Twenty Billion – a Drop in the Barrel for Renewable Energy

January 25, 2007 at 7:52 pm
Contributed by: Chris


Here’s my latest, originally published at Energy and Capital and Green Chip Review.

As always, I invite your feedback. What do you think? Is asking Big Oil for $20 bil too much?


Twenty Billion – A Drop In The Barrel for Renewable Energy

By Chris Nelder

January 22, 2007

Last week, by nearly a 100-vote margin, the U.S. House of
Representatives voted to do what OPEC has been unable to do: defend a higher
price for oil.

Although oil’s at a 19-month low, I’m sure that wasn’t precisely the
intent of H.R. 6. The “Clean Energy Act of 2007” could have been more accurately
titled the “Cleaning Up Our Energy Act of 2007,” because it was mainly about
repealing tax credits and royalty exemptions for the oil and gas industries, so
that the money could be squirreled away in a fund, for later spending on
home-grown renewable energy and efficiency.

Big Oil has admitted that it didn’t need most of those tax breaks.
How could they, when they have been racking up record profits—obscene profits,
according to some—for the last few years in a row?

But I don’t think H.R. 6 is quite what they had in mind.

estimates that H.R. 6 will generate $6.3 billion in savings from direct spending
over the next ten years. And the Joint Committee on Taxation estimates that over
the same period, it will generate an additional $14 billion in revenues.

That adds up to a $20 billion kitty to be spent on renewable energy!
For those of us who invest in renewable energy, that’s cause for a Slim Pickens

Like Taking Candy From a Cry-Baby

In particular, some of the bill’s provisions will:

  • Eliminate some income tax deductions for domestic production of oil
    and natural gas.

  • Close a loophole (created by a clerical error) which allowed some
    Gulf of Mexico leases to avoid royalty
    payments. Oil companies now can choose to renegotiate the leases and pay by
    the existing royalty schedule (about $9 a barrel), or they can pay a
    “conservation of resources fee,” or…they can be barred from bidding on future
    drilling leases altogether.

  • Repeal additional royalty relief on future production, which had
    been granted in the Energy Policy Act of 2005.

  • Remove an inadvertent tax benefit in the Jobs Act of 2005, which
    lowered the income tax rate paid by oil companies by reclassifying oil and gas
    production as a “manufactured good.”

Naturally, the
oil companies and their friends have been vocal in their opposition to H.R. 6.
Grover Norquist, the guy who wanted to shrink the federal government until he
could “drown it in the bathtub,” says H.R. 6 will “decrease domestic energy
production and provide a boost for OPEC producers — thereby increasing our
energy dependence.”

Methinks the
lady doth protest too much.

The domestic oil
industry is now earning $78 billion in profits every year. Just one of the big
oil companies, ExxonMobil, earns $40 billion of that. And they would have you
believe that setting aside an aggregate $2 billion a year, or 2.5% of Big Oil’s
profits today, for investments in renewable energy and efficiency is going to
break their backs.

See this? It’s
the world’s smallest violin, playing “Poor, Poor, Pitiful Me.”

If the oil
industry were paying one dollar in taxes, no doubt Norquist would say it was a
buck too much.

The Rest of the

But they do have
a point: the Clean
Energy Act of 2007 probably will slow down the pace of Gulf
of Mexico production somewhat. Without a big federal subsidy (in the
form of royalty-free leases and fat tax credits) that the “free marketers” love
so much, international oil companies might prefer to lift oil from somewhere
else in the world, for now. And that will, in turn, increase imports, to make up
for decreased domestic production. Which will lead to higher crude prices, and
more money into the pockets of foreign producers.

That’s where the free market-lovin’, Alaskan oil-drillin’ crowd would
like to stop the narrative: OPEC and other oil producers win; you pay more at
the pump, and America becomes more “dependent.”
Those Democrats are going to war with Big Oil, and the winners will be the
terrorists, and the loser will be you.

But of course, that’s not the end. That’s maybe the next chapter or
two. Allow me to tell the rest of the story.

If we’re not at the peak of oil production yet, then we soon will be.
Easily within the time scale (10 years) of this bill. The things we’re doing to
mitigate that, like increasing domestic ethanol production, will help, but they
can’t make up for the shortfall in oil production. That means that oil prices
are going higher—much higher—and that’s true no matter how much oil we produce
domestically! Everyone from Matthew Simmons to Goldman Sachs has worried
publicly that we could see spikes to $180/barrel, depending on how the cards

So the more domestic oil that we don’t sell today, when it’s cheap,
will be worth much more in the future. And it will be even more vital to our
national security than it is today, when we can call tankersfull to us, at will,
for mere cash. Ten years after the peak—say, 2017—exports, no matter how vital,
may come to be of secondary importance to just keeping one’s own lights on for
some oil producers (like all of the producers in the U.K.

As we move into the future, oil and gas prices will rise, and
carbon-based fuels will be disfavored, be it by agreement or mandate or a market
mechanism like carbon credits. Meanwhile, the cost of renewable energy and
efficiency improvements will decline. Those two trend lines meet somewhere in
the near future. The far future has a new paradigm, one that is based on clean,
green fuels. Countries known for their long-term strategic planning horizons,
such as Sweden and China,
are already preferring the clean, green path.

The sooner we make the necessary investment to begin that transition,
the easier and cheaper it will be. Modern materials, like carbon fiber and
highly refined silicon and specialized plastics, which are essential to building
out a renewable energy infrastructure, are a whole lot cheaper and easier to get
right now than they will be in ten or twenty years.

Domestic production from renewables offers long-term security, and
keeps more of that precious, miraculous oil around for the future, when we may
desperately need it for much more valuable things (like making plastics) than
just burning it in a 10% efficient engine. Drilling our oil today only offers
security of supply for the short term.

We don’t yet know the difficulties of tomorrow, but on the current
trajectory, it’s not looking pretty. The simple fact that we are about thirty
years late in getting serious about renewable energy and conservation should be
reason enough to ask Big Oil to help pay for the transition. Who better to make
the investment in tomorrow’s energy than today’s energy companies?

In a perfect world, with perfect markets, we would have started
choosing domestic renewables over foreign oil long, long ago. If our markets had
good feedback mechanisms for the real costs of oil, and the extraction of
something nonrenewable had an appropriate cost, and our carbon emissions weren’t
“externalized” but actually paid for by somebody, and a hundred other things,
instead of being twisted like corkscrews, the Invisible Hand would have already
put its big Invisible Finger on renewables.

How many trillions of dollars have we spent to have our military
protect our oil supplies in foreign lands? How many people died for it? Nobody
counts it. But we spent it, and they died, all to get us right here where we are
today: waist deep in the Big Muddy without a paddle, if you will. (Cue The Fugs’
“Wide, Wide, River.”)

The IEA says the world will spend $20 trillion in new investment in
oil and gas over the next 25 years, just to keep supplies up with demand.
Wouldn’t you rather spend that money to get you out of the blood-and-oil game

So, we’re really talking about 1/1000th of the investment
that humanity is prepared to make in oil and gas over the next 25 years, no
questions asked, after which we would be even deeper in the Big Muddy.

This isn’t a war on Big Oil. We’re just starting to play catch-up
with reality.

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