Past Shape Deepwater Horizon Future

The ongoing BP Deepwater Horizon oil spill, now the largest in U.S. history, is doing more than clouding the waters of the Gulf of Mexico; it’s creating a cloudy mess of responsibility and blame. From questions regarding the limits of oil spill liability caps to the possibility of handing BP the tab for the lost wages of oil workers sidelined while the future of offshore drilling gets sorted out, there is little doubt policymakers will be busy unpacking the legal, economic, social and environmental consequences of the accident for the foreseeable future.

But disentangling the diverse strands of applicable liability laws further complicates an understanding of who bears the cost of damages. Three new RFF backgrounders delve into these issues, focusing on the range of costs associated with spills, the state of existing liability law, and methods for deterring such accidents.

In “A Taxonomy of Oil Spill Costs: What are the Likely Costs of the Deepwater Horizon Spill?,” Vice President for Research Mark Cohen classifies the range of private and external costs associated with the disasters, like the one in the Gulf. According to Cohen, the average oil spill in the United States $16 per gallon in cleanup and damages. However, there can be tremendous variation in ultimate cost outcomes:

The Exxon Valdez—a spill of approximately 10.8 million gallons in Alaska in 1989—cost over $630 per gallon, according to my estimates (see the appendix). In contrast to the Valdez, the largest accidental spill ever recorded was the Pemex Ixtoc I oil rig off the Gulf Coast of Mexico that occurred between June 1979 and March 1980, a spill10-12 times the size of the Valdez. The total cleanup and damage costs associated with the Ixtoc I are estimated to have been less than $7 per gallon.

So how will these costs end up being covered? Visiting Scholar Nathan Richardson explains the effect of legal regimes from new statutes to old state common law doctrines, and how these are likely to interact in “Deepwater Horizon and the Patchwork of Oil Spill Liability Law.”

And what about avoiding these incidents in the future? In “Deterring Oil Spills: Who Should Pay and How Much?,” Cohen details how different incentives impact oil companies’ efforts to avoid spills, including the roles of civil and criminal law, insurance, and firm reputation.

Tiffany Clements is managing editor of Weathervane.

Published: Jun-14-10 | 0 Comments

Jun02

EIA Annual Energy Outlook: Where, Exactly, is the Oil Coming From?

Oil

Editor’s Note: Sifting through two weeks’ worth of email messages will generally yield a gem or two, like this contribution from John Anderson. The EIA report has been out for a few weeks but as oil continues to gush in the Gulf of Mexico, it’s interesting to take a quick at the numbers behind global oil consumption and projections for where we may end up.

Most forecasts warn that world demand for liquid fuels is going to rise substantially faster over the coming decades than conventional oil production. What’s going to fill the gap?

That question was raised most recently by the U.S. government’s Energy Information Agency, which published its Annual Energy Outlook on May 11. Under its reference case—which means no surprises and no major changes in policy—world consumption of liquid fuels would rise from 86 million barrels a day in 2008 to about 112 million barrels in 2035.

That’s an increase of 26 million barrels a day.

But conventional oil production, under the same projection, would rise only 15.5 million barrels a day by 2035. The remaining 10.5 million barrels a day would come from a variety of sources, the EIA expects.

About 4 million barrels a day would come from unconventional oil—mainly from Canadian oil sands and the very heavy oils in Venezuela’s Orinoco belt, but also a small amount from American oil shale. The remaining 6.5 million barrels a day would be fuels manufactured from coal and gas, and biofuels.

As the EIA makes clear, no part of this projection is a sure thing. Canadian oil sand production, for example, is limited by environmental concerns. The same is true of coal-to-liquid fuel. Here in the United States, Congress has mandated a massive increase in biofuel production over the next 12 years but success will depend upon, among other things, technologies that have not yet been fully developed.

Nor is the availability of conventional oil easy to predict. The EIA notes that the countries in the Organization of Petroleum Exporting Countries have recently shown unusual discipline in controlling output to maintain prices. In countries outside OPEC, it said, the financial crash and resulting credit squeeze is having an impact on the oil industry.

