All the Wrong Moves on Energy Markets

 

In a world of sane energy policy, the following three precepts would take pride of place: (1) the forces of supply and demand would allocate scarce energy resources to their best possible use; (2) constant competitive pressures should lead energy suppliers to reduce their costs of extraction, refinement, and sales, just as it should lead purchasers to economize on the use of fuels; and (3) a set of careful taxes and restrictions should be imposed proportionate to measurable externalities, and only where the benefits from government imposition exceeded the costs of running the regulatory system. The combination of market and regulatory measures is not perfect, but it should lead to steady improvements, as the price system should prove resilient enough to absorb the full range of exogenous shocks, whether from natural events like storms and volcanoes or from political sources like the stress of the Russian invasion of Ukraine.

By every measure, the energy market is fraught with vulnerabilities, virtually all of which stem from high levels of government interference in the production, distribution, and sale of goods. The source of the distress is the unannounced, but readily apparent, decision of the Biden administration to dethrone fossil fuels from their central position in energy markets. There is no single tool used to achieve this end, and certainly no explicit acknowledgment of the overall agenda. But the dire consequences of these policy changes become more evident by the day. Multiple reports point to systematic shortages in diesel fuel nationally, but particularly in the Northeast, where refining capacity is down by half from 2009. The national diesel fuel shortage will start this summer and continue indefinitely. Right now, the electricity industry also faces planned and unplanned blackouts because of a decline in energy sources from nuclear and coal, which is placing excessive dependence on unreliable wind and solar sources. Gasoline prices have already spiked to record levels, most recently at $4.43 per gallon and climbing, driving a core inflation rate over 6 percent, while the energy inflation rate remains over 30 percent per year.

In the face of this energy crisis, the one imperative is to increase the supply of energy to both meet the post-COVID jump in demand and fill the supply gap left by the much-needed strategic effort to shut down Russian natural gas sales to the West.  However, the Biden administration has not taken any steps to bring more US energy online in the short run.

One striking development was the administration’s recent announcement that it had canceled the proposed oil and gas leases in excess of one million acres in the Cook Inlet in Alaska and in the Gulf of Mexico “[d]ue to a lack of industry interest in leasing” these potential sites. This lame excuse is too true, but for all the wrong reasons. One might ask the Biden team: why does the entire industry have no interest in leasing new sites when high prices signal robust demand?

The explanation is that the successful bidder will face a nonstop set of legal challenges from environmental groups and a series of unidentified obstructionist actions from the Biden administration reflecting its hostility to fossil fuels. This hostility has been evident ever since the administration posited a set of climate change objections to fossil fuels when it nixed the Keystone XL pipeline on its first day in office. Yet, at the same time that these oil and gas leases went begging, the Biden administration celebrated the successful leasing of new properties for wind energy toward its “goal of deploying 30 gigawatts of offshore wind energy capacity by 2030.” It is not difficult to connect the dots.  Private firms know that it pays to invest only in energy sources that have government support, and to shy away from those projects that do not.

At this point, the administration does have its own plan to increase fossil fuel supplies, which is to release one million barrels per day from the nation’s reserve of energy sources, without consulting our international partners. But this Band-Aid approach does not generate any new energy supplies, and it dips into reserves that were intended for short-term emergencies when it is not possible to gear up production. This unwise approach plays into the hands of people like John Kerry, who thinks that “the climate crisis cannot take a backseat to short-term fossil fuel growth while the world figures out the energy crunch.” That is no excuse for many government initiatives, including the misconceived mandatory disclosure program of the Securities and Exchange Commission for climate-related investments.

Other actions taken on the energy front by the Biden administration are every bit as destructive. The administration and its allies think that the key need under these circumstances is to rein in what misguided pundits like Robert Reich call the “staggering profits” made by large oil companies in the face of current global shortages of energy, and thus this coalition eyes the passage of some windfall-profit tax on oil and gas. The current proposal of Senator Sheldon Whitehouse (D-RI) and Representative Ro Khanna (D-CA) would strip away from producers a substantial portion of their gains by imposing a tax of 50 percent on any profits that are over a $66 baseline, equal to the average price for a barrel of oil in the 2015–19 base period. This tax would apply even to companies that have suffered taxable losses during this period, and thus would operate as an excise tax whose only consequence could be to induce the targeted firms to cut back on their production, thereby exacerbating the current malaise.

