Author: energylawprof

Garcia Sanchez on North American Energy Conflict

Leave a comment

A North American energy trade war may be on the horizon, according to Texas A&M Associate Professor Guillermo Garcia Sanchez, an expert on international investment and energy law. Under President Lopez Obrador (AMLO) Mexico has begun to reverse its prior policy of opening its energy markets, and foreign investors are alleging unfair and discriminatory treatment. The Canadian and U.S. governments began consultation procedures with AMLO’s administration but, after seventy-five days, failed to settle the dispute. The exhaustion of the consultation period triggers the first step in the dispute resolution mechanism of the new United States-Mexico-Canada Agreement (USMCA), which could lead to the establishment of arbitral panels and the suspension of trade benefits to Mexico.

Canada and the United States’ objections mark the first time foreign powers have challenged Mexico’s energy policies since 1938, when Mexico expropriated foreign oil and gas companies. They also may mark the beginning of a regional trade conflict—in the midst of the Russian-Ukraine conflict, unsettled energy markets, and global inflation that has reached its highest levels since the 1970s. Professor Garcia Sanchez’s article, In the Name of Energy Sovereignty, is one of the first to unpack the USMCA’s energy-related provisions and its dispute resolution mechanisms, as well as its place in the global debate around energy transition and security. The article will be published in a forthcoming issue of the Boston College Law Review and the abstract is below.

Throughout history, the phrase “In the name of the King” justified actions that trumped the rights of citizens in order to safeguard the interests of the Crown. Today, in the name of energy sovereignty, States deploy the government apparatus to access oil and gas in other parts of the world, build pipelines on private lands, subsidize renewable energy, and nationalize their oil and power industries. States justify each of these actions by noting that they create a sense of energy independence, ensure security, or achieve other social and economic goals. Energy, however, cannot be trapped in one “realm.” Its nature is to move across human-created jurisdictions and settle, at least in the cases of oil and gas, in specific geological formations where extraction is not always economically feasible. Additionally, energy evolves with technology advancements and its production must adapt to new challenges, like that posed by the global climate crisis. Thus, an efficient and reliable energy sector that “secures” the State requires engagement with other foreign powers to regulate the trade and investment of energy and its sources. States, however, have created a web of often inconsistent treaties, reflecting competing and frequently contradictory energy policy goals. When disputes inevitably arise, arbitrators or committees must balance the parties competing energy goals.

This Article introduces the concept of energy sovereignty as a novel analytical framework to explain the fragmentation and inconsistencies in international energy governance. By introducing archetypical energy sovereignties, this Article provides a framework for interpreters of trade and investment agreements to balance the competing energy goals that are attached to the agreements. In doing so, this Article demonstrates how ignoring the complexities in the way States exercise their energy sovereignties can undermine integrated regional efforts to deal effectively with energy challenges like reducing carbon emissions or building a cost-effective and resilient energy matrix. This Article uses the United States-Mexico-Canada Agreement (USMCA), the latest North American international trade and investment agreement, to show how the archetypical energy sovereignties conflict with each other and how its dispute resolution mechanisms may balance them.

Can Weak Manchin Permitting Bill Be Strengthened?

Leave a comment

After authorizing $370 billion in new funding for new, cleaner energy sources, Congress is turning to permitting reform: All the money in the world will not help if projects don’t have permission to build. Wednesday evening, Senator Manchin released proposed text for his permitting bill, which he apparently negotiated in return for his vote to authorize the energy funding. Unfortunately, the bill is not well-designed to speed up construction of new energy sources. But with a few strategic additions it could go a long way toward speeding up permitting to secure a cleaner, more reliable, and affordable energy future for the United States.

The biggest roadblock to energy sources is not financial; it is receiving permission to build. And many of the projects that we most need for a clean energy transition face particular permitting difficulties because they need permits from multiple states or local communities and the federal government. Our traditional energy commodities, oil and coal, are less dependent on building long-distance infrastructure because they can rely on existing railroads and pipelines, and they are easier to ship by multiple pathways using rail, road, and water transport. By contrast, cleaner energy products such as renewable electricity, natural gas, and hydrogen can only be shipped by new long-distance infrastructure.