“Severe problems in the global credit market that began in 2006 and continued through 2009 have made it difficult to finance some exploration and production (E&P) projects,” the EIA wrote. “The full effects of limits on credit availability for oil supply projects will not be realized for some time, as the projects stalled due to a lack of financing, particularly exploration projects, would not have brought supply to the market for several years. In addition to its impact on individual E&P projects, the recent credit crisis may also have led to an overall and possibly lasting change in risk tolerance on the part of both lenders and investors.”

Everything about this forecast suggests that the industrial countries would be wise to move vigorously to reduce their dependence on oil as fast as they can.

J. W. Anderson is Resources for the Future’s journalist in residence.

Published: Jun-02-10 | 0 Comments

May05

From the Gulf of Mexico, Questions About Oil

Obama Administration, Oil

It’s much too early to try to predict the impact of the massive oil spill in the Gulf of Mexico. But it’s not too soon to start thinking hard about it—and what the response ought to be.

Obviously the cap-and-trade bill to restrain climate change will be delayed. The Obama administration says that there will be no more talk of expanding offshore drilling until it knows exactly what went wrong in the Gulf, and how a repetition can be prevented. That isn’t likely to be soon. But the proposed new ocean drilling policy is—or at least was—part of an intricate structure of compromises and concessions built to win crucial votes in the Senate for the climate legislation.

Oddly, the disaster in the Gulf has one thing in common with 2008's financial crash on Wall Street. Both happened despite assurances from industry that new techniques and technologies had made these failures impossible. In both cases, managers told investors, the government and the public that they had developed procedures and devices that all but eliminated risk. As a result public policy in both cases is going to be strongly influenced by the evidence that neither the banks nor the oil companies understand their new technologies as well as they thought they did.

The memorable oil spills of the past, most notably the one off Santa Barbara in 1969, generated important support for stronger environmental protection. But the current spill in the Gulf ought to force a deeper issue: How much oil do we really need, and to what lengths should we go to find it?

At one time Americans thought that there was a fixed relationship between oil production and economic growth. But in the oil crises that began in 1973, we learned that the country could get along with considerably less oil than we had thought. Currently this country consumes little more oil than it did four decades ago. Today we are using only 40 percent as much oil to produce a dollar’s worth of Gross Domestic Product as we did in 1973. And yet most of that progress was made in the first decade after the oil crises began. As the memory of the lines at filling stations began to fade, so did the determination to do more with less fuel.

With the rise of the big developing countries, the world’s consumption of oil is going up steadily and the hunt for new resources is accelerating. The message from the Gulf of Mexico is that drilling in deep water involves risks that the explorers do not yet fully comprehend and a mishap on the ocean floor, under a mile of water, is extraordinarily difficult to fix.

One consequence of this tragic accident will necessarily be to raise once again the basic question whether it might not be safer, as well as cheaper, to reduce consumption on dry land rather than to speed up drilling under the sea.

J. W. Anderson is Resources for the Future’s journalist in residence.

Published: May-05-10 | 0 Comments

Apr06

The Unintended Consequences of Expanded Offshore Drilling

Obama Administration, Oil, Natural Gas

After nearly a week of grumbling, measured praise, and ample head scratching by policy wonks, it looks as though the real outcomes of President Obama’s plan to expand offshore oil development could be more modest than they seemed at first blush.

Still, as is the case with all policymaking, it’s important to consider the possible unintended outcomes of expanding and increasing U.S. offshore oil and gas production, as RFF Vice President for Research and Senior Fellow Mark Cohen pointed out with his response to the most recent prompt at National Journal’s Energy and Environment Expert Blog:

While there might be important political reasons for expanding offshore oil exploration, the president's proposal to increase offshore drilling is unlikely to have a significant effect either on the supply of natural gas or on energy security in the U.S. In fact, the end result might simply be to increase greenhouse gas emissions.

Most of the offshore gas is relatively expensive to bring to market, and the recent technological innovations that significantly lowered the cost of recovering abundant shale gas resources are likely to make the offshore areas a less attractive source of natural gas supply. Thus, unless there is a substantial expansion of natural gas demand beyond what is currently forecast, we are unlikely to see major increases in offshore drilling for natural gas.

