During his trip to Savannah, Obama shared a lunch with a few of the locals.

Savannah, Ga. – Willing homeowners across America may soon be eligible for rebates for making energy efficient improvements to their houses, according to President Barack Obama. Standing in front of the student body and faculty at Savannah Technical College, Obama laid out the general groundwork for implementing his $6 billion HOMESTAR program, commonly referred to as the “Cash for Caulkers” program.

Obama said the plan is focused on providing rebates for consumers that purchase energy saving, home improvement upgrades such as insulation and water heaters. Under the program, vendors ranging from small independent contractors to nationwide home improvement chain stores will offer the on-the-spot rebates that will range between $1000 and $1500. The federal government will then reimburse the vendor for the rebate.

This program would also reward homeowners who have energy audits conducted and then follow through with the necessary improvements to reduce their energy consumption. Audited homes that are improved by cutting their energy costs by at least 20 percent can receive up to $3000 with the possibility of a larger rebate for any reduction over 20 percent.

Obama praised the Savannah Tech’s initiative called the YouthBuild program, geared toward pursuing energy efficient business practices through their specialized classes and training. He also drew parallels between the school’s energy education program and the White House’s current goals.

“In terms of energy usage, 40 percent of it goes into our homes and our building,” Obama said during the speech. “So as we’re looking for additional initiatives to spur hiring, I think we ought to embrace what’s happening on this campus. I think we ought to embrace the incredible potential that awaits us across America in clean energy.”

Cutting residential energy consumption and providing relief to homeowners who would partake in the plan, was not the only item on the agenda. The other task at hand for the White House, according to Obama, is attempting to provide jobs for American’s who will assist in weatherizing these houses.

Obama referred to manufacturers and contractors being ready to work and take on the possible increase in demand for labor, and even joked at one point in his speech about outsourcing.

“It turns out that energy-efficient windows or insulation, those things are products that are almost exclusively manufactured right here in the United States of America. It’s very hard to ship windows from China,” Obama said. “So that creates work for small businesses and contractors like some of the folks who are here today. And obviously construction work that’s been as hard hit as anything during this recession, so you’ve got a lot of skilled contractors ready to go.”

The White House has yet to propose the plan to Congress and several details are yet to be determined, such as its duration and costs.

There was one issue that I considered quite important, but I didn’t know whether it was in the bill. Jim Mulva was recently quoted as saying that the climate bill would impose higher taxes on domestic fuel versus imports. While we can agree that Mulva’s comments are self-serving, I also believe that most people would oppose a bill that shifts more of our fuel supply to imports.

While I know the goal here is to favor renewable energy, what happens if it can’t fill a void left if the new bill discourages domestic production? The void will be filled by imports. Prices will also rise, so some of the void will be filled by conservation. But in order to keep the playing field level, I really liked the idea proposed by Jeff Rubin: If you place a carbon tax on domestic production, you can place a carbon tariff on imports. This idea was discussed in my review of his book Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization.

I hadn’t heard any discussion of this until today. From Steven Mufson of the Washington Post:

Obama Praises Climate Bill’s Progress but Opposes Its Tariffs

President Obama yesterday said that the House took an “extraordinary first step” by passing a climate bill on Friday, adding that he hoped it will “prod” action by the Senate and predicting that the legislation could make renewable energy “a driver of economic growth.”

But he said he hopes that Congress will strip out a clause that would impose a tariff in 2020 on imports from countries without systems for pricing or limiting carbon dioxide emissions.

Obama went on to suggest that there were other protections built in that will keep the playing field level. I would like to know what those are. I can understand how tariffs would do it (although enforcement raises some sticky questions). But I have heard enough double-speak on energy policy that I want to see the fine details of how the playing field will be kept level.

Make no mistake: This bill is a tax increase. That’s the basis for the political opposition. But I have long advocated a tax increase on fossil fuels to slow the rate at which we are using them up (and to make renewables more competitive). So I don’t oppose the bill on the basis that it is a tax increase. On the other hand I can’t say that I endorse it, because I haven’t read it. I certainly believe there are more efficient ways of raising carbon taxes than this. I still think – perhaps naively – that my proposal to tilt the tax code toward higher fossil fuel taxes and lower income taxes would be more attractive than this.

A particular example I will name (but not the only one) is that of Range Fuels. I have written about them in the past, and while I am a fan of gasification, I don’t think gasification to produce ethanol is the right path. But if you search through my blog, you will find that I have not written much about Range Fuels. Why? Because two different people have passed on sensitive information to me that compromises my ability to criticize the company. Now if I write that I expect Range Fuels to be wildly successful – or not – my writing could be influenced because I know some things that aren’t public. So, I play it safe and generally don’t say much about Range Fuels – even though they would appear to fit the criteria of a company that I would normally focus on.

Such was the case with some juicy information I received last year. In July of last year I received the following tip: Presidential candidate Barack Obama had summoned some of the CEOs of the top oil companies to a secret meeting to talk about energy policy. I knew who was at the meeting, and I knew what the meeting was about.

Some may know that Vice President Dick Cheney also summoned a number of energy executives to private meetings at the White House in 2001, and he had been criticized heavily over the secret meetings:

Document Says Oil Chiefs Met With Cheney Task Force

The task force’s activities attracted complaints from environmentalists, who said they were shut out of the task force discussions while corporate interests were present. The meetings were held in secret and the White House refused to release a list of participants. The task force was made up primarily of Cabinet-level officials. Judicial Watch and the Sierra Club unsuccessfully sued to obtain the records.

Sen. Frank Lautenberg (D-N.J.), who posed the question about the task force, said he will ask the Justice Department today to investigate. “The White House went to great lengths to keep these meetings secret, and now oil executives may be lying to Congress about their role in the Cheney task force,” Lautenberg said.