One equally unwise possibility is the Democratic proposal to prohibit an increase in prices whenever the president (currently Biden) declares that there is an energy shortage. People who advocate for such a proposal have short memories of the long queues that developed throughout the United States when then-president Richard Nixon put caps on oil and gas prices. The price caps generated long lines at the pumps while benefiting foreign producers who faced less new entry from the United States.

The illusion behind both proposals is that somehow the oil and gas companies have (in a deconcentrated industry), the power to dictate prices. This theory purports to explain the current price increases, but a quick look at this Bloomberg graph shows that it cannot explain the equally precipitous declines:

The only way to stop the excessive prices is to increase fuel supplies in global and domestic markets, as these political efforts to get even with alleged price gougers will only prolong the crisis. Unfortunately, led by Chuck Schumer and Nancy Pelosi, the Democrats are instead determined to take the wrong way out—all because they refuse to expand supply to meet rising demand.

In addition to the misconception that fossil fuel companies have the power to control prices, a second flawed justification is that major interventions, which foreclose the option of increasing supply, are needed to control harmful environmental externalities. There are two elementary propositions at play. First, that it is necessary to take into account the substantial externalities that arise when solar panels chew up a large portion of the landscape. Solar generation will require, by one estimate, some 8,800 square miles of land to reach the Biden administration’s goal of deriving some 40 percent from solar sources by 2035. Second, that those losses are just a down payment on other externalities that arise from solar, such as having to mine for exotic rare earths on one end and to dispose of used facilities on the other. Wind presents a similar story, where the dead birds, the noise levels, the visual blight, along with the high costs of fabrication, construction, and decommissioning must also be taken into account. Shockingly, there is no mention of these costs in any of the Biden administration documents.

Ironically, the same can be said of the administration’s near-obsessive concern with the effects of climate change, because these are largely ignored as well. There is rarely any mention of the positive effects of climate change, for the rise in carbon dioxide levels is associated with an increase in global greening, which makes extremes in temperature less likely. Nor is there any discussion of exactly how the measures now in place will reduce total emissions, much less the effect that this reduction will have on overall global temperatures, given that the Chinese have decided to expand their reliance on clean coal. Nor are the voluntary efforts by American firms to address climate change given much weight. Instead, there are just statements that since this is the sixth-warmest year globally, the doom must be greater than ever, even though the plateau at current temperatures is not likely to produce major catastrophes. Once again, there are wild gyrations in annual losses from natural catastrophes, which suggests that smallish annual changes in carbon dioxide levels cannot account for the variation.

A coherent energy policy cannot merely posit huge losses from climate change in some indefinite future, but instead should seek to estimate how the Biden administration policies will fare when the full range of effects from all sources is considered. We know that the market losses from shunning fossil fuels are enormous. What evidence is there that net climate change loss justifies those losses? The Biden administration won’t say.

© 2022 by the Board of Trustees of Leland Stanford Junior University.

Published in Energy, Law
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  1. kedavis Coolidge
    kedavis
    @kedavis

    Gazpacho Grande' (View Comment):

    They really think we’re all monkeys, screeching at the obelisk.

    See the source image

    Monolith.

    • #31
  2. Paul Stinchfield Member
    Paul Stinchfield
    @PaulStinchfield

    kedavis (View Comment):

    Gazpacho Grande’ (View Comment):

    They really think we’re all monkeys, screeching at the obelisk.

    See the source image

    Monolith.

    The left found their own monolith. But when they touched it, it made them stupider.

    • #32
  3. DrewInWisconsin, Unapologetic Oaf Member
    DrewInWisconsin, Unapologetic Oaf
    @DrewInWisconsin

     Manchin Exposes Insane Biden Plan on Oil Leases During Haaland Testimony

     

    It would be nice if other Democrats piled on, but . . . I’ll take Manchin for now. When even Democrats are calling out the DELIBERATE destruction of American Energy by the Biden Administration, we may see progress.

    But we won’t see any actual progress until every single one of these leftist lunatics is forcibly removed from Washington.

    The Biden Administration must be removed from power to save America.

    • #33
  4. Bishop Wash Member
    Bishop Wash
    @BishopWash

    DrewInWisconsin, Unapologetic … (View Comment):

    Manchin Exposes Insane Biden Plan on Oil Leases During Haaland Testimony

     

    It would be nice if other Democrats piled on, but . . . I’ll take Manchin for now. When even Democrats are calling out the DELIBERATE destruction of American Energy by the Biden Administration, we may see progress.