Think of a long-distance power-line designed to bring renewable energy to market, a pipeline shipping natural gas to communities hoping to move away from coal, or a hydrogen pipeline designed to help replace fossil fuels. These linear infrastructure projects often need approvals from each state they cross and may also need approval from the federal government as well whenever they cross federal lands, borders, or streams.

There are two huge legal permitting challenges for these new cleaner energy projects.

So if we want to clean up our energy system and address the global energy crisis, which is causing energy shortages and price spikes around the globe, we need to speed up permitting. If the $370 billion authorized by Congress just goes to the few projects that would already have passed the permitting gauntlet, it will be money wasted. So we’ve seen a growing chorus of voices demanding reform to the permitting process to ensure this money isn’t squandered and that we can build a cleaner energy future.

The federal and state permitting challenges are linked because perhaps the most common proposal to speed permitting is to replace state and local siting processes with federal processes. For example, in 2005, the U.S. Congress gave the federal Department of Energy the power to designate areas that particularly needed more electricity transmission and gave the Federal Energy Regulatory Commission power to, in some circumstances, permit power-lines that hadn’t been approved by the states in those areas. Senator Manchin’s bill leans heavily on this method of speeding permitting: it gives federal government more power over permitting new power-lines and hydrogen pipelines.

The problem is that this is not an improvement at all when federally-approved projects are facing Kafkaesque challenges when they seek approval to actually build their projects. The energy sector where federal permitting is most common is in interstate natural gas permitting and these projects are routinely stopped by local objections even when they have federal approval. In fact, the two highest-profile recent gas pipeline projects—the Atlantic Coast Pipeline and the PennEast Pipeline—eventually had to give up on building their projects after years of expense and struggle, even though the federal government repeatedly backed both pipelines and both pipelines won blockbuster decisions in the U.S. Supreme Court.

If the Manchin bill passes as is, the gas pipeline industry can welcome the power-line and hydrogen industries to national regulation with this unwelcome news: “Even if the federal government backs you on every permit, and even if the Supreme Court backs you in every decision, no matter how long you wait, or how much you spend, states and lower courts will make life so difficult that your proposed project will never be built.”

The dysfunctions of federal permitting under court review are well known in energy policy. Congress’s 2005 grant of power to the Department of Energy and the Federal Energy Regulatory Commission was eviscerated by two federal appeals court decisions over the next six years. This is why the single project that really will be helped by the current Manchin proposal is the Mountain Valley Pipeline. The bill makes special provision for this project, directing that all actions “necessary for the construction and initial operation at full capacity of the Mountain Valley Pipeline shall not be subject to judicial review.”

The Manchin bill does almost nothing to help other energy projects stop endless court demands for further environmental review. The bill does address some less important timing issues so it’s important to keep straight three kinds of time limits:

  1. Time limit for the federal government to complete environmental review. The proposal directs a two year limit for environmental review of major projects and a one year limit for minor projects. Unfortunately, such deadlines are unenforceable—the federal government routinely misses even the statutory deadlines it is trying to meet. The deadlines may even be counterproductive if they encourage courts to stop projects and order further reviews because of concern that review was rushed to meet an artificial deadline.
  2. Time limit for plaintiffs to challenge a project after it receives its permit. This kind of “statute of limitations” is not harmful but of very little use. Smart plaintiffs hoping to stop infrastructure generally sue at the earliest opportunity because the best chance to stop an infrastructure project is before construction begins. So big projects are almost never held up by plaintiffs that waited years after the project was approved to bring their lawsuit.
  3. Time limit for courts to order more review on projects that have already been under review for years. Unfortunately, the Manchin proposal does not put any time limits on courts’ ability to hold up nationally-approved projects other than the Mountain Valley Pipeline. The federal environmental review law, the National Environmental Policy Act (NEPA), is a procedural statute simply intended to ensure the government did sufficient environmental review of a project. If the federal government has been reviewing the environmental consequences of a project for years and has approved it, and the court would still like more review, the court can order the government to do more review. But it is not reasonable to make a nationally-approved project, and all the consumers and producers that depend upon it, wait for the court and government to reach agreement on how much environmental review is enough.