So now we had Obama conducting secret meetings with Big Oil, but the press didn’t seem to have wind of it. I had a possible scoop on the story. The only problem was that I was asked not to divulge the information. So, I waited until it hit the press. And I waited. And I waited until now, almost a year later. I have finally seen the story in the press for the first time. Not surprising to me that Washington Post reporter Steven Mufson would have the story:

How Obama Made Energy Platform ‘Pop’

After a long day of campaigning on July 8, candidate Barack Obama arrived at his Chicago headquarters for a three-hour brainstorming session about a suddenly hot issue: energy and climate change.

He had summoned a cross section of experts, including top executives from three utilities and two oil companies, the chief energy economist of an investment bank, a climate scientist, a California energy and environment expert, an oil consultant-historian, and several campaign staffers. Despite the late hour, one participant recalled, “He walked in as if he had just gotten up after a refreshing night’s sleep to lead a class. He was clearly there to harvest information and then do something with it.”

My version is slightly different from this. I was told that the meeting happened in D.C. – not Chicago – and it happened on July 10th – not July 8th. Not sure which of those versions is correct [RR: My source has sent me a note correcting previous statements; the meeting was in Chicago on the 8th, although there was a similar meeting on the 10th in D.C.], although I got the information very close to the source. Otherwise, the description of the meeting is consistent with the information I had been given.

To be clear, the Washington Post story isn’t about uncovering a secret meeting with energy industry executives. That bit is just the preamble to the story of how Obama’s energy policy crystallized into a high-profile part of his campaign. Oil and gas prices were headed to record highs, and Obama wanted input from energy insiders on how to tackle energy problems (although I was told that he did most of the talking).

So how will partisans react to this news? Will those who denounced Cheney for his secret meetings now do the same for Obama? I had seen endless speculation that the Cheney meetings were all about carving up Iraq for the oil companies to loot. This, despite there being no public details about the meeting available. Once again, the Washington Post finally broke the news of who some of the attendees were to Cheney’s meetings:

Papers Detail Industry’s Role in Cheney’s Energy Report

Provided a copy of the list, Cheney’s office said he would not comment on it. “The vice president has respectfully but resolutely maintained the importance of protecting the ability of the president and vice president to receive candid advice on important national policy matters in confidence, a principle affirmed by the Supreme Court,” spokeswoman Lea Anne McBride said by e-mail.

Rep. Henry A. Waxman (D-Calif.), chairman of the House Oversight and Government Reform Committee, who unsuccessfully pushed for details of the meetings, said it is “ridiculous” that it has taken six years to see who attended the meetings. He described the energy task force as an early indicator of “how secretively Vice President Cheney wanted to act.”

Waxman said he was not surprised to see the prevalence of energy industry groups on the list of meetings. “Six years later, we see we lost an opportunity to become less dependent on importing oil, on using fossil fuels, which have been a threat to our national security and the well-being of the planet,” he said.

One thing that fueled the speculation was that Cheney fought to keep the names of the participants and the discussions that took place a secret. But that certainly didn’t stop the speculation that the meetings were for planning the U.S. invasion of Iraq and the subsequent division of the spoils among the oil companies.

Don’t get me wrong. I am glad Obama summoned energy executives to these talks. To formulate a good energy policy you had better be engaging those who provide the energy. I am also sensitive to the fact that this could have been unpopular with his supporters. But I suspect that those who suggested sinister motives behind Cheney’s meetings won’t do the same over Obama’s meetings.

Lisa Jackson, head of the EPA, delivered a "message of hope... message of change" from President Barack Obama on the issue of climate change.

EPA administrator delivers “message of hope” to G8 environmental meeting, committing the U.S. to the fight against climate change, in a major departure from the policies of former President Bush.

United States environmental officials, taking part in talks with the Group of Eight nations in Syracuse, Italy on Thursday, vowed that President Barack Obama would help bring about a ‘meaningful’ response to climate change.

“I bring from President Obama his message of hope, his message of change, his message of common purpose for the environment,” said Lisa Jackson, the administrator of the U.S. Environmental Protection Agency.

“The U.S. government now fully acknowledges the urgency and complexity of climate change challenges, and we know full well that a meaningful U.S. response to this challenge is absolutely essential,” she said.

Obama’s stance marks a radical about-face from that of former President George W. Bush who refused to endorse the 1997 Kyoto Protocol binding wealthy nations to carbon cuts because he said it would endanger American jobs.

The current administration has made the fight against climate change a priority, and insists that protecting the environment will actually have a positive impact on the economy.

Currently, the US Congress is debating a bill that seeks to cut the country’s carbon emissions by 20 per cent from their 2005 levels by 2020. The Obama administration is also pushing for the introduction of a carbon trading system similar to the one already in place in Europe.

Obama is also set to host a meeting of world leaders from the 16 largest carbon emitting nations in Washington next week, in an attempt to clinch an international agreement in Copenhagen in December to extend the Kyoto deal beyond 2012.

The message that Jackson brought to the conference received warm applause from nations in attendance at the G8 meeting of environment ministers.

“It shows that the Americans attach a lot of importance to these discussions,” said Stavros Dimas, the EU environment commissioner.

Pollution in China often obscures visibility in city streets.

European ministers at the conference continuously spoke about how important it is for the U.S. to take the lead in cutting greenhouse gas emissions. The ministers contend that it’s the only way that big polluters such as China can be expected to follow suit.

“The sooner the U.S. can specify, and be concrete in its position, the sooner we can expect some signals coming out of Beijing,” Danish Climate and Energy Minister Connie Hedegaard, who will chair the talks in Copenhagen, told a German news service.

Jackson also scolded lobbyists who she said were attempting to derail the President’s attempt to fight climate change.

“I am hopeful and the president is hopeful that we are on the verge of opening a clean energy economy,” she said. “Certainly those with interests vested in the status quo will come up with horror stories to try to hold us back.”

Small island nations, such as Trinidad and Tobago, can "simply dissapear" due to rising temperatures, warned Energy Secretary Steven Chu.

Attending the fifth Summit of the Americas in Trinidad and Tobago, along with U.S. President Barack Obama, Energy Secretary Steven Chu told reporters on Saturday that if climate change is not dealt with properly “some island states will simply disappear.”

