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WaPo: Falling oil prices aid Obama on foreign policy

The Washington Post has a story about what falling oil prices has achieved for President Obama’s foreign-policy goals:

The precipitous fall in oil prices, which is hammering countries heavily dependent upon oil exports, could prod Russia into abiding by a ceasefire in Ukraine, make Iran more pliable in talks over its nuclear program, undercut Venezuela’s influence in the Caribbean, and weaken the finances of the Islamic State.

There’s another side to the coin, however:

… other parts of Obama’s foreign policy agenda could become more difficult, including efforts to open up Mexico’s oil industry to foreign companies, promote oil-fueled development in poor nations in Africa, and reduce global fossil fuel use to limit climate change. Brazil, already grappling with a corruption scandal linked to its state-owned oil company, is now uncertain about long-anticipated revenues from ultra-deepwater oil prospects.

The plunge in oil — and the subsequent hit to Russia’s economy — has achieved what sanctions could not: Humble Russia, which is “suddenly finds itself fighting a rear guard action on its own economy.”

But some analysts worry that the Obama administration hasn’t considered all the consequences.

“The ruble is in real trouble, the Russian economy is in real trouble,” said Bruce Jones, deputy director of the foreign policy program at the Brookings Institution. But, he adds, “do we understand what happens if we really break the back of the Russian economy? I’m not sure we’ve thought that through.”

Alaska’s Bristol Bay placed off-limits from oil, gas drilling

President Obama on Tuesday pulled Alaska’s Bristol Bay from consideration for federal oil and gas leases.

As AP reported:

The decision announced Tuesday under the federal Outer Continental Shelf Lands Act means no leases will be sold for petroleum drilling in the area. The bay provides 40 percent of America’s wild seafood and supports up to $2 billion in commercial fishing every year.

Obama said: “These waters are too special and too valuable to auction off to the highest bidder.”

Watch the video the president made announcing the decision.

The area, west of the Alaskan peninsula near the start of the Aleutian Islands, has been the subject of a tug-of-war for drilling for years. President Clinton issued a moratorium on drilling in the bay in 1995, and Congress and the executive branch have wrangled over the region ever since. This site has more on the battle.

Vox answers ‘9 questions about KXL you were too embarrassed to ask’

Great, informative piece by Vox.com about the Keystone XL pipeline, which the U.S. House approved yet again Friday.

The Vox post answers “9 questions about the Keystone XL pipeline you were too embarrassed to ask.”

There’s even music!

President Obama is described as possibly leaning toward skepticism about the project, saying in an ABC interview: “Understand what this project is: It is providing the ability of Canada to pump their oil, send it through our land, down to the Gulf, where it will be sold everywhere else. It doesn’t have an impact on US gas prices.”

Is that true? As with many aspects of the KXL debate, it depends on whom you ask, and what data set you consult.

Here’s what an op-ed in the Great Falls (Montana) Tribune said in October:

Canada’s National Energy Board anticipates 15 Midwestern states will experience a 10 to 20 cent per gallon increase in gasoline prices if KXL is built. It would happen because an oversupply of Canadian crude now refined for U.S. domestic use will be diverted to KXL for export.

House approves Keystone XL again, Senate up next

The U.S. House approved, for the ninth time, construction of the Keystone XL pipeline, designed to carry Canadian tar-sands oil to the Gulf of Mexico.

The bill passed Friday by a vote of 252-161, but prospects in the Senate are unclear. The Senate is due to take up the bill Tuesday, but the measure must beat the 60-vote threshold to move forward.

USA Today reports:

If it overcomes a 60-vote threshold it will head to President Obama’s desk where he will either sign it into law or veto it. The president has delayed a decision on the pipeline, deferring to an ongoing review at the State Department, but White House spokesman Josh Earnest suggested Thursday that the president could veto it.

Obama has declared previously that he would only approve the pipeline if it could be demonstrated that the project wouldn’t increase greenhouse-gas emissions.

Democratic Sen. Mary Landrieu of Louisiana has been promoting her own bill in the Senate. The bill approved Friday was sponsored by Rep. Bill Cassidy of Louisiana. He will face Landrieu in a runoff election next month for the Senate. Landrieu has an uphill battle to win a fourth term: Although she beat Cassidy by 1.2 percentage points on Election Day last week, neither candidate won at least 50 percent of the total, forcing the runoff. Observers expect much of the support of the third-party candidate in that race, Rob Maness, a Tea Party favorite who won 14 percent in the election, to swing to Cassidy.