The crucial importance of a time limit on judicial delay of projects is well explained in the Institute for Progress’s excellent recent report on “How to Stop Environmental Review from Harming the Environment“:

The time limit that would likely have a major impact on outcomes is restricting the ability of the courts to issue injunctions against projects that have undergone extensive environmental review under NEPA. This change would provide developers the certainty they need to invest in large-scale build outs of solar, wind, transmission and other clean energy infrastructure. Without a time limit on judicial injunctions, developers have a sword of Damocles perpetually hanging over their head, threatening the entirety of the project.

As it stands, the Manchin permitting proposal would be a serious lost opportunity that would be unlikely to significantly speed up construction of new energy projects. The focus on federalizing review of clean energy projects is particularly unhelpful when the proposal doesn’t address the problems that are making federal review the bane of energy project developers.

The good news is that the Manchin proposal could be improved relatively simply if it added limits on federal court and state delays on federal projects. Speeding up permits for nationally-approved projects would accelerate construction of all the new energy projects that it designates for federal review.

Oyewunmi on Permitting Offshore Wind Farms

Leave a comment

In the aftermath of the new law funding clean energy sources, Tade Oyewunmi of the University of North Dakota sends in a timely new paper on some of the challenges facing companies looking to build offshore wind energy, and some of his suggestions for streamlining.

Here is the abstract for his paper, which is titled “The Regulatory State and the Emerging Offshore Wind Energy Market,” and is forthcoming in in the Arizona Journal of Environmental Law and Policy:

Offshore wind energy systems are generally regarded as variable baseload technologies and can therefore serve a crucial role in a net-zero or carbon-neutral electricity supply grid. With the spate of growing commercial and government-policy interests in offshore wind, it is important to examine how and to what extent the framework for assessing and reviewing project plans, as well as the process of engaging with impacted stakeholders, or alternative users of the outer continental shelf, can become more efficient and less controversial. Thus, this paper discusses the emerging offshore wind energy market in the U.S. and highlights the role of the regulatory state in facilitating a more efficient leasing and permitting process for projects without compromising the protections afforded under applicable laws and regulations. Adopting a compressive and standardized review of relevant project plans and proactive stakeholder engagement processes is recommended at an early or appropriate time during the permitting process. Understanding the opportunity costs of delayed and canceled projects, addressing misperception of risks, and standardizing best practice measures for addressing common issues identified from review processes could go a long way in making a project’s impact assessment and permitting framework more efficient while protecting the environment and legitimate interests of other users in the outer continental shelf.

The new paper can be found here on SSRN.

Permitting Reform to Put New Energy Funding To Use

Leave a comment

On Sunday, August 7, the U.S. passed new legislation that provides $370 billion dollars for a wide variety of technologies in the energy and climate sector, including renewable energy, carbon capture, and electric vehicles. The House of Representatives is expected to pass this legislation tomorrow, Friday, August 12, so it may soon be enacted into law.

The strange thing about this huge spending on new energy sources is that high energy prices already promise financial rewards to anyone who can build the new energy infrastructure America needs for more reliable, affordable, and secure energy supplies. Unfortunately, these power-lines, pipelines, and clean energy projects are being held up by our sluggish permitting system. To put its new spending to good use, Congress must adopt permitting reforms that will make it easier to build America’s future energy system.