Chu called the potential for disastrous hurricanes and rising oceans caused by an increase in temperatures “very, very, scary.” Climate change is “a demonstrable fact,” he said.

He cited “very, very convincing evidence” that climate change “was caused predominantly by greenhouse gas emissions.”

Polar ice is melting “considerably faster than anyone predicted” just a decade ago, he said.

Obama, during his address to the summit in the island’s capital, Port-of-Spain, on Friday, was also extremely vocal about climate change, and the need to develop sources of renewable energy.

In order to combat the effects of climate change, such as those Mr. Chu alluded to regarding islands beginning to ‘disappear’, the President proposed the creation of a new Energy and Climate Partnership of the Americas “that can forge progress to a more secure and sustainable future.”

Trinidad and Tobago is one of the wealthiest Caribbean countries and lies just 11 miles off the coast of Venezuela. The island is quite small – slightly less than the state of Delaware.

“It’s a partnership that will harness the vision and determination of countries like Mexico and Brazil that have already done outstanding work in this area to promote renewable energy and reduce greenhouse gas emissions,” said Obama.

“Each country will bring its own unique resources and needs, so we will ensure that each country can maximize its strengths as we promote efficiency and improve our infrastructure, share technologies, support investments in renewable sources of energy. And in doing so, we can create the jobs of the future, lower greenhouse gas emissions, and make this hemisphere a model for cooperation,” he said.

Obama said that the threat of climate change is a real one and needs to be dealt with collectively. “The dangers of climate change are part of a broad range of threats to our citizens,” he said.

“We must come together to find new ways to produce and use energy so that we can create jobs and protect our planet,” he said.

Do I believe the U.S. can be energy independent? Yes, I believe that with certain draconian measures, the U.S. could achieve energy independence within 10 years. But emphasis must be placed on ‘draconian.’ So yes, I think Barack Obama could make good on his campaign promises and make the United States energy independent. However, it would almost certainly make him a one-term president because the population would rebel at the cost of energy independence.

I covered the expected contribution of renewables to the U.S. electricity picture in The Nuclear Comeback. Conclusion? They better start building more nuclear plants if the administration wants to move away from coal. So let’s have a look at the oil picture and get our heads around just what energy independence might look like.

We Use a Lot of Oil

Here are some numbers, courtesy of the Energy Information Administration’s database. In 2008, the United States consumed 19.4 million barrels of oil per day (bpd) and produced 6.7 million bpd (including LNG). We imported 12.9 million bpd. (You may notice that there is a 0.2 million bpd discrepancy, which is partially caused by changes in inventory levels). So, in order to bring the United States to a state of energy independence, we have to somehow eliminate those imports through some combination of decreased demand and/or increased supply.

One way the U.S. could be energy independent is if we reduced our consumption by 65% to 6.7 million bpd. This would take the 23.6 barrels consumed in 2008 by the average person in the U.S. down to 8.3 barrels. That would put U.S. per capita consumption of oil between that of Croatia and Mexico. For reference, here is a sampling of per capita consumption of oil from various countries around the world (extracted from Energy Statistics – Oil – Consumption (per capita) (most recent) by country).

* Oil usage for the US is from 2008; usage for all other countries is from 2007.

So the US could still use almost twice the per capita consumption of Brazil and achieve energy independence (because we produce a lot more oil per capita than Brazil). But how likely are we going to be to reduce our consumption levels down to less than that of Germany or the UK? It’s hard to imagine unless oil becomes very, very expensive. But that’s an option. President Obama could make oil very expensive and potentially pull usage down toward U.S. production levels. Of course in the process, the recession would probably deepen and Obama would lose the election in 2012. More on that later.

Can Renewables Fill the Gap?

But that’s not the plan. The plan primarily involves filling the supply gap, with renewables as the most important part (see quotes below) of that plan. So what might renewables contribute? There are lots of small contributions from areas like corn ethanol and soy-based biodiesel. But let’s put those in perspective. In 2008, the US produced a record amount of ethanol: 9 billion gallons. How much does that amount to, given our need to close a gap of 12.9 million bpd of imported oil in 2008? Converted into barrels per day, 9 billion gallons per year amounts to 0.59 million barrels per day on a gross basis, but because of the lower BTUs it would only displace 0.32 million bpd. (The BTUs per gallon for a barrel of oil are higher than for gasoline; relative to oil, ethanol has 54% of the BTUs per gallon). For the purposes of this exercise, we will pretend for a moment that there aren’t big quantities of fossil fuels that enabled that 9 billion gallons.

Thus, last year’s record ethanol production is a drop in the bucket relative to the oil we use. How much ethanol – as a reference point – would we need to close that gap? Given that last year’s ethanol production in theory already should have displaced some level of oil, there is a gap of 12.9 million bpd to close with incremental ethanol. How about an additional 364 billion gallons, or more than 40 times last year’s record number? For reference, global ethanol production in 2008 is estimated to be 17.3 billion gallons.

Campaign Promises Revisited

I don’t know about you, but I don’t see any combination of renewables being able to close a gap like that. Remember what Obama said during the campaign?

We have to have energy independence, so I’ve put forward a plan to make sure that, in 10 years’ time, we have freed ourselves from dependence on Middle Eastern oil by increasing production at home, but most importantly by starting to invest in alternative energy, solar, wind, biodiesel, making sure that we’re developing the fuel-efficient cars of the future right here in the United States, in Ohio and Michigan, instead of Japan and South Korea.

Note what is “most important” in the drive for energy independence. To me, this is an example of someone who either doesn’t understand the scale of the issue, or someone who is just trying to score debate points.

Later on he elaborated:

The second point I want to make is — is the issue of energy. Russia is in part resurgent and Putin is feeling powerful because of petro-dollars, as Senator McCain mentioned. That means that we, as one of the biggest consumers of oil — 25 percent of the world’s oil — have to have an energy strategy not just to deal with Russia, but to deal with many of the rogue states we’ve talked about, Iran, Venezuela.

And that means, yes, increasing domestic production and off-shore drilling, but we only have 3 percent of the world’s oil supplies and we use 25 percent of the world’s oil. So we can’t simply drill our way out of the problem.