The situation with offshore oil, however, might be considerably different. If it is profitable to produce oil from these offshore areas, it might increase our oil security somewhat. However, as a recent RFF study, "“Reassessing the Oil Security Premium,” by Stephen Brown and Hillard Huntington shows, there are two effects to consider when we increase the supply of U.S. produced oil. Certainly producing more oil in the U.S. will reduce our dependence on foreign oil and increase the stability of our oil supply. However, partly offsetting this positive effect is the basic law of supply and demand. New oil supplies will lower the price of oil on the world market, which will increase oil consumption in the U.S. This partly offsets the energy security benefit of new oil production in the U.S. because increased oil consumption increases the economy's exposure to supply disruptions. In other words, each new barrel of oil production does not necessarily result in one less barrel of oil imports. This doesn't mean that there are zero energy security benefits, however. Netted out, the Brown and Huntington estimates suggest that the effect of increased U.S. oil production is about $1 per barrel (or 2.4 cents per gallon of gasoline); for each barrel of increased U.S. oil production, the risk to the U.S. economy of supply disruptions is reduced by an expected value of about $1.

The story for greenhouse gas emissions, however, is not so rosy. It is important to realize that policies that enhance energy security do not always result in lower greenhouse gas emissions. In some case, policies are complementary, but oftentimes a policy that enhances energy security results in higher greenhouse gas emissions. In fact, that is true with offshore oil drilling. Nearly all of the increase in U.S. oil production will result in increased oil consumption somewhere in the world, which will likely result in a net increase in CO2 emissions. The bottom line is that the president's policy might have a small positive effect on energy security, but might ultimately increase—not decrease—greenhouse gas emissions.

Published: Apr-06-10 | 0 Comments

Feb03

Cutting Fossil Fuel Subsides to Cut Emissions

Oil, Subsidies, Renewables

President Obama’s FY 2011 budget proposal puts the kibosh on some $39 billion in tax breaks for oil and coal companies over the next 10 years. The president seems to be taking a step in the direction of making good on last year’s G20 agreement to phase out subsidies for fossil fuels.

The connection between a fossil fuel phase-out and global emissions reductions is undeniable, according to RFF Senior Fellow Ray Kopp. He explains in that in order to meet worldwide emissions reductions, fossil fuel consumption will have to be curtailed. One way to encourage using less, reducing subsidies on fossil fuel costs, he says:

Fossil energy subsidies hamper all government efforts to increase energy conservation, provide a viable market for renewable energy sources, and accelerate the transition to a low carbon economy. The OECD estimates that removal of the $300 billion of consumer subsidies would reduce carbon dioxide emissions by 13 percent in 2050.

Of course, removal of the subsidies is easier said than done. Consumer energy subsidies are very popular among the groups receiving them and therefore politically difficult to dismantle. Moreover, they are seen as government support for poor households. It is arguable whether a significant portion of these subsidies (for example gasoline) target very low-income households; but, in some countries the only link households have to the monetary based market world is through the purchase of fossil fuels. In these cases the fossil markets provide governments with a mechanism for income support—perhaps the only mechanism.

A U.S. proposal to end fossil fuel subsidies to oil, diesel and gas “in the medium term” was accepted by world leaders at a G-20 summit in Pittsburgh in September. While no deadline was set, the action by the G-20 to end subsidies is clearly a step in the right direction, but the political hurdles and issue of poor household income support must be addressed and overcome.

Read Kopp’s entire post, “Fossil Subsidies: Yet Another Call for Getting Prices Right” here. Raymond J. Kopp is a senior fellow and director of Resources for the Future’s Climate Policy Program.

Published: Feb-03-10 | 0 Comments

Feb02

2011 Energy Funding Forecast: Sunny, Breezy with a Chance of Nuclear

Obama Administration, Congress, Subsidies, Oil, Renewables

Given the scope of problems associated with climate change—economic, environmental, foreign and domestic concerns, to name a few—it seems virtually every federal department plays some part in President Barack Obama’s policy response. Here’s a look at where climate and energy issues have cropped up in the president’s FY 2011 budget proposal.