    But we won’t see any actual progress until every single one of these leftist lunatics is forcibly removed from Washington.

    The Biden Administration must be removed from power to save America.

    The Three Martini Lunch podcast is playing audio of her refusing to answer if she thinks gas prices are too high. She gave a round-about answer remembering the gas lines of the 1970s but couldn’t say yes.

    Once Barry told the truth. Maybe he thought he was with a friendly reporter. He said the only problem he had with high gas prices was the speed in which it happened. He wanted a slow boil so we could adapt but high prices were necessary to move us away from petroleum.

    • #34
  5. Raxxalan Member
    Raxxalan
    @Raxxalan

    Bishop Wash (View Comment):

    DrewInWisconsin, Unapologetic … (View Comment):

    Manchin Exposes Insane Biden Plan on Oil Leases During Haaland Testimony

     

     

    It would be nice if other Democrats piled on, but . . . I’ll take Manchin for now. When even Democrats are calling out the DELIBERATE destruction of American Energy by the Biden Administration, we may see progress.

    But we won’t see any actual progress until every single one of these leftist lunatics is forcibly removed from Washington.

    The Biden Administration must be removed from power to save America.

    The Three Martini Lunch podcast is playing audio of her refusing to answer if she thinks gas prices are too high. She gave a round-about answer remembering the gas lines of the 1970s but couldn’t say yes.

    Once Barry told the truth. Maybe he thought he was with a friendly reporter. He said the only problem he had with high gas prices was the speed in which it happened. He wanted a slow boil so we could adapt but high prices were necessary to move us away from petroleum.

    The problem I have with the push to move away from petroleum is to what?  I mean there isn’t currently a replacement for petroleum except perhaps to EVs in the passenger car space.  Virtually every other application runs on petroleum.  The administration has only a cursory understanding of how the real world works.

    • #35
  6. DrewInWisconsin, Unapologetic Oaf Member
    DrewInWisconsin, Unapologetic Oaf
    @DrewInWisconsin

    Raxxalan (View Comment):
    The problem I have with the push to move away from petroleum is to what?  I mean there isn’t currently a replacement for petroleum except perhaps to EVs in the passenger car space.

    And those don’t work very well when it’s 20 below and it’s a three-hour drive between cities.

    But they also want us all living in dense urban areas, too.

    • #36
  7. kedavis Coolidge
    kedavis
    @kedavis

    DrewInWisconsin, Unapologetic … (View Comment):

    Raxxalan (View Comment):
    The problem I have with the push to move away from petroleum is to what? I mean there isn’t currently a replacement for petroleum except perhaps to EVs in the passenger car space.

    And those don’t work very well when it’s 20 below and it’s a three-hour drive between cities.

    But they also want us all living in dense urban areas, too.

    And growing all of our food in window boxes, apparently.

    • #37
  8. RufusRJones Member
    RufusRJones
    @RufusRJones

    Raxxalan (View Comment):

    Bishop Wash (View Comment):

    DrewInWisconsin, Unapologetic … (View Comment):

    Manchin Exposes Insane Biden Plan on Oil Leases During Haaland Testimony

     

     

    It would be nice if other Democrats piled on, but . . . I’ll take Manchin for now. When even Democrats are calling out the DELIBERATE destruction of American Energy by the Biden Administration, we may see progress.

    But we won’t see any actual progress until every single one of these leftist lunatics is forcibly removed from Washington.

    The Biden Administration must be removed from power to save America.

    The Three Martini Lunch podcast is playing audio of her refusing to answer if she thinks gas prices are too high. She gave a round-about answer remembering the gas lines of the 1970s but couldn’t say yes.

    Once Barry told the truth. Maybe he thought he was with a friendly reporter. He said the only problem he had with high gas prices was the speed in which it happened. He wanted a slow boil so we could adapt but high prices were necessary to move us away from petroleum.

    The problem I have with the push to move away from petroleum is to what? I mean there isn’t currently a replacement for petroleum except perhaps to EVs in the passenger car space. Virtually every other application runs on petroleum. The administration has only a cursory understanding of how the real world works.

     

     

     

     

    • #38
  9. RufusRJones Member
    RufusRJones
    @RufusRJones

    DrewInWisconsin, Unapologetic … (View Comment):
    But they also want us all living in dense urban areas, too.