What we’re going to have to do is to approach it through alternative energy, like solar, and wind, and biodiesel, and, yes, nuclear energy, clean-coal technology. And, you know, I’ve got a plan for us to make a significant investment over the next 10 years to do that.

And I have to say, Senator McCain and I, I think agree on the importance of energy, but Senator McCain mentioned earlier the importance of looking at a record. Over 26 years, Senator McCain voted 23 times against alternative energy, like solar, and wind, and biodiesel.

And so we — we — we’ve got to walk the walk and not just talk the talk when it comes to energy independence, because this is probably going to be just as vital for our economy and the pain that people are feeling at the pump — and, you know, winter’s coming and home heating oil — as it is our national security and the issue of climate change that’s so important.

How About Drilling?

Those are certainly reasonable comments, but they won’t make us energy independent. Also, because the talk of drilling from Obama started just as McCain was gaining some traction with the ‘drill here, drill now’ campaign, many people felt like it was a campaign promise that wasn’t destined to be carried out in an Obama administration. However, it looks like Obama has looked at the issue closely enough to recognize that new production is going to have to be part of any energy independence plan that has any chance of success any time soon:

Obama to Remake Drilling Policies

Wesley Warren, director of programs at the Natural Resources Defense Council, said, “They have made a commitment to really be science-based, to look at all the facts before they make a decision. It is a new way of doing business.” The early signals from Obama and his cabinet agencies speak to that new way. Shortly after taking office, the president reversed orders issued in the closing days of the Bush administration that would have dramatically expanded offshore drilling.

Still, the Interior Department went ahead this week with a long-planned auction of drilling tracts in the Gulf of Mexico.

And Interior Secretary Ken Salazar has indicated in recent days that he’s looking for ways to expand offshore drilling in an environmentally conscious way. He has even said he’s open to allowing limited drilling at Alaska’s Arctic National Wildlife Refuge if it can be done from outside the refuge. “Oil and natural gas are, and will remain for many years to come, a cornerstone of our nation’s energy base,” Salazar told the American Petroleum Institute Thursday. “This is not, as some have suggested, a war on the oil and gas industry.”

There are still plenty of skeptics:

[Charles] Drevna of the National Petrochemical and Refiners Association said he’s concerned about Obama’s “anti-oil-refining-industry rhetoric,” the suggestion that big energy companies should face higher taxes as the nation shifts toward renewable sources.

“It is this talk about energy independence; it’s not achievable, and it probably is not desirable,” Drevna said. “Energy independence means energy isolation, and we simply cannot afford it if we expect the economy to grow.”

One could expect that we could open up offshore areas of the U.S. and potentially get some incremental production, but the administration certainly doesn’t plan to make it easy. They have more or less declared open season on the oil industry, and are pursuing policies that are certain to discourage U.S. oil production. Geoff Styles recently discussed the folly of punishing our own oil industry in The Wrong Enemy. Excerpts from his article:

I would paraphrase the Obama energy strategy as seeking to reduce US oil imports and greenhouse gas emissions by strongly promoting renewable energy and energy efficiency. Unfortunately, the administration’s actions risk putting the domestic oil and gas industry on the wrong side of the divide that creates.

Rather, we need to look to our self-interest, here. When an oil company drills in the US, its production backs out imports directly, barrel for barrel. It pays US salaries–attractive ones–and it pays hefty taxes: income taxes at a 40% effective rate, along with billions of dollars in royalties, rents and bonus bids collected by the government. When a US oil company drills elsewhere, much of the benefit is captured by foreign governments, and when the oil we import comes from a non-US supplier, our trade deficit swells and the federal government only gets to tax the profits on refining & marketing, which are often pretty thin.

Styles argues that the policies that are being pursued will almost certainly result in an increase in U.S. oil imports. If U.S. production is discouraged – and renewables aren’t up to the task of filling the gap – then guess what? Our imports will increase, and we will increase our energy dependence.

A How To Guide to Energy Independence

So how would I go about making the U.S. energy independent? As I said, it would require draconian measures. First, I would try to increase supply by incentivizing all forms of energy production. As I argued in an essay last year, I would use the proceeds of expanded offshore drilling to fund higher efficiency vehicles, electric transport, mass transit, and biofuels that aren’t highly dependent upon fossil fuels for their production. This should start to pull supply and demand closer together. But even my most optimistic scenario would still require substantial oil imports.

To close the rest of that gap requires the draconian piece. There are two choices. One is to ration fuel. Imagine that you had to get by on half the fossil fuel you normally use. Could you? I think most people – if they really dug down – could do it. It wouldn’t be easy, and we would certainly lose a lot of convenience. Someone complained to me last year that when gasoline got up to $4 a gallon, it was a real inconvenience for the family because they had to start consolidating trips. Boo-hoo. Nobody said it was a piece of cake; if it was we would already be energy independent.

The other option is to ration by price. The problem with this one is that there really isn’t a good feel for what kind of prices it might take to bring consumption in line with production. It could take $20/gal gasoline. Could we afford that? I would argue that we could, if the incremental gasoline tax was offset by income tax cuts. I have covered what I think would be a politically viable scheme for increasing carbon taxes in The Case for Higher Gas Taxes. But again, the problem with this option is that we don’t have a good model for how high the price would need to go before destroying enough demand.

But in my opinion, this is what it would take to become energy independent within the next decade. There is a reason that countries in Europe – with their mass transit and fuel efficient vehicles – still can’t achieve energy independence. It’s hard. It will always be difficult to achieve in a Democracy, where you have to make the voters happy lest you be voted out of office. Voters who have to make big sacrifices don’t look favorably on political leaders who ask for it.

Therein lies the problem for Obama. Yes, he could. But not with the policies he is pursuing. So, at the end of the day, “No, He Won’t.”