Environmental Protection Agency

Even in the absence of accounting for a federal cap and trade program—a move some see as an acknowledgement of cap and trade’s demise—the budget throws some $44 million toward the EPA’s efforts to regulate greenhouse gases under the Clean Air Act. Moreover, it seeks to help states do the same.

The Office of Management and Budget sums up the EPA’s climate change mitigation requests:

$21 million—an increase of $4 million from 2010—to implement the Mandatory Greenhouse Gas Reporting Rule and ensure the availability of high-quality emissions data.

$56 million—including $43 million in new funding—for the EPA and states to address climate change effectively through regulatory initiatives to control greenhouse gas emissions

$25 million to aid states in permitting activities for greenhouse gas (GHG) emissions under the New Source Review and Title V operating permits programs

$7 million to develop New Source Performance Standards (NSPS) to control GHG emissions from major stationary sources

$6 million in new funding to implement the 2010 light duty vehicle rule and to develop regulations for large mobile sources

$5 million to develop guidance regarding the best available practices and technologies to control GHG emissions under permitting programs

Department of Energy

The DOE’s budget requests underscore a strong political will to wean the U.S. economy off fossil sources (and make good on G20 commitments) by cutting $36 billion worth of fuel subsidies and shift renewable energy sources with requests for investment in wind and solar energy research.

But, perhaps most notably, the proposal makes a strong statement about U.S. nuclear power, guaranteeing $55 billion in loan funding to build new nuclear power plants and recording a departmental goal to “Commit (conditionally) to loan guarantees for two nuclear power facilities to add new low-carbon emission capacity of at least 3,800 megawatts during 2010.” Reaction to the news has been predictably mixed. (And—I assume since he didn’t address the budget directly—predictably satirical from Stephen Colbert.)

OMB breaks down DOE requests further:

$36 billion in new loan authority – for a total of $54.5 billion – to expand support for DOE loan guarantees for nuclear power facilities.

$500 million in credit subsidy to support $3 billion to $5 billion in loan guarantees for innovative energy efficiency and renewable energy projects.

$144 million for research, development, and demonstration activities to modernize the grid including smart-grid technologies that will spur the transition to a smarter, more efficient, secure and reliable electric system, resulting in energy- and cost-saving choices for consumers, reduced emissions, and growth of renewable energy sources.

$4.7 billion in clean energy technology investments at DOE, including:

Nearly $2.4 billion, an increase of $113 million, for energy efficiency and renewable energy programs including $302 million for solar energy, $220 million for biofuels and biomass R&D, $325 million for advanced vehicle technologies, and $231 million for energy efficient building technologies.

$545 million for advanced coal climate change technologies to focus resources to develop carbon capture technologies with broad applications to advanced coal power systems, existing power plants, and industrial sources.

$300 million for the Advanced Research Projects Agency–Energy to accelerate game-changing energy technologies in need of rapid and flexible experimentation or engineering.

$793 million for clean energy activities and civilian nuclear energy programs, including research and development and infrastructure programs. The budget includes a new cross-cutting research program to address technology needs for all aspects of nuclear energy production.

Department of State

In conjunction with U.S. Agency for International Development (USAID) and the Treasury Department, the State Department put forth a budget that will provide developing nations $1.4 billion in FY 2011 to address climate change.

A drop in the bucket toward $100 billion a year by 2020, the proposal would concentrate international efforts on adaptation, energy development, and ecosystem management programs to improve agricultural practices and support carbon sequestration and storage. Combined with last year’s final tally of about $1.0 billion, even meeting the U.S.’ share of the $30 billion by 2012 pledge in the Copenhagen Accord (likely to be about 25 percent) will require a substantial increase in FY 2012 or some creative accounting.

Other notable requests, via OMB:

The Department of Transportation: $530 million as part of the President’s Partnership for Sustainable Communities to help State and local governments invest in sustainable transportation infrastructure that integrates with housing development and other critical investments.

The Department of the Interior: $73 million—a $14 million increase—to build agency capacity to review and permit renewable energy projects on federal lands. DOI has set a goal to permit at least 9,000 megawatts of new solar, wind, and geothermal electricity generation capacity on DOI-managed lands by the end of 2011.

So where does it go from here?