    Minneapolis is trying to social engineer the whole metro with light rail. It’s a fiscal disaster. One line is literally subsidizing each passenger $700 per trip now. Zero is being reserved for capital replacement. There is so much crime in social problems people don’t want to go on it. Of course there are a lot of free riders.

     The bike lanes aren’t being used.

    • #39
  10. kedavis Coolidge
    kedavis
    @kedavis

    RufusRJones (View Comment):

    Raxxalan (View Comment):

    Bishop Wash (View Comment):

    DrewInWisconsin, Unapologetic … (View Comment):

    Manchin Exposes Insane Biden Plan on Oil Leases During Haaland Testimony

     

     

    It would be nice if other Democrats piled on, but . . . I’ll take Manchin for now. When even Democrats are calling out the DELIBERATE destruction of American Energy by the Biden Administration, we may see progress.

    But we won’t see any actual progress until every single one of these leftist lunatics is forcibly removed from Washington.

    The Biden Administration must be removed from power to save America.

    The Three Martini Lunch podcast is playing audio of her refusing to answer if she thinks gas prices are too high. She gave a round-about answer remembering the gas lines of the 1970s but couldn’t say yes.

    Once Barry told the truth. Maybe he thought he was with a friendly reporter. He said the only problem he had with high gas prices was the speed in which it happened. He wanted a slow boil so we could adapt but high prices were necessary to move us away from petroleum.

    The problem I have with the push to move away from petroleum is to what? I mean there isn’t currently a replacement for petroleum except perhaps to EVs in the passenger car space. Virtually every other application runs on petroleum. The administration has only a cursory understanding of how the real world works.

     

     

     

     

    Far from a magic wand…

     

    • #40
  11. RufusRJones Member
    RufusRJones
    @RufusRJones

    Wind has zero merit. 

    • #41
  12. Paul Stinchfield Member
    Paul Stinchfield
    @PaulStinchfield

    DrewInWisconsin, Unapologetic … (View Comment):

    Raxxalan (View Comment):
    The problem I have with the push to move away from petroleum is to what? I mean there isn’t currently a replacement for petroleum except perhaps to EVs in the passenger car space.

    And those don’t work very well when it’s 20 below and it’s a three-hour drive between cities.

    But they also want us all living in dense urban areas, too.

    There are a lot of people on the left who openly hate suburbanites. We’re not just wrong, we’re evil and deserve to be punished.

    • #42
  13. RufusRJones Member
    RufusRJones
    @RufusRJones

    The left is comprehensively forcing centralization in Minneapolis. They are totally blowing it in every way. The choo-choo trains are a disaster, comprehensively. Now they are fooling around with rent control with predictable results. They are behind on police recruitment and the problem is feeding back on itself and I don’t see how it stops. 

     

    • #43
  14. Paul Stinchfield Member
    Paul Stinchfield
    @PaulStinchfield

    RufusRJones (View Comment):

    The left is comprehensively forcing centralization in Minneapolis. They are totally blowing it in every way. The choo-choo trains are a disaster, comprehensively. Now they are fooling around with rent control with predictable results. They are behind on police recruitment and the problem is feeding back on itself and I don’t see how it stops.

    “Minnesota nice” isn’t nice.

    • #44
  15. Paul Stinchfield Member
    Paul Stinchfield
    @PaulStinchfield

    RufusRJones (View Comment):

    Wind has zero merit.

    Oh get real, man: Wind powers countless legislatures and committees around the world.

    • #45
  16. Raxxalan Member
    Raxxalan
    @Raxxalan

    RufusRJones (View Comment):

    DrewInWisconsin, Unapologetic … (View Comment):
    But they also want us all living in dense urban areas, too.

    Minneapolis is trying to social engineer the whole metro with light rail. It’s a fiscal disaster. One line is literally subsidizing each passenger $700 per trip now. Zero is being reserved for capital replacement. There is so much crime in social problems people don’t want to go on it. Of course there are a lot of free riders.

    The bike lanes aren’t being used.

    Very few cities are actually setup for light rail.  We have light rail in Austin.  I goes from were few people are to where few people want to go.  There is some ridership but I doubt it comes close to paying for itself.  It certainly doesn’t help with traffic congestion.