1. Unprecedented volatility in the energy markets

Oil prices raced to nearly $150 a barrel, and then fell to the $30’s by year end. This marks the highest ever prices for oil, followed by the lowest prices in four years. Gasoline, diesel, and natural gas prices demonstrated the same kind of volatility. There are multiple factors behind the volatility. The role of speculation was hotly debated, and the economic collapse – fueled by cash-strapped consumers who had overextended themselves – resulted in a sharp drop in demand. Some even argued that the real reason behind the plunge in prices was closure of the so-called “Enron loophole.”

2. Oil price volatility fallout

A consequence of the incredibly volatility was the economic damage done at both ends of the price spectrum. At the upper end, airlines were going bankrupt and car companies were in deep financial trouble as consumers stopped buying the higher profit margin SUVs. After oil prices plunged, some non-integrated oil companies found themselves in financial trouble, including Flying J who declared bankruptcy.

3. Barack Obama elected

In a normal year, this would have been my #1 story, especially considering that the new administration is likely to attempt a major shift away from fossil fuels. My prediction is that reality is going to collide with enthusiasm, and while gains are likely to be made along several fronts, aggressive renewable energy targets will not be met.

4. Ethanol producers struggle

Despite production mandates and generous federal subsidies, ethanol producers struggled to make a profit. A combination of high corn prices followed by falling fuel prices pushed even some of the largest ethanol producers to bankruptcy. Corn growers fared much better, as higher prices and mandated demand from the ethanol industry provided them with the same sort of windfall seen recently by the oil industry (prompting some to ask whether a windfall profits tax on corn would be good for consumers). Xethanol finally ceased operations, as I had predicted in early 2007.

5. Somali pirates hijack supertanker

Somali pirates, emboldened by recent multi-million dollar ransom payments, hijacked a Saudi supertanker carrying $100 million worth of oil. At the time of this writing, the situation remains unresolved, although the value of the oil at current market prices is now considerably less than $100 million.

6. 2nd generation ethanol is delayed

The story this year was supposed to be “2nd generation ethanol production begins“, but alas the over-promise, under-deliver meme that I have been critical of continues. Range Fuels had initially intended to start producing in 2008, but that was delayed to 2009 and now production isn’t forecast to begin until 2010. Meanwhile, other 2nd generation ethanol companies continue to promise the world, including Coskata who claims they can make ethanol for “under US $1.00 a gallon anywhere in the world.” (I took a good look at those claims here.) Finally, according to this source (another here), of the six cellulosic ethanol projects selected to receive $385 million in federal funding in February 2007, almost two years later only one plant is actually under construction (Range Fuels).

7. Peak oil becomes fashionable, then unfashionable again

High oil prices demanded an explanation, and peak oil was ready to provide that explanation. 2008 was probably the year that the mainstream began to seriously discuss and debate peak oil. However, when prices began to plunge, the peak oil skeptics began to say “I told you so.” Others suggested that this was just a continuation of the normal cycles.

8. Gas stations in the southeast run out of gasoline in the wake of Hurricanes Gustav and Ike

Some major oil refineries that shut down in the face of Hurricane Gustav had to remain shut down with Hurricane Ike following closely behind. Gasoline inventories heading into the hurricanes were low, so it wasn’t long before spot outages began to show up across the southeast. As I predicted during a panel session at this year’s ASPO conference, the outages were likely to be short-lived, and inventories would recover as refineries came back online. This was in response to wide-spread concern, partially fueled by Matt Simmons’ presentation, that the outages were the beginning of something much more widespread. (I think my answer was literally “This situation is temporary. I expect inventories a month from now to be substantially higher.”)

9. “Drill here, drill now”

Momentum for more exploration and production in U.S. waters increased along with oil prices. This became a campaign theme for Republicans, who adopted the slogan “Drill here, drill now.” President Bush lifted a moratorium on offshore drilling. Democrats initially responded with calls for oil companies to be forced to drill on current leases before opening up new ones. However, Congress – facing constituents unhappy with high gas prices – ultimately followed suit and allowed the 25-year moratorium to expire. The response from then candidate Obama was that he wasn’t happy to see the moratorium expire, and that he favored “responsible” drilling as part of a broader energy package. My own proposal was to allow drilling and funnel the lease proceeds to alternative energy, mass transit, and other initiatives designed to reduce oil consumption. This proposal later received quite a lot of attention when Paris Hilton proposed the same thing.

10. Record profits by US energy companies

On the back of high oil prices, the integrated oil companies (those who produce both oil and refined products like gasoline and diesel) once again saw record profits. There was an interesting dichotomy, however, as downstream profits in the refining sector vanished as gasoline consumption fell. Pure refiners like Valero saw their profits crash.

That’s more or less what I think were the Top 10 stories of 2008. There were quite a few in the honorable mention category, such as T. Boone Pickens energy plan, the decision by OPEC to reverse direction and propose big production cuts, falling oil production in Russia and Mexico, and postponed investments in the wake of lower prices.

So, what did I miss? Which stories do you think should be ranked in a significantly different order?

In closing, Happy Holidays to all readers. I am now going offline to spend some good family time. Here’s hoping that you all have the same opportunity.

Barack Obama has said that energy is going to be one of his top priorities. I believe he is completely sincere about this and that energy will get a lot of attention early on in his administration. I believe he is committed to moving the U.S. toward energy independence and a greener energy future. However, one can recognize energy as an important priority, yet sharply differ on the policy direction that is needed. For instance, some may have energy as a high priority because they feel that gasoline is too expensive. Their priority may be to keep gasoline prices low so people’s budgets aren’t adversely impacted by their fuel bills. Some can see energy as a top priority, and yet see a solution as suing OPEC to provide more oil.

On the other hand, someone else may have energy as a top priority, but think gasoline prices need to be much higher in order to shift our demand away from fossil fuels. This is the nature of my disagreement with some aspects of Obama’s energy plans: We broadly agree on the big picture, but differ on how to get there. And since I recently heard him say “I may not agree, but I will listen”, here is my attempt to highlight what I feel are the flaws in his energy proposals.