The road from proposed budget to actual budget runs directly through Congress; more specifically it runs through a process outlined in this interactive graphic. (And, while we’re on the subject, NYT has this really cool graphic illustrating funding request sizes. I love alternative ways to illustrate governmental functions. I was a huge fan of School House Rock as a kid.)

The process of hearings and congressional consideration got underway in earnest today with Treasury Secretary Timothy Geithner testifying before the Senate Budget Committee and OMB Director Peter Orszag testifying before the House Budget Committee.

Tiffany Clements is managing editor of Weathervane.

Published: Feb-02-10 | 0 Comments

Dec21

Carbon’s Costly Paradox

CO2, Renewables, Oil

If the domestic and international policy debates of 2009 have taught us anything, it’s that shifting the world’s economies to energy sources that are both abundant and carbon-friendly presents countless challenges. Not the least of which is cost.

According to RFF Senior Fellow Joel Darmstadter, the following image—originally appearing in the Fall 2006 edition of Resources Magazine and updated for a forthcoming report entitled, "Toward a New National Energy Policy: Assessing the Options"—offers a useful illustration of just how costly, under present conditions, a low-carbon economy could be. Joel takes it from here:

See Larger

Imagine a downward-sloping line from the upper-left quadrant to the lower-right quadrant and you’ll appreciate the paradox conveyed by the accompanying figure: liquids that are CO₂-friendly are widely judged to be costly; those that seem competitive with crude oil are CO₂-intensive.

The vertical and horizontal ranges of each bar reflect uncertainty about, respectively, cost and emissions. (Note that, while most discussion of global warming centers on CO₂, the figure covers all greenhouse gases; these sum to about a 1.2 multiple of CO₂ alone.)

Cost and emission data for alternatives to crude oil are estimated to roughly approximate 2008-2009 conditions. The $70-$90 per barrel range of crude oil prices is intended to reflect the situation prevailing towards the end of 2009 rather than the much higher projected level and range of those inflation-adjusted prices by DOE’s Energy Information Administration for the year 2030. Emissions (for both crude oil and its alternatives) are calculated on a lifecycle (“well-to-wheel”) basis—spanning extraction or production at one end to utilization and combustion at the final-demand stage.

Technological advance that could spur a clustering of various fuel options in the “clean-and-cheap” bottom-left area is obviously a desirable, though for now, still elusive goal.

Joel Darmstadter is a senior fellow at Resources for the Future. Since joining RFF in 1966, his research has centered on energy resources and policy.

Published: Dec-21-09 | 0 Comments

Dec15

U.S. Dependence on Foreign Oil to Decline Despite Increased Consumption

Obama Administration, Renewables, Oil

Richard Newell, Administrator of the U.S. Energy Information Administration (EIA), and former Senior Fellow at RFF, released EIA’s Annual Energy Outlook 2010 Monday at the Johns Hopkins University School of Advanced International Studies, Global Energy and Environment Initiative in Washington.

The study projects that U.S. primary energy consumption will grow a moderate 14 percent by 2035, but fossil fuel use will decline from 84 percent to 78 percent. Currently, the United States consumes 19 million barrels per day of fossil and biofuels. EIA anticipates an increase to 22 million barrels per day in 2035 with all additional growth from biofuels like ethanol and not petroleum-based liquids. This bodes well for the domestic renewable energy sector. Reliance on imported foreign liquids is expected to decline from 57 percent of total U.S. consumption today to 45 percent in 2035.

The annual report builds on EIA’s statistical, economic, and analytical knowledge to create independent projections of U.S. energy consumption and production over the next 25 years. The 2010 Outlook evaluates current laws and regulations within the energy sector, technologies that are commercial or expected to become commercial in the next decade, and global supply and demand prices to support their study.

Newell says energy efficiency, alternative fuels, and higher prices, “curb energy consumption growth and shift the energy mix toward renewable fuels.” However, without new government policies which encourage a move toward alternative energy, “fossil fuels would still provide about 78 percent of all energy used in 2035.” Environmentally speaking, the report states that without new emissions reduction policies carbon dioxide from the energy sector will grow at 0.3 percent per year, mostly due to electric power and transportation.