    • #46
  17. Raxxalan Member
    Raxxalan
    @Raxxalan

    RufusRJones (View Comment):

    The left is comprehensively forcing centralization in Minneapolis. They are totally blowing it in every way. The choo-choo trains are a disaster, comprehensively. Now they are fooling around with rent control with predictable results. They are behind on police recruitment and the problem is feeding back on itself and I don’t see how it stops.

     

    Detroit.  That is Minneapolis depeoples itself.

    • #47
  18. DonG (CAGW is a Hoax) Coolidge
    DonG (CAGW is a Hoax)
    @DonG

    Raxxalan (View Comment):
    Very few cities are actually setup for light rail.  We have light rail in Austin.  I goes from were few people are to where few people want to go.  There is some ridership but I doubt it comes close to paying for itself.  It certainly doesn’t help with traffic congestion.

    I think the farebox ratio for the Red Line is 8%.  If you count in capital investment, it is about 4%.   That is, for every $1 a rider pays, the taxpayers put in $24. 

    A few years back Richard Garriott offered to build a transportation pod system around UT, but the city nixed the idea.  Too bad.  Trains were a great solution for the 1800’s.

     

    This rendering shows how “personal rapid transit” might look in Austin. Small pilotless vehicles, each carrying four to six people, would run on elevated concrete structures.

    • #48
  19. Raxxalan Member
    Raxxalan
    @Raxxalan

    DonG (CAGW is a Hoax) (View Comment):

    Raxxalan (View Comment):
    Very few cities are actually setup for light rail. We have light rail in Austin. I goes from were few people are to where few people want to go. There is some ridership but I doubt it comes close to paying for itself. It certainly doesn’t help with traffic congestion.

    I think the farebox ratio for the Red Line is 8%. If you count in capital investment, it is about 4%. That is, for every $1 a rider pays, the taxpayers put in $24.

    A few years back Richard Garriott offered to build a transportation pod system around UT, but the city nixed the idea. Too bad. Trains were a great solution for the 1800’s.

     

    This rendering shows how “personal rapid transit” might look in Austin. Small pilotless vehicles, each carrying four to six people, would run on elevated concrete structures.

    UT might have been interesting and valuable.  24:1 sounds like the type of ratio a government boondoggle should have.  Thanks for the Info.

    • #49
  20. kedavis Coolidge
    kedavis
    @kedavis

    DonG (CAGW is a Hoax) (View Comment):

    Raxxalan (View Comment):
    Very few cities are actually setup for light rail. We have light rail in Austin. I goes from were few people are to where few people want to go. There is some ridership but I doubt it comes close to paying for itself. It certainly doesn’t help with traffic congestion.

    I think the farebox ratio for the Red Line is 8%. If you count in capital investment, it is about 4%. That is, for every $1 a rider pays, the taxpayers put in $24.

    “Affordable housing” seems to follow the same pattern.  When I lived in Phoenix, I would occasionally see news reports of some new “affordable housing” project, either new construction or rehabbing some existing apartment building etc.  Without exception, if you divided the total cost by the number of “units” (usually 1- or 2-bedroom apartments) being “created,” you wound up with a “cost per unit” sufficient to buy 2-bedroom or larger HOUSES at market price.

    • #50
  21. Raxxalan Member
    Raxxalan
    @Raxxalan

    kedavis (View Comment):

    DonG (CAGW is a Hoax) (View Comment):

    Raxxalan (View Comment):
    Very few cities are actually setup for light rail. We have light rail in Austin. I goes from were few people are to where few people want to go. There is some ridership but I doubt it comes close to paying for itself. It certainly doesn’t help with traffic congestion.

    I think the farebox ratio for the Red Line is 8%. If you count in capital investment, it is about 4%. That is, for every $1 a rider pays, the taxpayers put in $24.

    “Affordable housing” seems to follow the same pattern. When I lived in Phoenix, I would occasionally see news reports of some new “affordable housing” project, either new construction or rehabbing some existing apartment building etc. Without exception, if you divided the total cost by the number of “units” (usually 1- or 2-bedroom apartments) being “created,” you wound up with a “cost per unit” sufficient to buy 2-bedroom or larger HOUSES at market price.

    Which is why government shouldn’t be let anywhere near the “Affordable housing” market.  I fact I think that government needs to get out of providing “normal” goods altogether.  I think contingencies need to be provided for by the government.  Normal goods should only be provided by the market and perhaps provisioned by government at the very lowest end.  There are problems with that as well, but I don’t see how to get around those entirely.

    • #51
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