Up front, let me state my assumptions. These will of course influence my opinion on his proposals. I believe that the present rate of fossil fuel usage in the U.S. is unsustainable. I believe that world oil production is very near a production peak, and an energy policy that is keenly aware of the potential for energy shortfalls – which will lead to severe oil price volatility – is paramount. I believe that even if oil production does not peak in the next five years, oil production will not be able to be expanded quickly enough to stay ahead of demand. Finally, I believe our current breed of liquid biofuels is too fossil-fuel dependent to enable them to make up for significant energy shortages, and that there are no obvious silver bullet technological fixes around the corner.

These key assumptions impact the direction that I believe energy policy should take. While I believe the evidence supports human-caused global warming, I don’t think the world has the collective will to voluntarily reign in greenhouse gas emissions. I think this will ultimately only be accomplished by a combination of high prices and lack of availability. So the energy policy that I would propose would not focus on protocols and agreements for reducing greenhouse gases. Even though many countries signed on to the Kyoto Protocol, carbon dioxide continued to accumulate in our atmosphere – even from the signatories of the agreement. There will always be countries that will choose not to be a party to such protocols, thus I believe a greenhouse gas reduction will only come about as a consequence of a reduction in fossil fuel usage.

Thus I believe a sound energy policy should focus on 1). Minimizing per capita energy usage; 2). Finding sustainable, affordable alternatives; 3). Managing the down side of the production peak such that severe shortages are avoided. 4). Communicating to the public the nature of the problem, and explaining why sacrifice is needed.

The Fossil Fuel Blind Spot

While I think many of Obama’s proposals are spot on, and with a little tweaking he could have a great energy plan, I think he overestimates how easily alternatives can displace fossil fuels. Thus, he largely ignores the need to slow the decline of U.S. oil production. Late in the campaign, he started to pay some lip service to the need to (responsibly) drill, but not too many people are expecting him to put much emphasis on that aspect. That “responsibly” qualifier is usually a sign that 1). Someone thinks drilling is not presently responsible; 2). They are going to put hurdles in place that discourage drilling. In fact, one of the Obama proposals is

• A “Use it or Lose It” Approach to Existing Oil and Gas Leases.

Oil companies have access to 68 million acres of land, over 40 million offshore, which they are not drilling on. Drilling in open areas could significantly increase domestic oil and gas production. Barack Obama and Joe Biden will require oil companies to diligently develop these leases or turn them over so that another company can develop them.

That sounds great. Just one problem, though. There already is such a provision. To continue to beat this drum is either pandering, or demonstrates a fundamental misunderstanding of the oil and gas regulations in the U.S. The way these leases work is that companies bid on them competitively. They bid because they think there might be oil there. They then pay annual fees to the government over the course of the lease as they explore, and then if they find economically recoverable oil they begin to develop the lease. But the time between acquiring the lease and the beginning of production (should oil be found there) is several years. You don’t acquire a lease and immediately start producing oil. Further, if an oil company did acquire a lease and didn’t develop it (which would happen if they don’t find any oil there) then it goes back to the government anyway. Oil companies can’t keep leases tied up indefinitely without developing them.

The fact that these are the sorts of policies that are highlights of Obama’s domestic exploration plan indicate to me that he doesn’t look at domestic oil production as a big part of his overall energy plan. In fact, Geoffrey Styles recently noted the same in an essay that examined Obama’s plans in detail:

Senator Obama appears to consider the US tapped out for oil, and apparently expects his energy independence goals to be met without more help from that quarter. That assessment pervades his approach to the oil & gas industry, though recently he has described natural gas in more favorable terms. It is also consistent with his periodic citations of the “3% of reserves vs. 25% of consumption” soundbite, which drastically understates the remaining resource potential of the US. This may explain his 2006 vote against a modest expansion of the allowed drilling area in the Gulf of Mexico, and his restrained support for expanded access to oil & gas during this summer’s Congressional debate on various drilling proposals.

I think the vast majority would agree for the need to move away from oil as our principal source of energy. But fossil fuels and nuclear power presently combine to provide more than 90% of America’s energy needs (Source: EIA). And I think there are too many people who fail to understand exactly why that is the case. As Geoffrey Styles put it so well in the afore-mentioned link “it is counter-productive to pit solar, wind and biofuels against domestic oil & gas, which today contribute roughly 30 times as much net energy to the US economy, and could do more.”

Not understanding the problem can lead to unrealistic choices. A key question for me is whether Obama will sit down with the oil companies, explain his vision, but then also listen to these companies explain the view from their vantage point. After all, these are the companies that provide the vast majority of our energy today. They might know a thing or two about energy.

I believe that 10 years from now (the time frame we could reasonably expect today’s exploration projects to start putting supply on the market) we are going to find ourselves falling in a deep supply hole, and while biofuels can help, they aren’t going to fill the void. By adopting policies now that will encourage U.S. oil production, the supply void will shrink, and prices should be more stable. And as I have argued before, we can earmark the tax revenue from new production to fund alternative energy. The point here is not to keep us dependent on fossil fuels; it is to address what I see as a pending supply shortage in 10 years. Adopting policies that discourage U.S. production will exacerbate that supply shortage. If we are near an oil production peak – as I think we are – then those policies that discourage domestic production will put the country at great risk.

Yet there is a second proposal in Obama’s plan that will discourage domestic production:

• Enact a Windfall Profits Tax to Provide a $1,000 Emergency Energy Rebate to American Families.

Obama and Biden will enact a windfall profits tax on excessive oil company profits to give American families an immediate $1,000 emergency energy rebate to help families pay rising bills. This relief would be a down payment on the Obama-Biden long-term plan to provide middle-class families with at least $1,000 per year in permanent tax relief.

I have had an internal debate on this one for quite a while. I favor higher gas taxes to reduce consumption. (And I give Obama high marks for resisting the calls by McCain and Clinton for a gas tax holiday over the summer). If a windfall profits tax is in place, I believe that this will discourage investment, and ultimately lead to higher prices as supply is constrained. Hence, the same objective is ultimately achieved – except the oil companies get blamed instead of the politicians. But the biggest difference is that gas taxes can be implemented or removed in short order. Taxes that discourage investment will have unpredictable results.