Our energy infrastructure is aging because it is simply too difficult to build new energy projects. More than half of American crude oil pipelines were built before the National Environmental Policy Act, which mandates lengthy environmental reviews was adopted in 1970; they are more than 50 years old. The nation’s largest grid manager, PJM, recently requested a two-year pause before adding any new solar projects because of how far behind it is in updating its grid to accommodate new energy sources. Opponents of new energy sources are finding more and more ways to ensure that new projects cannot get built.

Much of the massive new funding for energy will be in vain if projects cannot get the approval they need to begin construction. In the run up to the legislation, lawmakers and the media often cited models showing the bill would reduce U.S. emissions 40% by 2030. But although studies find that the average new transmission project takes over ten years to complete, these models “assume many of these projects will be built” in the next seven years to bring more renewable energy to the grid.

The good news is that, in return for supporting the energy spending bill, Senator Manchin reportedly received a commitment from Senator Schumer and Speaker Pelosi to support a bill to speed permitting for energy projects. The bad news is that the outline of the permitting bill released by Senator Manchin’s office does not yet specify serious steps to speed permitting. For example, it would “set maximum timelines for permitting reviews, including two years for National Environmental Policy Act reviews for major projects.” If accomplished, this would be a huge improvement over the current system where, as I explain in this video, National Environmental Policy Act average over five years.

The problem is that simply telling the federal government it has a two year deadline for its review will not accomplish much because the federal government routinely misses such deadlines. And courts could still strike down the review if they believed it was rushed or incomplete.

The key to watch is whether an emerging compromise imposes hard limits on courts and states’ ability to slow down federally-approved energy projects. In the past, I have proposed that if the federal government has approved a project, and more than five or six years have passed since the government began considering it, the courts should no longer be able to prevent the project from beginning construction. (Proposal is at pp. 304-305.) I defended that position in the Congressional testimony below. (My five-minute testimony starts at 49:28.)

If Senator Manchin’s permitting bill doesn’t take real steps to speed up permitting, it will be an important missed opportunity to build a better energy future.

Supreme Court: EPA Can’t Cap Greenhouse Gas Emissions From Power Plants

Leave a comment

The Supreme Court just decided “the most closely watched environmental case in decades,” West Virginia v. U.S. Environmental Protection Agency. In the 6-3, opinion, the Court holds that the EPA cannot use Clean Air Act §111(d) to set power-sector-wide greenhouse gas emissions standards for state power plants. The Court also explains that the Major Questions Doctrine is crucial to this analysis and reflects both “separation of powers principles and a practical understanding of legislative intent.”

A Justice Gorsuch concurrence, joined by Justice Alito, lays out their view of history and application of clear statements doctrines and the major questions doctrine specifically. Justice Kagan wrote a dissenting opinion, joined by Justice Breyer and Justice Sotomayor.

The opinion can be found here: https://www.supremecourt.gov/opinions/21pdf/20-1530_n758.pdf

As a reminder, here is a summary of how the case got to the court from a blog post and webinar I did last December, in anticipation of the Supreme Court argument:

Under the Clean Air Act, the Environmental Protection Agency regulates greenhouse gas emissions from various sources including new cars and new industrial sources. But a large proportion of the country’s greenhouse gas emissions come from existing sources, such as the nation’s coal and natural gas power plants, which provide over half of American electricity.

In 2015, the Obama administration issued a regulation for existing fossil fuel power plants under Clean Air Act §111(d), which allows the EPA to “establish a procedure” for each state to adopt “standards of performance” for existing sources of air pollutants. The administration called this rule the “Clean Power Plan.” It was controversial, in part, because it went beyond asking states to make their existing power plants run more efficiently. Instead, it went “beyond the fenceline” of the power plant to encourage non-fossil sources of electricity such as wind and solar power and shrink the fossil-fuel power sector.