The 2010 Outlook is released at an important moment for international energy policy negotiations. The EIA provides a view of the future where government regulations, markets, and environmental considerations can reduce the overall dependence on oil without a decrease in domestic consumption.

Aysha Ghadiali is a Research Associate at Resources for the Future.

Published: Dec-15-09 | 0 Comments

Nov24

The Intersection of Autos and Policy

Cash for Clunkers, Oil, United States

U.S. auto policy is in the midst of a revival of relevance in the wake of Cash for Clunkers and with the nation watching the Obama administration’s handling of GM. Recently, RFF’s Weekly Policy Commentary series set out to examine key components of other U.S. auto policies.

In this November 13 commentary, RFF fellow Shanjun Li took a closer look at the popularity of hybrid vehicles among U.S. consumers. He writes:

Today, hybrids represent roughly three percent of new car sales because of—or perhaps in spite of—federal subsidies, which are due to expire across the board in 2010.

The evidence to support the success of those subsidies is somewhat mixed. For example, in the two years since federal subsidies for the most popular hybrid, the Toyota Prius, have ended, it has continued to gain market share. While most observers agree that federal subsidies were critical to gain market acceptance of what was then a brand-new technology, is that still true today? Or is what matters most the price at the pump?

And what of those prices at the pump?

In his November 20 commentary, Kenneth Small of the University of California at Irvine wondered if the time has come for a federal gas tax increase. According to Small, the convergence of three key factors—an infrastructure in need of updating, petroleum dependence and climate change, and budget deficits at both the state and federal level—may make the time right to raise gasoline and diesel taxes:

It’s rare that a single policy instrument can solve several problems at once. Rarer still that the political and economic motivations to address these problems converge; and almost unheard of that lessons of history lead to the same conclusion. We are in such a situation today with respect to taxes on motor vehicle fuels. It is time for a dramatic, permanent increase in these taxes.

Read Li’s What Motivates People to Buy Hybrids? and Small’s Triple Convergence toward a Higher Gasoline Tax plus nearly 40 additional commentaries at RFF’s Weekly Policy Commentary Energy and Climate page.

Published: Nov-24-09 | 0 Comments

Nov04

Oil Prices, Economic Stability and Climate Change

Oil, Congress

Oil Derrick image courtesy mvferguson2000 via Flickr While climate change is the primary reason for cutting American oil consumption, a second reason is nearly as urgent. Oil prices are inherently volatile and their violent swings repeatedly do serious damage to the American economy. This year is yet another example of this phenomenon.

The price of a barrel of oil has more than doubled since 2009 began, rising more than $40. Americans are now spending their money on oil at a rate approaching $300 billion a year more than 10 months ago. That is a number of the same general magnitude as President Obama’s recovery program enacted last February, which provides $787 billion in tax cuts and spending over several years. The difference is, of course, that the recovery money pushes toward economic growth while the increment in oil expenditures pulls in the opposite direction.

Economic strategists are watching with concern the data on consumer expenditures. One major item is the price of gasoline, which has gone up about 90 cents a gallon since last winter. Using Energy Information Administration 2008 figures, which put U.S. gasoline consumption at some 3.28 billion barrels, more than $100 billion a year is being spent to buy fuel rather than to create jobs as the administration had hoped.

Since more than half of the oil used in this country is imported, the price increase also is a factor in the country’s foreign trade deficits. Last February Americans spent $13.6 billion to import oil and oil products. In August they spent $22.4 billion to import a somewhat smaller amount. That differential represents about $100 billion a year of the United States’ current account deficit, which is now running about $400 billion a year.

In Congress, the senators who support legislation to slow climate change and reduce the use of fossil fuels are looking for allies among their colleagues who want to expand nuclear power. The senators might also look for help among those who want to protect the stability of the national economy. Failing that, the country will continue to live with the economic equivalent of a volcano that erupts at unpredictable intervals, with great damage to employment and to incomes.

More information on U.S. petroleum prices and consumption can be found at the Energy Information Administration’s website. For more on U.S. imports and exports, head over to the Bureau of Economic Analysis’s website.

J.W. Anderson is Resources for the Future’s journalist in residence.

Published: Nov-04-09 | 0 Comments

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