Why is Landrieu so strongly in favor of Keystone XL? A story on Slate.com tried to figure that out, as well as why the leadership in the (for now) Democratic-controlled Senate is so willing to bring her bill to the floor for a vote:

What’s befuddling isn’t that the Democrats are playing politics with Keystone—it’s that they’re playing them so poorly. Thanks to their seven-seat-and-counting gain on Election Day, Republicans will take control of the Senate next year for the first time since George W. Bush’s second term. More importantly for the Keystone crowd, the pipeline is all but certain to have a filibuster-proof 60-plus votes in the next Senate, whether Landrieu is there or not.

Some experts say China really is serious about climate change

The reaction to President Obama’s climate-change deal with Chinese President Xi Jinping, among congressional Republicans, was swift and negative. The prevailing sentiment is that China didn’t give up as much in the bargain as the U.S., and that China isn’t likely to live up to its end of the agreement anyway.

But Mother Jones magazine quotes some experts on U.S.-China relations, and they say China is indeed serious about cutting greenhouse-gas emissions.

MJ’s James West writes:

So I asked experts on US-China relations to explain why this deal was so attractive to the leaders of two countries that have historically locked horns over everything from human rights to lingerie imports. Here’s their explanation of why China really does want to want to act on climate change, and why the bargain makes sense for President Barack Obama, as well:

China has to act on air pollution. If it doesn’t, the country risks political instability. Top Republicans have slammed the US-China deal as ineffective and one-sided. “China won’t have to reduce anything,” complained Sen. Jim Inhofe (Okla.) in a statement, adding that China’s promises were “hollow and not believable.”

But the assumption that China won’t try to live up to its end of the bargain misses the powerful domestic and global incentives for China to take action. The first, and most pressing, is visible in China’s appalling air quality. President Xi Jinping needs to act now, says Jerome A. Cohen, a leading Chinese law expert at New York University. Why? Because “the environment—not only the climate—is the most serious domestic challenge he confronts.”

Can a carbon tax capture oil’s emissions?

One of the knottiest problems for people who want to reduce carbon emissions with cap-and-trade and command-and-control regulation is that it is impossible to include motor vehicles in these schemes.

The Obama administration is now concentrating on coal plants and other stationary sources. This affects coal and possibly gas plants, but the oil industry gets off scot-free. And cars and other moving sources constitute almost half the carbon we’re putting into the atmosphere.

The idea that keeps popping up, which would deal with these difficulties and perhaps make climate issues less partisan, is a flat tax on carbon products. The tax would fall on coal, gas and oil and be collected at the mine or wellhead. $20 per ton is the number most often mentioned. Coal would pay the largest share, oil second-most and natural gas the least, since they differ in carbon content. But everything else is equal across the board. It doesn’t matter what people do with the fuel once they’ve claimed it. If you conserve energy, you burn less fuel, if you switch from high-carbon coal to natural gas. And if you discover a true alternative that doesn’t rely on fossil fuels, you pay nothing.

In theory, it’s an ideal solution. Adele Morris of the Brookings Institution has calculated that a modest carbon tax of $20 per ton would allow us to lower the corporate tax to 25 percent, just below the world average, and still leave $199 billion for deficit reduction over the 10 years. Most important, though, is that a carbon tax would capture non-stationary sources, which is the Achilles’ heel of cap-and-trade. When it comes to mobile sources of carbon, regulators just throw up their hands. “You can’t measure emissions from individual vehicles,” they say. But a carbon tax captures everyone, including cars and trucks, which are impossible to monitor as individual vehicles. In the end, it is a much better system than that now being pursued by the EPA.

So what would this mean for alternative vehicles?

Corn ethanol would be a big winner. It is not derived from fossil fuels, and it’s already in 10 percent of gasoline that is dispensed at the pump. Morris estimates that a tax of $20 per ton on carbon would mean a 4-to-5 cents per gallon increase in gasoline. E85 now undersells gasoline in the Midwest by that same amount, and a carbon tax would make it even more attractive. Other parts of the country might start taking notes as well, since E85 can be sold anywhere; it just hasn’t caught on yet.

Methanol would not have the same advantages, since it is currently made from natural gas. But gas has only about two-thirds of the carbon content of oil, and a carbon tax would work in its favor. In addition, methanol can be derived from other sources: It’s the simplest alcohol and can be distilled from municipal waste, forest wastes and any number of the other sources that now go unused.

CNG and LNG do not stand up quite as well. Both would have to pay the carbon tax but would enjoy a small advantage over diesel, became the carbon content of gas is lower. Still, they would see their own price go up, because they are fossil fuels.