The Clean Power Plan never went into effect because the Supreme Court stayed its implementation on February 9, 2016. The D.C. Circuit heard more than 7 hours of argument on the validity of the Clean Power Plan but never ruled on it because the Trump administration repealed it and replaced it with its own rule, which it called the “Affordable Clean Energy Rule,” and was limited to promoting efficiency measures at existing fossil fuel plants. The D.C. Circuit then heard 9 more hours of argument on this new rule, before striking it down on January 19, 2021. The court held that EPA’s authority was not so limited.

The Supreme Court granted certiorari to decide whether Clean Air Act §111(d) gives “the EPA authority not only to impose standards based on technology and methods that can be applied at and achieved by that existing source, but also allows the agency to develop industry-wide systems like cap-and-trade regimes.” The case is an important sequel in the Court’s lines of cases on how much deference executive agencies should receive to decide major questions of policy and whether Congress might authorize dramatic agency action from relatively obscure provisions—hiding an elephant in a mousehole.

The opinion can be found here: https://www.supremecourt.gov/opinions/21pdf/20-1530_n758.pdf

The Supreme Court emphasized that “the only interpretive question before” it was “narrow”: “whether the ‘best system of emission reduction’ identified by EPA in the Clean Power Plan was within the authority granted to the Agency in Section 111(d) of the Clean Air Act.” Some had thought it might explicitly limit the Chevron doctrine or return to the non-delegation doctrine. This is a narrower ruling, but may rule out some of the more aggressive steps the Biden administration might have considered to reduce sector-wide greenhouse gas emissions in areas such as utilities, refineries, and oil and gas development.

Build Up Before You Tear Down (or Subsidize): Easing New Energy Infrastructure

Leave a comment

As energy prices have risen over the past 20 months, there has been growing clamor for solutions to make our energy system more affordable and more secure. Unfortunately, these discussions are often sidetracked by debates about 1) proposals to subsidize energy use to reduce its apparent costs and 2) debates about how quickly we should transition to cleaner energy sources.

The latest proposal is President Biden’s plan to suspend federal taxes on gasoline and diesel fuel for three months. These taxes help pay for the infrastructure—highways and bridges—that drivers use. Unfortunately, waiving this tax may not help drivers much because many refineries closed down in the last twenty months and the remaining refineries are already producing as much fuel as they can and barely keeping up with fuel demand. This shortage makes it very hard for refiners to lower prices. If they lower prices, more Americans will purchase fuel and we may actually run out of fuel supplies.

Ultimately, prices will only fall when there is enough energy production to comfortably meet energy demand. Unfortunately, our current approach to encouraging energy supplies is too reliant on tax breaks and dollar subsidies for new energy sources. The problem with these subsidies is that like the proposed “gasoline tax holiday,” they simply bid up the price for energy supplies if there are other roadblocks that prevent energy production.

As I explain in a recent op-ed in the The Hill:

The current challenge is securing investment in energy sources that could quickly ramp up supplies of reliable, affordable energy. Unfortunately, clean energy funding alone will not accomplish this. Investor hesitation is often driven less by pure financial concerns than by slow permitting processes that can delay or stop new infrastructure. Think of the 2009 stimulus, which put a record $8 billion toward high-speed rail, yet nothing has been built in America because of permitting delays — something that is holding up so many infrastructure projects around the country. 

James W. Coleman, Biden’s Approach to Climate Action Drives Energy Conflict, Not Cooperation, THE HILL, Jan. 26, 2022 (suggesting Carbon Matching Commitments as an alternative method of encouraging climate action)

Instead, government should focus on removing the permitting roadblocks that are holding up so much energy infrastructure. Easing permitting would help lower the cost of both oil and cleaner sources such as natural gas and renewables because they are often held up by the same roadblocks. As I explain in another recent op-ed:

The problem with arguments about the pace of the energy transition is that an orderly transition has two parts: first building new energy infrastructure and then restraining, and eventually retiring, older energy infrastructure.

One of the main reasons for the current crisis is that the world has gotten these two steps out of order. Governments and litigants have developed legal tools to stop new fossil fuel infrastructure. Think of the demise of the Keystone XL oil pipeline, the Jordan Cove natural gas export facility, or the Constitution gas pipeline. But we have not built enough geothermal and nuclear power, or enough new power lines to bring renewable energy to market.