Let’s also be clear here. The oil industry does make big profits, but they are also already one of the most heavily taxed industries. And their tax payments to governments increase along with their profits. There has been a lot of coverage given to the record profits being made by the oil companies, but much less to the record windfalls in the form of taxes that governments have received over the past few years as a result.

And don’t forget that we have experimented with a windfall profits tax before. It raised far less revenue than anticipated, and caused investment to fall. An article from the Cato Institute notes:

We’ve actually been down this road before in the form of the Crude Oil Windfall Profit Tax of 1980. According to a study published by the Congressional Research Service, the tax discouraged investment in the domestic oil industry to such a degree that domestic oil production was 3 percent to 6 percent less as a result of that tax, and foreign oil imports grew accordingly by 8 percent to 16 percent. There isn’t a single credentialed oil economist in the country who would argue that windfall profit taxes are good for consumers.

Geoffrey Styles also weighed in on this provision:

If anything, [Obama] seems to regard the domestic oil industry not as a potential source of new supply, but as a source of new tax revenue. His short-term energy program leads off with one-time energy rebates–$1,000 per family or $500 per individual taxpayer–funded by a windfall profits tax on oil companies. He hasn’t put a price tag on this, but assuming all taxpayers would be eligible, it would require on the order of $20 billion dollars per year in new taxes over the next five years. Although there are legitimate differences of opinion on the justification for such a tax, its consequences for future US oil output are unambiguous: what you tax more, you get less of.

I don’t think there is any doubt that a windfall profits tax won’t help add to supplies. And refunding it back to consumers sends the wrong message: If gas prices go up, the government will protect you by taking the money from the oil companies and giving it back to you. Where is the incentive for the consumer to conserve? For the oil companies themselves, the likely impact would be that foreign earnings wouldn’t be repatriated back to the U.S., and would just be reinvested overseas. For that matter, a steep windfall profits tax would provide incentive for U.S. oil companies to simply relocate overseas.

The Ethanol Blind Spot

One reason Obama feels like he can shun the oil industry is that he comes from a ‘corn state’ and has ties to the ethanol industry. A recent Bloomberg story reported that he wants to bail out the financially strapped ethanol industry, keep the protective tariffs on Brazilian ethanol in place, and is “fully committed to it and sees tremendous value in the renewable fuels standard and continuing down this path.”

Here we have a fundamental disagreement. I have written tens of thousands of words on my opposition to corn ethanol (a random sample here). I won’t repeat all of my reasons here, but will highlight the key sticking point from my perspective. Sustainability and net energy are important. I think we should make every effort to make agriculture sustainable so we leave the soil in good condition for future generations. But the way we make corn ethanol encourages highly unsustainable agricultural practices.

Where do we pay the price for strip-mining the soil? Who is going to get the bill for degraded soils and depleted aquifers? Our children will. If we are consuming natural resources and making them unavailable for future generations, there needs to be a really extraordinary reason, like a crisis that threatens our existence. Yet we are depleting our soil to keep our cars running on a fuel that delivers a very small energy return. Most of the energy in ethanol is derived from the fossil fuels used to produce it. If we put higher carbon taxes in place, not only would it encourage conservation, but it would directly discourage ‘alternative’ energy that relies heavily on fossil fuels. A cap and trade system, or a system in which the EPA has to quantify greenhouse gas savings – will quickly degrade to a lobbying effort if the ethanol industry finds itself at a disadvantage as a result of the rules (see this example).

The “benefit” of corn ethanol – unless you happen to be a corn farmer or ethanol lobbyist – is questionable. The negative consequences need to be a part of the analysis when determining whether to continue pursuing ethanol policies. At present the environment would be better off if – instead of using natural gas to produce fertilizer and steam for the ethanol plant – the natural gas was just burned directly in CNG vehicles. (To his credit, Obama does favor increased use of CNG).

However, I think we have put an ethanol infrastructure in place that can’t be easily dismantled without severe consequences on Midwestern communities. I would not advocate pulling the support out from under the corn ethanol industry, but I would be looking for an exit strategy. Instead, Obama wants to expand the program. What I wish he would do – instead of making a priori assumptions about the value of ethanol for our energy policy – is put a task force together consisting of opponents and proponents – and let them document the pros and cons around all of the sticking points. Some, like the long-term consequences of aquifer depletion – don’t even seem to be on Obama’s radar. Present policy calls for sending that bill to our children.

The Nuclear Blind Spot

Nuclear power gets a bad rap. While it is true that there have been some very serious incidents involving the nuclear industry, the truth is that all of our energy options involve difficult tradeoffs. It is also true that countries like France derive almost 90% of their electricity from nuclear power. While the majority in France supports nuclear power, in the U.S. we have attached a particularly strong stigma toward the topic. Personally, I would rather see the U.S. use more nuclear power and less coal (particulate pollution kills thousands every year).

As is the case with fossil fuels, nuclear gets only a passing mention in Obama’s energy plan. The reasoning is clear: He thinks we are better off with ‘clean coal’ technology and a mix of renewables. In my opinion, if we discourage nuclear we will ultimately ensure that coal continues to play a dominant role in producing our electricity. While I would be the first in line for 100% solar, wind, and geothermal electricity, the EIA projects that by 2030 renewable energy will only provide 12.5% of our electricity. The EIA has a spotty prediction record, but they do a good job laying out the obstacles that renewable energy has traditionally faced:

Renewable Energy is Expensive and Capital-Intensive: Renewable energy plants are generally more expensive to build and to operate than coal and natural gas plants. Recently, however, some wind-generating plants have proven to be economically feasible in areas with good wind resources, compared with other conventional technologies, when coupled with the Renewable Electricity Production Tax Credit (described below).

Renewable Resources Are Often Geographically Remote: The best renewable resources are often available only in remote areas, so building transmission lines to deliver power to large metropolitan areas is expensive.

I personally believe we are going to exceed the EIA’s projections, but I also believe that fossil fuel depletion is going to put pressure on all sources of energy. Thus, I don’t believe we can afford not to encourage further development of the nuclear industry.