Electric cars, on the other hand, would be the big winner. Their cost advantage would widen, and they would have a leg up on gasoline and diesel. Of course, electricity must come from somewhere. It is now generated largely from coal and natural gas, and prices would rise. But the tax would encourage a shift from coal to gas, or non-fossil sources, and prices would eventually come down again. Morris calculates that revenues from the tax will eventually taper off from $160 billion to $60 billion by 2030 because of adjustments in the economy.

The carbon tax has a long and curious history. Conservatives often claim credit for it under Milton Friedman’s dictum, “I you want more of something, subsidize it. If you want less of something, tax it.” The Heritage Foundation actually backed a carbon tax in the early days, when the Obama administration was trying to impose cap-and-trade on the entire economy. But other factions of the conservative movement became convinced that the Democrats would just spend the money on renewable energy projects, so Heritage backed away.

Now the ball is being carried by a group of moderates who have a reputation for viewing things with a level head. The Brookings Institution has been at the forefront, arguing that a carbon tax promises to save billions. “By providing simple, transparent, but powerful market-based incentives to reduce damaging greenhouse gas (GHG) emissions, this levy could supersede the array of costly regulatory command-and-control approaches and expensive subsidies aimed at reducing dependence on fossil fuels and promoting clean energy,” writes Morris for Resources for the Future, another non-partisan group. Environmental Defense Fund, another moderate group that takes sensible positions, has said a carbon tax would bring everyone “simplicity and happiness.”

The carbon tax does have its problems. It comes down particularly heavy on the poor, who pay a much larger portion of their income for things that require oil and gas. Morris suggests putting 20 percent of the tax aside and earmarking it for the poor. This undoes some of the benefits of the tax and, in practice, is very difficult to do, and it creates a new distribution problem. It also hurts the middle class and especially Middle America.

Carbon taxes have been tried in other countries, with mixed results. Australia tried to impose a blanket tax a few years ago, but by the time it stopped awarding special exemptions and dispensations, the program was such a mess that oil refineries and others were making out better than before. The tax fell particularly heavily on farmers, whose operations, it turns out, are heavily dependent on fossil fuels. On the other hand, a tax in the United States might push more of agriculture into ethanol, since E85 is already widely available in the Midwest and would substitute nicely for gasoline.

Special pleading by individual parties is always the problem. France tried a carbon tax a few years ago, but by the time they were through, the law was so loaded down with exceptions and exemptions that it was practically meaningless. Sweden, on the other hand, has a flat $200 per ton carbon tax – four times the highest rate being suggested by the U.S – and no one seems to mind. The Swedes eliminated all special exemptions and used the revenue to lower personal income and estate taxes. True, the Swedes pay a higher price for gasoline – close to $4 per gallon – but they are happy with the simplicity of the system and accept the higher price as a fact of life. Of course, Sweden is a much more egalitarian country, with few truly poor people, but the population is happy and no one complains.

And the main problem is that the amount of tax will really not introduce any behavioral change. Five cents a gallon is just a tax – it will not create any real incentive to change to alternative fuels. What is blocking off alternative fuels today is not price, as they are already cheaper. It is the monopolistic structure of the car and distribution market. Even if gas prices were a dollar higher, the market first needs to be opened to competition so people could actually choose a fuel.

A carbon tax would cross political lines and maybe prove to be one of those rare instances where we can all agree. Conservatives would show that they take climate change seriously, and liberals would have to give up on their complex regulatory schemes and admit that simplest sometimes works best. Most of all, it would show the public that things can get done in Washington. However, a prerequisite for any tax or other solution is to open the market for competition by other fuels. Otherwise, the consumer will not have any option, and it will be just a new government tax.

U.S., China reach deal to cut emissions, but there are questions

President Obama and Chinese President Xi Jinping announced a milestone climate-change agreement in Beijing today, under which both countries would reduce greenhouse-gas emissions to meet certain targets.

A major goal of the agreement, which still needs to be formalized, is to spur other nations to reduce their own carbon output.

But the deal already is coming under criticism: As The New York Times reports, at least one climate-change expert says China could do more on its end; the country is vowing to cut off peak emissions only at “around” the year 2030.

Republicans in Congress were swift to criticize the deal. As The Hill notes, House Speaker John Boehner of Ohio issued a statement denouncing the deal as potentially harmful to the cheap energy that middle-class families rely on.

“This announcement is yet another sign that the president intends to double down on his job-crushing policies no matter how devastating the impact for America’s heartland and the country as a whole,” the statement said.