In fact, the legal tools developed to stop oil and gas projects, such as expanded environmental reviews and state permitting challenges, are now used to stop the infrastructure that could bring clean energy to market. The focus on further subsidies to renewable energy is beside the point when what these maturing energy sources really need is permission to build power lines to take them to market.

James W. Coleman, How America Can Survive Ukraine War’s Gas and Oil Crisis – and Build a Stronger Energy System, FOX BUSINESS, Mar. 9, 2022

The important debates about the pace of energy transition will continue, but for now the urgent priority must be making it easier to build all kinds of energy infrastructure. That is the only way to see the return of abundant energy supplies.

Guest Post: Electric Grid Failures are not Grist for Partisan Fights

Leave a comment

By David Spence

Transmission towers above snowy Katy Trail in Dallas, Texas (Feb. 2021)

Last summer California and Texas experienced almost simultaneous periods of very high electricity demand, triggered by hot weather. The California system struggled, experiencing several days of rolling blackouts; the Texas system did not. Characteristically, Texas Republicans (Ted Cruz among them) taunted California on social media, blaming renewable energy and over-regulation in the California market.

But what goes around comes around. This week the Texas’ grid failed in the face of an extended system-wide cold snap that froze power plant equipment and disrupted fuel supplies. No generation technology was left unaffected, but the bulk of the missing generation was natural gas-fired. That gave some on the left a chance to point the finger at fossil fuels and the less regulated Texas market design.

But neither crisis represents a fatal flaw in any particular electric generation technology, or either state’s market design.

As an initial matter, this is not about “privatization.” Most of the generators and sellers of power in Texas, California and elsewhere are privately owned and always have been.

It is true that the Texas market is lightly regulated, with easy market entry and access to transmission (but more price risk) for generators. There is competition and market pricing in both wholesale and retail markets. It is the only market in the country that depends almost exclusively on free-floating wholesale power prices to incentivize investment in new power plants. (Observers have long argued about whether that is enough of an incentive.) The state has no meaningful renewable energy or climate goals, but has nevertheless experienced massive investment in wind generation, giving Texas more wind capacity than any other state. The future promises a similar investment boom in solar generation. Retail power prices are low.

California, having suffered a breakdown in its competitive wholesale power market 20 years ago, is understandably wary of unrestrained competition. Its market has some competitive features but tighter controls designed to ensure both reliability and a cleaner energy mix. A spate of state climate and clean energy laws have led to the construction of more solar generating capacity and battery storage than any other state, and lots of wind too. Retail power prices are high, but most Californians don’t seem to mind.

And despite Texas’ lack of a climate policy, some proponents of a transition to a low carbon future actually like many aspects of the Texas market design.

Price competition and easy market entry benefit wind and solar plants because they are the least expensive forms of electricity generation. And some like that the Texas market rules allow wholesale prices to rise far higher during times of scarcity than they can in other markets, because that incentivizes conservation and demand reduction.

In competitive electricity markets in the northeastern United States (unlike Texas) some generators can qualify to be paid to be available as reserve power in the future. Some proponents of a green energy transition don’t like these “capacity payments” because they tend to go to coal- and gas-fired power plants.

So light-handed regulation has some unintended climate pluses. 

On the other hand, Texas owes its wind boom in part to a big departure from free market orthodoxy. It decided in 2005 to build new transmission lines connecting windy west Texas to cities in the east, spreading the cost of the lines across the entire customer base. Texas was able to socialize transmission costs that way because its grid is sealed off from the two big interstate grids that cover the rest of the lower 48 states. That isolation avoids federal regulatory jurisdiction, which arguably prohibits that approach to transmission financing elsewhere.