What I Like in Obama’s Plan

As I stated, there is much that I like about Obama’s plan. I have suggested my own plan in the past, and there are several areas of overlap. We agree on the need to push plug-in hybrid cars and to incentivize the purchase of these vehicles. We agree on the need to invest in a green energy future, but we differ on the details. I like his proposal to weatherize a million new homes a year, and I think incentivizing the solar, wind, and geothermal industries will pay big dividends. (I just don’t know how some of this stuff is going to be paid for). I certainly agree with the need to take our energy security out of the hands of foreign powers, but we have some fundamental disagreements on how to get there.

Also, I like the aggressive targets, but I think the most realistic way of achieving them is via a pricing lever. This is one reason I haven’t been overly enthusiastic about the efficacy of raising CAFE standards: We already make fuel efficient vehicles. What we need is the incentive to purchase them, which will be incentive to the auto industry to continue making and improving them.

Conclusions

While I think Senator Obama has great potential in front of him, and like a lot of his ideas, I can’t fully embrace his energy policy proposals. I think there are many positive elements, but in my opinion there are glaring blind spots that could lead to energy shortages. I recognize that he is going to have people trying to pull him in many directions, and this often leads to compromise in favor of the politically expedient over the technically best solutions. As he prepares to govern, he has to be very careful that some of the politically expedient solutions don’t carve out a huge energy shortfall.

Additional Reading

Obama’s Plan: New Energy for America
Geoffrey Styles on the Obama Plan
The Outline of My Energy Plan
CNN: Putting Obama’s energy plan to the test
Energize America

I think Obama’s choice of Secretary of Energy is going to be a strong indicator of whether he is going to declare open warfare on the oil companies, or whether he is going to try to work with them. I have seen Pennsylvania Governor Ed Rendell floated as a possible candidate. I think that signals that open warfare is the direction, as Rendell has been quite a demagogue over the oil companies.

As I documented before, Rendell is someone who doesn’t seem to see the connection between the ‘drive anywhere, anytime’ mentality and high gas prices. He wants to have the convenience of hopping in his suburban to drive two blocks, and then he wants to punish the oil companies because prices are too high. By suggesting a rebate (paid by the oil companies) based on how many miles you drove, he actually wants to reward the people who drive the most. This is genius: Reduce supply with a windfall profits tax, while at the same time increasing demand with a reward to those who drive the most. Fundamentally, I don’t think Rendell has an understanding of the nature of the problems we face.

I have also seen Arnold Schwarzenegger floated as a possible candidate. I think he would be a good choice, as would former Energy Secretary Bill Richardson (although my guess is that he may end up Secretary of State). Both are pretty knowledgeable about energy issues.

You can read through all of Obama’s proposals on his website at New Energy for America. Here is a summary, from Obama’s site, of the highlights. One thing that didn’t make the highlights is that Obama reportedly intends to continue to pursue our current ethanol policies.

Provide Short-term Relief to American Families

• Enact a Windfall Profits Tax to Provide a $1,000 Emergency Energy Rebate to American Families.
• Crack Down on Excessive Energy Speculation.
• Swap Oil from the Strategic Petroleum Reserve to Cut Prices.

Eliminate Our Current Imports from the Middle East and Venezuela within 10 Years

• Increase Fuel Economy Standards.
• Get 1 Million Plug-In Hybrid Cars on the Road by 2015.
• Create a New $7,000 Tax Credit for Purchasing Advanced Vehicles.
• Establish a National Low Carbon Fuel Standard.
• A “Use it or Lose It” Approach to Existing Oil and Gas Leases.
• Promote the Responsible Domestic Production of Oil and Natural Gas.

Create Millions of New Green Jobs

• Ensure 10 percent of Our Electricity Comes from Renewable Sources by 2012, and 25 percent by 2025.
• Deploy the Cheapest, Cleanest, Fastest Energy Source – Energy Efficiency.
• Weatherize One Million Homes Annually.
• Develop and Deploy Clean Coal Technology.
• Prioritize the Construction of the Alaska Natural Gas Pipeline.

Reduce our Greenhouse Gas Emissions 80 Percent by 2050

• Implement an economy-wide cap-and-trade program to reduce greenhouse gas emissions 80 percent by 2050.
• Make the U.S. a Leader on Climate Change.

I will have details and comments as soon as possible.

I hope that Obama runs the country the way he ran his campaign. His organization was superb, and he never seemed to get rattled. His decisions were well-thought out. As I heard a (conservative) commentator say earlier tonight, when it comes to politics he is a natural.

I do think a lot of his opponents have it exactly backwards regarding an Obama win. I know many people who fear that an Obama win will make the U.S. more susceptible to a terrorist attack, because other countries won’t fear the repercussions. To the contrary, in my travels I have spoken to people of many nationalities, including long conversations with an Iranian and a Saudi (and I told both that I thought Obama would win – as far back as May). People around the world are hopeful of an Obama win, because they feel that Obama will be more willing to sit down and listen to their concerns. I think an Obama win will buy so much goodwill in the world that it will make a terrorist attack much less likely, as the world will afford Obama a honeymoon period while they judge whether their impressions of him were correct.

I also think he will be an inspiration to minorities everywhere. Minorities will be able to see that even the highest office in the land is something they can aspire to. It is also hard to argue that the U.S. as a whole is a racist nation if we have just elected a man of Kenyan descent with a middle name of Hussein as president.

In summary, I think an Obama victory will do wonders for the image of the U.S. in the world, will go a long way toward improving race relations, and will inspire many minorities. On the other hand, I think the expectations for Obama will be impossibly high, and he is sure to disappoint many as he begins to make necessary compromises. I have also voiced my concerns about his energy policy proposals. I hope he picks someone like Bill Richardson as his energy secretary, as I believe he is one of the more knowledgeable Democrats on energy issues.

Coming soon I will start to dissect Obama’s energy proposals, and talk about the good and why I think some of his proposals are potentially problematic.