The decline of oil and gas prices, replacement fuels and Nostradamus

“It’s a puzzlement,” said the King to Anna in “The King and I,” one of my favorite musicals, particularly when Yul Brynner was the King. It is reasonable to assume, in light of the lack of agreement among experts, that the Chief Economic Adviser to President Obama and the head of the Federal Reserve Bank could well copy the King’s frustrated words when asked by the president to interpret the impact that the fall in oil and gasoline prices has on “weaning the nation from oil” and on the U.S. economy. It certainly is a puzzlement!

What we believe now may not be what we know or think we know in even the near future. In this context, experts are sometimes those who opine about economic measurements the day after they happen. When they make predictions or guesses about the behavior and likely cause and effect relationships about the future economy, past experience suggests they risk significant errors and the loss or downgrading of their reputations. As Walter Cronkite used to say, “And that’s the way it is” and will be (my addition).

So here is the way it is and might be:

1. The GDP grew at a healthy rate of 3.5 percent in the third quarter, related in part to increased government spending (mostly military), the reduction of imports (including oil) and the growth of net exports and a modest increase in consumer spending.

2. Gasoline prices per gallon at the pump and per barrel oil prices have trended downward significantly. Gasoline now hovers just below $3 a gallon, the lowest price in four years. Oil prices average around $80 a barrel, decreasing by near 25 percent since June. The decline in prices of both gasoline and oil reflects the glut of oil worldwide, increased U.S. oil production, falling demand for gasoline and oil, and the likely desire of exporting nations (particularly in the Middle East) to protect global market share.

Okay, what do these numbers add up to? I don’t know precisely and neither do many so-called experts. Some have indicated that oil and gas prices at the pump will continue to fall to well under $80 per barrel, generating a decline in the production of new wells because of an increasingly unfavorable balance between costs of drilling and price of gasoline. They don’t see pressure on the demand side coming soon as EU nations and China’s economies either stagnate or slow down considerably and U.S. economic growth stays below 3 percent annually.

Other experts (do you get a diploma for being an expert?), indicate that gas and oil prices will increase soon. They assume increased tension in the Middle East, the continued friction between the West and Russia, the change of heart of the Saudis as well as OPEC concerning support of policies to limit production (from no support at the present time, to support) and a more robust U.S. economy combined with a relaxation of exports as well as improved consumer demand for gasoline,

Nothing, as the old adage suggests, is certain but death and taxes. Knowledge of economic trends and correlations combined with assumptions concerning cause and effect relationships rarely add up to much beyond clairvoyance with respect to predictions. Even Nostradamus had his problems.

If I had to place a bet I would tilt toward gas and oil prices rising again relatively soon, but it is only a tilt and I wouldn’t put a lot of money on the table. I do believe the Saudis and OPEC will move to put a cap on production and try to increase prices in the relatively near future. They plainly need the revenue. They will risk losing market share. Russia’s oil production will move downward because of lack of drilling materials and capital generated by western sanctions. The U.S. economy has shown resilience and growth…perhaps not as robust as we would like, but growth just the same. While current low gas prices may temporarily impede sales of electric cars and replacement fuels, the future for replacement fuels, such as ethanol, in general looks reasonable, if the gap between gas prices and E85 remains over 20 percent  a percentage that will lead to increased use of E85. Estimates of larger cost differentials between electric cars, natural gas and cellulosic-based ethanol based on technological innovations and gasoline suggest an extremely competitive fuel market with larger market shares allocated to gasoline alternatives. This outcome depends on the weakening or end of monopolistic oil company franchise agreements limiting the sale of replacement fuels, capital investment in blenders and infrastructure and cheaper production and distribution costs for replacement fuels. Competition, if my tilt is correct, will offer lower fuel prices to consumers, and probably lend a degree of stability to fuel markets as well as provide a cleaner environment with less greenhouse gas emissions. It will buy time until renewables provide a significant percentage of in-use automobiles and overall demand.

Opponents of Keystone XL encouraged by oil’s decline

Bloomberg has a story on how environmentalists and other opponents of the proposed Keystone XL pipeline have new momentum because oil has now dropped to around $80 a barrel. When the Canada-to-Gulf of Mexico pipeline was first floated in 2008, oil prices were around $100 a barrel.

“At $75, a government analysis said producers may be discouraged from developing Canada’s oil sands without pipelines like Keystone.”

The pipeline remains a contentious issue, and the U.S. government has repeatedly delayed action. Opponents are hoping that if Republicans take control of the Senate in next month’s elections, the two-month window between Election Day and the swearing-in of the next Congress will allow them a final chance to kill the project.