It is true that some of these features of the Texas market have led to lower generation reserves than the rest of the country. Experts have long debated whether that feature will trigger more outages in the future. But that was not the culprit this time. Even if Texas had more generating reserves, those plants may have been incapacitated by the cold snap too.

Rather, it was mistaken judgments about insuring against a low probability disaster that led to this crisis, and those judgments concern reliability rules and standards, not the Texas electricity market design.

The isolation of the Texas grid did prevent Texas from accepting a helping hand from neighboring states. Texas politicians seem in denial about that, either peddling the “wind farms are to blame” lie or the debatable notion that independence and self-reliance are worth the price of crises like this one.

February 18 marked the fourth and final day of the power outage at our house in Austin, and we remain under a boil water advisory as of this writing. We were lucky to find temporary heated shelter. Others will suffer much more, and some will die.

But it is a waste of time to use grid failures like these as ammunition for online ideological or partisan battles. Recognize them for the tragic failures they are; but think of them also as learning opportunities that will help grid operators and managers of power markets do better next time.

That isn’t a dramatic lesson, but it is a better one.

Both Texas and California experienced grid failures, and both will learn and adapt. Climate change will bring more severe weather more often. That, and the rapid growth of renewable energy will pose challenges for grid managers. But regulators and grid operators will find a way to provide reliable and affordable electricity anyway, because consumers (read: voters) will demand it. 

Those solutions may not be the same solutions everywhere, but that is as it must be. One size has never fit all in the American electricity sector.

Making the Most of a New Era of American Energy

Leave a comment

This year, the United States emerged from history’s biggest oil boom—this boom was more than an order of magnitude bigger than previous U.S. commodity booms and seven times bigger than the world’s biggest previous oil boom, which occurred in Saudi Arabia in the 1970s.

As a result, even with the 2020 oil bust, the U.S. produces more oil than any other nation. In 2019, America produced 65% more oil than #2 Saudi Arabia. And the U.S. is also the world’s biggest producer of natural gas and may soon be the world’s biggest exporter of liquefied natural gas. America is at the dawn of a new era as the world’s #1 energy producer.

My new line of research shows that, to maximize the benefit from this new bounty, oil & gas regulators should slightly slow production. Counterintuitively, slower production will benefit oil & gas companies by marginally increasing their cash flow and significantly increasing the long-term expected value of their assets. And slower production will also limit the environmental downsides of oil & gas and maximize the environmental benefits of natural gas.

Slower production counterintuitively helps oil & gas companies for two reasons.

First, although no individual company wants its production slowed, if companies were allowed to freely negotiate with each other, they would agree to cut back production simultaneously because slower production means higher prices and higher profits. As Adam Smith put it, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in some contrivance to raise prices.” Antitrust law forbids them to negotiate a production slow down, because we usually prefer lower consumer prices. But oil & gas prices have been so low following the boom, sometimes even negative, that gas is just being wasted—flared off at thousands of wells across Texas and North Dakota. Regulators can stop this waste, which just harms consumers, by cutting back oil production. Modest production limits would also raise prices enough to increase overall cash flow to oil & gas companies immediately.

Second, oil and gas is a long-term asset, oil and gas that is wasted today could be worth a lot in the future. American oil & gas law pushes companies to drill and pump oil more rapidly than they would like—the rule of capture, common lease terms, and covenants implied into leases by the courts all make companies drill for oil when they would rather wait. But it makes no sense to rush to produce natural gas that will simply be flared, or to flood the market with oil at rock-bottom prices, when companies could simply wait to drill until prices recover. Modest production limits would somewhat mitigate the common law’s tendency to push more oil production than a truly free market would provide.

I explain these theoretical reasons for oil & gas production limits in my forthcoming Cardozo Law Review article, State Energy Cartels. I show how oil & gas production limits are actually an idea that came from the United States, and its oil producing states, during the Great Depression. And I show that production limits also have potentially massive environmental benefits: slowing carbon emissions, boosting renewable energy, and creating a counter-intuitive coalition of oil producing countries with a powerful interest in slowing fossil fuel production.