There’s also the issue of whether the pipeline will be good, bad or indifferent for consumers.

Winston, what would you do concerning natural gas?

Where is Churchill when we need him? How many psychobabble articles and cable commentary about Putin and Russia could we have done without by just remembering good old Winnie’s marvelous, insightful quote in 1939? It’s as near perfection as we are going to get in trying to understand Mr. Putin and Russia. Both are “riddle[s] wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian [and Putin’s] national interest.” (The word Putin is my addition — I am sure Churchill would not have minded.) What does Putin want? Apparently not only full control of Crimea, but also instability in Eastern Ukraine.

Okay, now some of you readers are saying the same about the U.S. We seem to accept Russia’s takeover of Crimea…ah, Russia had it once anyway and it has a big naval base there. Sounds vaguely historically familiar. What about the other place, they say. What was its name? Guantanamo and Cuba! Oh, no?! Please let’s focus on Eastern Ukraine.

Forget consistency and remember Ralph Waldo Emerson. “Consistency [in foreign policy] is the hobgoblin of little minds” (Again, pardon the added-on term, foreign policy.)

Now how does oil come into all of this? None of us, not just President Obama, want to fight a war over the Ukraine, Eastern Ukraine or Crimea. If he were running again, Obama would probably borrow from Woodrow Wilson’s campaign slogan, “He kept us out of war,” at least big wars, particularly with corrupt nations some of which have a history of fascism..

Alright, let’s use tough energy sanctions — oil and natural gas. if the regulations concerning sanctions were tough, they might really hurt Russia’s economy and its ability to move out of the economic doldrums. Let’s hit them where it hurts! No, apparently, we will not, at least for now. Why? Well, Western Europe and our new ally, the Ukraine, depend on natural gas. Without it, both would be in for cold winters and probably a severe industrial recession. So what did our leaders do? They excluded natural gas from the list of recent sanctions. I suspect they, also, will allow Russia and the West to continue to trade in oil not involving new technology from the West.

Absence of natural gas in Europe and the Ukraine (and probably other Eastern Europe nations) is a plus for the U.S. We can make it up by selling natural gas. Isn’t what’s good for the U.S. bad for Russia and Mr. Putin?

Maybe, maybe not…or maybe the view that the U.S can be savior of Western Europe is a myth. Or maybe it’s just too complex for political leaders to grab hold of instantly.

Some verities to deal with:

1. Even with the current rush to permit the export of natural gas, before terminals get built and tankers are ready and environmental issues are disposed of, the first large volume of natural gas would not reach Ukraine or Western Europe until 2016 or later.

2. The U.S., despite the increase in shale development and natural gas production, still imports natural gas to meet domestic supplies — about 12.5% in total. Like big oil, exports of natural gas are to a large degree being sought to secure a higher prices overseas than in the U.S. Hurting Russia for U.S producers is a side show.

3. Russia, ostensibly, can produce natural gas and ship it by pipeline, rail or boat cheaper than we can. According to experts, the cost of U.S.-produced, transported and sold natural gas in Europe and the Ukraine is and will be much higher than Russian-produced and transported natural gas sold globally. Note in this context that Russia just cemented a $4 billion deal for Russia to sell oil to China. Will the Europeans and Ukrainians want higher-priced natural gas from the U.S.?

4. Oh, I almost forgot. Just last winter, U.S. residents in many states, particularly eastern states, nearly froze because of shortages of natural gas resulting from lack of adequate pipeline capacity and pipeline congestion. Consequently, the gas they secured came at very high prices. If ports can be built, pipeline amendments for the east coast cannot be far behind and probably should come first, if money is tight. Can we afford both, given uncertainties concerning price of natural gas and cost of drilling in tight areas? Sure. But the tradeoffs need to be carefully balanced by policymakers and the long term for investors must look bright.

It’s a puzzlement. Our policy seen by many nonpartisan observers as a “riddle wrapped in a mystery…” I will know sanctions are real when gas is included. What I won’t know is whether it will make a difference to Russia, given the fungibility of import-needy nations like China. Sanctions may bring both China and Russia something that communism has failed to do — build back a broken alliance. What I also don’t know is whether the growth of exports will significantly raise natural gas prices over time in the U.S. and lower the price differential with oil, and its derivative gasoline. If it does, producers and distributors may get rich, but opportunities for something I do care about — the development and widespread use of natural gas-based ethanol as a replacement fuel — may be impeded significantly. If this occurs, the environment, our economy and low- and moderate-income Americans may be worse off for it. Policymaking in today’s world is difficult and is something you often cannot fully learn in school.