My own state of Texas will have to be a leader in negotiating any new coalition of oil producers to impose production limits. Because of the new oil boom, Texas now produces more oil than 12 of the 13 nations that comprise the Organization of Petroleum Exporting Countries (OPEC).

The Railroad Commission, Texas’s oil and gas regulator, has coordinated oil production limits before, as I explain in this EnergyTradeoffs.com podcast. In the years before and after World War II, Texas alone produced one quarter of the world’s oil and the United States together produced two-thirds. During these years, American oil powered recovery from economic catastrophe, victory in World War II, and the post-war global economic expansion. Texas played a leading role in limiting year-by-year oil production—so much so that when Middle Eastern countries moved to the forefront of oil production and formed OPEC, they described it as “a kind of international Texas Railroad Commission.”

My newest article, published in the Oil, Gas, & Energy Law Journal, shows how the Texas Railroad Commission can reclaim its mantle as the world’s leading oil & gas regulator and take initial steps toward cooperation on restraining production. I propose that it start by phasing in modest cuts in natural gas production to stop economic flaring and marginally raise oil and gas prices.

As I explain in this new Houston Chronicle op-ed, the Commission can improve its data collection to fine-tune its phase-in of new gas limits to ensure they boost industry cash-flow. I explain the economic and environmental benefits of this proposal at greater length in this recent video presentation on why it is the best method of stopping flaring, which is also embedded below.

The United States and Texas find themselves again at the center of global energy production. It is high time for them to carefully consider how they will maximize the economic and environmental benefits of this new bounty.

Energy Tradeoffs Podcast #43: Eric Orts

Leave a comment

Another Thursday, another EnergyTradeoffs.com podcast episode: This week, Eric Orts from the Wharton School at the University of Pennsylvania and David Spence talk about Eric’s research on “Climate Change and the Ethical Obligations of Business.”

Eric argues that major fossil fuel companies—the “carbon majors”—face a dilemma: they face an ethical imperative to address climate change but they also face a market imperative to maximize their profits. He argues that one way to address this dilemma is for the carbon majors to push governments to adopt stricter greenhouse gas regulations. If governments adopted a legal framework that adequately reduced carbon emissions, then energy companies could compete within this framework without violating their ethical imperative. Eric also argues that the investment community must accept that it is ethically bound to reduce carbon emissions and can no longer focus solely on maximizing economic returns.

The conversation builds on a working paper that Eric has written with Brian Berkey, which is titled “The Climate Imperative for Management.”

The Energy Tradeoffs Podcast can be found at the following links: 
Apple | Google

Podcast: Play in new window | Download

Subscribe: RSS

Energy Tradeoffs Podcast #42 – David Konisky

Leave a comment

This week’s EnergyTradeoffs.com podcast episode features Indiana University’s David Konisky talking with Shelley Welton about his research on “Public Attitudes on Energy & Climate.”

David and Shelley discuss David’s research on what Americans believe about different sources of power. David finds that people mostly judge power sources based on their local environmental harms and their cost. They tend to be very favorable toward renewable sources, less favorable toward fossil fuels, and conflicted about nuclear power. David explains that many are more comfortable with traditional regulation such as emissions standards rather than market-based approaches to limiting carbon emissions. The discussion relates to a 2016 book that David wrote with Stephen Ansolabe, Cheap and Clean: How Americans Think About Energy in the Age of Global Warming.

Shelley and David also discuss a newer article that David coauthored with Sanya Carley and Stephen Ansolabe, “Are all electrons the same? Evaluating support for local transmission lines through an experiment.” In the paper, they examine local opposition to new energy infrastructure projects and find that it may be possible to provide information to landowners that would make them more favorable to new transmission lines designed to enable more renewable power.

The Energy Tradeoffs Podcast can be found at the following links: 
Apple | Google

Podcast: Play in new window | Download

Subscribe: RSS

1 2 3 … 8